College Education Fund : 529 vs Self-Investment

Discussion in 'Off-Topic' started by abhijitz, Feb 17, 2017.

  1. abhijitz

    abhijitz Well-Known Member

    Location:
    Fremont
    Name:
    Abhijit
    A wild guess if someone here has evaluated both. I have evaluated the pros & cons of a 529 program and since CA do not offer tax incentive, self-investment is an option i thought would be worth checking.

    I just had a kid, 3 months old. I currently have a very healthy investment portfolio which yields a decent 2 digit YoY gains. I have zero debt/misc loans and my L2V ~ 40%

    The disadvantages of "withdrawal penalty" on a 529 if not used for educational purposes makes me think of building my "own fund". I have done my calculations and on a conservative to low moderate strategy it is possible to beat returns on a 529 when compared with self-investment minus LTCG. Still, many think this is not a good idea.

    Just wanted to check if anyone has pursued this thought and what did you end up with?

    Would appreciate if we can keep the thread focussed on the topic.
     
    eroseme and Rex like this.
  2. Ich

    Ich Well-Known Member

    Name:
    Ich
    I preferred the freedom and flexibility of a traditional investment portfolio over a 529.

    In any plan you end up investing, be aware that sales costs, management fees, adviser fees, will eat up 1% annually whether your investments grew 12% that year or tanked 35% in a recession. On top of that, factor in 0~3% for inflation, and 10%~25% for the tax man on any gains you realize.
     
    abhijitz likes this.
  3. BrianV

    BrianV -1

    Location:
    Los Gatos
    Name:
    Brian
    Look into the backdoor Roth IRA methods. You can take the principal out....
     
  4. discoganya

    discoganya Engineer, Rider, Dad

    Location:
    Fremont
    Name:
    Sujit
    Are you saying that for the same risk, a taxable investment account can beat a 529 (basically a Roth)...? How?

    There are many strategies to overcome the non-educational withdrawal penalty. E.g. You can always change the beneficiary to another child or nephew, or grand-child even. A lot of 529s get passed along in estates, harvesting the tax benefit year after year.

    Many states (e.g. Utah and New York) offer excellent 529 plans. We have been with Utah UESP since my first kid was born (10 years now).
     
  5. dudeonguitar

    dudeonguitar Lord of the Strings

    Location:
    San Jose
    Name:
    Vinnie
    We too! Almost 4 years into it now. Wow, time flies!
     
  6. BillST4s

    BillST4s PNW Chapter

    Location:
    Edmonds (near Seattle) Washington
    Name:
    Bill
    Look into US savings bonds. There is a series of savings bonds whose interest is tax free if used for college tuition.
     
  7. Andrew

    Andrew ... and Mexico will pay for it.

    Location:
    San Jose
    Name:
    Andrew
    Sure, if pre-tax versus post tax doesn't matter to you.
     
  8. discoganya

    discoganya Engineer, Rider, Dad

    Location:
    Fremont
    Name:
    Sujit
    Both Series EE and I bond interest is tax free if used for college, but note that there is an income limit - $146,300 for 2016 married filing joint
     
    abhijitz likes this.
  9. abhijitz

    abhijitz Well-Known Member

    Location:
    Fremont
    Name:
    Abhijit
    Yes for the same risk , {maybe slight higher} I have calculated "my own investment" - LTCG to beat 529 ... maybe not substantial. The biggest benefit is me (or the child) able to use the funds just not for education. Of course, i am not accounting involvement of my time managing the said fund.

    Changing the beneficiary in my case, not sure. I have no immediate family in United States.

    Utah will be my goto choice if i decide to go the 529 route.

    Moreover, if my son gets 100% scholarship (being overly optimistic) and do not intend to do expensive education (medical and alike) i get hit 10% on the 529.

    Utah will be my go-to route if i decide to stick with the 529.


     
  10. discoganya

    discoganya Engineer, Rider, Dad

    Location:
    Fremont
    Name:
    Sujit
    Abhijit, returns can be compared apples to apples only if they have the same risk. You cannot compare "returns" from say AAPL and VFIAX, just like you cannot compare the horsepower of a Ninja 250 to a Busa.

    If you hold the same exact funds (say Vanguard index) in a taxable account as in a 529, the 529 will beat the taxable account easily, because the 529 fees are about 0.1% or lesser.

    If your child gets a full scholarship to college - and that is a "good" problem to have - simply leave the funds untouched for the next generation :thumbup. Or take some classes in Europe when you retire - ride those awesome Alpine roads.
     
