529 questions

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RNJ
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529 questions

Post by RNJ »

1) We have 2 children, a 2nd grader and one in kindergarten. As of today, we have $145k and $138k saved in 529 plans, respectively. We are considering adding $50k (we could go a bit higher) to each account this year, moving to a somewhat more conservative allocation, and essentially considering the plans fully funded. By way of background, we are on target for retirement (12-13 yrs), live below our means, have emergency funds in place, and are in a fortunate position in that this is not life-changing money for us. We'd like to cross this - their education - off the list of future obligations. We are fairly secure in the idea that we can make up any potential shortfall out of future cashflow.

Is there a compelling reason not to proceed? Are our assumptions reasonable?

2) Though we have the cash to proceed, is there a way to use appreciated securities to fund their plans without incurring capital gains?

Thanks for your help!
livesoft
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Re: 529 questions

Post by livesoft »

2) No. Other than selling them. I suppose one could gift them the shares, they could sell in a lower tax bracket (their basis is your basis) and then they could open up their own 529 plans.

1) Your assumptions are fine. OTOH, with college so far away, you could stay more risky in a balanced asset allocation, not contribute the $50K and instead spend on their learning and life experiences such as new computers, travel to foreign places like Antarctica and Galapagos, summers abroad, best music teachers, best sports coaches, and still have plenty of money for college. Or buy new cars for them.
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sunnyday
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Re: 529 questions

Post by sunnyday »

With retirement so far away, I wouldn't want to overfund the 529s (unless you know for certain that you're going to be paying that much for college). Instead, I would first become financially independent and then make the large contributions to the 529s.
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Blue
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Re: 529 questions

Post by Blue »

Two considerations,

I) Will you miss out on any future tax years benefits by not making future contributions? We plan to make future annual contributions for the tax benefits and so have avoided "fully funding" at outset.

II) A conservative asset allocation's expected returns may (probably?) not keep up with college inflation. Our kids are similar ages with similar 529 balances but we have more aggressive asset allocations trying to track the historical 6% college inflation rates.
Laura
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Re: 529 questions

Post by Laura »

I am at the opposite end of the 529 lifecycle and getting ready to begin withdrawals for my children. Pay attention to what you can use 529s for and what you can't. Interestingly, I have figured out it is fairly easy to overfund 529 accounts. If you are going to be able to use any education tax benefits you cannot use 529 funds. In other words, for the same education expense you cannot benefit from tax credits and 529 tax savings. There are many fees at school that are not considered "qualified education expenses" so they cannot be covered with 529 funds. So, you might want to keep the money you were planning to contribute in a taxable account to be used for your own retirement if not needed for education. You already have a significant sum of money set aside in the 529s. If you end up taking money out of the 529 account for non-qualified expenses you pay taxes on the earnings or you pay taxes plus a 10% penalty (this depends on tax rules at the time).

Laura
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staythecourse
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Re: 529 questions

Post by staythecourse »

Great job on funding the 529. I would definitely stop now as you may get into the overfunded situation 10+ yrs. from now when they go to college. Unless they are going to be both going to grad. school and your picking up that tab as well I would be cautious not putting too much money into the accounts. Any shortage can be made up at that time with cash payments.

Good luck.
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gte939h
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Re: 529 questions

Post by gte939h »

Be careful with the IRS limitations on the annual gift exclusion. You can add $28k ($14k from each parent) per child without worrying about tax penalties. Other than that, I agree with the others here.
letsgobobby
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Re: 529 questions

Post by letsgobobby »

How much you contribute and your aggressiveness aren't that closely related. Why not fund the $50k and stay aggressive? Our kids ages and balances are similar in numbers to yours and we are and will remain 100% stocks.
Pacific
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Re: 529 questions

Post by Pacific »

Blue wrote:Two considerations,

I) Will you miss out on any future tax years benefits by not making future contributions? We plan to make future annual contributions for the tax benefits and so have avoided "fully funding" at outset.
Not sure I understand this. What do you mean by "tax benefits" as related to future annual contributions?
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Re: 529 questions

