Two 529 funds or add a Roth IRA instead

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Locked
Topic Author
Kickstart
Posts: 44
Joined: Thu Jan 25, 2018 8:23 pm

Two 529 funds or add a Roth IRA instead

Post by Kickstart » Wed Nov 06, 2019 7:29 pm

First off we live in Texas, there is no income tax benefits to contributing to a 529 fund.
We started a 529 Nevada fund through Vanguard a few years ago for my now 5 year old. Question is I now have a new baby, should I open him a Roth IRA in my moms name instead of a second 529 or a custodian account? My mom is 55 and plans to work another 10 years. We can contribute 7k a year to the Roth IRA in her name and have 70K to play with for my sons college or for us to eventually inherit if we have money left over that we dont use for the boys college. My mom has a 401k at work and a brokerage acct I assume as she dumped a large sum of money to invest some years ago with EJ, and she doesnt have or want a Roth IRA for herself. Any issues with starting a Roth IRA in my moms name to fund her grandkids college? Any issues that may cause my mom any problems with her retirement? Of course I would maintain the acct and do everything for her and she would never touch it, and all contributions would come from her bank acct after we give her the money.
I figure this way whats left over in the first 529 fund we can give the remainder or all to the second child to use for college as well, and any other costs not covered from a 529 can be paid with tax free withdraws from my then retired mothers Roth IRA.

Clarice
Posts: 182
Joined: Thu Jun 14, 2018 3:26 pm
Location: Orlando FL

Re: Two 529 funds or add a Roth IRA instead

Post by Clarice » Wed Nov 06, 2019 7:33 pm

Kickstart wrote:
Wed Nov 06, 2019 7:29 pm
First off we live in Texas, there is no income tax benefits to contributing to a 529 fund.
We started a 529 Nevada fund through Vanguard a few years ago for my now 5 year old. Question is I now have a new baby, should I open him a Roth IRA in my moms name instead of a second 529 or a custodian account? My mom is 55 and plans to work another 10 years. We can contribute 7k a year to the Roth IRA in her name and have 70K to play with for my sons college or for us to eventually inherit if we have money left over that we dont use for the boys college. My mom has a 401k at work and a brokerage acct I assume as she dumped a large sum of money to invest some years ago with EJ, and she doesnt have or want a Roth IRA for herself. Any issues with starting a Roth IRA in my moms name to fund her grandkids college? Any issues that may cause my mom any problems with her retirement? Of course I would maintain the acct and do everything for her and she would never touch it, and all contributions would come from her bank acct after we give her the money.
I figure this way whats left over in the first 529 fund we can give the remainder or all to the second child to use for college as well, and any other costs not covered from a 529 can be paid with tax free withdraws from my then retired mothers Roth IRA.
Roth then 529. Pretty sure regardless of state there are certain federal tax benefits...

Dennisl
Posts: 3
Joined: Sun Jun 09, 2019 1:46 pm

Re: Two 529 funds or add a Roth IRA instead

Post by Dennisl » Wed Nov 06, 2019 11:01 pm

Doesn’t really seem kosher to do the Roth IRA. Granted she’ll be able to pull the money out tax free, but technically it’s your mom’s money. If she passes away, you may run into issues if you have siblings or anyone else expecting an inheritance. Even if you use it all for college, since she is “gifting” the money, you’ll be limited in terms of how much you can use every year. I guess she can technically gift you, your wife and your child every year to pay for college, assuming you fill out the proper tax forms.

User avatar
FiveK
Posts: 7741
Joined: Sun Mar 16, 2014 2:43 pm

Re: Two 529 funds or add a Roth IRA instead

Post by FiveK » Thu Nov 07, 2019 2:09 am

Kickstart wrote:
Wed Nov 06, 2019 7:29 pm
Of course I would maintain the acct and do everything for her and she would never touch it....
Unless she needs it, or decides she wants to use it for something else....

Topic Author
Kickstart
Posts: 44
Joined: Thu Jan 25, 2018 8:23 pm

Re: Two 529 funds or add a Roth IRA instead

Post by Kickstart » Thu Nov 07, 2019 8:30 am

Dennisl wrote:
Wed Nov 06, 2019 11:01 pm
Doesn’t really seem kosher to do the Roth IRA. Granted she’ll be able to pull the money out tax free, but technically it’s your mom’s money. If she passes away, you may run into issues if you have siblings or anyone else expecting an inheritance. Even if you use it all for college, since she is “gifting” the money, you’ll be limited in terms of how much you can use every year. I guess she can technically gift you, your wife and your child every year to pay for college, assuming you fill out the proper tax forms.
Does she have to claim it as a gift for taxes? Or since its her money and she will be retired can she not just take the money out, say 50k a year and spend it how she wants, let say to pay for her grandsons college tuition? Not experienced too much with taxes yet, but does uncle sam really need to know how you spend your retirement money, or who you give it to? Lets say she pulls out 100k of it in one year to pay grand kids college, only way that effects her is it will raise her income for that year and thus raise her tax rate for the other money she pulls from her 401k?
Im not worried about the other sibling, plus I will be 100% beneficiary and have complete control over the account, as she will have no other acct with this broker and she doesnt do her own investing.

