529 plan with State Tax deduction

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shortduck
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529 plan with State Tax deduction

Post by shortduck » Fri Nov 08, 2019 9:47 am

Hello

I am in Michigan. I get a tax break of 4.25% state tax for my 529 plan contributions. My goal is to pay for my child college education.

I see that many have suggested not to invest in 529 plan. I do not understand the real reason behind it.

Can you please let me know why I should be investing into 529 plans ?

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RickBoglehead
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Re: 529 plan with State Tax deduction

Post by RickBoglehead » Fri Nov 08, 2019 9:51 am

shortduck wrote:
Fri Nov 08, 2019 9:47 am
Hello

I am in Michigan. I get a tax break of 4.25% state tax for my 529 plan contributions. My goal is to pay for my child college education.

I see that many have suggested not to invest in 529 plan. I do not understand the real reason behind it.

Can you please let me know why I should be investing into 529 plans ?
"many have suggested not to invest in 529 plan". Who are "many"?

You invest in 529 to pay for your child's college.

You should note that Michigan's tax deduction is for investing in the Michigan plan. If you pick a top-rated plan like Utah or Nevada, you get no deduction. A couple would save $425.00 max per year.
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Wiggums
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Re: 529 plan with State Tax deduction

Post by Wiggums » Fri Nov 08, 2019 9:56 am

I believe that Michigan allows a $5,000 deduction ($10,000/couple). I know that people that said not to over fund a 529 because the money may be used on education related expenses or you will pay the tax plus a 10% penalty.


3 Reasons Not to select a 529 Plans:

1) Limited investment options. The biggest reason why you might want to go beyond 529 plans is if you're an investor who wants to go beyond the limited investment choices that you have in 529s.

2) High costs for some plans.

3) Penalties if your child ends up not going to college.

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shortduck
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Re: 529 plan with State Tax deduction

Post by shortduck » Fri Nov 08, 2019 9:57 am

see over here : https://www.bogleheads.org/wiki/Priorit ... nvestments

There is no mention about 529 plans.

DaftInvestor
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Re: 529 plan with State Tax deduction

Post by DaftInvestor » Fri Nov 08, 2019 10:24 am

shortduck wrote:
Fri Nov 08, 2019 9:47 am
Can you please let me know why I should be investing into 529 plans ?
Reasons to Invest:
1) 20+ Years of Tax-free Growth on your money. Other than retirement accounts - there are few opportunities equal!
2) A State-Tax deduction for you!
3) Plenty of low-cost plans to choose from (I don't know why someone above mentioned cost as a reason NOT to invest - just choose wisely with as with any investment!).
4) Did I mention you can get 20+ Years of TAX-FREE growth on your money? !

DaftInvestor
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Re: 529 plan with State Tax deduction

Post by DaftInvestor » Fri Nov 08, 2019 10:25 am

Wiggums wrote:
Fri Nov 08, 2019 9:56 am
I believe that Michigan allows a $5,000 deduction ($10,000/couple). I know that people that said not to over fund a 529 because the money may be used on education related expenses or you will pay the tax plus a 10% penalty.


3 Reasons Not to select a 529 Plans:

1) Limited investment options. The biggest reason why you might want to go beyond 529 plans is if you're an investor who wants to go beyond the limited investment choices that you have in 529s.

2) High costs for some plans.

3) Penalties if your child ends up not going to college.
3 is the only valid reason above. Reasons 1 and 2 apply to ALL investments (If you don't choose wisely some investments are limited or have high costs).

snailderby
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Re: 529 plan with State Tax deduction

Post by snailderby » Fri Nov 08, 2019 10:30 am

I would absolutely invest in a 529 plan before investing in a taxable account, as long as that money will be used for qualified higher education expenses. The tax benefits can be significant. And the fees for Michigan's MESP 529 plan are reasonable (0.14% to 0.20%).

niceguy7376
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Re: 529 plan with State Tax deduction

Post by niceguy7376 » Fri Nov 08, 2019 10:34 am

Wiggums wrote:
Fri Nov 08, 2019 9:56 am
3) Penalties if your child ends up not going to college.
What are the penalties and do they differ from state to state or is it federal law that dictates?
1. Is state tax benefit during contributions clawed back if we withdraw for non educational expenses ? I know some states claw back if you move money from your state plan to other state plans.

2. Is there a % penalty only on growth or also on contributions?

3. What is the % penalty?

Admiral
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Re: 529 plan with State Tax deduction

Post by Admiral » Fri Nov 08, 2019 10:40 am

In general I would make sure your retirement accounts, including Roth IRAs, are maxed before using a 529 plan.