Post by gte939h »

State tax write offs for contributions.
nostalgic
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Re: 529 questions

Post by nostalgic »

I'm with Jack Bogle on 529 plans at the moment: I just don't like having the money tied up with so many restrictions. So for now saving for college in taxable and will re-evaluate moving some portion to a 529 later.
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RNJ
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Re: 529 questions

Post by RNJ »

Thank you all so much for your thoughtful replies. I apologize for taking so long to respond.
livesoft wrote:2) No. Other than selling them. I suppose one could gift them the shares, they could sell in a lower tax bracket (their basis is your basis) and then they could open up their own 529 plans.
That's what I thought. I actually had you in mind as the person who would know the workaround!
livesoft wrote:1) Your assumptions are fine. OTOH, with college so far away, you could stay more risky in a balanced asset allocation, not contribute the $50K and instead spend on their learning and life experiences such as new computers, travel to foreign places like Antarctica and Galapagos, summers abroad, best music teachers, best sports coaches, and still have plenty of money for college. Or buy new cars for them.
This sounds like a nice compromise, and we're doing our best on this front: school, music, experiences, etc. AS far as the last item is concerned, our older is socking away his earned income for a car (after 20% to his favorite charity).
sunnyday wrote:With retirement so far away, I wouldn't want to overfund the 529s (unless you know for certain that you're going to be paying that much for college). Instead, I would first become financially independent and then make the large contributions to the 529s.
Blue wrote:Two considerations,

I) Will you miss out on any future tax years benefits by not making future contributions? We plan to make future annual contributions for the tax benefits and so have avoided "fully funding" at outset.

II) A conservative asset allocation's expected returns may (probably?) not keep up with college inflation. Our kids are similar ages with similar 529 balances but we have more aggressive asset allocations trying to track the historical 6% college inflation rates.
Laura wrote:Pay attention to what you can use 529s for and what you can't. Interestingly, I have figured out it is fairly easy to overfund 529 accounts. . . There are many fees at school that are not considered "qualified education expenses" so they cannot be covered with 529 funds. So, you might want to keep the money you were planning to contribute in a taxable account to be used for your own retirement if not needed for education. You already have a significant sum of money set aside in the 529s. If you end up taking money out of the 529 account for non-qualified expenses you pay taxes on the earnings or you pay taxes plus a 10% penalty (this depends on tax rules at the time).

Laura
staythecourse wrote:Great job on funding the 529. I would definitely stop now as you may get into the overfunded situation 10+ yrs. from now when they go to college. Unless they are going to be both going to grad. school and your picking up that tab as well I would be cautious not putting too much money into the accounts. Any shortage can be made up at that time with cash payments.

Good luck.
nostalgic wrote:I'm with Jack Bogle on 529 plans at the moment: I just don't like having the money tied up with so many restrictions. So for now saving for college in taxable and will re-evaluate moving some portion to a 529 later.
I think we're at a point where we run the risk of overfunding and, of course, tying up funds that could be deployed more flexibly down the road. My concern here is that, given the recent run we've been enjoying, we've been "borrowing" from expected returns going forward, leaving college costs to be paid largely by dollars saved rather than future earnings on investments. We'll definitely give this more consideration.

letsgobobby wrote:How much you contribute and your aggressiveness aren't that closely related. Why not fund the $50k and stay aggressive? Our kids ages and balances are similar in numbers to yours and we are and will remain 100% stocks.
Nice take. And thanks for sharing your AA. I had been thinking that if we were reasonably close to fully funding their educational expenses, there would be diminished need to put money at risk (implying an inverse relationship between how much we've saved and how much we'll need). Put another way, If we're close to winning the game (paying for college), why keep playing (so aggressively, anyway)?
gte939h wrote:State tax write offs for contributions.
Unfortunately, our state does not make allowances for 529s.


