Should I bother with 529s?

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SilverDollars
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Should I bother with 529s?

Post by SilverDollars » Sun Jan 06, 2019 9:21 am

Kudos to those who had the foresight (and money!) to start a 529 when their children were born or very young. I'm not those people, as we spent the first 10 years of our kids lives climbing out of large debt, and then the remainder only having enough to fund retirement.

My situation: I have three children:
17 (a senior now, would be a freshman in college in Fall this year)
15 (sophomore)
12 (7th grade)
Roth IRA: Only $7k in entire Roth IRA, because I was only allowed to contribute one year, remainder were over the contribution limits
Rest of money is in 401k and Traditional IRA.
We live in CT (They have the CHET)

Child 1 is in the process of awaiting application responses. Some good news is that the first two said yes and offered merit which is around half of tuition. But even half of tuition, plus room and board, is significant of course.

I have some savings right now (not much) set aside, and will have a large bonus coming in February with the ability to sock away some money.

I've read up a little on 529s, but like many things in finance there seems to be a number of complexities, gotchas, etc. For example, I just saw something that said "you can only change your investment allocations twice per year". That was an eye catcher, and also, that they may have minimum paycheck/monthly contribution amounts?

I also don't have a lot of confidence, short term, in the market. In fact, not even entirely confident in the market in the medium term (3-5 years from now).

Different approaches I have thought of:

Set aside tiered amounts for each of the kids. For example, $500 a month for oldest, $300 for middle, $200 for youngest.

or

Forget the oldest, and just start on the youngest, since youngest is 6 years away from college, and pay with out of pocket savings for older.

or

Don't bother with 529 at all, just setup taxable investment accounts with Vanguard for each (in my name not theirs)

Open to any and all suggestions. Looking for flexibility and safety, don't want to get trapped/locked out of money, and don't know if throwing money into volatile stocks so close to college makes any sense either.

Thank you

Minty
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Re: Should I bother with 529s?

Post by Minty » Sun Jan 06, 2019 9:26 am

One point is that you don't have to invest the 529 money in equities. You can find a 529 that will let you invest in CDs, bonds, whatever. With a certainty of having college expense and a state income tax deduction as there is in Connecticut, I would unquestionably contribute to a 529.
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Alexa9
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Re: Should I bother with 529s?

Post by Alexa9 » Sun Jan 06, 2019 9:31 am

A 529 is better than taxable for sure. You will probably want a fairly conservative allocation at this point however. How much do you plan on helping them with college? I would be very clear with them whether you want them to pay part or you will pay the full amount and if it is contingent on grades or certain majors. They may want to take out loans (skin in the game) and you reimburse partially or fully depending on if they are a party animal or decide to major in philosophy.

livesoft
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Re: Should I bother with 529s?

Post by livesoft » Sun Jan 06, 2019 9:32 am

I'd figure out a way to put money in to Roth IRAs and not worry about 529 plan.

But there are lots of interactions between income, education tax credits, IRAs, and so on that will effect your finances in ways that I cannot tell you because I have no clue about all your finances.

IRS Publication 970 is a MUST READ for folks about to send kids to college. If you cannot understand ALL that is in there, then you are probably going to cost yourself some significant amount of money:
https://www.irs.gov/pub/irs-pdf/p970.pdf

For instance, are you eligibile for the free $2500 from the US government for college tuition? Were you aware of how to get it?
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livesoft
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Re: Should I bother with 529s?

Post by livesoft » Sun Jan 06, 2019 9:36 am

Alexa9 wrote:
Sun Jan 06, 2019 9:31 am
A 529 is better than taxable for sure.
Sorry, but that is NOT true in many situations.

A family in a low income tax bracket would pay no tax on gains in a taxable account and has the ability to tax-loss harvest losses. Not true of 529 plan money. Plus taxable money can be used for non-education stuff, but if $4,000 is used for college tuition, then one can claim the AOTC and get a free $2500. That is certainly not true of 529 money used for college.
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Triple digit golfer
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Re: Should I bother with 529s?

Post by Triple digit golfer » Sun Jan 06, 2019 9:53 am

livesoft wrote:Plus taxable money can be used for non-education stuff, but if $4,000 is used for college tuition, then one can claim the AOTC and get a free $2500. That is certainly not true of 529 money used for college.
Livesoft,

Are you saying that if one uses 529 money to pay for college, he or she is not eligible for the $2,500 AOTC? I am reading publication 970 and I only see income requirements of $180k MAGI or less to fully qualify for the AOTC.

