Kyle Mcintosh

Comments:

• As mentioned in an earlier post, I was relieved to find that it should be easy to access the funds that are in the 529 plan. I tell Schwab what I've spent and they will send the money from the 529 plan to cover the cost. The 529 plan can also cover the college costs directly (i.e. send the funds to the college), but that sounded like a trickier route to take. By the end of four years, the balance should be down to zero. I am good with that. I am well aware there are other schools of thought on how to approach 529 balances. Many have an eye towards preserving the balances for the future. In one case, I have a friend who is funding college without tapping his child's substantial 529 account. His thinking: the 529 plan is an efficient vehicle to pass money to his child who can use the funds to fund college costs for his grandchildren. While generous and forward-thinking, this approach does not work for me. First off, as mentioned in prior posts, 529 plans carry fees that can offset the tax deferral benefit. If you have your 529 plan with a low cost provider, then the tax benefit math may work. If you have your plan with a company - like Schwab - who levies about 1% per year, you may find that the tax benefit is offset by the fees. My second argument against this "save it for later" approach is that you don't know what tax changes and financial aid rules will be in the future. While unlikely, it could be that withdrawals from 529 plans are taxed in the future. It could also be that there is a change in the student aid formula that makes 529 plan accounts unfavorable to hold. A final argument against such a "hold on to it" approach is that there is no certainty you will have grandkids. And if you do, it could be they will not need money for college as they choose to enter a trade or they end up earning a scholarship. In a case where the funds are never used, you will certainly pay a hefty tax to access the funds.

  Post: College Savings Forum

  Link to comment from July 7, 2024

• Another benefit I see with the 529 plans is that it's easy to pull money from the account to reimburse yourself for college-related costs you incur. About a year ago, I talked to a 529 specialist at Schwab. Given that my balance had grown quite a bit, I started to worry about how to access the funds. In past lives, I'd found it challenging to access dependent care flex spending and HSA accounts. So as college for my oldest was drawing near, I figured I'd check in to understand the process to access funds. To my surprise, it will be relatively easy to access the funds. I will simply communicate to Schwab the qualified costs I've incurred and they will cover it accordingly. The qualified costs include tuition, room, board, books and technology costs. For the latter two costs, it's my understanding that they are covered so long as the costs are paid directly to the school. The key costs not covered would be travel to the school, any health fees levied by the school, and fees for extracurricular activities. With the cost of college these days, I am fairly confident it will be no problem for us to drain our 529 balances.

  Post: College Savings Forum

  Link to comment from July 7, 2024

• There are many benefits that we can list about a 529 plan. The key benefit most cite is that earnings will grow tax free. Based on my analysis, the benefit of the tax deferral may not be there for everyone. Some data to consider:

  • During the 17 years we've had money invested in our 529 plan, the market has returned about 9% per year on average with 2% of this return from dividends and 7% from capital appreciation. So, we have not had to pay tax on any of the dividend income and we will have no capital gains tax when we liquidate the account to pay for college.
  • At the same time, this benefit has had a significant cost. Our 529 plan has been with Schwab (where we have several other accounts) and the fee per year on the 529 plan has been over 1%. The fee has come down over time as it was once in the 1.5% range. I regret not having the 529 account with a lower cost provider like Vanguard (current cost for a Vanguard plan is 0.14% per year), but I also abhor having accounts with multiple brokerages.
  • Given that we have been paying Schwab at least 1% per year on the full balance of the account for 17 years, the tax advantage of the account has nearly been wiped out.
  • By my calculations, we will have 9% more available for college in our 529 account compared to if we had invested the same monthly amounts in an S&P 500 index fund in a regular brokerage account.
  • So that's good news, right? Not for most. Consider my assumptions: to be conservative, I assumed that I would have paid 20% Federal tax on both my dividend income and my capital gains (when we start liquidating the account). And since I live in California, I assumed that I'd pay 10% on dividends and capital gains. It took all of these assumptions for the 529 with Schwab to be a good play for my situation (which involves much higher taxes than most thanks to Governor Newsom and co).
  • If you are not in a top tax bracket of if you live in a lower cost state, chances are that a 529 plan that charges you in the range of 1% per year is not a good approach. Speaking strictly from a financial standpoint, my calculations say you are better off to keep the funds in a low-cost index fund in a standard brokerage account.
  • What if you have a lower cost provider like Vanguard (which looking back I should have done)? In that case, the math is quite a bit more favorable with the 529 plan. By my calculations, I would have 20% more (as opposed to 9% more) available in my son's 529 account had I been with Vanguard instead of Schwab. Even in lower tax brackets or living in a low tax state, the math would likely still heavily favor using a low-cost provider like Vanguard for a 529.
  A few final thoughts on this analysis:
  • Before doing my own calculations, I researched these topics online but could not find much. I also asked a few "experts" at Schwab about these subjects, but they hadn't given much thought to what I illustrate above. The overall guidance of financial firms is that we should mindlessly invest in the 529 plan. As you can see above, the 529 plan may not be for everyone.
  • It's a bit Captain Obvious, but it's key that you look at fees when selecting 529 plan administrators.
  • Closely consider your tax situation when investing in any tax advantaged accounts. It could be that the tax benefits are minimal, and the costs could far outweigh the benefits.

