Opening a 529 Plan – Conclusions from Reader Feedback

Opening a 529 Plan

Hello folks! Hope all is well. Thanks for the feedback on last week’s post regarding my 529 plan dilemmas. As a quick refresher, I was looking for some advice on whether I should 1) switch my 529 plan from Utah to NY based on about 8 bps differential in the total fee structure on my investment selections and 2) whether I should ultimately hold less in my 529 plan in favor of greater flexibility in holding some funds to be used for college in my taxable brokerage account.

Based on all your helpful advice and further research I’ve completed, I have come to a conclusion! Drum roll please….

Utah or New York 529 Plan

First up, on where I will continue to hold my 529 plan assets. I’m still a little wishy-washy on this one, but for now I have come to terms with keeping all 529 plan assets in one location (for ease and simplicity) and for that location to continue to be Utah. While the investment options are basically the same in both, the fees are slightly higher in Utah…at least for now.

My plan will be to continue to monitor fees. It is not uncommon at all for states to lower fees to jockey for more assets under management (AUM per the industry jargon). Given how Utah has been a perennial stakeholder on the low fee front, versus New York who is new on the scene from the low fee perspective, I plan to hold out in Utah with the expectation that fees will be more in line with New York eventually.

If by chance another year or two down the road and the fees are still decently far apart, it may be time to pull the trigger on a move. But what I don’t want to end up doing is switching the assets back in forth between states every other year.

For now, I will keep my 529 plan assets in Utah; however I will hold this decision up for further review regularly in the future. And if I do end up switching…you’ll be sure to hear about it :).

That said, I appreciate the feedback from Vicki who lives in New York and also benefits from the tax deduction of the contributions!

We live in NY and use NY’s 529 plan – but we get a tax advantage too!Vicki from Making Smarter Decisions

529 Plan or Taxable Brokerage

Now for the next dilemma I was facing, whether to save for college in a 529 plan or a standard brokerage account.

Two factors come into play here. Let’s take them one at a time.

Estimating the Cost of College

First, how to go about estimating the cost of college 15 and 18 years down the road for our two kiddos. Certainly not an easy feat…

As you can see from my prior post on estimating college costs, I’ve checked online calculators annually since 2014 to update assumptions on the cost of college. As for my most recent update on my estimates per, T Rowe Price, and American Funds as of June 2017, things haven’t changed much from last year.

Saving For College still comes in on the lower end of the range compared to the other two based on a lower inflation factor. The American Funds calculator comes in much lower compared to when I ran it last year ($178,281 compared to $254,256) not because of a change in the inflation estimate, it was still at 6%, but because of a change in what they report as the average cost of college today at $17K compared to $23K last year. Who knows the rationale for that change or how each of the three services come up with different numbers for the average cost today?! But nonetheless, I’d expect the starting point of the cost of college today to be around $20K to $25K.

Opening a 529 Plan

What has changed though is my belief more in the lower inflation number. Last year I concluded college at a four-year in-state public university would cost between $200K and $250K and I was planning to conservatively fund the upper end of that range in a 529 plan by age 18. That was in line with the T Rowe Price and American Funds which both used a 6% inflation target.

I think there is some truth to the argument that 6% inflation is unsustainable. I’m probably more in the camp that college tuition inflation will be more in the range of 3% to 4%, similar to Saving For College. While this is still above general inflation levels, it is moderated from historical inflation on the cost of college.

Based on the cost of college today coming in around $20K to $25K and inflation to be in the range of 3% to 4%, below are the given ranges for the cost of college 15 and 18 years down the road for my two boys, Cygnet #1 and Cygnet #2.

Opening a 529 Plan

While the ranges are still pretty wide, I’m ball-parking the total cost of college at $150K for Cygnet #1 and $165K for Cygnet #2. Note that this is a change from my prior thinking of $200K to $250K outlined in my post last year on the cost of college, but as previously noted this is due to a change in thought process around inflation. Before I was thinking around 6%, now I’m thinking around 3% to 4%.

