Continue contributing to 529 after kid starts college or not? Also, lump sum or monthly tuition payments?

Paying for College
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We’re figuring out our plans for paying for D26s college starting in the fall. She has a fairly well funded 529 plan. Our preliminary plan is to leave $35k in her 529 since that is the amount that one can roll over into retirement or other things if it is left over (just in case she decides not to go to graduate school). Beyond that, we will then take 25% of the 529 and put it toward her cost of attendance for each of the 4 years. We will then pay the rest of her cost and expenses from our income cashflow.

We currently make monthly contributions to her 529 plan (as we have since she was an infant). My question is, should we continue to contribute to the 529 while she is in college and shift our distributions accordingly. Or, should we just take that money from our monthly cashflow and apply it toward her cost of attendance expenses? We can do either, but I can’t figure out which is best or what the pros and cons of either are.

Relatedly, we are in the fortunate position that we could pay tuition all at once when it is due or do a monthly payment plan (or whatever they offer, I haven’t figured that out yet). Do folks know the pros and cons of one vs the other? If we can do either without financial strain or impacting our emergency funds, which is better and why?

Thanks for any info and thoughts on this.

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I cannot comment on the 529 because we never had this for either of our kids.

We did use the monthly payment plan every year for 7 years. It was easy to set up and we just found it good for our cash flow (we were paying out of current earnings). You never know what other expenses might come up. There is a small fee to set these up…but the money is taken out of your designated account every month. Easy peasy!

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Do you get a tax break on the 529 contributions? I do in my state so I would put money in and pretty much take it right back out again. That way I got the tax deduction another four years (should probably do it once more before graduation in a couple weeks). If you don’t get a tax deduction I see no point in putting money in over her college years -

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Sadly, no tax break. In CA.

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We’ve opted to pay all direct costs once per semester. I have the money electronically transferred from child’s 529 to the school. The plan we use charges a a small fee ($10 or 20 per transaction) for the electronic option but it is worth it to avoid the stress of waiting for a check to arrive and be credited to the student’s account. Electronic transactions are acknowledged within days versus two plus weeks for mailed payments.

My current college student’s school charges a fee, I think $50 plus a percentage of the outstanding balance, to set up a monthly payment plan. Since we have enough in the 529 to cover the semester’s costs, I’d rather pay once than incur the added charges. We do top off the 529 account to ensure there is at least 110% of the next semester’s bill plus the electronic withdrawal fee. The extra 10% is because the 529 requires that buffer for electronic payments. The 529 allows us to open CDs within the account, so that is what I do with any new money added. I choose the CD that matures one month before I expect to need the funds.

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In New Jersey, there’s effectively no benefit to continuing to add to the 529. We intend to pay balances monthly, mostly to keep the cash flow easy/predictable.

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So we have done the payment plan (since it was only $50 a semester) and then reimbursed ourselves from the 529. Always feel it is better for the money to stay in our account and make a few months worth of interest rather than having the school have it. We have continued to put money in since any gains from those deposits grow tax free.

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So if you don’t get a state tax break for contributions, the other main incentive for 529s is no tax on gains for qualified expenses. But usually the gains you would get between the time you contributed and the time you withdraw during the college years is so small the marginal tax break is pretty trivial.

I do know a few people who leave their 529s invested in a very aggressive way, planning to cash flow more in the event of a big loss. That creates at least the possibility of more gains that would escape tax (but not without the risk of loss, of course).

But if that isn’t your investment plan for any new 529 contributions, I would not worry about discontinuing them at this point.

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I think the answer is - it depends.

If I were going to leave it in, I would move out the target year - otherwise you are just getting a money market return - 1%, 2%, etc. In other words, you might make it a 2040 or something instead of 2026. Of course, the idea there would then be it hopefully would go well beyond $35K or you wouldn’t need to leave in $35K to have it get there when you decided to start gifting it (as you can only do a portion each year)..

Personally, I wouldn’t leave the $$ - I’d spend it. But even if you leave some thinking about a Roth, you never know what future expenses there might be. My daughter just gave me a $1700 bill for a certification she needed that I paid for.

So i’m not sure you can truly get it right.

I do have monies left - but only because my kid’s school cost less than I had. But I would have spent it all down.

But it’s a personal decision.

You saved all this time to fund college - and I’m sure you’ve had growth so college will cost less than it appears. So why not take that gain and cash it in?

On the other hand, if you set your student up for retirement, well now you need to cash flow as you noted - so that’s spending another $8 or $9K today (which cost you less given your presumed gains) if you spent down the 529.

And don’t forget, the money had to be in the 529 with the student as designee (I believe) for 15 years for it to be Roth eligible.

As for monthly vs. one shot, I’d go for one shot - it’s just simpler. Some monthly plans may have a fee too - although I can’t say yours does. But is the “holding” of the tuition and earning a bit more interest worth it? Only you can decide. As it’d be autopay, it’s just administrative on your part - is it too hard to track? If you are ok with the fee - if there is one - or you are ok tracking many payments vs. one, then the monthly is ok.

