Overfunding 529

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leftcoaster
Posts: 327
Joined: Mon Jul 23, 2007 4:04 pm

Overfunding 529

Post by leftcoaster » Thu Jun 07, 2018 7:12 pm

I vaguely recall a thread here where someone mentioned intentionally overfunding a 529. Usually the guidance is against that.

Anyone able to explain the strategy there?

letsgobobby
Posts: 11511
Joined: Fri Sep 18, 2009 1:10 am

Re: Overfunding 529

Post by letsgobobby » Thu Jun 07, 2018 7:30 pm

- multigeneration educational ‘trust’
- if you are in a very high tax bracket now, and will be in a lower tax bracket later, the penalty plus taxation of earnings may not be worse than a taxable account. Admittedly it is hard to think of many situations where the numbers work out well.
- some minor estate tax benefits

GCD
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Joined: Tue Sep 26, 2017 7:11 pm

Re: Overfunding 529

Post by GCD » Thu Jun 07, 2018 7:33 pm

letsgobobby wrote:
Thu Jun 07, 2018 7:30 pm
- multigeneration educational ‘trust’
-
I would imagine this is the most likely reason. I may or may not have overfunded. I don't care because I am happy to have created this ^^^ if it is overfunded.

aogut
Posts: 3
Joined: Fri Sep 23, 2016 10:21 am

Re: Overfunding 529

Post by aogut » Thu Jun 07, 2018 8:35 pm

letsgobobby wrote:
Thu Jun 07, 2018 7:30 pm
- multigeneration educational ‘trust’
can someone explain and point me the links? thanks.

Iridium
Posts: 260
Joined: Thu May 19, 2016 10:49 am

Re: Overfunding 529

Post by Iridium » Thu Jun 07, 2018 9:21 pm

aogut wrote:
Thu Jun 07, 2018 8:35 pm
letsgobobby wrote:
Thu Jun 07, 2018 7:30 pm
- multigeneration educational ‘trust’
can someone explain and point me the links? thanks.
I not think trust was meant literally here. More that any money not spent on your kids can be held in your account until your grandchildren go to college.

So, it might look something like this:

1. Fund $250K in 529 for each kid, 10 years before college
2. Grows to about $450K in 10 years
3. Private school tuition is 'only' $300K for the 4 years, leaving $150K.
4. 15ish years after graduation, grandchild is born. Child's 529 has grown to ~$400K. Transfer funds from kids 529 to grandkid's plan.
5. 18 years later, 529 plan has grown to ~$1.2 million, but 4 years of private tuition is 'only' $1 million. Leave the $200K to grow with grandchild's 529.
6. Repeat process when great grandchild is born, etc.

All this time, a reasonable clever setup is able to avoid all dividend, capital gain, and estate taxes.

One of the downside with this plan is that you are essentially betting on what the higher education market will look like 40+ years from now, just to get to the second generation (and 70+ years to get to the third generation). I doubt that a repeat of the tuition increases over the last 40 years is sustainable, as it is hard to imagine the lifetime earnings premium for a college degree able to stay ahead of tuition over the long term [in other words, it will become much more profitable to skip college and invest the difference]). If colleges recognize this and figure out a way to keep a lid on tuition increases, then this plan works well. If the colleges don't, then leave themselves open to disruption, then you potentially end up with a pretty massive penalty as you gradually withdraw money from am obsolete plan.

Bacchus01
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Joined: Mon Dec 24, 2012 9:35 pm

Re: Overfunding 529

Post by Bacchus01 » Fri Jun 08, 2018 5:45 am

aogut wrote:
Thu Jun 07, 2018 8:35 pm
letsgobobby wrote:
Thu Jun 07, 2018 7:30 pm
- multigeneration educational ‘trust’
can someone explain and point me the links? thanks.
Stated well above as an example. It’s not a legit term, it one I and others use frequently.

For us, we came to the conclusion at one point that there was no better way for us to give inheritance than through the ability to have a quality education. As long as we live in a state that has a tax deduction, we intend to fund 529s for the rest of our life.

