A quick 529 run down

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wldlndfirefghtr
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A quick 529 run down

Post by wldlndfirefghtr »

Hello,

I'm trying to educate myself on 529 for my daughter. I am not too familiar with them. We currently live in Alaska, and don't have a real good understanding on how to pick and enroll into one.

Appreciate the info in advance!

Thanks!

Jason
livesoft
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Post by livesoft »

Start with answering these questions:

1. I contributed $16,500 to my 401(k)/457/403(b) plan: Yes or No?

2. I contributed $5,000 to my Roth IRA: Yes or No?

3. My spouse contributed $5,000 to a Roth IRA: Yes or No?

4. My spouse contributed $16,500 to a 401(k)/457/403(b) plan: Yes or No?

If you don't have 4 Yes answers, then a 529 plan is probably not for you.
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dkdoy
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Post by dkdoy »

Lots of great threads on this site on 529 plans. Clark Howard also has some good info. http://www.clarkhoward.com/news/educati ... uide/nFZS/
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wldlndfirefghtr
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Post by wldlndfirefghtr »

Thank you for your response,

I meant to add I am reading through the wiki of 529's, and the money that would be contributed to the 529 would be her money that she receives from birthday money and her Permanent Fund.

My wife and I do max out our ROTH IRA. I try to put a good portion of money away in my 401k, but not leave us hanging for living expenses. She has a simple IRA through her work, and works part time at this time. Some day we hope to max out our 401k's.

Thanks,

Jason
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Post by wacodiver »

Lots of good plans out there and lots of bad plans out there. Since this is a Vanguard-centric forum I would recommend:

1. The Vanguard Nevada Plan that is directly administered by Vanguard if you have the minimum $3,000 required to open an account, or

2. The Utah Plan which uses Vanguard funds but is administered by Utah and has a much lower minimum balance.

Both plans have basically the same fund choices and comparable fees.

The Alaska Plan through T-Rowe Price is OK but has higher fees because it uses a blend of actively manged T-Rowe Price funds and has $20 annual account fees. Because Alaska has no state income tax you really gain nothing by keeping your money within the Alaska plan. My wife and I used to live in Juneau and we originally opened our 529 plans through the Alaska T-Rowe Price plan but I recently rolled the money into the Vanguard Nevada plan which has lower fees and lets me see the 529 accounts through my regular Vanguard log-in.
xerty24
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Post by xerty24 »

livesoft wrote:Start with answering these questions:

If you don't have 4 Yes answers, then a 529 plan is probably not for you.
I disagree. If you're getting a state tax deduction, a 529 may be a compelling alternative. If not, other retirement accounts are probably best as you say.
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Post by Delayed Gratification »

I'm in Utah 529 (i.e. UESP), in sort of a token fashion, mostly for when grandparents or friends want to "donate to the college fund". Utah has low fees, a customizable option and access to Vanguard funds, including international options.

I won't be contributing much myself until retirement/down payment savings are maximized, since I live in CA and there's no income tax deduction.

The best way to ask about 529's is in the full context of your overall savings plan, since it doesn't always make sense to use this vehicle. I'm no expert, but there are plenty around that will give you solid advice.

Remember the old adage: Your child can get loans for education; you can't get loans for retirement!
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Post by White Coat Investor »

Agree with others. Fund your retirement first. But if you want to dump her PFD into a 529 each year, I'd use Utah's. You obviously don't get a state tax deduction in AK, so you might as well use one of the best plans out there. Since each state has a plan, it varies a little bit which one is the very best each year, but Utah is consistently in the top 5. I'd use it even if I wasn't getting the state tax deduction for it.

You can put in up to $13K a year, it is taxed up front, then, if spent on education, never taxed again. It remains your money, so if she doesn't go to college, you can exchange it into a 529 for a little brother or pull it out yourself, pay the penalty, and spend it.

