Planning for Children's College Expenses ROTH IRA vs 529 Education IRA?

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Our kid still crawling in Pampers and head-butting walls. So we have 17 years before college. For UC estimate, I used something like ~$30k/year compounding at 4%. And 6% for personal rate of return. A UC education is just a ballpark goal for our distant timeframe. Eventually I'll have to adjust for all the variables. Maybe President Bernie Sanders socializes higher education :P, our kid falls in love with a private college, or 6% rate of return is wrong, etc.

Vanguard fits our personality right now (low-expense, passive indexing) although I appreciate that everyone has their own opinion. IMHO an asset umbrella clearly makes sense as a financial goal given all the unknowns.


Panda said:
Rizdak,

Are you happy with the Nevada's Vanguard 529 plan?

I like to have my Roth IRA (first contribution was made when i was 21 years of age) as the umbrella for my 529 plan if it ever get exhausted sort of like an insurance policy. I personally think that the Vanguard 529 Nevada plan is among the best 529 plans out there. What amount did you come up with as the best guesstimate for your UC expenses by the time your child is 18. How many years do you have until your child enters college?
 
Have 529s for each of my girls. I don't expect it to cover 100% of the cost of college, but it certainly should help. I think I put $5,000 in for each when they were born and have put some more here and there. The oldest went through one bit stock run-up, but the market has been relatively flat lately. Hopefully it will have enough good years in the next five years or so :)
 
I just put it all into our 401ks/retirement funds. If they need it for college, I get a loan and pay ourselves interest.

If they get scholarships, don't go to college or end up funding another way, than more for us.

Probably not the best financial advice but it's easier for my kids to get financial aid/loans for college than it is for us to get money in our retirement years.
 
irvinehomeowner said:
I just put it all into our 401ks/retirement funds. If they need it for college, I get a loan and pay ourselves interest.

If they get scholarships, don't go to college or end up funding another way, than more for us.

Probably not the best financial advice but it's easier for my kids to get financial aid/loans for college than it is for us to get money in our retirement years.
Your max? $50K loan from your retirement plan won't even cover the first year tuition of a private college. :'(
 
Irvine Dream said:
irvinehomeowner said:
I just put it all into our 401ks/retirement funds. If they need it for college, I get a loan and pay ourselves interest.

If they get scholarships, don't go to college or end up funding another way, than more for us.

Probably not the best financial advice but it's easier for my kids to get financial aid/loans for college than it is for us to get money in our retirement years.
Your max? $50K loan from your retirement plan won't even cover the first year tuition of a private college. :'(
Hehe... which is why I'm "urging" my kids to do the junior college -> UC route.

If they want to Ivy it up... they better get a scholarship. :)
 
I'm with IHO. Why not put all of the college savings in brokerage account in SPY?  The long term capital gains rate is what, 15-20%? There are no tax benefits to a 529 (for contributions). If things don't work out and you pull out the 529 money you get hit with ordinary income rates on the growth and the penalty of 10%. You pull out the money from the brokerage and its 20%.
 
qwerty said:
I'm with IHO. Why not put all of the college savings in brokerage account in SPY?  The long term capital gains rate is what, 15-20%? There are no tax benefits to a 529 (for contributions). If things don't work out and you pull out the 529 money you get hit with ordinary income rates on the growth and the penalty of 10%. You pull out the money from the brokerage and its 20%.

Why not both?
 
peppy said:
qwerty said:
I'm with IHO. Why not put all of the college savings in brokerage account in SPY?  The long term capital gains rate is what, 15-20%? There are no tax benefits to a 529 (for contributions). If things don't work out and you pull out the 529 money you get hit with ordinary income rates on the growth and the penalty of 10%. You pull out the money from the brokerage and its 20%.

Why not both?

You can do both. I just like having flexibility with the money. I can fund my kids college tuition right now in 529. If they didn't go to college and the money doubled and I withdrew it all, I would pay close to 50% in taxes and penalties on 50% of the balance vs if I put that same amount in a brokerage account and the funds doubled and I withdrew the money I would pay 20% on 50% of the balance.
 
qwerty said:
peppy said:
qwerty said:
I'm with IHO. Why not put all of the college savings in brokerage account in SPY?  The long term capital gains rate is what, 15-20%? There are no tax benefits to a 529 (for contributions). If things don't work out and you pull out the 529 money you get hit with ordinary income rates on the growth and the penalty of 10%. You pull out the money from the brokerage and its 20%.

Why not both?

You can do both. I just like having flexibility with the money. I can fund my kids college tuition right now in 529. If they didn't go to college and the money doubled and I withdrew it all, I would pay close to 50% in taxes and penalties on 50% of the balance vs if I put that same amount in a brokerage account and the funds doubled and I withdrew the money I would pay 20% on 50% of the balance.

No faith in kids getting into college??? lol

It's a personal risk/reward calculation that everyone has to make. I'm probably at 10-25% in 529 rest getting poached out of an IIA. Double legacy into $$$ school will cost me later in life ...
 