Here’s how that works for us. We have 3 children, ages 16,12, and 9. WI has a tax deduction on up to about $3K per beneficiary per year. We put away $3K for each of our kids and for ourselves each year for a total of $15K. We have accumulat d $150K and our oldest will start college in a year. He may consume all of it, or not. But we will continue to fund the 529s for us, for them, and then for our grandchildren someday. With the ability to change the beneficiaries and move down and across, we see that as a great tax strategy to fund a multigenerational education “trust.”

When the kids finally have kids (I.e. grandkids) we’ll have a stipulation that we contribute to the grandkids on a matching basis with our kids. We actually will have a similar rule for them when they get in the “real” workforce that we will fund a ROTH IRA for them, provided it’s a match on anything they contribute to their company sponsored 401K.

Rupert
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Joined: Fri Aug 17, 2012 12:01 pm

Re: Overfunding 529

Post by Rupert » Fri Jun 08, 2018 6:43 am

Iridium wrote:
Thu Jun 07, 2018 9:21 pm
aogut wrote:
Thu Jun 07, 2018 8:35 pm
letsgobobby wrote:
Thu Jun 07, 2018 7:30 pm
- multigeneration educational ‘trust’
can someone explain and point me the links? thanks.
I not think trust was meant literally here. More that any money not spent on your kids can be held in your account until your grandchildren go to college.

So, it might look something like this:

1. Fund $250K in 529 for each kid, 10 years before college
2. Grows to about $450K in 10 years
3. Private school tuition is 'only' $300K for the 4 years, leaving $150K.
4. 15ish years after graduation, grandchild is born. Child's 529 has grown to ~$400K. Transfer funds from kids 529 to grandkid's plan.
5. 18 years later, 529 plan has grown to ~$1.2 million, but 4 years of private tuition is 'only' $1 million. Leave the $200K to grow with grandchild's 529.
6. Repeat process when great grandchild is born, etc.

All this time, a reasonable clever setup is able to avoid all dividend, capital gain, and estate taxes.

One of the downside with this plan is that you are essentially betting on what the higher education market will look like 40+ years from now, just to get to the second generation (and 70+ years to get to the third generation). I doubt that a repeat of the tuition increases over the last 40 years is sustainable, as it is hard to imagine the lifetime earnings premium for a college degree able to stay ahead of tuition over the long term [in other words, it will become much more profitable to skip college and invest the difference]). If colleges recognize this and figure out a way to keep a lid on tuition increases, then this plan works well. If the colleges don't, then leave themselves open to disruption, then you potentially end up with a pretty massive penalty as you gradually withdraw money from am obsolete plan.
You're also betting that 529s will still exist 40 years from now.

NoHeat
Posts: 165
Joined: Sun Sep 18, 2016 10:13 am

Re: Overfunding 529

Post by NoHeat » Fri Jun 08, 2018 9:13 am

Iridium wrote:
Thu Jun 07, 2018 9:21 pm

4. 15ish years after graduation, grandchild is born. Child's 529 has grown to ~$400K. Transfer funds from kids 529 to grandkid's plan.
I'm wondering if gift taxes could be an issue with this scheme, if transferring more than $15k per year from one beneficiary to another. I've read the IRS instructions regarding 529 and gift taxes, and they are unclear to me, regarding whether changing the beneficiary can trigger the tax.

letsgobobby
Posts: 11511
Joined: Fri Sep 18, 2009 1:10 am

Re: Overfunding 529

Post by letsgobobby » Fri Jun 08, 2018 11:45 am

Yes, it doesn’t work quite as well as outlined above because of the gift tax issue, though the annual gift tax exemption does increase with inflation. Assuming the 529 five year election option remains, one could (for example), take the $225k left in Child A’s 529 and transfer $75k to each of three new 529s with three different grandchildren as beneficiaries and not face any tax.

randomguy
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Joined: Wed Sep 17, 2014 9:00 am