Flyer24
Moderator
Posts: 1161
Joined: Sun Apr 08, 2018 4:21 pm

Re: Two 529 funds or add a Roth IRA instead

Post by Flyer24 » Thu Nov 07, 2019 8:52 am

You can’t use someone else’s account for tax free growth.

User avatar
teen persuasion
Posts: 952
Joined: Sun Oct 25, 2015 1:43 pm

Re: Two 529 funds or add a Roth IRA instead

Post by teen persuasion » Thu Nov 07, 2019 8:57 am

Is mom eligible to contribute directly to a Roth IRA? You mentioned she has a work 401k.

If not, can she do a backdoor Roth IRA contribution cleanly (no other IRA balances)? Would this throw a kink in withdrawals due to 5 year seasoning of conversions?

User avatar
goodenyou
Posts: 1979
Joined: Sun Jan 31, 2010 11:57 pm
Location: Skating to Where the Puck is Going to Be..or on the golf course

Re: Two 529 funds or add a Roth IRA instead

Post by goodenyou » Thu Nov 07, 2019 8:59 am

Doesn’t really seem kosher to do the Roth IRA. Granted she’ll be able to pull the money out tax free, but technically it’s your mom’s money. If she passes away, you may run into issues if you have siblings or anyone else expecting an inheritance. Even if you use it all for college, since she is “gifting” the money, you’ll be limited in terms of how much you can use every year. I guess she can technically gift you, your wife and your child every year to pay for college, assuming you fill out the proper tax forms.

There is no gift tax if someone writes a check to the institution on your behalf. There is no limit, thankfully, because the sky appears to be the limit for tuition prices. You can also payoff medical bills (with no limit) for someone without incurring a gift tax.
"Ignorance more frequently begets confidence than does knowledge" | Do you know how to make a rain dance work? Dance until it rains.

Topic Author
Kickstart
Posts: 44
Joined: Thu Jan 25, 2018 8:23 pm

Re: Two 529 funds or add a Roth IRA instead

Post by Kickstart » Thu Nov 07, 2019 2:53 pm

teen persuasion wrote:
Thu Nov 07, 2019 8:57 am
Is mom eligible to contribute directly to a Roth IRA? You mentioned she has a work 401k.

If not, can she do a backdoor Roth IRA contribution cleanly (no other IRA balances)? Would this throw a kink in withdrawals due to 5 year seasoning of conversions?
She has what I assume is a taxable or brokerage acct with EJ. Since she invested a lump sum with them I know its not a tIRA. So that taxable acct should not be an IRA correct? Should be no reason to do a backdoor roth.

User avatar
FiveK
Posts: 7741
Joined: Sun Mar 16, 2014 2:43 pm

Re: Two 529 funds or add a Roth IRA instead

Post by FiveK » Thu Nov 07, 2019 2:58 pm

Kickstart wrote:
Thu Nov 07, 2019 2:53 pm
Since she invested a lump sum with them I know its not a tIRA.
That conclusion is not necessarily correct, given only the words "lump sum". One may contribute a lump sum to a tIRA.

Topic Author
Kickstart
Posts: 44
Joined: Thu Jan 25, 2018 8:23 pm

Re: Two 529 funds or add a Roth IRA instead

Post by Kickstart » Thu Nov 07, 2019 4:25 pm

FiveK wrote:
Thu Nov 07, 2019 2:58 pm
Kickstart wrote:
Thu Nov 07, 2019 2:53 pm
Since she invested a lump sum with them I know its not a tIRA.
That conclusion is not necessarily correct, given only the words "lump sum". One may contribute a lump sum to a tIRA.
6-7k a year is all you can contribute to a tIRA in one payment or annually correct? Regardless she wont need to do a backdoor Roth as she doesnt make too much money for a direct Roth IRA contribution.

Grt2bOutdoors
Posts: 21385
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Two 529 funds or add a Roth IRA instead

Post by Grt2bOutdoors » Thu Nov 07, 2019 5:02 pm

The use of a 529 plan is a) to meet a specific need to accumulate funds on behalf of an individual for qualified schooling expenses including high school, college and/or a vocational education. The main benefits of a 529 plan are the tax free accumulation of gains, interest and dividends. B) the beneficiary can own the account or it can be owned by the person funding it.

The use of a Roth IRA is somewhat restrictive unless the owner has reached age 59.5 at the time of withdrawal. Your mother owning the account means she controls the assets, not you. Depending on circumstances, as if she is admitted to a nursing home those assets could be fair game for payment of bills.

