Q&A: How Much to Put in 529 Plan?

Surprise, you can actually save too much in a 529 Plan.

Question: I find it confusing to figure out how much money to sock away in a 529 plan for our children’s college. It seems you have to make judgments based on many factors that are unknown or difficult to estimate — such as the future cost of tuition, the rate of return on the money and so forth. I’m wondering if you have a suggested ballpark figure for how much we need to save to send our kids to a good college 15 years from now.

Ric: We generally advise our clients to save no more than $50,000 to $60,000 in a 529 plan for children as young as yours. It may not fully fund college, but that’s by design: You do not want to overfund the accounts.

(A lot of parents, of course, struggle with getting the 50 grand. That’s a separate conversation!)

If you accumulate too much money in the account, the child might not spend it all. If that occurs, withdrawals become subject to taxes and a 10% penalty. So you want to have only enough in the account to be able to withdraw funds tax-free to use for qualifying college expenses.

Another concern: We have seen people put so much money into college savings plans that they put their own retirement at risk. We want to make sure you are saving sufficiently for your retirement before you save for your children’s college.

Talk to a financial advisor, or call us if you don’t have one, so we can evaluate whether you are on track with your retirement savings. Then we can examine what you should be doing for college.

This material was prepared for informational and/or educational purposes only. Neither Financial Engines Advisors L.L.C (also referred to as Edelman Financial Engines) nor its affiliates offer tax or legal advice. Be sure to consult with a qualified tax or legal professional regarding the best options for your particular circumstances.

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