As always, you've all been VERY helpful. THANK YOU!
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dodecahedron
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Re: 529 questions

Post by dodecahedron »

[quote="livesoft"]2) No. Other than selling them. I suppose one could gift them the shares, they could sell in a lower tax bracket (their basis is your basis) and then they could open up their own 529 plans.[\quote]

Watch out for the "kiddie tax." If their investment income is more than a very small amount, their tax bracket becomes the same as yours.
letsgobobby
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Re: 529 questions

Post by letsgobobby »

Bottom line, I just don't think you're even close to overfunding unless you are only aiming for public schools. Ivies are currently $260k for four years. I agree with the eloquent way you described having borrowed from future returns, thus you have $100k more to save per child, then hope portfolio keeps up with tuition inflation. And fixed income just isn't going to do it, so unlike retirement I don't think you can claim to have won the game until they matriculate.

Also your income is high so the consequences of losing college money are not severe.

And there is grad school, and future grandchildren, who will consume funds in the unlikely event of modest overfunding.

In the mid to late teens I might go more conservative if I've clearly got enough AND my income has dropped such that the consequences of loss would be greater.
sscritic
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Re: 529 questions

Post by sscritic »

dodecahedron wrote: Watch out for the "kiddie tax." If their investment income is more than a very small amount, their tax bracket becomes the same as yours.
This year $2,000 of cap gains get taxed at 0% (assuming no earned income). If the securities have gains of 20% or less, that's $10,000 per child per year. Small, but not very small, in my way of thinking.

P.S. I made a math error. Would someone please correct me? :)
Leesbro63
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Re: 529 questions

Post by Leesbro63 »

nostalgic wrote:I'm with Jack Bogle on 529 plans at the moment: I just don't like having the money tied up with so many restrictions. So for now saving for college in taxable and will re-evaluate moving some portion to a 529 later.
Where and when did Bogle say this? For HNW people who won't get aid, the tax free growth is the best college savings break going. In fact I think it's the only college cost break! If Mr Bogle really did say this, I'm surprised and disagree.
nostalgic
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Re: 529 questions

Post by nostalgic »

Here is the link and snippet:

http://www.reuters.com/article/2012/09/ ... LI20120911

Q: Do you set a little aside for those grandkids in 529 college-savings plans? (Vanguard has about $40 billion in assets in 27 state 529 plans.)

A: I don't really like the idea of tying up your money in 529 plans, because of all the restrictions on withdrawals. I'm not against them, I just like having more flexibility than being required to use those funds specifically for educational purposes. We do save a little money for all my grandkids every year, but we just chose the Vanguard Balanced Index Fund (VBINX). It's about 60 percent stocks, 40 percent bonds, and it's been wonderful. We give them what we can within annual gift-tax limitations, and put it all into that very tax-efficient fund.
Leesbro63
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Re: 529 questions

Post by Leesbro63 »

Thanks for this, Wow. Well, again, I think he's wrong, at least for a traditional family with at least an upper middle class family income where the parents will pay for their kids' college. The 529 is a great tool. Not for everyone, but for many Boglehead types.
livesoft
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Re: 529 questions

Post by livesoft »

As I noted elsewhere, a 529 plan doesn't really save a wealthy family that much money compared to tax-efficient investing and some other techniques. I think we all go, "Wow this is a good deal" and it is, but it is not a great deal.

For wealthy folks who pay to have their taxes done and who have 529 plans, they will get charged for the 1098T and the 1099Q during college years a few bucks, too.
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JamesSFO
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Re: 529 questions

Post by JamesSFO »

livesoft wrote:As I noted elsewhere, a 529 plan doesn't really save a wealthy family that much money compared to tax-efficient investing and some other techniques. I think we all go, "Wow this is a good deal" and it is, but it is not a great deal.