Another option that is probably just as good is to use an ESA. Unfortunately, Vanguard isn't letting people open new ones anymore since Congress started discussing cutting the annual contribution limit back to $500 a year. They haven't yet, it's $2K a year, but I think you'd have to use a different company. There really isn't a lot of reason to go with an ESA over Utah's 529 though.
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Post by letsgobobby »

ESAs are still cheaper and more flexible, but they only make sense if the amount of money being contributed is small.
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Post by Beantown85 »

livesoft
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Post by livesoft »

The only reason to use a 529 plan after you have filled up retirement plans is to save on taxes. Since this money belongs to the child who probably doesn't pay taxes, I'm not sure a 529 plan is useful.

I would use the money to enrich the education now of the child. That might mean music lessons, trips to foreign countries, foreign language lessons, laptop computer, summer camps, etc.

www.savingforcollege.com is another web site with lots of info about 529 plans.
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Post by retiredjg »

esetter
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Post by esetter »

In terms of fees, the New York plan looks better than Nevada's. New York's plan, however, has the Vanguard Developed Markets Index investment option, rather than the Total International Stock Market Index that is available in Nevada.

However, New York's plan has the following provision (according to savingforcollege.com) which I do not understand:

"New York follows tax-free treatment for rollovers except that, according to a New York State Dept. of Taxation and Finance interpretation, a rollover out of a New York 529 plan is treated as a nonqualified withdrawal. A direct trustee-to-trustee rollover between two New York 529 accounts is not treated as a nonqualified withdrawal for this purpose."

Can anyone explain this provision? Does it affect changing account owners or changing to another state's plan if the owner is not a New York resident?

I hope I'm not hijacking this thread by posting this comment.
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Post by livesoft »

I think it means that if you move from the NY 529 plan to another state's 529 plan, that you have to pay NY State income taxes on that rollover since it's non-qualified as far as NYState is concerned. NY is pretty good about trying to recapture state income tax from folks who try to get tax breaks.
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Post by esetter »

livesoft wrote:I think it means that if you move from the NY 529 plan to another state's 529 plan, that you have to pay NY State income taxes on that rollover since it's non-qualified as far as NYState is concerned. NY is pretty good about trying to recapture state income tax from folks who try to get tax breaks.
That was my knee jerk interpretation. If it's accurate, it's a good reason for non New York residents not to invest in the NY plan. Better to retain the flexibility to change plans without incurring NY taxes.
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Post by Chuck »

I think you'd only have to pay NY taxes if you deducted them in the first place. I hope.
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Post by livesoft »

esetter wrote:That was my knee jerk interpretation. If it's accurate, it's a good reason for non New York residents not to invest in the NY plan. Better to retain the flexibility to change plans without incurring NY taxes.
I do not think that is the case. Only NY residents or others who previously took a NY state income tax break would have to pay NY taxes on non-qualified withdrawals.
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Post by gulliver »

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wldlndfirefghtr
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Post by wldlndfirefghtr »

Everyone,

Thanks for the great discussion. I understand the benefits to investing in a 529, I understand if I was in a state with state income tax, I would get a tax break in that state. It basically boils down to finding a good performer, low er, no fees, and whether to put it in my name or hers.

Any thoughts on age based 529 vs AA yourself?

EmergencyDoc, what is an ESA?

Still sifting through the wiki, lots of good info

Thanks all!!
Last edited by wldlndfirefghtr on Mon Jan 10, 2011 2:54 pm, edited 1 time in total.
markcoop
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Post by markcoop »

livesoft wrote:Start with answering these questions:

1. I contributed $16,500 to my 401(k)/457/403(b) plan: Yes or No?

2. I contributed $5,000 to my Roth IRA: Yes or No?

3. My spouse contributed $5,000 to a Roth IRA: Yes or No?

4. My spouse contributed $16,500 to a 401(k)/457/403(b) plan: Yes or No?

If you don't have 4 Yes answers, then a 529 plan is probably not for you.
Well, I do 1-3, not 4, and contribute to a 529. If you do 1-4, that's $43,000/yr toward retirement. Of course, the more the better, but that's quite a bit of money per year. Also, I don't do 4 because my wife's plan is a bad plan. I'd imagine that there are plenty of people who don't do 1-4, but it still makes sense to contribute to a 529.
Mark
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Post by livesoft »

My spouse has one of the worst 401(k) plans reported on the forum. Nevertheless, she contributes the max allowed to it. We found that we can then borrow from the 401(k) plan to put money into a 529 plan and save lots of money while still having plenty of tax-advantaged space for retirement.

