WWYD re: 529 and windfall?

[ohgillian]

That close to going to college, I personally wouldn't put it in a 529. It seems like the power of a 529 is that the earnings grow tax free - but with only 3 years until she starts school, that's only 3-7 years of tax free growth, which to me doesn't offset the limitations that you get from a 529. Where are the funds going to be? Do you have an account anywhere that would let you tap into financial advisor services?

Other options if you want to keep it more protected for college would be something like a short-term bond fund. I have my car fund in Vanguard's BSV which is a short-term bond fund ETF; the next car is maybe 6 years out but I wanted something more secure b/c I really don't want to lose the car savings to market whims.

[aspentosh]

Agree with ohgillian. Only three years out, I wouldn't bother with a 529. You're not getting that much benefit out of it with the limitations they put in place. Not sure exactly what I'd do (possibly CD, even with a low rate) so I hope others chime in.

Admittedly, I am pretty conservative when it comes to large expenses that are planned for within 5 years.

[Poppy]

Interest rates are low right now, so yeah it's going to be tough to find good returns with short term principal protection.

You could still have up to 7 years of growth on the money so the 529 seems a fine choice. I would hope that the fund is already pretty conservative since it's age based.

A bond fund is not ideal because if yields (highly correlated with interest rates more broadly) rise, the value of the bond fund might actually go down. So with yields already this low, I don't think it's a very appealing option. If you are really interested in principal protection I think you just need to accept that yields are low and do something like CDs, money market, or so forth.

[Poppy]

Yeah, I looked it up and it already has low stock holdings at her age:
advisor.my529.org/age-based-moderate-fa/

ETA, initially misread and updated this post accordingly.

[Poppy]

That is really close to what I would choose at her age, actually.

I personally would probably go more aggressive with more stocks through college (that fund appears to go to 0% stocks at age 18), understanding that I may have to top up from non 529 funds if stocks go down. But that is because of our big picture situation with a lot of investments and maxed out tax advantaged investing.

[gt7301b]

I would put some of the monet in a 529 for the younger ones and use existing funds/cash flow the older one, if possible.

[ohgillian]

melmaria, to clarify, I am a big fan of 529s. My comment was more about the fact that they do restrict usage, and that's fine b/c that risk is offset by the significant tax benefit. In your case I was thinking it was basically a restriction with little tax benefit due to the timeframe. BUT, I had forgotten that you have a big age gap in kids. With the additional information, yes, I'd do a 529.

I think if you contribute over the gift tax exclusion limit you are supposed to file a gift tax form in the year you contribute. I didn't do this when I put a lump sum in, but only b/c I didn't really know i was supposed to. (But let's be real, i'm in no danger of going over the lifetime limit, which is what, like $11 million? lol for days)

[simpsongal]

melmaria,do 529s adjust for the age of the likely recipient? sort of like lifecycle funds? I sort of assumed they did....you'd think they would favor bonds and safer vehicles once kids hit those right before college years...

[fryjack2]

Do you want it all to go towards kids' college?

Can you open a Roth for your daughter with some of the money? Or open an account that may gain over the next few years that can be a gift to her upon graduation?

[lacey]

I’d put it in the 529.

It sounds like her 529 is already pretty well funded. If this is a windfall you’d like to remember fondly and go primarily to the kids, I’d consider taking 5k for the 2 younger kids (assuming it will grow with the longer time horizon) and 10k for the older and putting it in a regular Vanguard account and earmarking it for a graduation trip that the graduate wants to pick. Want to go to Paris and stay at a fancy hotel with a view of the Eiffel Tower? Or go on safari? Or explore all the national parks in California? Well the money is ready for that occasion thanks to this windfall.

[aspentosh]

The reason I don't like the idea of a 529 doesn't apply here- since you have two younger kids that could potentially also use whatever your oldest doesn't.

But with the update that you have enough for in-state public college makes me think, again, that just investing it might best. If she decides or continues suggesting she wants to leave the state, then you'll have it available. But tying it up in a 529 doesn't seem quite as necessary.

I also love the idea of putting some aside for all three kids as a graduation present.

[Poppy]

FYI, you can't do a Roth unless she's earning money that's reportable to the IRS at tax time.

[ohgillian]

Apr 29, 2021 9:30:24 GMT -5 melmaria said:

ohgillian , we both have Vanguard accounts that we could use financial advisor services at.

Do you know what the rate is for your short-term bond fund?

Scroll down a bit on the Price and Performance tab: 


investor.vanguard.com/etf/profile/bsv 

[sadlebred]

With 3 years to go, I'd err a bit more on the conservative side. Maybe put half in the 529 and half in cds? I know interest rates suck right now, but they money itself would be safe.