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      01-29-2023, 12:49 PM   #1
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529 Investment Strategy

My wife and I just had our first child in January. I have always been a planner, so I have reached out to FutureScholar and am starting to do some research into the different investment options that are available. As of current, we do not have a financial advisor, I typically just try to do what research I can without throwing away a percentage of my investments towards an advisor. As our portfolios grow, I am considering one more, but in the mean time we want to get his plan started. I understand that the plans differ from state to state (We are in SC), but figure there may be some good advice on what other parents have chosen.

We are leaning towards a conservative Age-based option especially since we are starting the plan early. It just seems like the least amount of work on our end and if we invest properly, having the plan more conservative towards the end (18yrs old) seems like the way to go. Has anyone had any negative results going this route?

Interested in hearing different opinion - uncharted territory on my end. Thank you!

Last edited by JP10; 01-29-2023 at 12:57 PM..
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      01-29-2023, 01:44 PM   #2
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Quote:
Originally Posted by JP10 View Post
My wife and I just had our first child in January. I have always been a planner, so I have reached out to FutureScholar and am starting to do some research into the different investment options that are available. As of current, we do not have a financial advisor, I typically just try to do what research I can without throwing away a percentage of my investments towards an advisor. As our portfolios grow, I am considering one more, but in the mean time we want to get his plan started. I understand that the plans differ from state to state (We are in SC), but figure there may be some good advice on what other parents have chosen.

We are leaning towards a conservative Age-based option especially since we are starting the plan early. It just seems like the least amount of work on our end and if we invest properly, having the plan more conservative towards the end (18yrs old) seems like the way to go. Has anyone had any negative results going this route?

Interested in hearing different opinion - uncharted territory on my end. Thank you!
You can invest in any state’s plan but investing locally may infer tax advantages. We invested in the Oregon college savings plan because it uses mutual funds. They are fairly conservative so I didn’t take those massive pandemic gains but also haven’t been hit as hard with the recent slide. We have invested 1k a month almost from day 1. I think at 8-8.5% annual returns that’s over 500k+ at 18 which is what I estimated years ago as the 4 year cost of the most expensive private school in the west at her graduation year. She doesn’t have to go there but it created a benchmark to target. As the college years approach you want to shift to more conservative investment mix. Our state has a prepaid state university tuition plan and that’s good too but fairly conservative gains. Whatever you choose, start early to maximize compounding and make it part of your non-negotiable monthly budget. (Not an investment advisor)
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      01-29-2023, 01:53 PM   #3
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After researching the last hour, I'll probably just delete this thread. I thought maybe there were more to these plans, but really seems like basic investing with limited options. My goal as of current is $200 a month. Based on returns rates as of inception, and going an age based route, it would be just shy of $70k at 18. I never intended to pay for all of their college, but this would be a good start. As we go I can increase that contribution as well.

Leaning towards a target allocation plan the more I research, then as you mentioned, switching towards a more conservative approach once he gets into his teenage years.
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      01-30-2023, 01:00 PM   #4
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Couple of cheap, but still low-touch ways you could go about it:

Choose your favorite brokerage (Vanguard, Fidelity, Schwab, etc) and invest in a 2040 Target Retirement Fund. This will gradually slope less aggressive as you get closer to his College age.

Use a robo-advisor, and specify the estimated HS graduation date. It will manage the risk profile for you over time, and keep you in low-cost index funds. My son's 529 is at Wealthfront, and they charge a 0.25% advisory fee, with the first few thousand free. This works out to about $7/mo on a balance in the mid-$40k range. 6-year returns (after fees) have been 45.6%. Using the equivalent Target Retirement fund, total return would have been 35.5%.
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      01-30-2023, 02:16 PM   #5
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My state offers to options: prepaid and an investment trust managed by T Rowe Price.

I do have a financial advisor and posed the question as to which one I should consider. He said go with the investment trust which was where I was leaning. Glad I did it. Because the prepaid plan is under a scandal right now. I haven't read into the details fully but the gist I got out of it was there was an error (more to me like mismanagement) which caused people to not see the full value of what they were promised. It's a huge mess as parents that were looking to draw funds out of their account couldn't as the money wasn't there. Conveniently the state administrator of the program resigned when all of this hit the fan. There hasn't been any clear indication as to how families are going to be made whole from this debacle.

Meanwhile the money I have put in is "safe" under a well respected financial institution.

Since you've already made the decision to do the 529, look into seeing if your state offers any tax breaks for putting money in. Mine does. So I've been putting in up to the max to get the most in the tax break.
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      01-30-2023, 05:28 PM   #6
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Timely conversation as I just sat with an advisor today to discuss investing options and touched on 529 for my two girls.

Will watch along for input!
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      01-30-2023, 07:01 PM   #7
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Quote:
Originally Posted by zx10guy View Post
My state offers to options: prepaid and an investment trust managed by T Rowe Price.

I do have a financial advisor and posed the question as to which one I should consider. He said go with the investment trust which was where I was leaning. Glad I did it. Because the prepaid plan is under a scandal right now. I haven't read into the details fully but the gist I got out of it was there was an error (more to me like mismanagement) which caused people to not see the full value of what they were promised. It's a huge mess as parents that were looking to draw funds out of their account couldn't as the money wasn't there. Conveniently the state administrator of the program resigned when all of this hit the fan. There hasn't been any clear indication as to how families are going to be made whole from this debacle.

