In my last post, I laid out my plan for contributing to my children’s college education and creating incentives for keeping the cost down without sacrificing the quality of their education. My final contribution goal (including a 3% inflation) came to $299,901. That’s significantly smaller than the original number of $413,264, but still pretty high. Let’s look at some ways to make that more manageable.
The Long Distance
Luckily, we don’t have sextuplets and the full amount isn’t due immediately. Instead, the total amount is spread across fourteen years, $26k a year on average. Since kicking my own student loan debt to the curb last December, we have only mortgage debt remaining. So it feels doable. But it would mean cutting back on our current savings rate in a significant way.
Saving State Income Taxes Using 529s
We live in Virginia where we get a deduction for the first $4k contributed to any 529 account. My state income tax marginal rate is 5.75%. If I can pass every bit of college-bound money through 529 accounts, I can save up to $16,307 in taxes. All for just passing it through 529 accounts. Updated total: $283,594.
In addition to attending fall and winter in 2021, my daughter plans on attending summer as well. I’m forecasting I’ll be out $18,177 for her college expenses in 2021. Her current 529 balance is $11,044. Assuming a year of flat growth, I’ll need to be able to pass an additional $7,133 through her 529 to cover this year alone.
But what about that $4k deduction limit? Will I need to roll my excess deduction into future tax years?
No. In Virginia, the 529 deduction is per account. Accounts are considered different from each other if they vary by either owner, beneficiary, or investment option. To maximize an immediate deduction against my 2021 income, we could double our deduction amount by simply having my wife open accounts alongside my accounts. And with over twenty different portfolio options, the theoretical maximum deduction is more than $160k. I think I’ve got that covered.
Future Rate of Return
As I’ve shared before, I opened the first 529 account in 2006, putting all of the contribution into equities. Over the past 14 years, my internal rate of return was 8%. Assuming an 8% return over the next 14 years and a flat, dollar-cost averaged monthly contribution for each child’s 529 account, my total contribution drops to $188,467 or an average of $31.4k per child or around $12k/year.
Is it reasonable to expect an 8% return for the next 14 years? Maybe not. But frankly, I’m not sure anyone really knows. It could be lower, it could be higher. But you have to start somewhere and 8% seems as good as any. Drop the rate to 3% (pacing tuition inflation) makes it $241,992 and goosing it to 10% takes the total contribution down to $169,590. I suspect it’s somewhere in between.
Dollar-Cost Averaged Contribution
Last year, realizing that I need to play catch up on my college savings, I opened accounts for each child and maximized contributions to two different accounts for my oldest. My modeling spreadsheet includes a calculation of how much I need to contribute each month to their accounts to realize my desired contribution. Here’s a table that breaks it down per child:
|Child||Year Entering College||Current 529 Balance||Monthly Contribution|
I’ve thought about contributing more in the next couple years, when I only have one student, to have my money in the market. This diminishes the benefits of dollar-cost averaging some and introduces some sequence of return risk, so I’m not 100% settled on that idea.
Here’s a peak at my spreadsheet that breaks this all down:
College isn’t cheap, whether it’s the student or the parents paying. But using 529s for the state tax benefit and as investment vehicles can both significantly lower the total cost. Telling my past self to save a little bit more in my 529 accounts isn’t an option, but perhaps passing on what I’ve learned to you is the next best thing.
Anything else that you think I should consider when trying to reduce the burden of my expected contribution to my children’s college expenses? I’d love to hear about them in the comments.