Ask the grumpies: How much is too much in a 529?

OMDG asks:

We are also starting to have what… seems like a lot in our daughter’s 529. Any thoughts on what is “too much?” She’s 10.

We are not finance professionals.  Consult with a certified financial planner with fiduciary responsibility and/or do your own research before making any important financial decisions.

Here’s our last ask the grumpies on realistic 529 numbers.  This post also has links to calculators.

Here’s a forbes article on the topic.  They recommend saving 75% of the expected cost of college, whatever that means.

In the previous ask the grumpies, we were talking about a situation in which the oldest of multiple kids hadn’t started college yet.  There’s less leeway to making oversaving mistakes when you only have one person that it can benefit, rather than obvious people you can pass a plan to.  Maybe you our your spouse have additional education you can get that isn’t paid for by your employers? Age 10 is a bit early to know if graduate school is a definite thing.

If you can’t think of any obvious educational use for excess money, then it might be a better idea to stop using the 529 (giving up some of the tax advantages) and put targeted money in another accessible account.  You have to pay a 10% penalty plus any taxes on earnings for anything that you withdraw for an unauthorized use.  Having to pay tax on the earnings is something you would have had to do anyway if you hadn’t put the money into a tax advantaged account in the first place.  A 10% penalty is a lot, but it’s not the end of the world, especially if you’re high income.  So if you do over-contribute, you’ll survive.  But you will also survive if you have to cash flow or take out temporary loans.

Obviously you know that you should be putting as much money as possible into retirement accounts before putting money into the 529.  If necessary, you can stop contributing as much to retirement and cash flow some college expenses with what you would have contributed beyond the employer match during those 4 years.  When you’re high income, there’s no real downside to “over-contributing” to retirement while there is still some downside risk to over-contributing to a 529.

You are in a state with one of the top public college flagships in the world.  There’s a reasonable chance that your kid may end up going to school there and getting in-state tuition.  If you can cover 4 years of that now maybe it’s time to stop contributing to the 529 and direct private school moneys to some other outlet.  (College costs will probably go up at a rate faster than inflation, but it’s quite possible that so will the stock market.)  If you’re certain that only private school (or out of state public) is on the horizon, then you may want to stop contributing once you get to the average cost for four years at a private school.

You can get back money that your DD gets in terms of merit scholarships without having to pay the 529 withdrawal penalty.  You will still have to pay taxes on any earnings, but you would have had to do that anyway if you’d put the money into the taxable stock market.  You’re high income, so unless something changes, you’re unlikely to be getting much need-based aid.

We stopped contributing to our kids’ 529s a while back, figuring we’d rejigger for DC2 if necessary once DC1 started college.

Looking at what we have… DC1 has $256K (a year and some change away from college) and DC2 (currently in 5th grade) has 130K.  If either of them choose to go to a local state flagship and then decide not to continue to graduate school, we have way over-saved.  Given DC1’s age, it makes sense for hir to tack on a 2 year MA after college, so we’re not that worried about having over-saved.  If DC1 goes to one of the most expensive schools out there, Harvey Mudd (not incredibly likely, but it sounds like zie may try hir changes with early decision), their expected 4 year cost for us is something like $330K, so we will have to cash flow some of that (or, more likely, move some from DC2’s account and cash flow some of DC2’s college down the line).  If DC1 goes to my state school for four years and lives at home (the cheapest option), then it would be like $60K and all the excess would go to graduate school and/or DC2.

Most likely what will happen if it turns out we over-contributed is that we will just hold onto the excess 529 money and if our kids decide to go to graduate school later, we’ll use it for any unfunded portion.  If that doesn’t happen, then maybe they’ll have kids who want to go to private K-12 school or college and we’ll transfer it over.  (Or potentially we can transfer it to DH’s siblings for their kids.)  Or when we’re in retirement they’ll still have the loophole in which you can learn cheese mongering in someplace like France with the money.  Either we’ll find a use for it or it will get passed to our heirs.

The nice thing about being high income is that these choices aren’t really life or death.  We can still buy whatever we want at the grocery store if we make the wrong decision.  Optimal isn’t as important as satisficing.

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