beliavsky[at]aol.com wrote:
- quote -

I agree that college credentialing is a "broken system," but if that's
what the broken system demands, then that's what its gonna get.

I have heard similar arguments that the only reason we wear suits to
job interviews instead of more casual clothes is because somewhere a
long time ago one guy did it to "get ahead of the game" and now
everyone does it because that's the new standard. BUT, I am not going
to be the person that shows up in sweatpants just to protest the flawed
standard.

The biggest thing I learned in college was how to set priorities and
handle responsibilty. If I chose to party instead of study, I suffered
the consequences. Sometimes I learned the hard way.

All of that aside, I don't see the system getting changed anytime soon,
and in the meantime college tuition is climbimg at a rate much higher
than general inflation.

Tad Borek wrote:

- quote -

If I put money in John's (to pick a name) 529 account, I may feel
morally obligated to use that money to send him to college if he wants
to attend. I would not feel that way about a regular taxable account.

Even if John is college material, if I put only limited amounts in a
529, I can more easily say, "do you want to me to spend X for a private
university or Y for a public one", with him pocketing X-Y (maybe at age
30 -- many teenagers cannot be trusted with large sums of money) in the
latter case.

As I explained earlier, I think college is an overly expensive
credentialing machine. I won't need new credentials in retirement. I do
think that learning is important throughout life, but I can and do use
books and online academic research for that.

joetaxpayer wrote:
- quote -

That's true and it wasn't long ago that capital gains were taxed just
like ordinary income. Still are in many states (eg here in CA).

But I'm not a fan of IRA-for-college. Just some general points on all
this stuff...

1. very few people save "too much" in their IRAs, it's much more common
for people to be behind. So the notion of using an IRA (a tax-advantaged
account for retirement) to fund college (a financial need that typically
occurs well before retirement) seems a waste of a tax-deferred "bucket"
that's made available through the tax code. Specific cases might point
to it but those cases are also the ones where someone has a lot of money
and probably wants to use the 529.

2. Doubly so for a Roth IRA. It's hard getting money into them, and I
don't think it's a good idea to deplete them even during early
retirement, let alone many years before that.

3. If the goal is to save money for college (a big "if"), not-using a
529 is probably leaving money on the table (tax money) for mid-to-high
bracket taxpayers. If nothing else it's a way to shelter some of your
index funds from tax, in exchange for a slightly higher expense ratio
(marginal cost of 529 wrapper). And when you think of it there are very
few "income-tax-free" carve outs in the code and most have strings attached:
* Roth IRA - actually, very few strings, which is why you should leave
these dollars alone
* muni bonds - pay low interest rates because of tax-free nature
* 250k/500k home-sale gain exclusion - but you need to sell your home to
get it, and downsize your home or take out a loan to get at the cash
* life insurance proceeds - free of income tax - but you need to die to
get them!
* step-up of cost basis at death - ditto!
Any others? Well, 529s which, if you sift, include some pretty good
investment alternatives.

4. Beliavsky, in your sub-par-IQ scenario (setting aside THAT topic
entirely), have you thought about going back to school during
retirement? Don't laugh, I could see it, I've thought of it myself.
Excess 529 dollars...change beneficiary to yourself and fund another
degree. Semester abroad anyone? I believe the rule is that any overseas
institution for which you could receive financial aid qualifies for 529
withdrawals. LSE class of 2050?

5. Or...worst case you take the money out and pay a 10% penalty on
gains/income, which by some of my spreadsheet analyses might not be so
bad after a long-enough period of receiving tax-deferred growth, at a
marginal cost of perhaps 30-40 basis points. Tax drag on a portfolio can
be well above that (1-2%+ per year depending on asset class?).

If I saw more overfunded IRAs I could get behind the idea of using them
for college funding, but the opposite is the case. And I think there's a
benefit to the mindset "these are to be left alone until retirement,
because it's my responsibility to fund my retirement." Nipping into that
for college, for a home purchase, etc, could be a slippery slope.

-Tad

- quote -

That is an excellent point. Of course, anyone can withdraw their Roth
contributions for anything. For other early distributions (Roth
earnings and traditional IRA), you can only avoid the penalty if the
education expenses are for you, your spouse, your children or your
grandchildren.

--Bill

woessner[at]gmail.com,

A large number of 529 plans are set up by people other than parents.

I don't believe they get the same benefits from using IRA/401(k) that
the parents do. Someone else may want to better analyze this aspect.