Edit: Never mind. I see now.

So why would anybody use a 529 instead of a taxable account if they're giving up $10k per student over 4 years? Even at the highest LTCG rate $50k in gains at 20% would equal $10k.

Of course, things change in the future. Tax rates, income, tax credits, etc.

I fill up tax advantaged space and already contribute around $3k a year to taxable and $3k to a 529. Is it prudent to plan to underfund the 529 so that I have at least $2,500 in qualified expenses being paid through cash flow each year of my daughter's college education in order to get the AOTC?

Maybe fund expected 75%. If the credit exists in 17 years, great. If not, then I have to pay one year out of cash flow or taxable. No big deal.

I also get the Illinois 4.95% state tax deduction.

What's a prudent approach to analyze this as a whole, assuming tax rates, credits and my income remain as they are in 2019?
Last edited by Triple digit golfer on Sun Jan 06, 2019 10:03 am, edited 1 time in total.

livesoft
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Re: Should I bother with 529s?

Post by livesoft » Sun Jan 06, 2019 9:58 am

SilverDollars wrote:
Sun Jan 06, 2019 9:21 am
I've read up a little on 529s, but like many things in finance there seems to be a number of complexities, gotchas, etc. For example, I just saw something that said "you can only change your investment allocations twice per year". That was an eye catcher, and also, that they may have minimum paycheck/monthly contribution amounts?
I wanted to comment on these gotchas which I don't think are anything to worry about.

1. We haven't changed the 529 investment allocations that we started with ever. We had two 529 plans for each of our two children, so 4 plans in all. We still have one 529 plan left with money in it for about another week and it will all be withdrawn to help pay for the final semester room & board of our youngest student.

2. We never made monthly contributions to 529 plans, but just lumped in money years ago when we borrowed money from a 401(k) plan to put into the 529 plan.

If you think you can make contributions now to a 529 plan for college for your 3 children, then I don't understand why you don't just use that money to pay expenses for the oldest now or make Roth IRA contribution for yourself.
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livesoft
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Re: Should I bother with 529s?

Post by livesoft » Sun Jan 06, 2019 9:58 am

Triple digit golfer wrote:
Sun Jan 06, 2019 9:53 am
Are you saying that if one uses 529 money to pay for college, he or she is not eligible for the $2,500 AOTC? I am reading publication 970 and I only see income requirements of $180k MAGI or less to fully qualify for the AOTC.
No double dipping on tax benefits. Please re-read Pub 970 more carefully.
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Flyer24
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Re: Should I bother with 529s?

Post by Flyer24 » Sun Jan 06, 2019 10:00 am

livesoft wrote:
Sun Jan 06, 2019 9:36 am
Alexa9 wrote:
Sun Jan 06, 2019 9:31 am
A 529 is better than taxable for sure.
Sorry, but that is NOT true in many situations.

A family in a low income tax bracket would pay no tax on gains in a taxable account and has the ability to tax-loss harvest losses. Not true of 529 plan money. Plus taxable money can be used for non-education stuff, but if $4,000 is used for college tuition, then one can claim the AOTC and get a free $2500. That is certainly not true of 529 money used for college.
I don’t think Alexa9 was referring to all situations but more so the OP. The OP is not in a low income tax bracket.

Topic Author
SilverDollars
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Re: Should I bother with 529s?

Post by SilverDollars » Sun Jan 06, 2019 10:01 am

A little further info to answer some questions above:

Our income is considered very high (>200k), our expected family contribution number was around 65,000 (lol at the idea we have that much free).

On skin in the game: Absolutely plan for the kids to have some loans. For two reasons, we can't afford to pull full tuition and board, and we also think they should be in the game for some of it. I am thinking they take the $5500 stafford each year, plus anywhere from 5-10K in a secondary co-signed loan per year, putting them at about 10-15k per year on loans. For my oldest, for example, best case scenario financially is uconn acceptance (TBD), which will cost about 30k per year. Lets say 10K in loans for the kid, and we'd have to finance the remaining 20k per year as parents. Worst case scenario right now looks like going with one of the private schools that accepted her, and offered her 15-20k off of tuition per year, which puts cost around 40k per year. In that scenario might be more like 15k in loans per year, and us having to pay 25k per year as parents out of pocket.

As a ballpark number, assume that I will have about 25-30k once per year to set aside from bonus money, and possibly as much as 1k per month to also set aside.

