- March 4, 2024
- Posted by: legaleseblogger
- Category: Related News
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### College Planning for Only Son
I currently only have one son, who will be starting college in August 2024. Fortunately, I have saved enough money in his 529 plan to cover about two years of his education. Additionally, I have additional cash invested in CDs with a 5% APY that should cover the remaining years of his college education. Money is not a problem for me, but I do wish I had made better decisions when selecting the portfolio for his 529 plan. I have had this account since he was born, and I want to maximize its potential for the next four years.
### Disappointment with Virginia’s 529 Portfolio
I have been disappointed with Virginia’s 529 age-based portfolio because it has been overly conservative, with 100% bonds for the past few years. In contrast, other states like Utah, Alaska, and Michigan maintain at least 10-20% equities until the end. Virginia offers a tax break of up to $4,000 per year, allowing me to carry forward any unused amount in the following years. Given my stable financial position, I am open to increasing my contributions to the plan, but I want to make sure I am making the most strategic choices for my son’s education.
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Or hereÔÇÖs another way to look at it. Have you thought about about the Ira conversion aspect of your 529?
How long have you had that 529 open for your son? If it is over or approaching 15 years, you need to think about if you want to add more than heÔÇÖs gonna need for college so that you can give him a jumpstart in converting some of that Roth for him.
I guarantee you no one his age will have multiple years of having the Roth maxed out. You said that money has never been that hard for you well I donÔÇÖt know what field your son is going into but in a sense you could front load his retirement for him and if you trust him, you could encourage him to still give on top of that to any plan that he has with some of his early jobs.
There are some caveats and some fuzziness because the rule just rolled out but hereÔÇÖs what I understand about it:
HereÔÇÖs some of the specific details of what I was telling you about on Sunday.
There are some more details that IÔÇÖm reading through and figuring out as I strategize implementing this for my kids.
A few bullet points to consider:
1- As mentioned above the account must be open for 15 years before conversions can begin (at age 18)
2- You are currently allowed to convert the $35k* in unused funds $7000* per year (which will take a total of 5 years, per kid). *My guess is this amount will change over the years as the annual limit increases progressively.
3- Your child will need need to have an earned income meeting or exceeding the conversion amount for the years you convert it ($7000 per year) similar to current Ira rules.
4- Your conversion will count as their annual IRA contribution limit for the years that you make it (they canÔÇÖt double dip and have 2 Roth IraÔÇÖs per year) but they would still be able to contribute what they would have to their Roth or traditional in a work 401k or similar retirement vehicle, (up to the annual limits set) so they wouldnÔÇÖt be shut out of adding to it unless their employer had no retirement plan available.
5- You arenÔÇÖt allowed to convert funds dumped into the account the last 5 years (you canÔÇÖt have nothing then backload a bunch of money for a conversion so you have to plan ahead).
I know this isnÔÇÖt exactly what you asked but in this past year my friends and I have been thinking was different about our kidÔÇÖs 529s because of this.
I just ran the numbers and if my parents did this for me when I was 18 I would have about a quarter million dollars in my retirement account that I didnÔÇÖt contribute to at this point in my career.
You are lucky you have the tax advantage. My state doesnÔÇÖt even have that. Just remember the 5% CDs havenÔÇÖt existed for long so you didnÔÇÖt lose out too much. IÔÇÖd max out the tax advantage every year he is in college and put the rest in a CD or Treasury ladder.
Note my 529 returns have been disappointing as well. I am in age based based funds and just leave it because I donÔÇÖt want to be too aggressive.
You said ÔÇ£money isnÔÇÖt a challengeÔÇØ. If that is the case, how have you left this in a bond fund for years? If you truly understand that equities is the better investment, then why have any bonds at all? I look at it differently than you are.
You said money isnÔÇÖt an issue. Why not move a big chunk of his 529 to equities and let it grow? Maybe use the CDÔÇÖs for years 1-2. It sounds like you have $50-100K in the 529. Even if it drops for a couple years, itÔÇÖs not that critical, as it will rebound eventually. Then it can pay for his grad school or he can convert to a Roth, or he can let it grow for 25 years and use it for his own kids. I only say this because you have been throwing away significant returns for years, and you have plenty of money outside that can cover any short-term shortfalls.
I don’t think I can help on the strategy but was wondering if you could outline how you approached the 529 through the years. My daughter just turned 1 and we have been funding a 529 since we found out we were pregnant. I am pretty unsure on what my target dollar amount should be at age 18 and just feel like I’m guessing wildly.
Option #2 sorta. I would transfer the existing funds and add all new funds to VA 529 HYSA fund (if they have one). Using myself as an example, South Carolina 529 (future scholars) has a “bank deposit fund” which is essentially a HYSA that is currently paying 4.95%. My kids are in HS and will need to access the 529 soon (next few years), so I’m keeping it there for now.
I am in a similar boat – one kid is a sophomore, the other will be a freshman this fall.
I have them in a 529 allocation that’s approximately 30% S&P 500 and 70% bonds (various corporate, Treasuries, TIPS).
The sophomore has enough money to finish out undergrad, but we’re a little short for the younger one, so I am still putting money aside. I’m in NJ which has a $10,000 deduction to the state plan, so I’m contributing that much.
If I had my druthers, I’d have most of this money earning reliable monthly dividends in a money market fund. The so-called equivalent position in the plan does not behave like that; it seems to never accumulate interest. It just sits there, and the NAV increases by a penny every few months. It irks me! And the bond funds are volatile since the whole market is continually obsessed with interest rates for the past 2 years now.
So I am doing two things; one, I’m saving the balance in a taxable account with securities of my choosing, a variety of MMF and callable bonds. Two, I’m withdrawing the current calendar year’s estimated expenses from the 529s and dumping it into the MMF since it needs to be liquid. Even though the dividends are taxed, I’m using state tax-exempt securities with known yield, and preservation of the capital is guaranteed. Works for me.