Keep this in mind with a 529!
I have put two kids through college, and my wife and I each finished grad school in the last several.
Within the next three years, I’ll have two more kids in college.
The AIO has been invaluable for us as we’ve been able to pay tuition invoices without having to take on a mountain of student loans. Having access to our home’s equity has been extremely helpful, but I’ve learned a few things about how to be most strategic.
For years, we set aside money every month into a 529 so we could write it off on our state income taxes (details vary from state to state) and have funds saved & available for our kids’ education. I wish I’d known then what I’ve learned since, namely, about 529s, tax write-offs, and the finer points about eligibility for financial aid.
Your 529 isn’t earning you much interest—at all.
All of those funds that we set aside for all of those years didn’t earn us hardly anything in interest. Literally: thousands of dollars sitting idle for over twenty years created next to nothing in terms of interest earnings! I hate to think about how much that money could have been saving me if it’d be sitting in my AIO, driving down the balance of my mortgage.
Money only needs to be in a 529 for a few days to write off.
This was what nobody ever told me. Instead of depositing thousands of dollars a year into my 529 and then writing that amount off on my taxes, I could’ve kept those funds in my AIO until getting an invoice from the universities. At that point, I could transfer funds from my AIO into my 529, let them sit there (while the 529 buys a mutual fund) for several days, and then pay the tuition invoice from the 529. Those funds could be written off just as if they’d been sitting there all along.
That much money for that much time could have really benefited me if it’d been sitting in a smarter place. And I still could’ve written off the exact same amount on my taxes.
Money in a 529 has to be spent on education.
If your kids decide not to go to college, you aren’t allowed to simply repurpose those funds without paying a penalty. Your money in a 529 will have to wait until eligible education expenses warrant their use. Withdrawal of funds from a 529 for non-qualifying expenses results in penalties that could end up costing thousands of dollars—to access your own funds.
The AIO actually entitles you to receive more financial aid.
Another mindblower: Did you know your 529 is actually hurting your chances of receiving financial aid? Take a look at this screenshot from the 2022-2023 FAFSA application:
When the government is determining how much financial aid you are entitled to, they require tax returns, bank balances, & investment account balances.
They use these to see how able—or unable—you are to pay for school on your own. “The more money you have, the less money you need,” in their eyes.
Notice what you don’t see listed?
Your home’s value, nor its equity.
Having $100,000 set aside in a 529 for education is accountable, whereas if you’d left that in your AIO, it would be unaccountable. You’d be eligible to receive more financial aid, and the funds will be working for you in the meantime. If your mortgage balance was $400,000, keeping those funds in the AIO would be saving your hundreds of dollars every month by dropping the balance to $300,000.
Since you can still write off the money you spend on education (see point #2), you have nothing to lose by storing those funds in your AIO, and then channeling them through your 529 when the time comes to pay tuition.
And if your kids decide college just ain’t their thing, that’s no problem either.
