Brokerage or 529's...

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rogers-SNK
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Joined: Wed Feb 13, 2013 2:53 pm

Brokerage or 529's...

Post by rogers-SNK » Mon Feb 12, 2018 1:02 pm

My wife and I have a 4 year old and are expecting baby #2 this spring. We've talked about setting aside some money for college. I'm torn between doing that with a brokerage account rather than a 529. Am I way off base for thinking like this?

Thanks!

miamivice
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Re: Brokerage or 529's...

Post by miamivice » Mon Feb 12, 2018 1:31 pm

A lot of people seem to struggle with this, but it's seems like a no-brainer to me.

A brokerage account is a taxable account. After tax money is put in and you pay 15% on any returns that are generated while the money is in the account.

A 529 account is a tax advantaged account. After money is put in, but all money pulled out that is used for college education expenses (tuition, room, board are the primary qualified uses) is tax free.

Generally most families will have college costs. Maybe not all kids will graduate college, but most parents of two will have at least one child do one year of college. To me, it makes tremendous sense to enjoy the tax advantages of a 529 account for those expenses that you feel you absolutely will have for your kids, and use a brokerage account or cash flow those expenses you feel you might or might not have.

mega317
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Re: Brokerage or 529's...

Post by mega317 » Mon Feb 12, 2018 1:36 pm

A common topic on this forum. To specifically answer your question, no you are not way off base. My opinion is that you ensure your own retirement is secure first. That means maxing what you can in tax advantaged accounts and imo directing any additional savings to taxable. When you reach your "number" or at least when the future comes in to clearer focus then you can decide about college savings. I'd rather have been told I had to pay for college on my own than have my parents pay for it and later depend on me financially late in their lives.

Many parents will be able to cash flow college or spend from taxable because they have "over funded" retirement. Or take out loans and pay them off fairly quickly.

If your state offers a deduction for 529 contributions that's at least worth considering.

tsewell10
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Re: Brokerage or 529's...

Post by tsewell10 » Mon Feb 12, 2018 1:39 pm

I agree with miami. My wife and I decided to go with 529 plans as well. I've seen lots of discussion on how much benefit you really get from it being tax advantaged rather than just using a taxable account. For us, having separate accounts that I can keep track of for each child is nice. Plus, it isn't money that I am counting on for retirement so if for some reason neither child goes to college and I will just take the penalty and it is still "bonus money" for our retirement at that point.

mega317
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Re: Brokerage or 529's...

Post by mega317 » Mon Feb 12, 2018 1:43 pm

Oh good I was hoping miamivice would weigh in because s/he is one of the posters who make a strong case opposite mine.

My rebuttal is taxable accounts can be invested tax-efficiently and there are several scenarios in which capital gains would not be taxed. If the argument is for using 529s for definite expenses, defined in that post as one year for one child, then the tax benefit will not be huge.

delamer
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Re: Brokerage or 529's...

Post by delamer » Mon Feb 12, 2018 1:56 pm

Things to think about:

Do you receive a state tax deduction if you invest in your state 529?

Are the options in your state plan good, with index funds and low fees? If not, which plan will you use?

This does not have to be either/or. You can invest in both a 529 and a taxable account.

miamivice
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Re: Brokerage or 529's...

Post by miamivice » Mon Feb 12, 2018 2:16 pm

mega317 wrote:
Mon Feb 12, 2018 1:43 pm
My rebuttal is taxable accounts can be invested tax-efficiently and there are several scenarios in which capital gains would not be taxed.
It would be helpful if you would explain in what situations gains in a taxable account are not taxed.

marcopolo
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Re: Brokerage or 529's...

Post by marcopolo » Mon Feb 12, 2018 2:30 pm

mega317 wrote: Oh good I was hoping miamivice would weigh in because s/he is one of the posters who make a strong case opposite mine.

My rebuttal is taxable accounts can be invested tax-efficiently and there are several scenarios in which capital gains would not be taxed. If the argument is for using 529s for definite expenses, defined in that post as one year for one child, then the tax benefit will not be huge.
I don't understand this line of thinking at all.
Do you avoid Roth IRAs as well?