For wealthy folks who pay to have their taxes done and who have 529 plans, they will get charged for the 1098T and the 1099Q during college years a few bucks, too.
I think the behavioral aspects of getting people to actually do the saving are a huge help.
michaelsieg
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Re: 529 questions

Post by michaelsieg »

RNJ
We are in a similar situation as you are, and I have done what you are considering now - I went much to a more conservative AA with our 529 plan. Statistically speaking, you have a good chance to see a 20-30% correction (or more) in equities in the next 10 years, i.e. before you need the money for college.
So, after fully funding the 529 plans, the question that I asked myself was, how I would feel, if suddenly the accounts would have a 30-40% lower balance?
I think investing is a lot about the need the take risks, if you don't have the need, I would consider a more conservative AA - you can always change to a more aggressive AA if there is a major correction in the markets.
Due to the restrictions of the 529 savings pans, we are planning to fund about 50% of the college costs with these plans - so the target is about 150k by the time they go to college...
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Re: 529 questions

Post by Grt2bOutdoors »

Leesbro63 wrote:
nostalgic wrote:I'm with Jack Bogle on 529 plans at the moment: I just don't like having the money tied up with so many restrictions. So for now saving for college in taxable and will re-evaluate moving some portion to a 529 later.
Where and when did Bogle say this? For HNW people who won't get aid, the tax free growth is the best college savings break going. In fact I think it's the only college cost break! If Mr Bogle really did say this, I'm surprised and disagree.
I'm not surprised he said this and here is why: Whose responsibility is it to save for one's offspring, the parent or the grandparent? Let's say Mr. Bogle's son has been saving for his child's college in a 529 plan and let's say Mr. Bogle wants to help but not be restricted in how the funds could be used including investment options and only being able to switch once per year, it would make perfect sense to use a vehicle other than a 529 plan which restricts the use of funds for "qualified higher educational expenses". I myself am using three vehicles, taxable accounts, UTMA and 529 plans. If the 529 plan doesn't have enough funds to pay for school, the UTMA will be tapped next, after that I'll use taxable and if that fails, student loans. That's a four-pronged savings plan and not far off from others on the forum who utilize pre-paid, 529 plans and taxable to pay for college.
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sls239
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Re: 529 questions

Post by sls239 »

You said you'd want a more conservative allocation and I think the main risk with that is that it doesn't keep pace with increasing college costs.

You could consider putting some of that money into the other type of 529, the kind that is actually pre-paid tuition credits. For some states, these aren't really a good deal right now, but some are just fine. And it is something you can keep in mind for later as well.
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Re: 529 questions

Post by JW-Retired »

nostalgic wrote:Here is the link and snippet:

http://www.reuters.com/article/2012/09/ ... LI20120911

Q: Do you set a little aside for those grandkids in 529 college-savings plans? (Vanguard has about $40 billion in assets in 27 state 529 plans.)

A: I don't really like the idea of tying up your money in 529 plans, because of all the restrictions on withdrawals. I'm not against them, I just like having more flexibility than being required to use those funds specifically for educational purposes. We do save a little money for all my grandkids every year, but we just chose the Vanguard Balanced Index Fund (VBINX). It's about 60 percent stocks, 40 percent bonds, and it's been wonderful. We give them what we can within annual gift-tax limitations, and put it all into that very tax-efficient fund.
IMO, Mr. Bogle should have mentioned he can flat out pay for 100% of the grandkid's college tuition when the time comes. Checks written to schools for tuition are excludable from the gift-tax. That's a guarantee against over funding a 529.
Form 709 instructions wrote: Educational exclusion. The gift tax does not apply to an amount you paid on behalf of an individual to a qualifying domestic or foreign educational organization as tuition for the education or training of the individual.
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YttriumNitrate
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Re: 529 questions

Post by YttriumNitrate »

From Savingforcollege.com
Contributions to a New York 529 plan of up to $5,000 per year by an individual, and up to $10,000 per year by a married couple filing jointly, are deductible in computing New York taxable income. Only contributions made by the account owner, or if filing jointly, by the account owner's spouse, are deductible. Contribution deadline is December 31 postmark.
Assuming you're using the New York plan, it would seem that to get the max tax benefit you should spread out the contributions over several years instead of plunking down $50k all at once.
Leesbro63
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Re: 529 questions

Post by Leesbro63 »

livesoft wrote:As I noted elsewhere, a 529 plan doesn't really save a wealthy family that much money compared to tax-efficient investing and some other techniques. I think we all go, "Wow this is a good deal" and it is, but it is not a great deal.