Re: Overfunding 529

Post by randomguy » Fri Jun 08, 2018 1:37 pm

letsgobobby wrote:
Fri Jun 08, 2018 11:45 am
Yes, it doesn’t work quite as well as outlined above because of the gift tax issue, though the annual gift tax exemption does increase with inflation. Assuming the 529 five year election option remains, one could (for example), take the $225k left in Child A’s 529 and transfer $75k to each of three new 529s with three different grandchildren as beneficiaries and not face any tax.
There is no gift. The account owner is just changing the beneficiary. You can do that to grand kids tax free. Great grand kids are a different story. You can split the account by doing partial rollovers

marcopolo
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Joined: Sat Dec 03, 2016 10:22 am

Re: Overfunding 529

Post by marcopolo » Fri Jun 08, 2018 1:40 pm

NoHeat wrote:
Fri Jun 08, 2018 9:13 am
Iridium wrote:
Thu Jun 07, 2018 9:21 pm

4. 15ish years after graduation, grandchild is born. Child's 529 has grown to ~$400K. Transfer funds from kids 529 to grandkid's plan.
I'm wondering if gift taxes could be an issue with this scheme, if transferring more than $15k per year from one beneficiary to another. I've read the IRS instructions regarding 529 and gift taxes, and they are unclear to me, regarding whether changing the beneficiary can trigger the tax.
my understanding is that if you move laterally or up in generation when changing beneficiaries, it is not considered a gift. But, if you move down (like child to grand child), then it is considered a gift. But, that does not necessarily imply any taxes due, and it can be counted against lifetime allowance.
Once in a while you get shown the light, in the strangest of places if you look at it right.

marcopolo
Posts: 1052
Joined: Sat Dec 03, 2016 10:22 am

Re: Overfunding 529

Post by marcopolo » Fri Jun 08, 2018 1:43 pm

randomguy wrote:
Fri Jun 08, 2018 1:37 pm
letsgobobby wrote:
Fri Jun 08, 2018 11:45 am
Yes, it doesn’t work quite as well as outlined above because of the gift tax issue, though the annual gift tax exemption does increase with inflation. Assuming the 529 five year election option remains, one could (for example), take the $225k left in Child A’s 529 and transfer $75k to each of three new 529s with three different grandchildren as beneficiaries and not face any tax.
There is no gift. The account owner is just changing the beneficiary. You can do that to grand kids tax free. Great grand kids are a different story. You can split the account by doing partial rollovers
Hmm. Are you sure about that? I think transfers down a generation is considered a gift.
Once in a while you get shown the light, in the strangest of places if you look at it right.

Iridium
Posts: 260
Joined: Thu May 19, 2016 10:49 am

Re: Overfunding 529

Post by Iridium » Fri Jun 08, 2018 4:43 pm

letsgobobby wrote:
Fri Jun 08, 2018 11:45 am
Yes, it doesn’t work quite as well as outlined above because of the gift tax issue, though the annual gift tax exemption does increase with inflation. Assuming the 529 five year election option remains, one could (for example), take the $225k left in Child A’s 529 and transfer $75k to each of three new 529s with three different grandchildren as beneficiaries and not face any tax.
True. I glossed over some stuff to convey the concept. There are a number of ways to deal with the gift tax issue. One way is shift funds from siblings, cousins, and folks up a generation to multiply the annual exclusion. In the example I gave, you probably would not even have to get that fancy. Under my assumptions, when grandchild is born, the annual exclusion would be around $25K. Assuming parents are married and elect to use 5 year rule, that means that $250K can be transferred to grandchild when he/she is born. The rest of the money stays with your child's 529, until 5 years later, at which point the child's account can be drained into the grandchild's account tax free with another 5 year election.