  Post: College Savings Forum

  Link to comment from June 25, 2024

• I see the top benefit of the 529 plan as having money that's specifically set aside for college. Assuming that my son does not get offered a large academic scholarship, we are within about a year of needing to write large checks to a university. For several friends with older kids, they have been pained to write checks from their bank or brokerage accounts as they did not have the funds earmarked for college. I believe it will be much easier for us to part with the 5-figure sums each year given that we have this money set aside and we have always intended it for school for our children.

  Post: College Savings Forum

  Link to comment from June 25, 2024

• I am 48, so this is not a lookback post but rather a "what I am focused on post." First, I am invested in four real estate partnerships. I had been invested in five, but one was sold recently and I didn't do the 1031 exchange that was offered. I was able to offset the capital gains (which were small relative to what stocks delivered in the same period) with losses on bond funds. As the other funds liquidate (which they should over the next 5-10 years) I will not re-invest so that I can have more liquidity and not have to deal with K-1s during tax season. The second area where I am focused is on how I will eventually (and hopefully) draw down my savings. For the last 25+ years, I have been a diligent saver. I now recognize that saving and investing is the easier part of planning for retirement. I have seen some family members make costly mistakes in using their savings, and I know that if I am not careful I could make similarly costly mistakes. Some readers have shared how a Roth conversion could make sense. That's definitely on my radar. I am also looking at whether there are other retirement income strategies I can employ now that could limit my risk and make my financial life simpler later on. More research needed on this front....

  Post: What advice do you wish you were given when you were in your late 40s?

  Link to comment from June 24, 2024

• I am a fan of TIPS for my "don't mess up" money. I am 48 and I have been buying 15-20 year TIPS in my Rollover IRA so I have reliable funds available to me in the years before I take Social Security. Most of the funds are still in stocks, but I eventually plan to shift more of my funds to TIPS in that account as I get closer to retirement.

  Post: Current TIPS opinion.

  Link to comment from June 24, 2024

• Interesting to see posts about bonds from 2-3 years ago. It's likely that most of these bond holders had their safe/stable bond holdings get crushed by higher interest rates over the last few years. I know I certainly did. My take on the foreign bond question is that it does not hurt to have some of your bond allocation in foreign fixed income. I like the call out on a Total International Bond fund/ETF that's hedged. But save yourself the tax headache of having to pay foreign taxes and take a foreign tax credit by holding the fund/ETF in a non-taxable account.

  Post: Should U.S. investors own foreign bonds?

  Link to comment from May 6, 2024

• Great piece as usual. One item that I see sucking time for people today - that I refuse to give in to - is time spent charging their electric cars. I see one executive jogging to the parking lot a few times a week to move his car. Other people seem to drive out of their way to spend 15-20 minutes waiting for cars to charge at these Tesla supercharging stations. It's hard enough to keep my cellphone charged :)

  Post: Budgeting Time

  Link to comment from October 23, 2022

• You can come to the next tour with me and see what it's all about. The beer is on me!!

  Post: Enjoying the Show

  Link to comment from May 26, 2022

• Definitely good to downsize early! I have some of my grandparents stuff sitting in my garage that I'll eventually have to toss. Mostly pictures of people they met on vacations :)

  Post: To the Dump

  Link to comment from May 14, 2022