While my new estimates are most certainly going to be wrong, that is after all the nature of projections, the good news is I still have plenty of time to refine these numbers :).

And I appreciate the feedback from Stock Street last week who made a good point about the affordability of in-state tuition:

And in many states with cheap in-state tuition, many people have more than the college costs in a 529 and that ends up being disadvantageous! Stock Street

Over-funding the 529 Plan

The second factor is not wanting to over-fund the 529 plan.The underlying premise to factor is the fact that I plan on retiring early and switching to the 15% income tax bracket or less for the majority (if not all) of retirement thereby resulting in 0% capital gains tax on my taxable brokerage account.

Having a 0% capital gains tax on a taxable brokerage account would negate the basic benefit of a 529 plan which is the investments growing tax free. Plus, the added benefit of flexibility in using the cash in a taxable brokerage account for anything (as opposed to only education related expenses in the 529 plan) makes the risk of over funding the 529 plan a major detriment.

The only reason I can think of to over-fund a 529 plan is the possibility of using it as a vehicle for inheritance to be passed on to either my kids or potentially future grandkids. My answer to that though is I can always make that election in the future. I’d rather preserve this optionality and therefore elect not to risk-over funding the 529 plan today.

If I do end up over-funding the 529 plan and chose to withdraw the extra funds (rather than pass them down to future generations still intact in the 529 plan) then I would incur income tax and a 10% penalty on the earnings portion. Yuck!

Assuming I’m at the 15% marginal tax rate, that would be a tax and penalty of 25% versus the alternative of 0% tax if held in the taxable brokerage account. The key note here is that earnings withdrawn for non-qualified reasons (aka not for college expenses) are subject to income tax, not capital gains tax which they alternatively would be subject to in the taxable account (which would effectively be 0% if I’m within the 15% income tax bracket).

Therefore, if I end up over-funding the 529 plan, I’d basically be subjecting the earnings from those assets to a 25% haircut (tax plus penalty) versus 0% in the alternative scenario by keeping them in the taxable brokerage.

And I’m not the only one worried about over-funding. Thanks to the feedback in last weeks post from Liz, Grant, and Mr. SSC:

I like your idea of transferring $40k into #2’s account and letting both compound, while investing in after-tax brokerages for flexible funds. That way if there’s a shortfall because the market doesn’t perform, you’re covered – but if the 529’s do perform well, then you can just use those funds to cover college. Liz from Chief Mom Officer

I am looking to fund half of college with the 529 and the remainder through brokerage accounts or scholarships. – Grant (reader)

Take the penalty, or roll it over for one of their kids or do what with it? Either way, we decided to keep them both in a 529 and worry about it if the time comes that we have to do that. Mr. SSC

Dr. Curious made a good point about the behavioral finance aspects of 529 plans:

The only real argument I can think of for a 529 over taxable in your case would be a behavioral finance one: the 529 is earmarked for education, no questions asked. Dr. Curious

Likewise, Amber Tree Leaves made a great point of having some funds in a specifically designated account for college, but does also favor the flexibility in taxable brokerage accounts:

When it is in your name and something happens, how to make sure the money is for education? Amber Tree Leaves

Scholarships or College Hacking

As I noted above, I’d ballpark the cost of college for Cygnet #1 and #2 to be around $150K and $165K, respectively. That estimate though, is based on the assumption for the average cost of a degree. I wouldn’t be surprised if the actual cost comes in below this estimate based on one or a combination of scholarships or college hacking.


My wife and I didn’t get much for scholarships, but we admittedly didn’t try too hard and that is a knock on us. We could have done better, in all likelihood.

With the right incentives in place, I wouldn’t be surprised at all if the kiddos get some scholarship money. It could be either an academic or athletic scholarship…who knows. But the potential is there. Typical parent… believing their children are perfect :)!