If the intention is to save for college, use a 529 plan.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

Dennisl
Posts: 3
Joined: Sun Jun 09, 2019 1:46 pm

Re: Two 529 funds or add a Roth IRA instead

Post by Dennisl » Thu Nov 07, 2019 5:29 pm

goodenyou wrote:
Thu Nov 07, 2019 8:59 am
Doesn’t really seem kosher to do the Roth IRA. Granted she’ll be able to pull the money out tax free, but technically it’s your mom’s money. If she passes away, you may run into issues if you have siblings or anyone else expecting an inheritance. Even if you use it all for college, since she is “gifting” the money, you’ll be limited in terms of how much you can use every year. I guess she can technically gift you, your wife and your child every year to pay for college, assuming you fill out the proper tax forms.

There is no gift tax if someone writes a check to the institution on your behalf. There is no limit, thankfully, because the sky appears to be the limit for tuition prices. You can also payoff medical bills (with no limit) for someone without incurring a gift tax.
I did not know that. I stand corrected.

User avatar
FiveK
Posts: 7741
Joined: Sun Mar 16, 2014 2:43 pm

Re: Two 529 funds or add a Roth IRA instead

Post by FiveK » Thu Nov 07, 2019 5:38 pm

Kickstart wrote:
Thu Nov 07, 2019 4:25 pm
FiveK wrote:
Thu Nov 07, 2019 2:58 pm
Kickstart wrote:
Thu Nov 07, 2019 2:53 pm
Since she invested a lump sum with them I know its not a tIRA.
That conclusion is not necessarily correct, given only the words "lump sum". One may contribute a lump sum to a tIRA.
6-7k a year is all you can contribute to a tIRA in one payment or annually correct? Regardless she wont need to do a backdoor Roth as she doesnt make too much money for a direct Roth IRA contribution.
If you meant it was a large lump sum (e.g., $50K) and it wasn't a transfer from another traditional account (IRA, 401k, etc.), then it would be reasonable to conclude it is not now a tIRA.

delamer
Posts: 9141
Joined: Tue Feb 08, 2011 6:13 pm

Re: Two 529 funds or add a Roth IRA instead

Post by delamer » Thu Nov 07, 2019 5:56 pm

The dividend, interest, and capital gains within a 529 are not taxable in the year earned.

Nor are they taxable when they are withdrawn from a 529, if the money is used for educational purposes.

So what is the advantage of opening a Roth IRA in your mother’s name to hold college funds for your kids, instead of just putting the money in a 529 with them as beneficiaries and you/your spouse as account holder?

To answer my own question, there may be some slight advantage in qualifying for need-based financial aid. But if your intent is to pay the full cost of your kids’ educations, then that isn’t important.

And the IRS absolutely cares if your mother directly gives your kids money in excess of the annual gift exemption. She has to include that information with her annual tax filing, even though she won’t owe any tax on it at the time.

Topic Author
Kickstart
Posts: 44
Joined: Thu Jan 25, 2018 8:23 pm

Re: Two 529 funds or add a Roth IRA instead

Post by Kickstart » Thu Nov 07, 2019 5:57 pm

Grt2bOutdoors wrote:
Thu Nov 07, 2019 5:02 pm
The use of a 529 plan is a) to meet a specific need to accumulate funds on behalf of an individual for qualified schooling expenses including high school, college and/or a vocational education. The main benefits of a 529 plan are the tax free accumulation of gains, interest and dividends. B) the beneficiary can own the account or it can be owned by the person funding it.

The use of a Roth IRA is somewhat restrictive unless the owner has reached age 59.5 at the time of withdrawal. Your mother owning the account means she controls the assets, not you. Depending on circumstances, as if she is admitted to a nursing home those assets could be fair game for payment of bills.

If the intention is to save for college, use a 529 plan.
Gotcha, understood. Im just considering my options as I dont want one or two 529 funds that we don't use all of, or we can't use the funds for certain expenses with college that are not covered by the 529 fund. A Roth IRA in my moms name is cheating, but if your not cheating your not trying. And I'm trying to think out of the box considering I wont be 59.5 when my son goes to college thus I cant use my own Roth IRA, and I have a mother who doesnt want to contribute to a Roth IRA and another acct would free up another 7k to invest with little limitations in a few years. But I understand the payment of medical bills.

Flyer24
Moderator
Posts: 1161
Joined: Sun Apr 08, 2018 4:21 pm

Re: Two 529 funds or add a Roth IRA instead

Post by Flyer24 » Thu Nov 07, 2019 6:06 pm

Topic is locked pending moderator review .

User avatar
LadyGeek
Site Admin
Posts: 57468
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: Two 529 funds or add a Roth IRA instead

Post by LadyGeek » Thu Nov 07, 2019 7:40 pm

Discussions of dishonest behavior or bypassing the law is totally unacceptable. The OP understands that a Roth IRA in someone else's name is cheating, but will not be dissuaded. The correct term is tax evasion, which is an illegal evasion of taxes.

The thread will remain locked.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

Locked