College Saving Plans

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Joined: Fri Oct 18, 2013 10:26 pm

College Saving Plans

Post by axman »

wonderful tool! Anyone on this forum can point me how to deal with college saving plans (e.g. 529). Those accumulate tax free and distributions for tuition and room and board are tax free. I can see how I can put college expenses into the tool, but how can I add contributions and distributions from a 529 plan. Those will only apply over some defined period (hopefully 4 years).

Any suggestions.

Posts: 634
Joined: Thu Feb 28, 2008 6:48 pm

Re: College Saving Plans

Post by jimr »


Thanks for the kind words about the planner and the excellent question about how to account for tax free college savings.

The planner doesn't have explicit support for tax free college savings programs, but you can get a decent approximation by using taxable savings and making some rough adjustments to offset the tax savings you'll get from the 529 plan.

Calculating the precise adjustment needed to offset the impact of taxes is very complicated, but it's not that hard to come up with a very rough adjustment that's probably within about 5% of the precise answer.

Here's a formula to adjust (increase) your annual college savings amount:
Adjusted Annual Contribution = actual_contribution + (actual_contribution*avg_return*investment_tax_rate*(years/2))

- actual contribution is the actual amount you'll put in your 529 each year
- years is the number of years of annual contributions and the approximate number of years until the college expenses start (these are assumed to be the same).

If you already have a balance in the 529, here's a formula to adjust that:
Adjusted Starting Balance = starting_ balance + (starting_balance*avg_return*tax_rate*(years/2))

In both cases, the actual amount you have or will contribute is adjusted upwards to account for the fact that the simulation is taking taxes out when in real life there won't be any taxes due.

Again, these are very rough estimations, but they should get you in the ballpark. Please post again if you have questions.


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