Someone asked about deductions for our state plan (CHET), here is what I see:
Connecticut taxpayers are eligible to receive a Connecticut income tax deduction of up to $10,000 on contributions made to CHET. And your earnings, if any, are free from federal and state income tax when used for qualified expenses.

Spirit Rider
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Re: Should I bother with 529s?

Post by Spirit Rider » Sun Jan 06, 2019 10:03 am

Tax-free earnings are not the only tax benefit of 529 plans. As pointed out by @Minty, in CT, a married couple can receive up to a $10K/year state tax deduction for all contributions to CT's 529 plan.

At a minimum the OP should be contributing that $10K to the CT plan. I don't know if that contribution has to be made during the tax year or by the tax filing deadline.

Also, CT allows a five-year carryover. So you could contribute $50,000 immediately.
Last edited by Spirit Rider on Sun Jan 06, 2019 10:05 am, edited 1 time in total.

masteraleph
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Re: Should I bother with 529s?

Post by masteraleph » Sun Jan 06, 2019 10:04 am

It’s page 14 in pub 970- no double benefit allowed (a 529 is a QTP).

Note that you can claim the AOTC and use a 529 if your expenses are high enough- if you had to pay $10k, for example, you could pay $5k out of pocket and claim the AOTC and $5k out of the 529 tax free. You just can’t double dip.

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SilverDollars
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Re: Should I bother with 529s?

Post by SilverDollars » Sun Jan 06, 2019 10:05 am

livesoft wrote:
Sun Jan 06, 2019 9:58 am
SilverDollars wrote:
Sun Jan 06, 2019 9:21 am
I've read up a little on 529s, but like many things in finance there seems to be a number of complexities, gotchas, etc. For example, I just saw something that said "you can only change your investment allocations twice per year". That was an eye catcher, and also, that they may have minimum paycheck/monthly contribution amounts?
I wanted to comment on these gotchas which I don't think are anything to worry about.

1. We haven't changed the 529 investment allocations that we started with ever. We had two 529 plans for each of our two children, so 4 plans in all. We still have one 529 plan left with money in it for about another week and it will all be withdrawn to help pay for the final semester room & board of our youngest student.

2. We never made monthly contributions to 529 plans, but just lumped in money years ago when we borrowed money from a 401(k) plan to put into the 529 plan.

If you think you can make contributions now to a 529 plan for college for your 3 children, then I don't understand why you don't just use that money to pay expenses for the oldest now or make Roth IRA contribution for yourself.
I cannot make roth contributions, never have been able to really. I live in a place where we all make high incomes, so we cant Roth, but we also have super high expenses, so we don't really get to live the life that the fed assumes we live :)

As for 529 for oldest, she wouldn't start until the Fall I guess. That is 9 months away or so. If I had say 20k to put toward her year 1 schooling, would it make sense to put that in 529 now for tax benefit on ct state income tax?

Triple digit golfer
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Re: Should I bother with 529s?

Post by Triple digit golfer » Sun Jan 06, 2019 10:05 am

livesoft wrote:
Sun Jan 06, 2019 9:58 am
Triple digit golfer wrote:
Sun Jan 06, 2019 9:53 am
Are you saying that if one uses 529 money to pay for college, he or she is not eligible for the $2,500 AOTC? I am reading publication 970 and I only see income requirements of $180k MAGI or less to fully qualify for the AOTC.
No double dipping on tax benefits. Please re-read Pub 970 more carefully.
Just did and edited my post above. Thanks.

Triple digit golfer
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Re: Should I bother with 529s?

Post by Triple digit golfer » Sun Jan 06, 2019 10:06 am

masteraleph wrote:
Sun Jan 06, 2019 10:04 am
It’s page 14 in pub 970- no double benefit allowed (a 529 is a QTP).

Note that you can claim the AOTC and use a 529 if your expenses are high enough- if you had to pay $10k, for example, you could pay $5k out of pocket and claim the AOTC and $5k out of the 529 tax free. You just can’t double dip.
Seems the prudent approach would be to not fund the 529s to cover 100%. Say education will cost $80k. Fund $70k, pay $17.5k annually out of 529 and $2.5k out of cash flow and claim the credit. In a perfect world, of course.

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SilverDollars
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Re: Should I bother with 529s?

Post by SilverDollars » Sun Jan 06, 2019 10:08 am

Presuming there are two benefits to the 529 chet for me:

1. 10k per year in state income tax deductions (but this is not per kid, this is in total I assume)
2. Tax free growth (doesnt seem to make sense for kid #1 who starts in 9 months, but maybe for kid 2/3. Having said that, there's also risk that investing these amounts for such a short amount of time means LOSING money)

livesoft
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Re: Should I bother with 529s?

