529

Fairly Funding Multiple 529s

This post is a followup to my Couch to 529, last month. The answer I’m searching for here is how to divide the $100k fairly between the education of many grandchildren. I explored something similar in Dividing a 529 Six Ways, but this time I’m throwing the hypothetical 24 grandchildren at it with a new spreadsheet. 

The goal is to be as fair and consistent as possible. This is probably an impossible task. Variables such as time remaining to compound, varying rates of return and inflation, scholarships, and different expenses between colleges can all make dramatic differences between education costs for each individual grandchild. 

Let’s see what we can come up with to untangle this Gordian knot.

Option 1: Equal Contributions

The first option is to keep things simple and just divide the contribution equally among all grandchildren, ignoring circumstances like remaining compounding time until college. I simply fund each account with $100k / 24 grandchildren = $4,167 and call it a day. A grandchild in college gets the same amount as the baby born last year.

The trick here is that while the contribution amounts are equal, the 529 balances when used will have vastly different balances. Assuming an 6% average annual return, the grandchild born last year, who has over 16 more years of compounding remaining, will have over $11k when she is ready to enter college. Meanwhile, the three granddaughters who are already enrolled in college would immediately need to turn the $4,167 gift into paying college expenses, being unable to compound it further. 

In the chart, Erica*, Tatiana and Amelia are all already in school, while Eve was born last year:

You could call this a fair approach because it’s equal contributions, but it’s not as fair in outcome, i.e. dollars towards degree.

At the end of this option, my total gift (contributions+compounding) is $144,501.

Option 2: Account for Remaining Compounding

A different approach is to consider how much time the grandchild has until college and then choose what I think is a reasonable, after-inflation, rate of return. Let’s say I assume an average 6%, average annual return. The grandchild who is already in school has 0 months remaining, while the grandchild born last year has 201 months of compounding left. Plugging those numbers into FV = PV * (1 + rate) ^ time gives me $5,670.99 for the grandchildren currently in college and $2,136.91 for the youngest grandchild.

Here’s the spreadsheet with the data. You can just “Make a Copy” and then play around with it by removing grandchildren or changing assumptions like gross contribution or rates of return.

At the end of this option, my total gift (contributions+compounding) is $136,104, over $8k less than the “equal division” option.

Option 3: Fixed Dollar Contribution At School Time

Perhaps I don’t like the idea of putting money into a 529 account for each grandchild. It’s a hassle to set up and manage 24 different accounts. And there’s flexibility I give up by putting it into a 529 that I might not have with a traditional brokerage account. Or maybe I really love real estate (I don’t, but work with me!) and I’d rather invest my $100k in a piece of real estate, then making college contributions from the rent it generates.

Well, with the flexibility of the brokerage account or perhaps the comfort I get from real estate investing, comes drawbacks.

First, I hope I’ll be able to get an equal or greater return on my non-529 investment. This isn’t crazy, but it would require more attention from me than just picking a simple index fund option with low fees like I can find in many 529 plans.

Second, it’s tax inefficient. Instead of getting tax-free compounding like I would with a 529 plan, I’m paying taxes every year on the gains. If I’m in the 24% or 32% tax brackets, I’ll have to get a super rate-of-return to compensate for the tax drag.

Third, even if I can satisfy the first two drawbacks, I’m still better off passing the money through a 529 when I make my contributions so I can score a state income tax deduction from the contribution (assuming I’m doing this from Utah as with my Couch to 529 post).

One 529 Super Account

Instead of creating 24 accounts, I might be tempted to create one 529 and then switch beneficiaries as needed. However, luckily, Utah’s my529 makes it easy to switch beneficiaries using this form. No notarized form like you need with Ohio’s 529 plan

Switching beneficiaries isn’t without problems. First, Utah’s 529 restricts switching to family members. In this case, first cousins are okay. Second, I can only super fund a 529 up to $75k (2021 gift tax exclusion spread over 5 years) before I run into gift taxes. Every time I switch beneficiaries, I could trigger gift taxes. And third, in Utah, my 529 tax credit is capped per beneficiary, per year, so maximizing the tax benefits would require work.

Some years I have multiple grandchildren entering college, and with restrictions on switching beneficiaries more than once a year, I’d still need to end up with a couple 529 accounts to fund years when multiple grandchildren are entering school. I could probably over come this by opening separate 529s for the oldest grandchild in each of my children’s families, then switching beneficiaries as they rotate through school. This is still a hassle and has all the challenges associated with switching beneficiaries, above.

Other Thoughts

I’m not sure I’d take into account varying school costs. I’d probably leave this one alone, letting the natural incentives play out in encouraging grandchildren to consider cheaper options.

I also wouldn’t factor in scholarships. Whether a grandchild scored a scholarship or not, I’d give them the same amount. This creates a maximum incentive for the grandchild to seek out scholarships. By reducing the aid I give them based on scholarships, I reduce that incentive.

Conclusion

Fairness is in the eyes of the bolder. I’m sure if I implemented this play across my hypothetical grandchildren that some of my children might see whatever I do as more or less fair than the others. However, my goal would be centered on contributing to my grandchildren’s education, not on necessarily making everyone happy.

Anything else I should be considering? Leave me a comment.

Hasta luego!

[*] Fictional names. Who knows how crazy baby names will be when/if my grandchildren are born.

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