Furthermore, if you have got your 401(k) ducks in a row early, by the time college expenses roll around, one can simply stop contributed to a 401(k) if needed and pay for college from current cash flow. For example, if you are used to putting $43K to $56K a year into retirement plans, then you are used to not spending that money with your lifestyle choices. That means a big chunk could go to current college expenses if you cut back then on 401(k) contributions.

Furthermore all the 401(k) money is exquisitely shielded from financial aid calculations, so that's an additional plus.
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Post by oragne lovre »

livesoft wrote:We found that we can then borrow from the 401(k) plan to put money into a 529 plan and save lots of money while still having plenty of tax-advantaged space for retirement.
Can you please explain a bit more about borrowing from 401K to put into 529s? Any penalty or tax consequence?
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Post by livesoft »

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Post by White Coat Investor »

wldlndfirefghtr wrote:Everyone,

Thanks for the great discussion. I understand the benefits to investing in a 529, I understand if I was in a state with state income tax, I would get a tax break in that state. It basically boils down to finding a good performer, low er, no fees, and whether to put it in my name or hers.

Any thoughts on age based 529 vs AA yourself?

EmergencyDoc, what is an ESA?

Still sifting through the wiki, lots of good info

Thanks all!!
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Post by porcupine »

xerty24 wrote:
livesoft wrote:Start with answering these questions:

If you don't have 4 Yes answers, then a 529 plan is probably not for you.
I disagree. If you're getting a state tax deduction, a 529 may be a compelling alternative. If not, other retirement accounts are probably best as you say.
I am curious why a 529 plan is not a good option once those four Yesses are recorded ... in a state tax free state?

- Porcupine
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Post by livesoft »

A 529 plan is a good option once you have 4 yesses.
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Post by xerty24 »

porcupine wrote:
xerty24 wrote:
livesoft wrote:Start with answering these questions:

If you don't have 4 Yes answers, then a 529 plan is probably not for you.
I disagree. If you're getting a state tax deduction, a 529 may be a compelling alternative. If not, other retirement accounts are probably best as you say.
I am curious why a 529 plan is not a good option once those four Yesses are recorded ... in a state tax free state?
Sure, if you've answered Yes to all of them. a 529 is a fine choice. My point was that IF you get a state tax deduction, you might want a 529 even if you answered No to several of the questions.
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Post by livesoft »

You are sure to get a state tax deduction for contributing to your 401(k) anyways.
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Post by xerty24 »

livesoft wrote:You are sure to get a state tax deduction for contributing to your 401(k) anyways.
Not if Roth 401k is a better choice for you. A 529 in a state with a deduction for it is like a deductible Roth - what's not to like about that? Sure you'd want to make sure Roth is better for your situation and the strings on the 529 aren't too troublesome in your personal situation, but it could happen.
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livesoft
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Post by livesoft »

If a Roth 401(k) is a better option for you, then either
(a) you are so poor, your kid will get financial aid out the wazoo, or
(b) you are so wealthy you can pay for a year of college from your January paychecks and thus should have 4 yesses anyways.
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Post by xerty24 »

livesoft wrote:If a Roth 401(k) is a better option for you, then either
(a) you are so poor, your kid will get financial aid out the wazoo, or
(b) you are so wealthy you can pay for a year of college from your January paychecks and thus should have 4 yesses anyways.
True but there are cases in the middle too. Say you're young professional just getting started - I think you should at least consider a deductible 529 before retirement savings. In this case your tax rate is probably on the low side of what you expect during your career, and maybe equal or lower to what you expect in retirement, so Roth is the right choice. In addition, in 10-20 years, you can expect to have a successful career and very likely not qualify for financial aid, so a 529 also makes sense to fund your family's future education costs.

In the early years, say when you're repaying your graduate or professional school debts, you might be able to save $10-20K/year but not $50K (to max out all your families retirement accounts and still contribute to the 529). Hence you would be able to answer No to several of your questions, but still a 529 is a better choice since you get the tax deduction on top of the Roth treatment for your investment (that you would have gotten in your IRA/401k).