  11. KTMrc

    KTMrc Dino

    Location:
    San Jose
    Name:
    Randy
    My daughter is a senior attending a private high school, and just finished applying to colleges. Because she was very specific about the type of college she wanted to attend (private), and applying to any type of college these days has become a complicated and competitive process, we chose to hire a private consultant, recommended to us by several friends--Manuel Fabriquer of College Planning ABC http://www.collegeplanningabc.com/

    He helped us tremendously, both in narrowing down which colleges she should apply to based on her qualifications and desires (there are over 4,000 colleges in the US--daunting), as well as how to pay for it.

    Manuel offers free college planning workshops (click on menu bar at top of his website to view upcoming dates and locations). You can show up to one and ask him your financial questions in person. We hired him when our daughter was a junior, so we were no longer in a position to save money for college, but, we have heard him advise others not to invest in a fund earmarked for college, as the colleges will deduct that amount from whatever they may offer you in financial assistance.

    FYI--the cost of attending a private university is now approximately $60,000 per year, counting tuition, books, fees, room & board, and some, but not all of their living expenses. That adds up to a quarter of a million dollars just for an undergraduate degree. California state schools can cost around $20,000+ per year, and UC campuses can cost $35,000+ per year, and costs go up each year. (There are less expensive alternatives, such as attending a community college for two years, and transferring to a state or UC campus within commute distance of your home, so your child does not have to pay for room and board).

    Our daughter has so far received acceptances from 6 of the 12 colleges she has applied to, with merit scholarship offers. We are still waiting to hear from more. Manuel knew which colleges would offer her money based on her qualifications, and encouraged her to apply to those, and it's paying off.

    He can also sometimes help people qualify for financial aid (to be added to and different from merit scholarship money) who think that they could not possibly qualify based on the income and asset ceiling limits. This is money that both the federal government as well as private institutions would offer.

    In addition to being extremely knowledgeable and experienced, we have come to realize over this past year and a half of knowing Manuel, that he is one of the most honest and sincere people we have ever met. He really cares about the kids and consults with them directly to understand their hopes and dreams.
     
  12. abhijitz

    abhijitz Well-Known Member

    Location:
    Fremont
    Name:
    Abhijit
    Agreed and that is the whole purpose of the "said own fund". What i meant was, the "said own fund" would be a conservative to a moderate approach similar to the approach taken by various 529 programs. (like Merrill does bonds off NH, while Utah static is equity based).


    Good advice and input from everyone ... Definitely helps with the decision making.
     
  13. Ankur

    Ankur Well-Known Member

    Location:
    Cupertino
    Name:
    Ankur
    What is your investment portfolio that is yielding double digits YOY? :biggrin That is very good :thumbup
     
    Joel likes this.
  14. Amadeus

    Amadeus Registered Abuser

  15. abhijitz

    abhijitz Well-Known Member

    Location:
    Fremont
    Name:
    Abhijit
    Haa haa ... i am seriously not bluffing. The last couple of years were great for tech and Trump regime is opening up doors to a whole new world. An exciting 4 years ahead. Lets put it, i was a heavy investor in FANG since early days (have significantly reduced now).

    Dont worry, i am not rich yet ... still buying used parts off CL and scouring Free parts here. :lol

     
    Rex and Ankur like this.
  16. Rex

    Rex Well-Known Member

    Location:
    Silicon Valley
    Name:
    Rex
    That never stops. I have friends and family that are worth 8 figures, a few 9 figures, and one acquaintance that is worth 10, they still hit CL to buy and look for free stuff to put at their multiple homes.

    --
    Rex
     
    cheez and abhijitz like this.
  17. Ankur

    Ankur Well-Known Member

    Location:
    Cupertino
    Name:
    Ankur
    Yeah, there is just something about free stuff....doesn't matter how much money you make...
     
  18. ghostbuster

    ghostbuster Well-Known Member

    Name:
    Pete
    Open a separate brokerage account in your name for your kids' college expenses. Invest it in a total stock market index fund or if you want less risk a target date fund.

    If your kid decides not to go to college or seek higher education you are not screwed by having all that money in a 529 plan.

    By keeping it in your name if your kid decides to live under a bridge or be a doper they will not be living large on your hard earned money.

    Seen both examples happen.
     
    abhijitz and ChuckFinley like this.
  19. abhijitz

    abhijitz Well-Known Member

    Location:
    Fremont
    Name:
    Abhijit
    This is exactly my plan, not a big fan of index funds though (expense ratios of equivalent ETF's are less). But what you stated in line 2 and 3 were my exact concerns with a 100% 529.


     
  20. Apex

    Apex The Pace/10r

    Location:
    Wats
    Name:
    apex
    I clerked in grocery through all schooling.
     
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