megabad
Posts: 507
Joined: Fri Jun 01, 2018 4:00 pm

Re: Overfunding 529

Post by megabad » Fri Jun 08, 2018 5:02 pm

Iridium wrote:
Fri Jun 08, 2018 4:43 pm
letsgobobby wrote:
Fri Jun 08, 2018 11:45 am
Yes, it doesn’t work quite as well as outlined above because of the gift tax issue, though the annual gift tax exemption does increase with inflation. Assuming the 529 five year election option remains, one could (for example), take the $225k left in Child A’s 529 and transfer $75k to each of three new 529s with three different grandchildren as beneficiaries and not face any tax.
True. I glossed over some stuff to convey the concept. There are a number of ways to deal with the gift tax issue. One way is shift funds from siblings, cousins, and folks up a generation to multiply the annual exclusion. In the example I gave, you probably would not even have to get that fancy. Under my assumptions, when grandchild is born, the annual exclusion would be around $25K. Assuming parents are married and elect to use 5 year rule, that means that $250K can be transferred to grandchild when he/she is born. The rest of the money stays with your child's 529, until 5 years later, at which point the child's account can be drained into the grandchild's account tax free with another 5 year election.
Gosh if you folks are giving so much money out that you think you are going to exceed the $5 million lifetime exclusion per person than put me on the list.

msr999
Posts: 22
Joined: Thu Mar 09, 2017 3:25 pm

Re: Overfunding 529

Post by msr999 » Fri Jun 08, 2018 6:32 pm

letsgobobby wrote:
Thu Jun 07, 2018 7:30 pm
- if you are in a very high tax bracket now, and will be in a lower tax bracket later, the penalty plus taxation of earnings may not be worse than a taxable account. Admittedly it is hard to think of many situations where the numbers work out well.
This is an interesting point that I never considered. So if you expect your tax bracket to be less 10% from current bracket (10% is the penalty to withdraw for other reasons), then you are better of over funding and paying the penalty?

marcopolo
Posts: 1052
Joined: Sat Dec 03, 2016 10:22 am

Re: Overfunding 529

Post by marcopolo » Fri Jun 08, 2018 6:42 pm

msr999 wrote:
Fri Jun 08, 2018 6:32 pm
letsgobobby wrote:
Thu Jun 07, 2018 7:30 pm
- if you are in a very high tax bracket now, and will be in a lower tax bracket later, the penalty plus taxation of earnings may not be worse than a taxable account. Admittedly it is hard to think of many situations where the numbers work out well.
This is an interesting point that I never considered. So if you expect your tax bracket to be less 10% from current bracket (10% is the penalty to withdraw for other reasons), then you are better of over funding and paying the penalty?
I still don't think it would be advantageous in this scenario.
The 10% is the penalty. But all gain coming out would also be subject to ordinary income taxes, which at least in recent past, has been greater than capital gains rate that you could have utilized in taxable account.

I am a big fan of 529 for college funding, but i am not sure it makes much sense to intentionally over fund, unless you plan to use it for future grand kids. We ended up over funding, not intentionally. we plan to leave the remainder in the 529 for future grand kids, or as buffer if the next 10 years go really poorly.
Once in a while you get shown the light, in the strangest of places if you look at it right.

Iridium
Posts: 260
Joined: Thu May 19, 2016 10:49 am

Re: Overfunding 529

Post by Iridium » Fri Jun 08, 2018 7:24 pm

megabad wrote:
Fri Jun 08, 2018 5:02 pm
Iridium wrote:
Fri Jun 08, 2018 4:43 pm
letsgobobby wrote:
Fri Jun 08, 2018 11:45 am
Yes, it doesn’t work quite as well as outlined above because of the gift tax issue, though the annual gift tax exemption does increase with inflation. Assuming the 529 five year election option remains, one could (for example), take the $225k left in Child A’s 529 and transfer $75k to each of three new 529s with three different grandchildren as beneficiaries and not face any tax.
True. I glossed over some stuff to convey the concept. There are a number of ways to deal with the gift tax issue. One way is shift funds from siblings, cousins, and folks up a generation to multiply the annual exclusion. In the example I gave, you probably would not even have to get that fancy. Under my assumptions, when grandchild is born, the annual exclusion would be around $25K. Assuming parents are married and elect to use 5 year rule, that means that $250K can be transferred to grandchild when he/she is born. The rest of the money stays with your child's 529, until 5 years later, at which point the child's account can be drained into the grandchild's account tax free with another 5 year election.
Gosh if you folks are giving so much money out that you think you are going to exceed the $5 million lifetime exclusion per person than put me on the list.
Remember that it would come out of your kid's lifetime exclusion, not your own. Even if it is unlikely to matter, it seems polite not to simply assume your kids are also going to see it as a non-issue.