Now maybe in such a situation you'd say the professional should contribute to his 401k, take a loan, use that money to fund to his wife's 401k, and take a loan from that to fund the deductible 529 (thereby reserving the extra tax-sheltered retirement space for their future savings), but that's not exactly the type of analysis you expect for people who are answering 4 simple questions ;).
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Post by wacodiver »

xerty24 wrote:
porcupine wrote:
xerty24 wrote:
livesoft wrote:Start with answering these questions:

If you don't have 4 Yes answers, then a 529 plan is probably not for you.
I disagree. If you're getting a state tax deduction, a 529 may be a compelling alternative. If not, other retirement accounts are probably best as you say.
I am curious why a 529 plan is not a good option once those four Yesses are recorded ... in a state tax free state?
Sure, if you've answered Yes to all of them. a 529 is a fine choice. My point was that IF you get a state tax deduction, you might want a 529 even if you answered No to several of the questions.
The original poster is from Alaska which has no state income tax so obviously no deduction. There is, however a 5th criteria for when a 529 makes sense and that is when it is the kids own money. I believe the OP was looking for ways to invest the child's permanent fund dividend. Sure, the parents could toss it into their retirement accounts but if they are treating it as the kids money and not theirs then a 529 makes a lot of sense.
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Post by market timer »

livesoft wrote:Start with answering these questions:

1. I contributed $16,500 to my 401(k)/457/403(b) plan: Yes or No?

2. I contributed $5,000 to my Roth IRA: Yes or No?

3. My spouse contributed $5,000 to a Roth IRA: Yes or No?

4. My spouse contributed $16,500 to a 401(k)/457/403(b) plan: Yes or No?

If you don't have 4 Yes answers, then a 529 plan is probably not for you.
What about those of us who answer yes to all the above but are not sure whether they'll have children?
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Post by PetaHertz »

I don't agree with the sentiment that I should only save for my retirement and not for my child's education. My parents saved for mine, and now I consider it my responsibility to provide for my child. Somehow I will have to find a way of funding both. Saddling her with debt when she graduates is not palatable to me. It's not the right path for everyone, but that is my objective. And as long as I'm saving, then it might as well be tax free.
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Post by livesoft »

You do know that you can use your Roth IRA for qualified education expenses, right? I'm not recommending that, but if your choice is to save for college in a 529 plan at the expense of not maximizing your Roth IRA contributions, then that just does not make any sense to me.
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Post by PetaHertz »

livesoft wrote:You do know that you can use your Roth IRA for qualified education expenses, right? I'm not recommending that, but if your choice is to save for college in a 529 plan at the expense of not maximizing your Roth IRA contributions, then that just does not make any sense to me.
Yes. My Roth IRA is maximized, although my wife doesn't have one and my 401k is not maxed. However, I still believe that my retirement is being adequately funded.

My savings goals, in order of priorities are:

1. Ensuring that my current modest standard of living is stable and safe. (funded)
2. Funding a reasonable nest egg for retirement (in progress, although I'll probably have to work longer than I would like)
3. Funding my child's education (badly underfunded)
4. Living a luxurious and extravagant lifestyle. (not funded yet, but taking donations)

Should I put more into my retirement to retire younger or richer? Everyone has to answer that for themselves, but for me, I think that my child's education has priority.

As for using my Roth as an education fund, no. I don't think co-mingling these funds are a good idea. My Roth is for me and the 529 is for my child. The two have different goals, risk profiles, and time horizons, and is therefore natural that the funds would be managed in separate accounts. I don't want it to be psychologically hard for me to divert money at the time out of my retirement funds. I would rather make the hard choice now, and make it easy then to make my gift. It will be far too easy otherwise just to nix the whole idea, keep the cash, and tell her it's her problem.