Post by livesoft » Sun Jan 06, 2019 10:09 am

Triple digit golfer wrote:
Sun Jan 06, 2019 9:53 am
So why would anybody use a 529 instead of a taxable account if they're giving up $10k per student over 4 years? Even at the highest LTCG rate $50k in gains at 20% would equal $10k.
Some high income people are not eligible for the AOTC nor the LLC.

Also AOTC and LLC can not used for room & board money, but 529 plan money can be used for room & board.

All this is in IRS Publication 970 which is why I recommended careful reading.
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livesoft
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Re: Should I bother with 529s?

Post by livesoft » Sun Jan 06, 2019 10:17 am

SilverDollars wrote:
Sun Jan 06, 2019 10:05 am
I cannot make roth contributions, never have been able to really. I live in a place where we all make high incomes, so we cant Roth, but we also have super high expenses, so we don't really get to live the life that the fed assumes we live :)

As for 529 for oldest, she wouldn't start until the Fall I guess. That is 9 months away or so. If I had say 20k to put toward her year 1 schooling, would it make sense to put that in 529 now for tax benefit on ct state income tax?
I lived for many years on Long Island, NY, so I would like to think that I am quite familiar with the situation you are in.

Yes, if you have the $20K earmarked for college expenses, then putting it in a 529 plan seems appropriate. Note that the CT deduction is a deduction and not a tax credit, so you would not be saving $20K in taxes.

If you can drive down your MAGI to be eligible for the AOTC, then that may be something to consider. For instance, more contributions to retirement plans if you are not contributing the maximums.

We used a 401(k) loan to fund 529 plans, too. Not for everyone though.
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Re: Should I bother with 529s?

Post by darkhorse346 » Sun Jan 06, 2019 10:20 am

I did not bother to read downstream threads. Having said that, I think that 529 plans can be one of the buckets that can fund college-related expenses.

I would not, and do not, use 529s exclusively. Money is fungible and I like flexibility and freedom to pull from whatever bucket makes the most sense, e.g., pay out of current income/cash flows for tax benefits, taxable investments, 529s etc.

Hold yourself accountable to make as few decisions as possible. In doing so, you have to consider many options and scenarios, but you'll make better-reasoned, long term decisions.

Good luck.

livesoft
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Re: Should I bother with 529s?

Post by livesoft » Sun Jan 06, 2019 11:12 am

Let me give a possible example of financial engineering:

1. Contribute maximums to 401(k)/403(b)/457 in order to drive MAGI below the level to qualify for the AOTC.

2. Borrow from 401(k) plan to put some money in 529 plan and to pay for college.

3. Use use tax-free withdrawals from 529 plan to pay for room & board AND to help make monthly payments for the 401(k) loan.

4. Snag the $2500 AOTC, too, by using some of the borrowed 401(k) money.

5. Since the 529 plan has much lower expense ratios than the 401(k) plan (say 0.15% versus 1.5%), then you get another 1.35% savings on the borrowed money.

I didn't list the downsides, but the upsides are significant in the right situation and overwhelm any downsides.
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Jack FFR1846
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Re: Should I bother with 529s?

Post by Jack FFR1846 » Sun Jan 06, 2019 11:22 am

I'll tell you what we do with one in college, grad school next year and another heading to college. In MA, we get tax deductions on only $2k in annual 529 (MA) contributions. I put in the $2k, let it settle and take it out. I'll take the $100 tax savings. Otherwise, we fund from cash flow and if needed from sale of US Savings bonds.
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Re: Should I bother with 529s?

Post by Spirit Rider » Sun Jan 06, 2019 11:27 am

SilverDollars wrote:
Sun Jan 06, 2019 10:08 am
1. 10k per year in state income tax deductions (but this is not per kid, this is in total I assume) Correct.
2. Tax free growth (doesnt seem to make sense for kid #1 who starts in 9 months, but maybe for kid 2/3. Having said that, there's also risk that investing these amounts for such a short amount of time means LOSING money)
If you are really worried about losses you can put it in the Principal Plus Interest Option, a stable value fund currently earning 2.05%.