If they were to get some scholarship money, it would put us back in the same spot as over-funding the 529 with exception to the fact we’d get out of the 10% penalty on withdrawals up to the scholarship amount. That means income tax on earnings. Say that is at the 15% marginal tax rate, but no matter what it is unavoidable whereas if those extra funds were in a taxable brokerage account we’d at least have some control on limiting capital gains tax by staying in the 15% income tax bracket.

Scholarships are a good thing, we certainly hope our kids will earn scholarship money, but in planning for that potential situation it may be better to have less in the 529 plan than more.

College Hacking

As I mentioned last week, I “hacked” the cost of college without even really trying or knowing it. Imagine what a little more focus and determination could result in the college hacking department for the kiddos!

For example, I received some college credit through CLEP tests, dual enrollment during the later years of high school, taking a few community college classes in the summer and winter breaks that were transferable to my university and I ultimately graduated in three years.

By the kiddos doing some of the same, and us being cognitively aware of this potential and actively looking to take advantage of various “deals” on the total cost of college, I imagine the cygnets will manage to reduce their cost somewhat below the average benchmarks I laid out above.

Other Noted Variables

  • Who knows what will happen to the tax code 15 years out with regard to either capital gains tax rules or 529 plan rules (for the better or worse). Status queue may not be the reality.
  • What if I “hack” the FAFSA application process because I’ll be retired early with little taxable income and most assets tucked into retirement accounts (not included on the FAFSA application) by the time the cygnets enter college?
  • If I over-fund the 529 plan, I could change the beneficiary to myself and then perhaps use the qualified withdrawals to fund my “education” in international travel or culinary arts in Paris…but that might be getting a bit too cute.
  • I could also change the beneficiary to grandkids. But say I overshoot funding the 529 plan by $50k for each cygnet and that sits in the 529 plan growing 7% to 8% for another 30+ years until my kids have kids and they become college aged. Those assets would then grow to ~$400k to $500k by that time! Assuming this gets allocated among two grandkids from each cygnet that might be a reasonable college inheritance to pass onto them. But then again, that’s a lot of assumptions to get to that point…

Thanks to FullTimeFinance who shared his perspective and wrote a great post on why he doesn’t plan on putting money in a 529 plan:

I wrote a post a few weeks back on why I do not have a 529. I have some of your same fears and since money is fungible I’ve decided to treat my normal savings tax optimized collectively as my kids college funds. – FullTimeFinance

A reader comment from MPH struck a cord with me as he/she explained the benefit of paying his/her own way through college. Not too much unlike myself, as I paid about half my college costs, not having help from his/her parents was the best thing for him/her. MPH’s advice:

I do not recommend 529s. Save it all in taxable accounts and when the time comes to decide whether they need your help or not (or if they even want it) you’ll have that flexibility. – MPH (reader)


The combination of (i) my estimates for the cost of college coming down (due to a lower inflation factor), (ii) my now unwillingness to risk over-funding the 529 plan and preference to maintain optionality to fund more in the future if needed (compared my indifference to over-funding the 529 plan no less than a year ago), and (iii) greater appreciation for the potential for the cygnets to come in below the “average” tuition cost via scholarships or college hacking has led me to revise and lower my planned lump sum contributions to their 529 plans.

In summary, I now plan on investing roughly $40K in each 529 plan for a total of $80K in contributions. This is down from my prior plan of $70K in contributions to each. Since I’ve already contributed $70K to Cygnet #1’s plan, I will transfer roughly $30K over to Cygnet #2 and add another $10K in the near term.

The $40K planned contribution is based on the assumption of it growing approximately [8% as it will be allocated entirely to stocks] (no bonds for me, thank you very much), and therefore I’d expect it to grow to $125K to $150K, give or take.