If you plan to have college expenses, 529 plans are are at least as good, and in some cases (state tax deductions) better than Roth IRAs.
The money goes in after tax, and then all growth is tax-free. There is a significantly higher contribution limit than Roth.

Sure, some gains in taxable can be tax-free, but that is limited and depends on your other income sources. Why use up your limited tax-free capital gains space with college savings which can have their own, practically unlimited tax-free gain space?

If you think Roth IRA is a good investment vehicle, and i have not seen anyone on this board argue against that, then why would you advise against a 529 plan for someone who will have college expense.
Once in a while you get shown the light, in the strangest of places if you look at it right.

mega317
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Re: Brokerage or 529's...

Post by mega317 » Mon Feb 12, 2018 4:13 pm

miamivice wrote:
Mon Feb 12, 2018 2:16 pm
mega317 wrote:
Mon Feb 12, 2018 1:43 pm
My rebuttal is taxable accounts can be invested tax-efficiently and there are several scenarios in which capital gains would not be taxed.
It would be helpful if you would explain in what situations gains in a taxable account are not taxed.
In the formerly 15% bracket, stepped-up basis after death, donated shares.

Marcopolo That is disingenuous. I said secure retirement first, I did not say 529 has no tax advantage. Plans go awry sometimes and if I found myself unemployed I would rather have my money penalty free and the gains taxed at 15% or less.

And nowhere did I say people who favor 529s are wrong. Both sides have compelling cases. I said "my opinion", IMO, and "I'd rather". I want to be clear to OP that I gave my view, not the right answer or any consensus.

Olemiss540
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Re: Brokerage or 529's...

Post by Olemiss540 » Mon Feb 12, 2018 4:36 pm

I will be putting money in a taxable account first, since it is not clear cut what I am saving for this early in the accumulation phase. Once my savings becomes substantial enough that I am comfortable in my family's future, I will start redirecting into a 529 account. Maybe I am being greedy, but I am excited to start accumulating some money in a taxable account after all of these years saving in tax advantaged accounts. Also may end up using it to pay off the mortgage (once it is large enough) and cash flow college.

Interesting and wonderful delimma to have! We are blessed for sure,
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.

marcopolo
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Re: Brokerage or 529's...

Post by marcopolo » Mon Feb 12, 2018 5:05 pm

mega317 wrote:
Mon Feb 12, 2018 4:13 pm
miamivice wrote:
Mon Feb 12, 2018 2:16 pm
mega317 wrote:
Mon Feb 12, 2018 1:43 pm
My rebuttal is taxable accounts can be invested tax-efficiently and there are several scenarios in which capital gains would not be taxed.
It would be helpful if you would explain in what situations gains in a taxable account are not taxed.
In the formerly 15% bracket, stepped-up basis after death, donated shares.

Marcopolo That is disingenuous. I said secure retirement first, I did not say 529 has no tax advantage. Plans go awry sometimes and if I found myself unemployed I would rather have my money penalty free and the gains taxed at 15% or less.

And nowhere did I say people who favor 529s are wrong. Both sides have compelling cases. I said "my opinion", IMO, and "I'd rather". I want to be clear to OP that I gave my view, not the right answer or any consensus.
I understand your reasoning in the broader context of saving for retirement first. You can't borrow to retire.
I agree that plans go awry, and in that case having funds readily available without penalty is important. But, that is what emergency funds and other taxable investments are for.

But, the OP specifically asked about putting money aside for college. If you had said "make sure you have your retirement savings and Emergency funds squared away, then saving for college in a 529 is a good idea", That would be great advice to the OP. Instead you clearly steer them away from 529 plans as a savings vehicle for college. Then in a follow-up post you clearly question the tax advantage benefits of a 529 (despite saying in this post that you are not making that claim). I think it is a dis-service to steer someone away from 529 plans towards taxable savings for college expenses. 529 plans were set up specifically to provide very valuable tax advantages for college savings. If you know you have money that will be used for such, there is almost no better vehicle to use for that purpose.
Once in a while you get shown the light, in the strangest of places if you look at it right.

miamivice
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Re: Brokerage or 529's...