I have heard of a couple who's child got a scholarship and they had
extra funds in a 529, and they took some classes - but the creative
part was that they were held on a cruise ship! LOL

Scott

OH charges 0.16% for their share of the fees. IL is supposedly going to
undercut that even more but no official unviling yet of the 2007
changes. I am funding a 529 (OH plan of course) but it's only a tiny
portion of my total portfolio so even if I have to take out the gains
and pay income tax+penalty, it's not really a big factor when
considering the entire universe.

joetaxpayer wrote:
- quote -

beliavsky[at]aol.com wrote:
- quote -

I think we are back to a topic where the answer is specific to a given
individual. I'm not a big fan of 529s, but am objective on the topic.
The limited choices within the plans are a negative to me, but can be a
positive as they are less overwhelming than having the entire universe
of investments to choose from.
I remain apprehensive of mixing one's retirement assets and college
savings, yet appreciate the point that if the child doesn't go to
college, then no action is required. At least a 529 isn't quite a
completed gift. If the child doesn't go to college, the parents still
have control of the money. I'm also hypersensitive to the gain/loss in a
given type of account, as my questioning of 401(k) fees exemplifies.
If we agree that the major benefit of the 529 is the tax free growth,
but the cost is a minimum 40 basis points (.40%) as there are index
funds at 10 basis points vs the 50 for the cheapest 529, that's about a
4% hit to the account. (say an average time invested of 10 years). This
to avoid whatever cap gain rate is in place at the time of withdrawal.
OTOH, we don't know the cap gain rate 10 or 18 years hence, so perhaps
putting in some money, but not 'too much' is a good diversification
among the tax aspect of the accounts. Some in your retirement account,
some in straight UGMA, some in the 529.

Your analysis of the percent of people who go to college is noted, but I
note also, that most people I run into have pitifully undersaved, and
are now either paying most of their income to tuition bills, or taking
equity loans. I'd make the case that the average person pondering this
question is both above mean income, and above mean intelligence. (kind
of like how any finance magazine can make a similar claim, the reader,
by definition, isn't average)

JOE

A 529 plan is plausible for those who have contributed the maximum to
401(k) and IRA contributions. Since it is the gains in the 529 plan
that are untaxed, the benefits are largest when contributions are made
long before they are withdrawn.

There is a philosophical problem with putting too much money in
children's college savings accounts when they are very young -- how do
you know they are college material? I think too many Americans who go
to 4-year colleges are not smart enough and motivated enough to benefit
from the experience. Most 4-year college degrees does not certify more
than what a high school diploma ought to. I don't want my children to
think of the freshman year of college as being the "13th grade" --
their should attend if their track record by the end of high school
demonstrates that they can handle the intellectual challenges of a real
college education and that they want to. Society needs skilled workers
(plumbers, electricians, nurses, etc.) whose occupations do not require
4-year college degrees. Even for medicine, 6-year
college+medical-school programs exist, and for law, I think people
could enroll just after high school -- the current obstacles to this
are artificial. I program at my job, and I know that somone with the
knack can pick up computer programming by reading and experimenting.

To forecast the probability that one's kids will be smart enough for
college, one should consider the intelligence of the parents. I think I
have read that rate of mean reversion is about 0.5, so that if the
average IQ of the parents is 130, the predicted IQ of the children is
100 + 0.5*30 = 115 . One can get a reasonable estimate of IQ from SAT
scores, and I think there are web sites that provide conversion tables.
Charles Murray estimates that an IQ of 110 is needed for college. Two
of his articles -- "What's Wrong With Vocational School?" and
"Intelligence in the Classroom" and his book "The Bell Curve" provide
the basis of what I have written.

To sum up, I think colleges today are a grossly inefficient
credentialing machine, and I hope that in 20 years time the education
sector will be rationalized, with less money spent in real terms. I
have 3 kids and have put about 5% of the expected costs of 4-year
colleges for all of them in 529 plans, but I intend to do further
saving in retirement and general taxable accounts, until I have a
better idea of their talents.

It is no disgrace for a kid to just not be smart enough to attend
college. Maybe his parents can better assist him with a down payment on
a house at age 30 than college tuition at 20.

woessner[at]gmail.com wrote:
- quote -

Here's the detail for Kansas;

(May 22, 2006) - Kansas has enacted a matching contribution program for
a limited number of Kansas residents participating in the state's
Learning Quest 529 plan. Under a 3-year pilot program beginning July 1,
2006, the match is dollar-for-dollar up to $600 per year. The program is
limited to 400 applications each year from individuals or families with
incomes below 200% of the federal poverty level.