Or use the Age-Based Conservative Managed Allocation Option:
  • 18+ 03% Equities, 1%Real Estate, 23% Bonds and 73% stable value
  • 17: 08% Equities, 1%Real Estate, 41% Bonds and 50% stable value
  • 15: 14% Equities, 3%Real Estate, 58% Bonds and 25% stable value
  • 12: 23% Equities, 5%Real Estate, 64% Bonds and 08% stable value

KingRiggs
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Re: Should I bother with 529s?

Post by KingRiggs » Sun Jan 06, 2019 12:15 pm

For those reading this thread who are not in the same boat as the OP (ie, longer time horizon until college for the kids), the take-home message is START EARLY. Clearly not at the expense of skimping on retirement funding, but start AS SOON AS POSSIBLE!

I work in a hospital around Labor and Delivery, and my message to every new couple is OPEN THE ACCOUNT NOW...

Through the miracle of compound interest, I was able to essentially double my principle, hit my savings targets, and convert to essentially a stable-value savings plan about mid-way through high school. TIME is the greatest ally...

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SilverDollars
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Re: Should I bother with 529s?

Post by SilverDollars » Sun Jan 06, 2019 1:13 pm

KingRiggs wrote:
Sun Jan 06, 2019 12:15 pm
For those reading this thread who are not in the same boat as the OP (ie, longer time horizon until college for the kids), the take-home message is START EARLY. Clearly not at the expense of skimping on retirement funding, but start AS SOON AS POSSIBLE!

I work in a hospital around Labor and Delivery, and my message to every new couple is OPEN THE ACCOUNT NOW...

Through the miracle of compound interest, I was able to essentially double my principle, hit my savings targets, and convert to essentially a stable-value savings plan about mid-way through high school. TIME is the greatest ally...
This all cannot be understated!

I came from parents who were terrible with money, and really knew NOTHING of real finance until around age 28, when I first started working at a financial company. My parents spent all their money, never saved a penny, lived for the day. They bought vehicles that did not depreciate well, had engine issues. My father liked to gamble on football games, and sometimes the casino. He felt he had a "system". They both worked hard and I am extremely thankful for everything they did for me, but they taught me all the wrong things when it came to finances.

I'm one of those "I wish I knew then what I know now" people, and hopefully my children will be better educated. Had I started college 529 plans when they were born or young, man oh man I would be sitting pretty now. Instead, I wracked up college and credit card debt, and spent a decade climbing out of that.

Start as early as possible!

Triple digit golfer
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Re: Should I bother with 529s?

Post by Triple digit golfer » Sun Jan 06, 2019 1:37 pm

livesoft wrote:
Sun Jan 06, 2019 11:12 am
Let me give a possible example of financial engineering:

1. Contribute maximums to 401(k)/403(b)/457 in order to drive MAGI below the level to qualify for the AOTC.

2. Borrow from 401(k) plan to put some money in 529 plan and to pay for college.

3. Use use tax-free withdrawals from 529 plan to pay for room & board AND to help make monthly payments for the 401(k) loan.

4. Snag the $2500 AOTC, too, by using some of the borrowed 401(k) money.

5. Since the 529 plan has much lower expense ratios than the 401(k) plan (say 0.15% versus 1.5%), then you get another 1.35% savings on the borrowed money.

I didn't list the downsides, but the upsides are significant in the right situation and overwhelm any downsides.
Assuming very low expense ratios and good investment options in the 401k, can you help me understand why it could make sense to borrow from the 401k? Is it to avoid LTCG taxes that would arise from selling taxable investments?

What are pros and cons of:

A. Lowering 401k contributions and then paying from cash flow

B. Borrowing from 401k

C. Selling taxable investments at a 15% LTCG rate

I will attempt to answer my own question. Lowering 401k contributions is tax deferred money you'll never get back, so maybe not the best option. Borrowing allows you to repay your tax deferred space and thus end up keeping that valuable space filled. If you can withdraw from taxable accounts at 0% LTCG then that is a great option too, but at a 15% rate requires additional analysis.

Am I missing anything?

cusetownusa
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Re: Should I bother with 529s?

Post by cusetownusa » Sun Jan 06, 2019 2:20 pm

SilverDollars wrote:
Sun Jan 06, 2019 10:05 am


I cannot make roth contributions, never have been able to really. I live in a place where we all make high incomes, so we cant Roth, but we also have super high expenses, so we don't really get to live the life that the fed assumes we live :)

As for 529 for oldest, she wouldn't start until the Fall I guess. That is 9 months away or so. If I had say 20k to put toward her year 1 schooling, would it make sense to put that in 529 now for tax benefit on ct state income tax?
Is there a reason you can’t do a back door Roth conversions? Do you have an IRA account that makes it not ideal to do?

