How much to invest in 529 and UTMA accounts?

How much per year should we be putting into these accounts if our little guy is 7 months old?  We started the first month after he was born... I know as much as possible, but what is reasonable- not too much or not too little, especially for the 529?  Thoughts on how much for the UTMA?

 

Thanks so much in advance!    

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  • Unless you are already maxing out all available tax advantaged accounts annually (401k, IRA, and if you have one and HSA) and have paid off all high interest debt, the answer is ZERO.

    If you are already good in all those areas, then it's really up to you. We chose not to use 529s with our kids at all because we felt the use was too restrictive. On the other hand, we do have a Florida Prepaid university plan for each of our kids.

    We do use UTMA accounts for savings at Ally and a brokerage at Vanguard. In the brokerage account we buy the Vanguard Total World ETF (VT), and tax gain harvest annually as appropriate. Just realize that the Kiddie Tax rules have changed again starting this year to revert back to the pre TCJA rules, so there is less head room for ordinary unearned income that is tax free. Just remember that the kid gets unrestricted access to the money in a UTMA account when they reach the age of majority.

    As for how much to put in, it really depends on you. Our kids get $150 in I Bonds, $90 to Ally savings (both used to be lower but we've finished paying Florida Prepaid and are just redirecting the payments to these accounts) and they get a cut of whatever leftover money we have at the end of the month for their brokerage account each month (the parents cut to the brokerage is 65%, each kid gets 5% rounded down in $25 increments.... most months that would be $100 or $125). The savings contribution goes up $5/month every year in January. But this is only because we are maxing all our available accounts, have the same budget every month and have significant excess money each month. That's around $350 per kid each month, but it's because we can afford it.

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  • We have 3 kids. We are doing 529 out of Utah (though that is not my state) since that has shown to have better options and performance over the years (https://www.savingforcollege.com/). I chose based off of the options as opposed to the tax advantage for my state. We are doing 200 per kid per month. We are also not doing age-based.

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  • Thank you so much for your advice!  To clarify- we don't have any high-interest debt.  We are maxing out our Roths and contributing to our work retirement accounts as well.  We mainly were thinking of 529 and UTMA as the way to go for saving for our little guy.  Are there other things I should be considering?  I bought him one I-bond in July (100) and we do have a small savings account, but we haven't put a lot in there.  I was thinking with compound interest, the more we put in the stock market now, the better.  

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      • nolesrule
      • YNAB4 Evangelist
      • nolesrule
      • 3 mths ago
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      Oatmealcookie said:
      To clarify- we don't have any high-interest debt.  We are maxing out our Roths and contributing to our work retirement accounts as well. 

      Yeah, I always give the blanket advice first when I don't have all the information available. ;)

      My kids are a little older, so telling you what we've done is age based (hence I Bonds and high yield savings account) in addition to the investment account.

      If you want to go stock only, a UTMA account is a great choice, because it can be used to pay for anything that benefits the child (for example, buying them a car when they go off to school or paying for their non-essential activities... my Oldest joined Scouts and we bought her some camping gear, which is now hers for as long as it'll last). You just need to make sure to tax gain harvest as gains happen so that when they get older they have reduced or no taxable gains.

      If you only want the money to be used for college, and college related eligible expenses (although apparently now it can be used for K-12 private school tuition), then a 529 is fine. But not everyone goes to college.

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  • nolesrule said:
    We chose not to use 529s with our kids at all because we felt the use was too restrictive

     Same here. We used UGMA's, same as UTMA's. 

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  • Thanks again so much!  What does it mean to tax gains harvest?  We have both the UTMA and 529 set up already, but I was thinking we just put money in and left it there.  

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    • Oatmealcookie nolesrule , correct me if I'm wrong, but I think the idea is to sell funds in the UTMA or other taxable account that have appreciated, and buy similar (but not identical funds). If you do this far enough ahead of college, you'll reduce the taxable income that would have to be reported for FAFSA purposes due to selling assets to pay for college.

      Right?

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      • nolesrule
      • YNAB4 Evangelist
      • nolesrule
      • 3 mths ago
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      Matthew When you sell at a gain, you can rebuy the same thing you just sold (at least if you are using an ETF rather than a mutual fund, where you'd have to wait a day to rebuy). This raises the cost basis while paying zero taxes on the gains as long as your gains are under a certain threshold. Raising the cost basis means that later on when the gains become taxable at 15% (because we expect the kiddos to be successful), there are less gains than if the harvesting had never happened.

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    • nolesrule Oh, right, of course there's no wash sale rule for gains! 🥴

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  • We opened 529 accounts, one for each child, when each of our kids was born.  I will admit that we were not maxing out retirement at the time, and we also had a car loan (but no credit card debt).  In the beginning we tried to put $150-200 in each account every month, and I would say we were successful 8-9 months per year.  Gradually, we were able to increase the amount we contributed and by the time we stopped contributing, we were adding $300-400 per month to each, again not every single month, but most of them.  Over that time, we also increased our retirement contributions (we did not always have access to workplace retirement plans).  

    We used the Alaska and Iowa plans, which had good reviews at that time (I don't know about now), because our state had (and still has) a bad plan.  We invested in the 100% growth stock option when they were little.  When they turned 12, we started moving the money out of stocks, and by the time they were 16, we had all the money in bonds/money market options within the plans.  We stopped contributing when the accounts hit about $75,000.  We still save, but in a regular money market fund.  We ended up contributing about $40,000 to each account, and both accounts reached about $100,000.  My oldest started school last fall, large state school, out of state but with a merit scholarship, and we will be able to cover 100% of the cost (tuition, room and board) with the 529, plus/minus a few thousand.  Just starting to look at colleges with our youngest.

    It is great to write the college checks (not that you literally write checks these days!) and know that the big gains in the accounts are tax free and 100% available for college costs (tuition, room and board, books, computer, etc.) It does not cover health insurance, which I pay for separately.  

    In hindsight, I do not regret contributing to the college funds even though we were not debt free and were not maxing out retirement.  I realize that decision may not have been the correct one from a purely mathematical standpoint, but it brought me a lot of peace of mind to know I was saving for them, because I know that I would have been very tempted to take out loans to help them out, and this saved me from myself!  We did still save for retirement and pay the car loan.  So I guess it was not efficient, but it got the job done!

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