I would still expect this to roughly fully-fund the total cost of college, however depending on how inflation shakes out I recognize it could be woefully underfunded. While the benefit lies in contributing early to let it grow tax free for many years, I can save optionality to contribute more later. This could be a benefit in the situation where I move to a state that provides a tax deduction for 529 plan contributions (which NC doesn’t today) or in the great scenario where the investments generate outsized returns compared to the historical average of the S&P 500.

Funding $40K for each cygnet allows me to “split the baby” by contributing a good amount upfront to get the tax benefits from growth while still preserving some optionality to contribute more in the future.


Sound off in the comments below. Any other feedback or advice for me?

Thanks for taking a look!

The Green Swan






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  1. Hey GS! Looks great to me. I like the inflation numbers you used. I don’t think it is sustainable for college costs to continue their outpace of inflation long-term. I like that you added in college hacking/scholarship costs to the equation and lowered the payment. Finally, I LOVE that you will not be using bonds.

    1. The inflation will be key to track over the coming years to monitor how adequate funding will be.

      Ha, I thought you’d like the all stock allocation! 🙂

  2. Sounds like the crowd helped you out. I like that in the community.

    The plan to go for 40K, have that compound and then see what is needed years down the road is a good plan. We do have a travel account with that purpose… IT’s sole goal is to boost in 5-7 years our summer holidays.

    And agreed, no bonds for such a long term plan.

    1. Agreed! It’s so beneficial getting non biased or judgemental advice to help frame up my own opinions. I love the PF and FIRE community!

      Nice idea with the summer holiday account! I may have to adopt that 🙂

      Thanks for the comment!

  3. Great job funding the kiddos’ education! I think you can guide them through college hacking and come in well under the average. Hell, who knows what college will look like by then?

  4. Quite an analysis! Do you have plans to use a glide-path style allocation as the kiddos approach college age? Or are you gonna let it ride to the bitter end? 🙂

    Predicting the future ain’t easy.

    1. My plan is to let it ride as equities are the best investment available in my opinion, but I’ll certainly be reassessing regularly. If for instance we are experiencing a long bull market near the time they’re about to enter college (like we are experiencing today) I may decide to move some to cash or something else safe.

      Thanks for the question!

  5. Nice plan! It’s awesome that you were able to get usable advice from people in your reader community as well.

    We’re looking at a similar funding target and expecting it to either a) barely cover or mostly cover college if they go in-state, or b) be woefully underfunded, and then we can help out with money from taxable accounts.

    If we end up with our 529’s overfunded (not seen as liekly, but who knows) then we’ll figure out what to do with it. Maybe one of us will take some courses, I hadn’t quite considered that option, just assuming we could audit most university courses once you hit a certain age. Maybe I could actually take a drawing course and better figure out “correct” perspective, lol.

    1. Thanks for your helpful feedback along with the others. It’s always nice getting an outside and fresh perspective!

      Good to hear we’re in the same ball park on funding levels and on the same page in terms of “what if” planning for over or under funding.

      And I like the point about auditing classes, hadn’t thought of that but how perfect of an opportunity!

      Good luck with the drawing! 🙂 What a fun hobby. I’ll have to redevelop some of my hobbies in retirement that have gone by the wayside during my busy career. Perhaps a good use of extra 529 dollars as well!

  6. Thank you for sharing! The 529 for our child is fairly underfunded. We should put more into it, but our relatively big expenses (between $10-12K a month because of private school tuition for my wife, and living in a HCOL area), is keeping us from maximizing the potential of certain tax shelters. We max out the others (i.e. 401K, IRA), and contribute pretty heavily in our taxable account so my thoughts are maybe cash-flowing the college expenses when our kid goes to college in 16 or so years. Although, from the way things are developing throughout the country, I have an inkling that at least community college will be free in 16 years. So the option is there to transfer to a 4-year university once all the general classes have been taken care of. That’d lower the costs quite a bit.

    1. That’s great your maxing out the other tax advantaged accounts! And you could always use some of the taxable account for college.