The other factor is that relatives give cash gifts from time to time for the express purpose of being used for her college education. There are no legal constraints, it is just trust that I'll do the right thing. The amounts are too small to create yet another account, and placing them in my personal retirement accounts is certainly not right, so the 529 is the best place.
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Post by wacodiver »

PetaHertz wrote:I don't agree with the sentiment that I should only save for my retirement and not for my child's education. My parents saved for mine, and now I consider it my responsibility to provide for my child. Somehow I will have to find a way of funding both. Saddling her with debt when she graduates is not palatable to me. It's not the right path for everyone, but that is my objective. And as long as I'm saving, then it might as well be tax free.
I don't think people are expressing the sentiment that you should save for retirement in lieu of college. But rather, the typical middle class family has 5 tax advantaged savings vehicles after which it is taxable savigns:

401(k) His and hers)
Roth (his and hers)
529 plans

And that if a couple has a fixed amount to save it is preferable to put that fixed amount into retirement savings rather than 529 for several reasons.

First, the tax advantages are greater. With the 401(k) or traditional IRA you are saving pre-tax dollars as opposed to the 529. The Roth is more similar to the 529 except that it can be used for any reason without penalty as opposed to the 529.

Second, the financial aid calculations do not consider retirement savings as part of a family's college resources whereas they do look at the 529 assets so putting the money into 401(k) or Roth will better hide it from financial aid consideration

Third, you cannot borrow for retirement but you can borrow for college. If, for example, your kid rolls into college short there are often subsidized loans that can be taken out that can be deferred for many years, especially if the kid moves on to do graduate school or volunteer work. And there are loan forgiveness programs for professions like teachers and doctors who work in underserved areas. If you roll into your retirement short then it's cat food time. The parents can eventually pay the loans if they want to but it could be as many as 10+ years after the fact during which time the parent's principal has been earning interest all those years.
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Post by Delayed Gratification »

"Second, the financial aid calculations do not consider retirement savings as part of a family's college resources whereas they do look at the 529 assets so putting the money into 401(k) or Roth will better hide it from financial aid consideration "

Wacodiver, just to clarify, it's not a huge penalty for eligibility from what I've read. If the account is in the parent's name, 529's are counted against aid eligibility at a rate of 5.64% (sounds like it used to be 35% before 2006). When a grandparent is the the account owner there is no impact. http://www.finaid.org/fafsa/maximize.phtml

Hope this helps.

[/quote]
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Post by scubadiver »

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Post by esetter »

Delayed Gratification wrote:"Second, the financial aid calculations do not consider retirement savings as part of a family's college resources whereas they do look at the 529 assets so putting the money into 401(k) or Roth will better hide it from financial aid consideration "

Wacodiver, just to clarify, it's not a huge penalty for eligibility from what I've read. If the account is in the parent's name, 529's are counted against aid eligibility at a rate of 5.64% (sounds like it used to be 35% before 2006). When a grandparent is the the account owner there is no impact. http://www.finaid.org/fafsa/maximize.phtml
Moreover, if the account is in the grandparent's name (not the case in your situation), I believe the 529 assets aren't included in the financial aid calculation at all.
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Post by wacodiver »

Delayed Gratification wrote:"Second, the financial aid calculations do not consider retirement savings as part of a family's college resources whereas they do look at the 529 assets so putting the money into 401(k) or Roth will better hide it from financial aid consideration "

Wacodiver, just to clarify, it's not a huge penalty for eligibility from what I've read. If the account is in the parent's name, 529's are counted against aid eligibility at a rate of 5.64% (sounds like it used to be 35% before 2006). When a grandparent is the the account owner there is no impact. http://www.finaid.org/fafsa/maximize.phtml
So it is 5.64% today and 5 years ago it was 35%. What will it be in 18 years when today's infants reach college age? These formulas aren't set in statute, they keep getting changed. But one thing is for certain, parent's are never going to be asked to cash out their retirement savings to pay for college.

And yes, grandparent's assets aren't included which is why if grandparents want to donate towards their grandkids college education they are probably better off opening their own 529 accounts rather than contributing directly to a 529 opened by the parent. Even though the grandparent is the account holder I don't believe that 529 plans are considered part of the estate so they can be transferred directly to the student if the grandparent dies. But those sorts of estate planning issues are outside my area of knowledge.
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