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Re: Should I bother with 529s?

Post by Bacchus01 » Sun Jan 06, 2019 2:42 pm

Triple digit golfer wrote:
Sun Jan 06, 2019 9:53 am
livesoft wrote:Plus taxable money can be used for non-education stuff, but if $4,000 is used for college tuition, then one can claim the AOTC and get a free $2500. That is certainly not true of 529 money used for college.
Livesoft,

Are you saying that if one uses 529 money to pay for college, he or she is not eligible for the $2,500 AOTC? I am reading publication 970 and I only see income requirements of $180k MAGI or less to fully qualify for the AOTC.

Edit: Never mind. I see now.

So why would anybody use a 529 instead of a taxable account if they're giving up $10k per student over 4 years? Even at the highest LTCG rate $50k in gains at 20% would equal $10k.

Of course, things change in the future. Tax rates, income, tax credits, etc.

I fill up tax advantaged space and already contribute around $3k a year to taxable and $3k to a 529. Is it prudent to plan to underfund the 529 so that I have at least $2,500 in qualified expenses being paid through cash flow each year of my daughter's college education in order to get the AOTC?

Maybe fund expected 75%. If the credit exists in 17 years, great. If not, then I have to pay one year out of cash flow or taxable. No big deal.

I also get the Illinois 4.95% state tax deduction.

What's a prudent approach to analyze this as a whole, assuming tax rates, credits and my income remain as they are in 2019?
Tax deduction is substantial. You can still use 529 and get AOTC.

Alas, many of us can’t even get AOTC because of income levels.

Triple digit golfer
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Re: Should I bother with 529s?

Post by Triple digit golfer » Sun Jan 06, 2019 2:45 pm

Bacchus01 wrote:
Sun Jan 06, 2019 2:42 pm
Triple digit golfer wrote:
Sun Jan 06, 2019 9:53 am
livesoft wrote:Plus taxable money can be used for non-education stuff, but if $4,000 is used for college tuition, then one can claim the AOTC and get a free $2500. That is certainly not true of 529 money used for college.
Livesoft,

Are you saying that if one uses 529 money to pay for college, he or she is not eligible for the $2,500 AOTC? I am reading publication 970 and I only see income requirements of $180k MAGI or less to fully qualify for the AOTC.

Edit: Never mind. I see now.

So why would anybody use a 529 instead of a taxable account if they're giving up $10k per student over 4 years? Even at the highest LTCG rate $50k in gains at 20% would equal $10k.

Of course, things change in the future. Tax rates, income, tax credits, etc.

I fill up tax advantaged space and already contribute around $3k a year to taxable and $3k to a 529. Is it prudent to plan to underfund the 529 so that I have at least $2,500 in qualified expenses being paid through cash flow each year of my daughter's college education in order to get the AOTC?

Maybe fund expected 75%. If the credit exists in 17 years, great. If not, then I have to pay one year out of cash flow or taxable. No big deal.

I also get the Illinois 4.95% state tax deduction.

What's a prudent approach to analyze this as a whole, assuming tax rates, credits and my income remain as they are in 2019?
Tax deduction is substantial. You can still use 529 and get AOTC.
But not if 100% of costs are paid with 529 money. That's why I suggested only aiming for partial funding.

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Kenkat
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Re: Should I bother with 529s?

Post by Kenkat » Sun Jan 06, 2019 2:58 pm

As long as you don’t phase out of the AOTC due to income limits (I unfortunately don’t have that issue!), a good strategy is to make sure you pay the first $4000 of tuition and fees out of pocket and fund a 529 to make up some or all of the difference. The state tax deduction alone is usually a good reason to fund a 529, even one you will tap soon.

We slightly overfunded our 529s for our two kids (we started early) so I am juggling things a bit to clear those accounts as best as possible.

livesoft
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Re: Should I bother with 529s?

Post by livesoft » Sun Jan 06, 2019 3:11 pm

Triple digit golfer wrote:
Sun Jan 06, 2019 1:37 pm
Assuming very low expense ratios and good investment options in the 401k, can you help me understand why it could make sense to borrow from the 401k? Is it to avoid LTCG taxes that would arise from selling taxable investments?