I'd imagine any matching plans are similar. But your logic is why I am a
broken record stuck on "deposit to your 401(k) to get the full company
match". Even after tax and penalty, if you lose your job, it's worth doing.

JOE

- quote -

I wonder if there are safeguards against abusing this benefit. For
example, you could open up an account for yourself and contribute just
enough money to get the full match. When the match is credited to your
account (and you're vested in it, if there's such a concept), you
withdraw the money. You'll have to pay taxes and the 10% penalty, but
who cares? You just got a 100% return on your investment. I'll take
that and a 10% penalty every day of the week and twice on Friday.

I am so going to Hell... :-)

--Bill

Bill
With out going into detail ,(because you already have, ha ha).No they
aren' tREALLY necessary.Personally I like the Roth IRA feature to tap
funds if needed for education.

On Jan 15, 1:38 pm, "woess...[at]gmail.com" <woess...[at]gmail.com> wrote:
- quote -


======================================= MODERATOR'S COMMENT:
Please trim the post to which you are responding. "Trim" means that except for a FEW lines to add context, the previous post is deleted.

Mark Bole wrote:

- quote -

Your point is well taken, I forgot to mention about the kiddie tax.
Which, if one follows your advice to move from stocks as school
approaches (which I agree with, BTW), then the 529 scores points in that
regard. While the choices within the 529 are limited, there's 100%
equity all the way to a Money Market equivalent in most offerings. And
the transactions remain tax free in the account.
JOE

joetaxpayer wrote:

[...]
- quote -

One thing to be careful of is the "kiddie tax", under which higher
amount's of child's investment earnings are taxed at parents' rate.
This wasn't so bad when the cut-off age was 14, but now it's 18. Even
with long-term investment in mutual funds, there can still be annual
capital gains distributions and dividends that are taxed at parent's rate.

Plus, a conservative approach would dictate that money you need for
tuition shouldn't be in the stock market within 3-5 years of when you
are going to need it (too risky).

So, you can still put maybe $10-20K in the kid's name and benefit from
lower tax rates on the earnings, but more than that and the new kiddie
tax rules really push you toward the 529 plan.

I'm old fashioned and have a chip on my shoulder from having to earn my
own way through college and beyond, so I say: let the kids work or
borrow to pay for college, you can always help them pay back the loan
later if you choose.

-Mark Bole

A few states even offer matching contributions. Can't pass a deal like
that if you live in those states.

woessner[at]gmail.com wrote:
- quote -

joetaxpayer <joetaxpayer[at]nospam.com> writes:

- quote -

I believe the "tax-free withdrawals if used to pay for qualified
educational expenses" was made permanent (well as permanent as
any law can be) by one of the tax laws that passed in 2006.

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

"joetaxpayer" <joetaxpayer[at]nospam.com> wrote in message
news:tLydnd7-rNw-ZzbYnZ2dnUVZ_qqrnZ2d[at]comcast.com...
- quote -

We have a Fidelity 529 that was setup by our son's grandparents,
and it has a 3.5% front end (that I believe is being waived)
along with the annual fee (forgot the %).
But - it's very conservative, and only earning about 5-6%.
So... we'll see -

woessner[at]gmail.com wrote:
- quote -

Aside from the state tax deduction, the benefit (if it survives 2010) is
the tax-free growth. Not deferred, tax free. You'd have to compare that
benefit to the expenses within the 529, because it would seem that
proper gifting to the child and having them pay long term gains at 5%
would quickly negate the tax savings.

The rest of your analysis mostly compares the 529 to using one's
retirement account to fund their child's college. For some, the 401(k)
and IRA limits are high enough to save for their retirement, for others,
that could make sense, and straddle the fence in that if the child
doesn't go to school, the money can just stay in the retirement account(s).

FWIW, the Fidelity 529 fees ranges from .50 (for their S&P index fund)
to over 1% for managed funds. I suppose, given the limited choices
within a 529, that can be motivation enough to avoid them.

JOE

"P.Schuman" <pschuman_NO_SPAM_ME[at]interserv.com> writes:

- quote -

If your state provides for this deduction when investing in your home
state's plan, it'd be on your state tax form somewhere.

Contributions to 529's are not deductible from federal taxes to the
best of my knowledge.

--
Todd H.
http://www.toddh.net/

- quote -

This is my understanding. Contributions are not deductible from your
federal taxes. According to this web page

http://www.savingforcollege.com/top-...?top_tip_id=13

28 states and DC allow you to deduct 529 contributions from your state
taxes. Only Pennsylvania allows you to deduct contributions made to
other states' plans.

--Bill