For wealthy folks who pay to have their taxes done and who have 529 plans, they will get charged for the 1098T and the 1099Q during college years a few bucks, too.
Both forms are issued by the institutions. the "T" from the college and the "Q" from the 529. There is nothing to get charged for, other than to check to be sure that the withdrawals don't exceed the "qualified" amount. There isn't even a form on the tax return to reconcile this (although IMHO there should be). So this "tax prep cost" objection is, IMHO, not legit.

As to efficient investing: Even long term gains are now taxed at marginal rates (including state and the latest health care and Bush-cut-repeal rates) over 30% in many cases, for the wealthy families you reference. Some people (generally grandparents) could be kicked into higher Medicare premium rate brackets too from higher recognized capital gain income. How does that beat ZERO tax? Also there are potential estate tax savings benefits as future gift exemptions can be pulled into a single year, in some cases.

Am I the only one here who thinks those dismissing the benefits of 529 plans for affluent families are wrong?

I guess for someone with hundreds of millions, the $250,000 to $500,000 cost of college (private school, undergrad and professional/grad school) is inconsequential and maybe the hassle with another account isn't worth it to them. Perhaps families this wealthy ALREADY have kicked money (in trust or directly) to their kids who can pay for college out of that pile or out of the income from it. But for those above the "financial aid" line but not at the caviar-and-yachts level, the 529 Plan is one of the few real benefits I see in the tax code for this group.
Last edited by Leesbro63 on Mon Feb 03, 2014 11:29 am, edited 1 time in total.
Leesbro63
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Re: 529 questions

Post by Leesbro63 »

JW Nearly Retired wrote:
nostalgic wrote:Here is the link and snippet:

http://www.reuters.com/article/2012/09/ ... LI20120911

Q: Do you set a little aside for those grandkids in 529 college-savings plans? (Vanguard has about $40 billion in assets in 27 state 529 plans.)

A: I don't really like the idea of tying up your money in 529 plans, because of all the restrictions on withdrawals. I'm not against them, I just like having more flexibility than being required to use those funds specifically for educational purposes. We do save a little money for all my grandkids every year, but we just chose the Vanguard Balanced Index Fund (VBINX). It's about 60 percent stocks, 40 percent bonds, and it's been wonderful. We give them what we can within annual gift-tax limitations, and put it all into that very tax-efficient fund.
IMO, Mr. Bogle should have mentioned he can flat out pay for 100% of the grandkid's college tuition when the time comes. Checks written to schools for tuition are excludable from the gift-tax. That's a guarantee against over funding a 529.
Form 709 instructions wrote: Educational exclusion. The gift tax does not apply to an amount you paid on behalf of an individual to a qualifying domestic or foreign educational organization as tuition for the education or training of the individual.
JW
Yes, a grandparent can pay for college gift-tax free. But what if the grandparent doesn't survive? Money that otherwise would have been set aside in a clearly designated account for Junior now becomes just part of the larger estate complication.
letsgobobby
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Re: 529 questions

Post by letsgobobby »

Leesbro63 wrote:
livesoft wrote:As I noted elsewhere, a 529 plan doesn't really save a wealthy family that much money compared to tax-efficient investing and some other techniques. I think we all go, "Wow this is a good deal" and it is, but it is not a great deal.

For wealthy folks who pay to have their taxes done and who have 529 plans, they will get charged for the 1098T and the 1099Q during college years a few bucks, too.
Both forms are issued by the institutions. the "T" from the college and the "Q" from the 529. There is nothing to get charged for, other than to check to be sure that the withdrawals don't exceed the "qualified" amount. There isn't even a form on the tax return to reconcile this (although IMHO there should be). So this "tax prep cost" objection is, IMHO, not legit.

As to efficient investing: Even long term gains are now taxed at marginal rates (including state and the latest health care and Bush-cut-repeal rates) over 30% in many cases, for the wealthy families you reference. Some people (generally grandparents) could be kicked into higher Medicare premium rate brackets too from higher recognized capital gain income. How does that beat ZERO tax? Also there are potential estate tax savings benefits as future gift exemptions can be pulled into a single year, in some cases.