What are pros and cons of:

A. Lowering 401k contributions and then paying from cash flow
Con: This increases one's AGI. Suppose one has AGI with 401(k) contributions of $160,000, but without 401(k) contributions of $199,000. They have just increased their taxes and priced themselves out of using the AOTC.
Pro: You get the state income tax deduction;

B. Borrowing from 401k
Pro: As you noted, you kept the "space" available" to re-pay / re-build in the future. No increase in AGI. AOTC may still be available.
Con: You lose your job and need to repay the loan within a month or so or it becomes fully taxable with a penalty.
Con: You have to pay the loan setup fee and the loan interest.
Pro: You get the state income tax deduction.

C. Selling taxable investments at a 15% LTCG rate
Pro: Perhaps you offset gains with previous losses, so no 15% tax rate. Also return of capital is tax-free.
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Bacchus01
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Re: Should I bother with 529s?

Post by Bacchus01 » Sun Jan 06, 2019 3:43 pm

Triple digit golfer wrote:
Sun Jan 06, 2019 2:45 pm
Bacchus01 wrote:
Sun Jan 06, 2019 2:42 pm
Triple digit golfer wrote:
Sun Jan 06, 2019 9:53 am
livesoft wrote:Plus taxable money can be used for non-education stuff, but if $4,000 is used for college tuition, then one can claim the AOTC and get a free $2500. That is certainly not true of 529 money used for college.
Livesoft,

Are you saying that if one uses 529 money to pay for college, he or she is not eligible for the $2,500 AOTC? I am reading publication 970 and I only see income requirements of $180k MAGI or less to fully qualify for the AOTC.

Edit: Never mind. I see now.

So why would anybody use a 529 instead of a taxable account if they're giving up $10k per student over 4 years? Even at the highest LTCG rate $50k in gains at 20% would equal $10k.

Of course, things change in the future. Tax rates, income, tax credits, etc.

I fill up tax advantaged space and already contribute around $3k a year to taxable and $3k to a 529. Is it prudent to plan to underfund the 529 so that I have at least $2,500 in qualified expenses being paid through cash flow each year of my daughter's college education in order to get the AOTC?

Maybe fund expected 75%. If the credit exists in 17 years, great. If not, then I have to pay one year out of cash flow or taxable. No big deal.

I also get the Illinois 4.95% state tax deduction.

What's a prudent approach to analyze this as a whole, assuming tax rates, credits and my income remain as they are in 2019?
Tax deduction is substantial. You can still use 529 and get AOTC.
But not if 100% of costs are paid with 529 money. That's why I suggested only aiming for partial funding.
I did not suggest any different.

Triple digit golfer
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Re: Should I bother with 529s?

Post by Triple digit golfer » Sun Jan 06, 2019 3:51 pm

Bacchus01 wrote:
Sun Jan 06, 2019 3:43 pm
Triple digit golfer wrote:
Sun Jan 06, 2019 2:45 pm
Bacchus01 wrote:
Sun Jan 06, 2019 2:42 pm
Triple digit golfer wrote:
Sun Jan 06, 2019 9:53 am
livesoft wrote:Plus taxable money can be used for non-education stuff, but if $4,000 is used for college tuition, then one can claim the AOTC and get a free $2500. That is certainly not true of 529 money used for college.
Livesoft,

Are you saying that if one uses 529 money to pay for college, he or she is not eligible for the $2,500 AOTC? I am reading publication 970 and I only see income requirements of $180k MAGI or less to fully qualify for the AOTC.

Edit: Never mind. I see now.

So why would anybody use a 529 instead of a taxable account if they're giving up $10k per student over 4 years? Even at the highest LTCG rate $50k in gains at 20% would equal $10k.

Of course, things change in the future. Tax rates, income, tax credits, etc.

I fill up tax advantaged space and already contribute around $3k a year to taxable and $3k to a 529. Is it prudent to plan to underfund the 529 so that I have at least $2,500 in qualified expenses being paid through cash flow each year of my daughter's college education in order to get the AOTC?

Maybe fund expected 75%. If the credit exists in 17 years, great. If not, then I have to pay one year out of cash flow or taxable. No big deal.

I also get the Illinois 4.95% state tax deduction.

What's a prudent approach to analyze this as a whole, assuming tax rates, credits and my income remain as they are in 2019?
Tax deduction is substantial. You can still use 529 and get AOTC.
But not if 100% of costs are paid with 529 money. That's why I suggested only aiming for partial funding.
I did not suggest any different.
Understood. Just clarifying. A reasonable approach, assuming a fully funded or overfunded 529, is to pay annual costs less $4k from 529. Then withdraw the extra later on and pay tax on the earnings portion of the extra money. All reasonable?