TheDDC
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Re: Overfunding 529

Post by TheDDC » Fri Jun 08, 2018 7:34 pm

letsgobobby wrote:
Thu Jun 07, 2018 7:30 pm
- multigeneration educational ‘trust’
Which would be an INSANELY ridiculous reason to fund a 529 as an investment mechanism, of course, considering that higher ed cannot continue to sustain double digit tuition increases and continue to stay afloat. Then you have the very real possibility of "free/low cost college" in the future. Imagine having $1M built up over several years in a fund you could never theoretically liquidate for anything other than one specific cost (that you may or may not have) without penalties+taxes. It makes including that fund in net worth calculations pretty ridiculous. At least with an HSA you know you will always have health costs as long as you're alive.

My wife and I are not fans of 529 because of the assumptions made ahead of time to fund one in the first place. When the time comes, opening a 529 in a just-in-time approach with a transfer in from a Roth *may* make sense, but holding your funds in an account with such a narrow purpose seems foolish.

-TheDDC

letsgobobby
Posts: 11511
Joined: Fri Sep 18, 2009 1:10 am

Re: Overfunding 529

Post by letsgobobby » Fri Jun 08, 2018 8:11 pm

Foolish like a fox, isn't that the saying?

I'll keep the six figures in gains from being taxed any day of the week.

Remember that generations increase exponentially. 2 children, 4 grandchildren, 8 great-grandchildren. $1 million sounds like a lot for two kids, not so crazy for eight great-grandchildren. Not afraid at all that I or my descendants won't have a way to use the money.

Erwin007
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Joined: Tue Aug 19, 2008 8:29 am
Location: Intermountain West

Re: Overfunding 529

Post by Erwin007 » Fri Jun 08, 2018 9:55 pm

letsgobobby wrote:
Fri Jun 08, 2018 8:11 pm
Foolish like a fox, isn't that the saying?

I'll keep the six figures in gains from being taxed any day of the week.

Remember that generations increase exponentially. 2 children, 4 grandchildren, 8 great-grandchildren. $1 million sounds like a lot for two kids, not so crazy for eight great-grandchildren. Not afraid at all that I or my descendants won't have a way to use the money.
Exactly. Plus the tax break now. Lots of irrational, unfounded fears out there about 529s.

Bacchus01
Posts: 1819
Joined: Mon Dec 24, 2012 9:35 pm

Re: Overfunding 529

Post by Bacchus01 » Sat Jun 09, 2018 6:48 am

TheDDC wrote:
Fri Jun 08, 2018 7:34 pm
letsgobobby wrote:
Thu Jun 07, 2018 7:30 pm
- multigeneration educational ‘trust’
Which would be an INSANELY ridiculous reason to fund a 529 as an investment mechanism, of course, considering that higher ed cannot continue to sustain double digit tuition increases and continue to stay afloat. Then you have the very real possibility of "free/low cost college" in the future. Imagine having $1M built up over several years in a fund you could never theoretically liquidate for anything other than one specific cost (that you may or may not have) without penalties+taxes. It makes including that fund in net worth calculations pretty ridiculous. At least with an HSA you know you will always have health costs as long as you're alive.

My wife and I are not fans of 529 because of the assumptions made ahead of time to fund one in the first place. When the time comes, opening a 529 in a just-in-time approach with a transfer in from a Roth *may* make sense, but holding your funds in an account with such a narrow purpose seems foolish.

-TheDDC

You are making a set of assumptions that keeps you out of them. Calling them insane is a bit short sighted.

