$20k is nothing to sneeze at and there is an obvious value in a 529.Yes, we are fine. For me, it is less a question of whether we'll have enough money and more a matter of whether I paid more taxes than necessary by not investing enough in 529, on the one hand, or locked up my money in 529 by contributing too much. With all of the unknowns you and others have enumerated, the right 529 investment is not known a priori.How are your retirement funds looking? Either you funded your retirement instead of a 529 and are comfortably paying the extra cost today or you did not have the extra funds to begin with and did the best you could. Or maybe you spent that cash on yourselves and now doing well enough to help your child cover the cost. Either way, sounds like it is working out for y’all.Okay, but realize it can be a lot more than $10K per year out of pocket, depending on where the child goes. Especially if it is a private school. I saved only $175K in a 529 for my daughter, and her school cost $333K for the four years. The last $158K is coming out of pocket.I would rather have to pay $10k a year out of pocket because I have too little compared to over funding it by the same amount and then needing to pay a penalty to be sued for something else.
My approach has been to split the difference. I'm putting in about 1/2 what is needed to fund a private college education. So far, the 529 has resulted in about $20K in tax savings. It could have been more if I had put more in the 529, but I can't complain. We didn't know what schools the kids would go to.
That's the problem though...We just don't know how much it costs. For a family who has their retirement funded, the question arises, is it better to be overfunded or underfunded? Reading here, it appears that there may not be a best answer. If the difference is small, it doesn't mater all that much, but if I had a choice between potentially underfunding by $100k vs overfunding by $100k, I would prefer to underfund.
Here is a mathematical answer to this problem with some assumptions:
Let's assume $70k invested and over the years grows to $100k with $30k in long term capital gains. If we underfunded by $100k we would have to pay 15% capital gains tax plus state tax of lets say 5% (20% total) or (30k x 20% = $6k) in taxes. That is what underfunding costs.
On the other hand if we overfunded with $30k in growth which we have to pay federal taxes, state taxes and a 10% penalty. Let's assume we do it in retirement where our taxes are lower. 12% federal, 5% state and 10% penalty for a total of 27% ($30k x 27% = $8,100) in taxes and penalty. If we are in the 22% tax bracket which I suspect we will be the math is 37% in taxes and penalty which comes out to $11,100.
I personally would rather risk paying $6k in taxes vs risking to pay $11,100 in taxes and fees. Of course some will choose to leave that $100k 529 for the unborn grandkids which may or may not be needed, but that is a whole other calculation and I am not making plans for the unborn.
I think my math is accurate, let me know if not.
Statistics: Posted by EnjoyIt — Fri Aug 02, 2024 6:46 pm