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willthrill81
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Re: Should I bother with 529s?

Post by willthrill81 » Sun Jan 06, 2019 7:22 pm

livesoft wrote:
Sun Jan 06, 2019 9:32 am
I'd figure out a way to put money in to Roth IRAs and not worry about 529 plan.
+1

I entirely agree.
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dogagility
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Re: Should I bother with 529s?

Post by dogagility » Sun Jan 06, 2019 8:50 pm

SilverDollars wrote:
Sun Jan 06, 2019 1:13 pm
...I wracked up college and credit card debt, and spent a decade climbing out of that.
Hi SilverDollars,
Upthread, you mentioned the possibility of your oldest having over 50K in student loans at the end of undergrad. I would seriously consider the ramifications of your oldest taking on this debt and keep this at the forefront of the college choice decision.

As to your 529 questions, yes invest in one to at least get the state tax deduction.

DA
Taking "risk" since 1995.

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SilverDollars
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Re: Should I bother with 529s?

Post by SilverDollars » Wed Jan 09, 2019 9:44 am

dogagility wrote:
Sun Jan 06, 2019 8:50 pm
SilverDollars wrote:
Sun Jan 06, 2019 1:13 pm
...I wracked up college and credit card debt, and spent a decade climbing out of that.
Hi SilverDollars,
Upthread, you mentioned the possibility of your oldest having over 50K in student loans at the end of undergrad. I would seriously consider the ramifications of your oldest taking on this debt and keep this at the forefront of the college choice decision.

As to your 529 questions, yes invest in one to at least get the state tax deduction.

DA
Thanks DA.

As far as the debt, let me know your thoughts on this all. For starters, we are doing OK for our retirement, but that's about all the money we have saved. Budget wise I believe we can afford 20-24K per year with some drastic and non-drastic moves. Drastic would be me selling my new car with car payment, and driving a beater around. Non drastic would be eating out less, camping family vacations instead of hotels and resorts, etc.

In any scenario, even if I was super wealthy, I would want my kids to have SOME financial skin in the game. So I figured that 5.5K federal loan as a minimum for each kid to take on, with inflation putting them around 23-24K when they graduate. Optionally, they could work and pay that off during school as well if they chose (summer job, work study, etc). Maybe this is wishful thinking on my part.

I look back to my education, and I graduated in 1998 with 40K in college loans (which is supposedly 62K in todays dollars based on inflation). I think my loan payments were about 500 a month right out of college. While these were painful, they were by no means non-starter, and I paid them all off in less than 10 years. Now, granted I had a good job out of school (late 90s, computer programming paid well), so I want to factor that in as well. I fear this generation may not do as well as a whole as mine did with the way things are trending. So I am thinking we might also do some or all of those 10K per year college/student co-loans, knowing they are in our name. If all goes well, we can pay them, or split with kids in some way.

All in all this systems is pretty poor for most Americans. For the wealthy it works great, but most people don't make enough to save for 3 kids to have college fully paid for at a better school, and for those, they spend a decade in debt. I do feel for the kids mostly, such as my daughter who took honors and AP classes, worked her tail off for many years, and then may be faced with "well, your parents just aren't rich enough for you to get into any of the great schools you got accepted at". The EFC the government has for us thinks we have an extra 60-70K in post tax money free per year, which is comical. I guess what this translates to is us having an extra 5K per month in disposable income.

To keep costs down, our choices appear to be sending our kid to state schools. Uconn is an excellent school and likely where they would go - IF THEY GET IN. Uconn has become extremely competitive because of the cost. The next option outside of Uconn is a big drop off (CT state schools, which dont compete with neighboring state schools like SUNY, Umass, which are all leaps and bounds better). The state schools also do not have either the minor or major DD wants to do.

But we will have this talk. They will need to decide if they want to go to the better school that is an extra 10K per year, and what that means for their future finances.

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serbeer
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Re: Should I bother with 529s?

Post by serbeer » Wed Jan 09, 2019 5:50 pm

Even if not trully investing into 529, if contributions are state tax-exempt as in many states with income tax, you are better off using 529 as at least conduits for college payments, even if the same year payments, as you get to save the state tax on the amount paid...

WhiteMaxima
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Re: Should I bother with 529s?

Post by WhiteMaxima » Thu Jan 10, 2019 5:32 pm

Not enough time to let 529 grow. But it doesn't mean you shoudn't invest in 529. You can invest age based or more conservative fund. Because 529 is tax free for college purpose, so it is still a good tax saving option.

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