Post by miamivice » Mon Feb 12, 2018 5:20 pm

marcopolo wrote:
Mon Feb 12, 2018 5:05 pm
mega317 wrote:
Mon Feb 12, 2018 4:13 pm
miamivice wrote:
Mon Feb 12, 2018 2:16 pm
mega317 wrote:
Mon Feb 12, 2018 1:43 pm
My rebuttal is taxable accounts can be invested tax-efficiently and there are several scenarios in which capital gains would not be taxed.
It would be helpful if you would explain in what situations gains in a taxable account are not taxed.
In the formerly 15% bracket, stepped-up basis after death, donated shares.

Marcopolo That is disingenuous. I said secure retirement first, I did not say 529 has no tax advantage. Plans go awry sometimes and if I found myself unemployed I would rather have my money penalty free and the gains taxed at 15% or less.

And nowhere did I say people who favor 529s are wrong. Both sides have compelling cases. I said "my opinion", IMO, and "I'd rather". I want to be clear to OP that I gave my view, not the right answer or any consensus.
I understand your reasoning in the broader context of saving for retirement first. You can't borrow to retire.
I agree that plans go awry, and in that case having funds readily available without penalty is important. But, that is what emergency funds and other taxable investments are for.

But, the OP specifically asked about putting money aside for college. If you had said "make sure you have your retirement savings and Emergency funds squared away, then saving for college in a 529 is a good idea", That would be great advice to the OP. Instead you clearly steer them away from 529 plans as a savings vehicle for college. Then in a follow-up post you clearly question the tax advantage benefits of a 529 (despite saying in this post that you are not making that claim). I think it is a dis-service to steer someone away from 529 plans towards taxable savings for college expenses. 529 plans were set up specifically to provide very valuable tax advantages for college savings. If you know you have money that will be used for such, there is almost no better vehicle to use for that purpose.
+1. Well said.

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DaftInvestor
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Re: Brokerage or 529's...

Post by DaftInvestor » Mon Feb 12, 2018 10:08 pm

I never understand why folks want to pass up on 20 years of tax free growth. If one of your financial goals in life is to put your kids through college 529s are the way to go.

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DaftInvestor
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Re: Brokerage or 529's...

Post by DaftInvestor » Mon Feb 12, 2018 10:10 pm

Olemiss540 wrote:
Mon Feb 12, 2018 4:36 pm
I will be putting money in a taxable account first, since it is not clear cut what I am saving for this early in the accumulation phase. Once my savings becomes substantial enough that I am comfortable in my family's future, I will start redirecting into a 529 account. Maybe I am being greedy, but I am excited to start accumulating some money in a taxable account after all of these years saving in tax advantaged accounts. Also may end up using it to pay off the mortgage (once it is large enough) and cash flow college.

Interesting and wonderful delimma to have! We are blessed for sure,
You aren't being greedy - you are helping support the country :)
I was too greedy NOT to use 529s. I didn't want to pass more of my earnings up in tax payments.
:)

mega317
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Re: Brokerage or 529's...

Post by mega317 » Mon Feb 12, 2018 11:43 pm

marcopolo wrote:
Mon Feb 12, 2018 5:05 pm
If you had said "make sure you have your retirement savings and Emergency funds squared away, then saving for college in a 529 is a good idea", That would be great advice to the OP.
Well what I said was
mega317 wrote:
Mon Feb 12, 2018 1:36 pm
When you reach your "number" or at least when the future comes in to clearer focus then you can decide about college savings.
Seems to be in the same spirit, no? This is based purely on speculation: My guess is most people who's eldest is 4 do not have retirement savings squared away.
If you know you have money that will be used for such, there is almost no better vehicle to use for that purpose.
I agree with this. The reason I don't use a 529 is that I feel I don't yet know.

