One of the reasons this blog seems to have become a spendapalooza is that there’s really not any obvious place for extra money to go.
But there actually is one place for extra money to go– the kids’ 529 plans. (A 529 plan is an awesome way to save for college or vocational school such that the earnings are tax-free. But, it’s a good idea to max out your retirement before setting money aside in 529 plans because retirement accounts aren’t included in college financial aid calculations and you can take out loans for college but you can’t for retirement.)
In the past, I’ve always said, “and the kids’ 529s are on track to pay for the school of their choice [by the time the graduate college].” What I mean by that is that we’ve been putting away $750/month in the accounts, even in the summers when I don’t get paid. (It used to be $500/month, but we increased it when we paid off the mortgage and stopped paying for daycare.) But we haven’t *actually* put enough money to be able to cash flow the remainder of the cost of (a four-year private) college yet. We’re just on track to.
Over the next 4 years before DC1 starts college, $750/mo works out to $36,000 (actually a little less than that since it’s November, but it’s an estimate). Over the next 8 years before DC1 ends college, it would be $72,000. (That’s a LOT of money!)
We could just put in $36K (instead of $9,000) over the course of this year and then either start contributing again once we know where DC1 is going to college or not based on the cost of hir chosen school. (Given hir struggles in English, it is likely that HMC is out, but also out with HMC is its insanely high $72K/year tuition. I told DC1 we could get hir a unicycle anyway.)
Doing it this way loses some dollar-cost averaging benefits, but it gains the benefits of a longer period of untaxed earnings.
There are some wrinkles to doing BIG 529 account transfers.
The first is that even though the account is a custody account and doesn’t actually belong to the child, it still is subject to the annual gift tax. For 2019, the amount that can be given annually without tax is $15,000. Each parent can give that amount, so a married couple can give $30,000 in one year. $36K is more than $30K, but there’s a loophole with the 529.
This wrinkle has its own wrinkle: An individual or couple can give a larger lump sum, so long as the total given in that five year period is still less than 5 times the annual exclusion. So DH and I *could* give $150K this year so long as we didn’t contribute again for another 5 years. (Of course, that’s a moot point because we don’t actually *have* $150K to give, but you get the idea.) That means when DC1 actually gets into college, we should be able to continue to contribute to hir 529 without penalty.
So our plan is to do a lump sum of $36K this month to DC1’s account (this gets rid of all our excess cash and digs pretty deep into our emergency fund, but the emergency fund doesn’t actually have to be full until May since we can cash flow most emergencies when we’re both being paid). Then we will stop contributions to hir account entirely. We will continue as normal with DC2’s account (contributing $750/month) until we build up excess cash and I start to feel like forcing DH to buy all the Apple products again. At that point we will re-evaluate and decide whether we want to do a lump sum to DC2’s account or if we just want to increase the monthly contribution. I’m sure I will post about what we end up doing.
In ~4 years when we know where DC1 is going to college, then we’ll decide whether or not to start contributing to that 529 plan again, and we will have a better idea about how much DC2’s account can bear without going over.
Grumpy Nation, I don’t have a good question for this post.