Meanwhile the money I have put in is "safe" under a well respected financial institution.

Since you've already made the decision to do the 529, look into seeing if your state offers any tax breaks for putting money in. Mine does. So I've been putting in up to the max to get the most in the tax break.
I just looked this up, I didn’t realize that they were state tax deductible. Good to know!
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      01-30-2023, 07:21 PM   #8
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My recommendation is to contribute the max to your state deduction. In NY it’s $10k and the NY & NYC taxes are often around 10%. So $10k in a 529 costs you $9k.
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      01-30-2023, 11:21 PM   #9
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Both my children have Vanguard 529s. When my grandmother died in 2013, they were gifted $50k each. We put it all in a 529 with an age based route. My son is going to Kansas State in the fall. With his scholarships, school will cost around $18-20k yr all in. He currently has $80k in the account and we didn't add a dime. I expect his 529 should cover all of the costs. My 14 y/o daughter has $82k in hers and I expect it will be close to $95-100k once she's heading to college in 2027. She says she won't need it as she'll be getting a full ride to play volleyball. Great. Then she'll have one hell of a nest egg to start out with and there's no tax to be paid if she gets a full ride and wants to cash out the 529. My son won't be as lucky with having much money left but he'll be getting a computer science/ cyber security degree and will probably be making more than me once he's 2 years into the field. LOL

Looking back though, if I were to do it again, I would have split money between a 529 and a brokerage account for each of them with just S&P 500 index funds. That way they aren't saddled with the tax implications of a 529 in the event that a 4 year college isn't for them, significant scholarships, they get a full ride, etc. It's a different world now. A 4 year college degree isn't absolutely necessary and a degree from a fancy/Ivy league school isn't going to necessarily result in higher pay, at least not a significant amount so it's hard for me to justify putting away huge sums of money given the lack of payback. Once you get that first job, most hiring managers don't care that much where you went to school. I know I don't when I'm hiring. I work directly with people with degrees from Harvard, Princeton, and even MIT. It doesn't necessarily mean that they are going to get paid more in the long run. I get that some people really want to go to a school like that though regardless of the potential payback.

Last edited by XutvJet; 01-31-2023 at 01:48 PM..
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      01-31-2023, 07:20 AM   #10
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529s are not limited to paying for a 4 year institution. It's for any education to include trades/vocational.
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      01-31-2023, 09:24 AM   #11
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529s are not limited to paying for a 4 year institution. It's for any education to include trades/vocational.
Exactly right. You can use it for damn near anything higher education related. We've used my son's 529 to pay for his advanced college credit courses while in HS. However, when my son wavered on just getting a two year cyber security degree, which would have cost him a mere $8k, it really made me rethink dumping a lot of money into a 529 if they won't use all the money, thus would have to pay a 10% tax on the earnings to cash it out.
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      01-31-2023, 10:04 AM   #12
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Originally Posted by XutvJet View Post
Exactly right. You can use it for damn near anything higher education related. We've used my son's 529 to pay for his advanced college credit courses while in HS. However, when my son wavered on just getting a two year cyber security degree, which would have cost him a mere $8k, it really made me rethink dumping a lot of money into a 529 if they won't use all the money, thus would have to pay a 10% tax on the earnings to cash it out.
Starting next year, you can roll over a lifetime maximum of $35k from a 529 account, into a Roth IRA for the same person. Annual contribution limits (currently $6500/year, $7500 if over 50) still apply, but you could hit the lifetime cap over the course of 6 years.

The 529 account must have existed for 15 years prior to the first rollover, and changing the 529 beneficiary resets the clock.
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      01-31-2023, 06:48 PM   #13
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Great points above. A couple additional things to keep in mind:

- the primary benefits are state tax deduction and tax free growth. The latter is the biggest benefit, and a way to maximize the tax free growth is to fund the account as a lump sum, if you're fortunate to be able to do that, as much as you possibly can. The more that's in the account sooner, the more and longer it can grow tax free. eg, likely much better to pile in 50k during the first three years instead of 5k/year for 10 years. (Beware, there are annual contribution limits)

- that being said, tax free growth is a nice free benefit but it's not really game changing in your bigger picture. Consider putting enough in to cover a reasonable amount of school in the future (150k-200k in 18 years from now?) and then anything you think you want to contribute past that consider putting it into your roth IRA instead. The latter has similar tax free growth benefits but a ton more flexibility than a 529. eg, 150k 529 + 150k Roth > 300k 529 😊

Something to clarify about some earlier posts, I think, is that the age based funds should "derisk" as the school date nears - ie, probably no need to make it more conservative yourself, it will do that for you, like a target date retirement fund
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      02-05-2023, 06:52 PM   #14
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A bit late to this one but I will throw in my 2c:

1. Don't be conservative with your 529 investments. You have 18 years of growth, put it in a VTI equivalent stock index fund with low fees and tune out. Remember you don't need all of the funds exactly at age 18, you will likely pay by semester.

2. Contribute big early, if you can, to capture gains over 18 years. You can front load 5 years' worth of contributions in one swoop. So that is 5 x $17k for you and 5 x $17k for your spouse, all into one 529 if you want. That's a bit rich for me but some people have the income to do it.

3. Remember you can use a 529 to pay for private K-12, undergrad, grad including med school/law school/dental etc.

4. You can change the beneficiary. That means fund your own education, or that of nieces/nephews/grandchildren.

5. Worst case you pay a penalty and withdraw for your own use.
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