It’s another - it’s an individual call.

Good luck.

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Thanks. We do not plan to be aggressive with what remains in the 529. We have what we need to cover her undergrad and then some with low stress. Losing a chunk of that money in a down market would be more stress than the positive feelings of bull market gains. So, tax break I expect to be trivial.

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The reason we’re thinking of leaving the $35k in there is she may go to grad school after undergrad. If she does, feels good to have some money in there. I suppose since we are not planning to seek aggressive gains on what remains in 529, we could think about whether it makes sense to structure things differently to maximize gains. Whatever we do, I probably don’t want to try to do anything too complicated or risky (in terms of the money we plan to use for her college expenses).

In terms of the 15 years, my understanding is that the account has to be open for 15 years (which hers has), and the money that would be converted to Roth (if that’s how it ends up) has to have been there for 5 years. Both of those should easily be met by the time we’d do any conversion at least a year or so after she graduates.

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We’ve lump-summed our payments to schools from the 529s. I didn’t see any reason to do the monthly plan, it is just one more thing to have to think about and I try to simply our finances was much as possible.

We have continued to contribute to 529s whiles the kids are in college as our state does give a tax credit for contributions. If there is anything left in the accounts, 35k each can be used to fund their Roths after graduation.

Ultimately, the answers to those questions have more to do with your own financial planning choices. It might be a good idea to figure out what else you would do with the money you’ve been contributing to the 529 to decide what is optimal for your family.

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I think both work:

If you pay undergrad with the 529, then you are cash flowing less today and saving for later.

If you hold the $35K to pay for grad school or a Roth, then you are cash flowing more today so spending money you may never need to.

Since you’re not wanting to take risk, I would look at the expected growth of the 529 vs. inflation. Clearly, inflation would grow faster, so that’s another reason for spending down today. In other words, spending $35K today will cover more than in 7 or 9 years - because your $35K might grow 1-2% a year and inflation would exceed that.

So mathematically, that’s likely your best bet - and by spending today, you’d be saving the cash flow which you can use tomorrow.

But that’s the math - for some, they’ve got more interest in a plan like you have - and the return itself is secondary - so that’s ok too.

I think it makes the most sense $$ wise to spend it sooner but if you choose otherwise, there’s no harm.

The good news is that college is affordable either way. Congrats on her making a decision.

Good luck.

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If you are considering the Roth conversion, please double check the rules in CA. It’s my understanding that CA has different rules for converting that might play into your decisions. Also, if student is oos, investigate how CA considers the 529 $$.

We have some left in one of our children’s 529 plan, and they are currently in a fully paid grad program, so we’re working through figuring out a path forward. Might end up redirecting to the next generation (if one comes to be..)

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This is the first I’ve heard of CA having different rules for the Roth conversion that we’d also have to consider. We live in CA and she’s going to CA. Do you have any info you can share on what I need to look out for here? I will look into it. But, that could be a reason for us to follow the plan @tsbna44 suggested and just spend the whole 529 down while she is in college.

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Yikes I found it on a quick google search. Looks like the rollover would be taxable by California and also subject to a 2.5% Penalty tax. So, absent other information, looks we should just spend all the 529 money on undergrad in case she does not go to grad school or goes to a program that is paid for (e.g. phd). 2025 Instructions for Form FTB 3805P | FTB.ca.gov

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Dang - California is just crushing - that sort of defeats the purpose. Good thing you found that for sure.

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The good news is just giving them money to help make early Roth contributions is not much less useful, as 529 to Roth rollovers come out of the annual limits anyway.

The main benefit of the rule is to help out families who would otherwise be making unqualified withdrawals. Since you can make qualified withdrawals, I would not consider this a big loss.

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I looked into this for D19’s upcoming grad programs, and it seems anything that is like a scholarship (such as tuition rebate) you can withdraw without the penalty, though you’re still liable for tax on the capital gain. (Anything that is being earned by the student such as a TA or RA position doesn’t count for this.) You may already have looked into this but just thought I’d mention it.

I think this is the cleanest route. You know you need it now, and especially if you have to put other funds in or pay other funds to make up for what you’d save, it doesn’t make sense to me to leave money on the table. (Of course depending where you are invested, the stock market might be doing that for you anyway…) Similarly, if there’s enough money in there and no tax break on contributions, I’d just keep the cash flow elsewhere. I also don’t see the point in monthly plan if the money is in the account and interest earned is minimal - it just seems cleaner to me to pay the lump sum each semester. I could see the point if it’s a cash flow issue/tuition is being paid out of income but not if it’s there for the taking.

Btw, as an aside, we got D19 a credit card for college (which I paid for obviously) which served a dual purpose - all her college-related spending went on there so we had the statements to easily see /track the 529-eligible spending (which I just withdrew from the 529 in a lump sum at the end of each semester) and she had a great credit score by the time she graduated. Planning to do the same with C26. While on rules, also be aware of the calendar year match-up requirement (so withdraw anything eligible for fall semester before end December, and don’t transfer spring tuition etc before 1 January).

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This thread has been so helpful. So glad I posted!

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