      Interesting thought about community college becoming free (government funded). I could see that happening given the topic has already been brought up by the politicians. Or if not nationally perhaps some states well adopt it. That’ll be interesting!

  7. Thanks for sharing your conclusions. Definitely helps as we think through the same questions. I do expect our kids will do some hacking through CLEP, PSEO, and or several good community colleges in the area. We plan to help out but not fully fund through 529s.

    1. That’s great! They’re definitely are some good feasible hacks out there to take advantage of. If my kiddos go to college I sure hope they take advantage too. Thanks Kalie!

  8. We live in NY so the 529 plan makes sense for us as we get the tax deduction. We contribute $100 a month to both our little one’s account which isn’t much but we also put money when they receive them as gifts. We might increase the contribution but not in a rush…as we’d prioritize other investments first. If you will be FIRE by the time they’re in college, they might get decent financial aid. I think Justin from Root of Good wrote extensively about his plan and he lives in your neck of the woods. Also congrats on the new baby!

    1. Thanks Andrew! Sounds like you folks have a good plan in place.

      I haven’t looked into the financial aid aspects much but that’s a good thought! I do know 529 assets are included on the FAFSA form, but the alternative being a taxable account would as well I’d think. More research to do there, thanks!

  9. Sounds like a plan – and very similar to where we landed. We partially superfunded Toddler BITA’s 529 last year by putting in 48k, and we’re done. No more contributions. We let that grow, and if there is a shortfall we’ll make that up from our taxable accounts.

  10. Hey, JW. I think what you plan to do is an excellent compromise. $40K in each kiddo’s 529 should be more than enough to fund whatever higher education they will need. I say this for the following reasons.

    1. The higher-education’s teaching philosophy and style is becoming increasingly antiquated. As Seth Godin once remarked:

    “Sooner or later, parents have to take responsibility for putting their kids into a system that is indebting them and teaching them to be cogs in an economy that doesn’t want cogs anymore.”

    2. More and more people are coming to the conclusion that the emperor (higher education) has no clothes. Paying for information you either won’t remember or won’t use (if you happen to remember it) was tolerable when college was cheap. That’s not the case however when a college education now can cost as much as a house.

    3. The means to disrupt the higher-education business model already exist. Just about anything taught in a college class today can be learned online for free.

    4. The only thing stopping the collapse of higher-education is the lock it currently has on credentializing. Once respected certification exams are created to compete against every imaginable bachelor’s degree, and providing that these exams are open to anyone, the higher-education business model will fold like a cheap camera. After all, why spend $100K on an economics degree when you can read 20 economics books, take a $400 prep course, and then take the national economics certification test?

    My good friend just spent $130K on his son’s University of Wisconsin degree. That’s a joke and it’s not sustainable. The internet has thus far disrupted newspapers, music, movie rental, taxis, and retail. Will the brick and mortar anachronism that is college survive this juggernaut? I seriously doubt it. Look for higher education to a lot cheaper and efficient than it is today by the time your oldest son turns 18.

    Okay, JW. That’s my prediction. I hope I’m right. But if I’m wrong, you still got things covered. Peace, my friend.

    1. You make some marvelous points Mr Groovy! Times are changing. It’s good to give thought to what the “worst case” is for the 529 plan assets, I.e. What if college experiences a revolution change such as you mentioned. I suppose that would be a 10% penalty for non qualified withdrawals but in that scenario Congress should act to remove that stipulation and restructure the entire 529 savings vehicle.

      Again, you make great points and I agree that my approach would be somewhat of a middle ground of wanting to invest some but certainly not over investing. It’ll be interesting to see how it all unfolds.

      Thanks my friend!

  11. The different things you can actually spend money from 529 plans is actually pretty interesting. I have friends that were able to tap out the remaining funds into rent and new laptops and other useful things. Probably a better alternative to to a 10% penalty.