Regarding the tax advantage, it's definitely real. I said it's "not huge". In my own situation I pay 15% + 9.3% on qualified dividends. If a stock portfolio distributes about 2%, the tax drag is about 0.5%. If your target is $260k (full cost at Harvard) over 18 years, it requires about an extra $30-$35 invested per month in taxable to break even. Then you're still left with capital gains to deal with. When my kids start college, if I can afford to pay, I will probably still be working and so could stop all savings and put all my cash flow towards college, plus sell the lots with the least gains if needed. Otherwise I'll be retired and pay little or no capital gains taxes. So the 529 comes out ahead but not by that much, and there is some risk on the other hand of needing the money for non-qualified reasons or over funding.

And again, I'm not going to close my eyes until fall semester. As it gets closer I will reevaluate.

marcopolo
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Re: Brokerage or 529's...

Post by marcopolo » Tue Feb 13, 2018 12:02 am

mega317 wrote:
Mon Feb 12, 2018 11:43 pm
marcopolo wrote:
Mon Feb 12, 2018 5:05 pm
If you had said "make sure you have your retirement savings and Emergency funds squared away, then saving for college in a 529 is a good idea", That would be great advice to the OP.
Well what I said was
mega317 wrote:
Mon Feb 12, 2018 1:36 pm
When you reach your "number" or at least when the future comes in to clearer focus then you can decide about college savings.
Seems to be in the same spirit, no? This is based purely on speculation: My guess is most people who's eldest is 4 do not have retirement savings squared away.
If you know you have money that will be used for such, there is almost no better vehicle to use for that purpose.
I agree with this. The reason I don't use a 529 is that I feel I don't yet know.

Regarding the tax advantage, it's definitely real. I said it's "not huge". In my own situation I pay 15% + 9.3% on qualified dividends. If a stock portfolio distributes about 2%, the tax drag is about 0.5%. If your target is $260k (full cost at Harvard) over 18 years, it requires about an extra $30-$35 invested per month in taxable to break even. Then you're still left with capital gains to deal with. When my kids start college, if I can afford to pay, I will probably still be working and so could stop all savings and put all my cash flow towards college, plus sell the lots with the least gains if needed. Otherwise I'll be retired and pay little or no capital gains taxes. So the 529 comes out ahead but not by that much, and there is some risk on the other hand of needing the money for non-qualified reasons or over funding.

And again, I'm not going to close my eyes until fall semester. As it gets closer I will reevaluate.
Fair points.

Most people with young kids probably have not hit their "number", but that is a high bar for saving for college. I think most families save for college in parallel to saving for retirement. We certainly did.

If you are uncertain about the future use of the funds, then i agree, the penalties associated with 529 are probably a big downside.

As far as the taxes go, i think you are underestimating the impact. A 0.5% annual drag on distribution, and then having to pay capital gains taxes at time of withdrawal is quite significant. As an example, here is my 1099Q for 2017. In a taxable account, my taxes on the earnings would have been over $3600, making college 10+% more expensive than it needed to be. Maybe you have that kind of money to throw away, but i have better uses for it. In early retirement, i would rather use my tax-free space for Roth conversions or tax gain harvesting instead of chewing it up to pay for gains on college savings.

1 Gross Distribution .................................................................... 33,119.85
2 Earnings ............................................................................... 13,558.04
3 Basis ................................................................................... 19,561.81
Once in a while you get shown the light, in the strangest of places if you look at it right.

StealthRabbit
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Re: Brokerage or 529's...

Post by StealthRabbit » Tue Feb 13, 2018 2:02 am

duplicate - delete
Last edited by StealthRabbit on Tue Feb 13, 2018 12:32 pm, edited 2 times in total.

StealthRabbit
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Re: Brokerage or 529's...

Post by StealthRabbit » Tue Feb 13, 2018 2:05 am

If you get a tax benefit... consider 529 as one of many options.

Since we were in an income tax free state (that funds 2 yrs FREE full time college instead of High School), and since my kids paid 100% of college, I didn’t want anything FAFSA considers as attachable to family contribution. (529 and students assets are added into FAFSA.

So... I kept my own retirement options funded, and my kids started their Roth IRAs at age 12.
Students can get deferred loans, so if you wish... you can pay off their loans AFTER / IF they finish school.

Just another perspective (and not a common one)

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