I agree with literally none of your assumptions.

leftcoaster
Posts: 327
Joined: Mon Jul 23, 2007 4:04 pm

Re: Overfunding 529

Post by leftcoaster » Sat Jun 09, 2018 7:48 am

Living in a state with no deduction, my only immmediate benefit would be removing assets from taxable. Have just one child, destined for college in 2019. So, the gamble is that she’ll have kids and that an extra 10 or so years of appreciation (30 total) in a multigenerational 529 are worth the risk of her not having kids and there being no beneficiary. And in that latter case, what’s it all for, really?

TheDDC
Posts: 181
Joined: Mon Jan 08, 2018 11:11 am

Re: Overfunding 529

Post by TheDDC » Sat Jun 09, 2018 11:09 am

Bacchus01 wrote:
Sat Jun 09, 2018 6:48 am
TheDDC wrote:
Fri Jun 08, 2018 7:34 pm
letsgobobby wrote:
Thu Jun 07, 2018 7:30 pm
- multigeneration educational ‘trust’
Which would be an INSANELY ridiculous reason to fund a 529 as an investment mechanism, of course, considering that higher ed cannot continue to sustain double digit tuition increases and continue to stay afloat. Then you have the very real possibility of "free/low cost college" in the future. Imagine having $1M built up over several years in a fund you could never theoretically liquidate for anything other than one specific cost (that you may or may not have) without penalties+taxes. It makes including that fund in net worth calculations pretty ridiculous. At least with an HSA you know you will always have health costs as long as you're alive.

My wife and I are not fans of 529 because of the assumptions made ahead of time to fund one in the first place. When the time comes, opening a 529 in a just-in-time approach with a transfer in from a Roth *may* make sense, but holding your funds in an account with such a narrow purpose seems foolish.

-TheDDC

You are making a set of assumptions that keeps you out of them. Calling them insane is a bit short sighted.

I agree with literally none of your assumptions.
So... You are basically saying nothing with this statement. OK, So it's NOT within the realm of possibility that costs continue to price people out of the higher ed market OR that free college tuition is not conceivably in anyone's future (either at the macro or micro level)? Or that your assumptions regarding a so-called "educational trust" setup is the best way to protect assets?

I guess there's always a sucker out there willing to pay any price offered and have crappy liquidity options to boot!

-TheDDC

letsgobobby
Posts: 11511
Joined: Fri Sep 18, 2009 1:10 am

Re: Overfunding 529

Post by letsgobobby » Sat Jun 09, 2018 1:21 pm

Pretty strong words from a newbie.

You’re entitled to your opinion but your presumptions are wrong for many others. Whatever “price offered” I am paying and whatever “crappy liquidity options” I am having are completely acceptable to me in light of the tax savings and estate planning goals achieved.

amitb00
Posts: 422
Joined: Sun Jan 01, 2012 9:04 am

Re: Overfunding 529

Post by amitb00 » Sat Jun 09, 2018 2:13 pm

If someone wishes to pay for college education for their kids and have means to do so, it makes complete sense to invest in 529. In fact overfunding is not an issue if you are willing to pass it on to next generation kids. I don’t understand why folks are so hesitant in using it.
Yes, your own finances should be in order. That is without 529 money, you should be set for retirement. If so, then use 529 in a big way.

TheDDC
Posts: 181
Joined: Mon Jan 08, 2018 11:11 am

Re: Overfunding 529

Post by TheDDC » Sat Jun 09, 2018 11:10 pm

Yup. Strong words indeed for a narrow allowable use of funds, and the uncertainty of use in the future based on sustainability of higher ed as it is bring operated today. I would order 529s at the very bottom of any savings plan due to the narrow use of the funds allowed by law. Nothing more, nothing less. An HSA would be next to the bottom, but since it's more likely you will need to pay for your own health care than college I would value that higher. Or would you disagree with that premise too since you would just write me off as a "newbie"? Just like any other piece of advice related to sinking money into savings, it's usually someone's opinion.

EDIT: I also believe I used too strong a term in discouraging the use of 529s as I re-read my original post.

-TheDDC

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