There's a lot of what if my kid doesn't go to college and what if my kids get a full ride scenarios here. I'm fairly certain the majority of Ti kids will probably go to college. 529 plans also allow for vocational and trade school expenses. Even if you get scholarship money, some scholarships don't cover room and board and other expenses.  And if they truly don't use any of the 529 monies, then you can change the beneficiary to another child.

I do see some of qwertys point so it is one of the last buckets I fill. Also I like putting gift money into a 529. Feels wrong to deposit it into my stock account. I guess I could open custodial accounts but the reality is, I'm fairly certain I will use all the 529 monies one way or another. And I'm also fairly certain, I'll have to dip into my own pocketbook to fund college.
 
qwerty said:
peppy said:
qwerty said:
I'm with IHO. Why not put all of the college savings in brokerage account in SPY?  The long term capital gains rate is what, 15-20%? There are no tax benefits to a 529 (for contributions). If things don't work out and you pull out the 529 money you get hit with ordinary income rates on the growth and the penalty of 10%. You pull out the money from the brokerage and its 20%.

Why not both?

You can do both. I just like having flexibility with the money. I can fund my kids college tuition right now in 529. If they didn't go to college and the money doubled and I withdrew it all, I would pay close to 50% in taxes and penalties on 50% of the balance vs if I put that same amount in a brokerage account and the funds doubled and I withdrew the money I would pay 20% on 50% of the balance.

I was thinking the same.
 
It is better to be slightly under than to be over in the 529 plan in my opinion. One of my favorite client and friend Has a daughter and son who both finished with a hope scholarship at Georgia tech. He didn't have a 529 plan but his total out of pocket expense for both children was $50k per child for 4 years since the hope scholarship covers tuition but not books, living expenses, and room and board. He will be retiring in about 5 years, however his financial picture may look very different if both attended private colleges where a four expense can total $300k per child attending a school like northwestern or Emory.


Today the total cost for attending Georgia tech is about $25k a year. At a minimum, my target should be over $100k per child in my 529 plan. If you have three children the minimum target should be $300k in Georgia and $360k in California for a state school. I treat my Roth and traditonal ira like my personal hedge fund growing tax deferred (  investing strategy is in currencies, commodities,  interest rates, and macro trends ). My goal is to use up 100% of my 529 vanguard plan and any overage will be insuranced by my personal hedge fund in the Ira. College tuition will continue to rise and one needs to plan accordingly in my opinion. My ultimate retirement income will come from real estate. My retirement accounts will be used to subsidize college expenses and remaining can be used to fund my retirement.
 
The last time I checked Cal State and UC tuition, other than books, lodging, it's on par with private pre-K and elem school tuition... we did that for many years so I think we should be able to handle the minimum college expense without having to save.

I'm terrible at giving college saving advice.
 
Today for any U C school, total expenses will cost around $30k a year. This number can be $50k a year in 10 years, which means $200k per child.

If the stock market crashes 50% this year, it will be a great time to fund your vanguard 529 plan. I have been a stock market bear For the last 16 years however I will convert in becoming very bullish in the stock market from the years 2018 -2036 like our last bull market from 1982-2000. A $250k investment in the vanguard index 500 in 1982 would have grown to $3.4 million by the year 2000 not including the dividends.
 
Panda said:
If your son or daughter decides not to attend college, then you can pass on your real estate to them. If you continue to 1031 exchange and defer your taxes for both depreciation and capital gains and transfer them to your children, once you pass away... you will never pay any taxes on the depreciation taken or capital gains on the real estate you pass down to the next generation. 
Momopi, just curious to know what type of income properties you have purchased? single family or multi family?
What area have you been investing in and what type of Cap rate and cash on cash return are you getting on your Real estate investments?

Hi Panda,

I started with condos and town-homes in Buena Park, Irvine, Placentia, and Murrieta (all except Irvine have been sold).  After 2008 we bought SFR's only in Lakewood/Cerritos/Norwalk area, Chino, and Temecula.  Only the Temecula SFR's generate cashflow, the rest are break-even or worse.  The Chino SFR's belong to the wife and she converted them from 30 to 15 year loan, so they burn a hole every month.

Irvine condo was a great investment in equity gain but terrible cash flow due to high HOA and taxes.  But I never raise my current tenant's rent so your experience may vary.  Since all properties were purchased prior to 2013 it's pointless to discuss the numbers in today's terms.

If anyone is interested in investing in Lakewood/Cerritos/Norwalk area in the next down-cycle, my $0.02 is that Norwalk is better for investment and Cerritos is over-priced.  I went to Artesia HS and know the area well, if you want my advice look for the chunk of Norwalk NE of Cerritos Library that's in ABC school district.  You'll pay a premium but it's still much cheaper than Cerritos.  Stick with single story SFR's and stay away from 2 story "add on" homes in this general area.