Am I the only one here who thinks those dismissing the benefits of 529 plans for affluent families are wrong?

I guess for someone with hundreds of millions, the $250,000 to $500,000 cost of college (private school, undergrad and professional/grad school) is inconsequential and maybe the hassle with another account isn't worth it to them. Perhaps families this wealthy ALREADY have kicked money (in trust or directly) to their kids who can pay for college out of that pile or out of the income from it. But for those above the "financial aid" line but not at the caviar-and-yachts level, the 529 Plan is one of the few real benefits I see in the tax code for this group.
livesoft has previously estimated the total benefit per 529 account for wealth families to be at most around $37,500 in saved taxes. I think it's a little more than that, but not orders of magnitude more. So the question is whether the restrictions are worth saving tens of thousands of dollars?

The restrictions are real, but there are intangible benefits as well, such as in estate planning and asset protection. Also I think it's highly unlikely that families in this situation (very affluent but not truly wealthy) will overfund their 529s. The flexibility of 529 plans is sometimes underestimated. They can be transferred to other family members, including nieces/nephews. They can be used for tuition but also housing, food, books, and required fees. They can be used for future grandchildren. They can be used by the account owner him/herself. Given all the possible exit strategies, I am not concerned about overfunding. As a caveat, this conversation is applicable primarily to those who have already maxed out all retirement accounts, and are choosing between saving in taxable accounts or 529s for the purposes of their children's future educations. Also, this advice doesn't apply if you think someday you might be eligible for financial aid.
livesoft
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Re: 529 questions

Post by livesoft »

So we can say that a 529 plan is up to a $50,000 gift to the wealthy.

I will also opine that it makes a college education cost $50,000 more since college administrators would like to capture part of that gift. And that extra cost can hurt the non-wealthy.
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Leesbro63
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Re: 529 questions

Post by Leesbro63 »

livesoft wrote:So we can say that a 529 plan is up to a $50,000 gift to the wealthy.

I will also opine that it makes a college education cost $50,000 more since college administrators would like to capture part of that gift. And that extra cost can hurt the non-wealthy.
It's unlikely that 529 money fuels college inflation. It's still real money with real owners who want the best value. Unlike student loans, which are often misunderstood by 18 year olds.
WorkToLive
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Re: 529 questions

Post by WorkToLive »

I wanted to note that transferring a 529 to a grandchild has some restrictions. From the BH wiki:
The IRS takes an interest in a transfer whenever the transfer involves a shift two steps down from your generation, and "skips" a generation. This skip subjects the account owner (or beneficiary) to the generation-skipping transfer tax‎. This skip is especially pertinent to grandparent's setting up, or shifting beneficial 529 interests to grandchildren. Fortunately, the same tax exclusions applying to the basic gift tax also pertain to the generation skipping transfer tax. One is allowed an annual $13,000 ($26,000 if there is a spousal "split") exclusion to the generation skipping transfer tax. One can also exclude up to $65,000 ($130,000 if there is a spousal "split') by electing five year forwarding of the transferred interest. Any transfer that involves a skip would benefit from the counsel of a qualified CPA.
So any transfer to grandchildren would potentially have to be done periodically.
Code Commit
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Re: 529 questions

Post by Code Commit »

Relative benefits of 529 plan also depend largely on the duration of tax-deferral. For parents with multiple children and who start contributing right when the children are born, the deferral period could be as long as 25-30 years and the benefits of tax-free withdrawals could be substantial. Personally, I would hate to pay taxes on our gains so far and we are only half way there.

livesoft has previously mentioned that they used 529 accounts for a relatively short period, which certainly could diminish the benefit.

Also, agree with JamesSFO that a separate pot of money also serves as a good behavioral tool for some (at least, for us). Compared to a taxable account, it is less likely to be raided for home remodeling or vacation funds, and we contribute more regularly (after maxing retirement accounts, of course).
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