    Jordan @ New Retirement

    1. Yes great point to remember there can be a few things to stretch for to pull out remaining funds. While the college cost estimates include room and board and some misc costs, these are not one size fits all estimates. Some folks could be creative in finding other expenses that qualify. Thanks Jordan!

  12. I hope Mr. Groovy is right but I think you are doing great to prepare. I don’t want to overdubs our kids college either but I’m ahead of you so I’ve contributed a bit more.
    Don’t forget the LL and AO tax credits available. That should help especially if you retire early, that is if the tax code stays the same.

    1. Good to hear we’re thinking along the same lines, HIP! And good point about the tax credits, a little extra help with those assuming they don’t change.

      Thanks for the great comment!

  13. One thing for you to consider. With two kiddos possibly heading to college, one could go on to grad school. I went to medical school in Philly, took a three year military scholarship, still ended up with 80k in student debt just from medical school. These days it seems a college degree is what is needed to just get your foot in the door for many jobs and graduate school degrees are often needed for higher paying jobs. Not always the case, but much more so than 20 years ago. My plan is to fund my two kids 529s to 100k each, then stop funding them and make up any future gap with taxable investments. I would be happy to help grandkids if there is anything left over. I think getting them through college with low or no debt is a better gift than any type of inheritance. Better to teach someone to fish than just give them a fish. The experiment on what kind of fishermen they become is still ongoing…

    1. That’s a fantastic plan and we’re thinking alike in many ways. The one difference being the amount and it seems like that’s because you plan on paying for grad school too? Just clarifying.

      I hear you on that being a necessity for many highpaying jobs. Being in the corporate world I see it first hand.

      I used my works tuition reimbursement program to pay my way personally and have always thought that could be an option for the kiddos as well… If they chose to pursue it. I’ll have to give that some more thought though and play it by ear as they grow up. I can always add more or choose to use the taxable accounts.

      Thanks for the great comment, Martdoc!

  14. I feel like I’m looking into a mirror reading this. My kids are 15 months apart, ages 3 and 5.

    We probably won’t have that low tax rate option due to my wife’s military pension. On the positive side, we have her GI Bill which can fund one child’s entire public college or split between them. Rhode Island is offering to pay for the second two years of college at it’s public universities. So we could use the GI Bill for the first two and the state’s for the last two and walk away with no bill.

    However, we’re a little obsessed about getting them into top schools. Yes, I’m a bit of a tiger dad. Essentially the only luxury we spend money on is their exclusive private school, which comes with a big military discount (but is still very expensive.) We’re not funding our 529s as much as many because we’re putting their education money to use now. Our hope is that it snowballs and gives them every opportunity to be the best they can be. Maybe it leads to scholarships down the line.

    Our college plan is a combination of GI Bill, a smaller 529, scholarships, and their contributions (we want them to have some skin in the game). Overall, I’d say that college planning is probably the most difficult financial challenge as the price can be all over the map especially with the two roads (public or private) which vary widely.

    1. Nice setup you guys have and that is awesome Rhode Island would pay for the last two years. Is there a requirement to stay in the state to work after graduating? I know New York has a similar offer and I’d even consider moving or establishing residence somehow for something like that given how expensive it is!

      No faults in wanting the best education for your kids. Hard to swing that but kudos to you folks. I’ve gone back and forth on wanting to push them toward a private college. I guess we both have some time before we are at that crossroad though.

      Thanks for sharing!

  15. It looks like my last comment might have errored out. It seems I jumped the gun on the RI 2 years of public college. That bill got narrowed to four years of community college. Oh well, it’s a good sign that they are thinking about it now. Maybe they’ll get it through in the 10+ years that we both have before our kids are ready for college.

    1. Oh shoot! I know the site was having an issue with the host provider this morning which may have caused the issue with your comment.

      It does seem like more states are realizing the issue with college affordability. I like the momentum there so yeah hopefully by the time our kids are there we’ll have some good options!

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