Going back to the college savings plan discussion, my amateur opinion is that the current low interest rate on mortgages is not the historical norm.  Under normal conditions student loans will likely have better rates than home loans.  So if my kid wants to attend college it may be better to apply for student loans.  After the kid graduates and get a job, he or she can pay the student loan and Dad will just give him/her keys to a house.

Also, instead of cash, I will buy my kid 1 oz gold every year and chuck it in a safety deposit box.  When the kid moves out I will give the kid a tube of gold coins for emergency funds.  Something my grandfather taught me was that when SHTF, the price for a bowl of noodle will change from the time you sat down to the time you're done eating.
 
momopi said:
If anyone is interested in investing in Lakewood/Cerritos/Norwalk area in the next down-cycle, my $0.02 is that Norwalk is better for investment and Cerritos is over-priced.  I went to Artesia HS and know the area well, if you want my advice look for the chunk of Norwalk NE of Cerritos Library that's in ABC school district.  You'll pay a premium but it's still much cheaper than Cerritos.  Stick with single story SFR's and stay away from 2 story "add on" homes in this general area.

Did you go to Tetzlaff Jr. high? 

I grow up in Cerritos, went to Tetzlaff JR. High then onto Gahr high.  And you are right about that part of Norwalk within ABC boundary, relatively better value and the kids can go to Cerritos high or Whitney high if got accepted. 
 
$300k per kid for college??! Whatever happened to - if you want a college education take out some loans and after graduation You better find a job real quick to pay down those loans? That's what I had to do. My parents couldn't afford to pay for my 10 year college plan. I feel that these days children are handed everything so they come out entitled and have no sense of responsibility. If there are some bills to pay it'll be a fire under them to get cracking. And it's all about the quality of their education. Good luck of I pay for their art degree so they can teach for $40k/ year. I'll pay for living expenses but even if I can pay their college in cash I won't. They should pave their own way and if they are responsible and I see that they have done well with some sensible plan after graduation - at that point I'll maybe pay 50% of that student loan.
 
Paris,
I bet you grew up from a middle class family. Am I correct?

I do agree with your post. If you are a college student paying your own way through college, I am sure he will attend every class trying to learn something that he can apply to the real world. When things are handed to you, you feel entitled and you take things for granted. You can skip classes whenever you feel like it, partying all night, wasting your parents' money.

When you have skin the game, you take your studies seriously.

I think the job market is also going to change quite a bit over the next 15-20 years. Perhaps a college education will not be as valuable as it used to be in the past. I can also see a potential shift from a W2 job market to independent contractors. 

Paris said:
$300k per kid for college??! Whatever happened to - if you want a college education take out some loans and after graduation You better find a job real quick to pay down those loans? That's what I had to do. My parents couldn't afford to pay for my 10 year college plan. I feel that these days children are handed everything so they come out entitled and have no sense of responsibility. If there are some bills to pay it'll be a fire under them to get cracking. And it's all about the quality of their education. Good luck of I pay for their art degree so they can teach for $40k/ year. I'll pay for living expenses but even if I can pay their college in cash I won't. They should pave their own way and if they are responsible and I see that they have done well with some sensible plan after graduation - at that point I'll maybe pay 50% of that student loan.
 
Panda said:
Paris,
I bet you grew up from a middle class family. Am I correct?

I do agree with your post. If you are a college student paying your own way through college, I am sure he will attend every class trying to learn something that he can apply to the real world. When things are handed to you, you feel entitled and you take things for granted. You can skip classes whenever you feel like it, partying all night, wasting your parents' money.

When you have skin the game, you take your studies seriously.

This is really a good point you are bringing up.

Paris said:
$300k per kid for college??! Whatever happened to - if you want a college education take out some loans and after graduation You better find a job real quick to pay down those loans? That's what I had to do. My parents couldn't afford to pay for my 10 year college plan. I feel that these days children are handed everything so they come out entitled and have no sense of responsibility. If there are some bills to pay it'll be a fire under them to get cracking. And it's all about the quality of their education. Good luck of I pay for their art degree so they can teach for $40k/ year. I'll pay for living expenses but even if I can pay their college in cash I won't. They should pave their own way and if they are responsible and I see that they have done well with some sensible plan after graduation - at that point I'll maybe pay 50% of that student loan.

Panda you're correct - more like lower middle class family. But I think that is what drove me to never be like my parents, always struggling and having this internal battle with finances. That's what drove me in higher education and those student loans were a big aspect of that drive to succeed. Because I had no other choice than to succeed or I'd be drowning in debt. Many of my classmates in medical school came from affluent families that paid cash for all their tuition and expenses. It would have been nice to have that but looking back I'm glad I did it on my own. I have this sense of achievement because of it that no one can take away from you. I want to instill that same sense of achievement in my children. No matter how much we have I try to shelter it from the kids (although growing up in Irvine it's difficult at times). They are small now but I never want to just "give" them everything. They better get a job at 16, they better pay for their own car if they want one. There is nothing I hate more than entitled children. I impedes them in the future workforce and ultimately in life. You aren't doing them a favor by handing them everything without hard work on their part.
 
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