Contributions to a Roth can always be used for education expenses tax and penalty free, but the reverse is not true: 529 monies cannot be used for retirement (at least, not without penalty).

If retirement accounts are all maxed--because you've paid yourself first, and college can be funded with loans or grants, while retirement cannot--then a 529 plan is appropriate, provided you have a good emergency fund in a taxable account (savings, brokerage, etc).

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shortduck
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Re: 529 plan with State Tax deduction

Post by shortduck » Fri Nov 08, 2019 11:30 am

Admiral wrote:
Fri Nov 08, 2019 10:40 am
In general I would make sure your retirement accounts, including Roth IRAs, are maxed before using a 529 plan.

Contributions to a Roth can always be used for education expenses tax and penalty free, but the reverse is not true: 529 monies cannot be used for retirement (at least, not without penalty).

If retirement accounts are all maxed--because you've paid yourself first, and college can be funded with loans or grants, while retirement cannot--then a 529 plan is appropriate, provided you have a good emergency fund in a taxable account (savings, brokerage, etc).
What you mentioned about "Contributions to a Roth can always be used for education", but the fact is contribution might not be enough vs the growth in 529 plan.

KingRiggs
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Re: 529 plan with State Tax deduction

Post by KingRiggs » Fri Nov 08, 2019 11:34 am

shortduck wrote:
Fri Nov 08, 2019 9:47 am
Hello

I am in Michigan. I get a tax break of 4.25% state tax for my 529 plan contributions. My goal is to pay for my child college education.

I see that many have suggested not to invest in 529 plan. I do not understand the real reason behind it.

Can you please let me know why I should be investing into 529 plans ?
Search for the many, many posts by Klangfool for counterarguments against using 529. Or just wait a while, I'm sure he'll be along shortly... :P
Advice = noun | Advise = verb | | Roth, not ROTH

Admiral
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Re: 529 plan with State Tax deduction

Post by Admiral » Fri Nov 08, 2019 11:36 am

shortduck wrote:
Fri Nov 08, 2019 11:30 am
Admiral wrote:
Fri Nov 08, 2019 10:40 am
In general I would make sure your retirement accounts, including Roth IRAs, are maxed before using a 529 plan.

Contributions to a Roth can always be used for education expenses tax and penalty free, but the reverse is not true: 529 monies cannot be used for retirement (at least, not without penalty).

If retirement accounts are all maxed--because you've paid yourself first, and college can be funded with loans or grants, while retirement cannot--then a 529 plan is appropriate, provided you have a good emergency fund in a taxable account (savings, brokerage, etc).
What you mentioned about "Contributions to a Roth can always be used for education", but the fact is contribution might not be enough vs the growth in 529 plan.
Earnings are also not subject to tax or penalty if used for qualified college expenses. Google it, there are some rules. I would not recommend doing this, simply pointing out the retirement savings are much more important than 529 savings. You cannot get the years back.

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FiveK
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Re: 529 plan with State Tax deduction

Post by FiveK » Fri Nov 08, 2019 2:22 pm

shortduck wrote:
Fri Nov 08, 2019 9:57 am
see over here : https://www.bogleheads.org/wiki/Priorit ... nvestments

There is no mention about 529 plans.
See also the similar Investment Order, which does address 529 plans by suggesting one use them after ensuring one's own retirement funding.

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FiveK
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Re: 529 plan with State Tax deduction

Post by FiveK » Fri Nov 08, 2019 2:27 pm

shortduck wrote:
Fri Nov 08, 2019 9:47 am
I am in Michigan. I get a tax break of 4.25% state tax for my 529 plan contributions.
At the very least, when your child is in college, you could contribute X in December, saving .0425*X in state tax, then withdraw X in January to pay the school. Wait two years and repeat.

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Re: 529 plan with State Tax deduction

Post by Jack FFR1846 » Fri Nov 08, 2019 2:38 pm

I'm perhaps part of the many...but until 2 years ago in my state, we got zip for investing in a 529. Now, with 2 kids in college, I invest the max where I can get anything in tax advantage....$2k a year. I literally put it into Fidelity....wait till it settles....and then ach it back to myself. I'll get about $100 in tax advantage for my trouble.

I never opened a 529 before that because savings bonds covered what I'd need and then some. If your state gives you tons of tax advantage, then sure....do it.
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DaftInvestor
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Re: 529 plan with State Tax deduction

Post by DaftInvestor » Fri Nov 08, 2019 2:42 pm

Jack FFR1846 wrote:
Fri Nov 08, 2019 2:38 pm
I'm perhaps part of the many...but until 2 years ago in my state, we got zip for investing in a 529. Now, with 2 kids in college, I invest the max where I can get anything in tax advantage....$2k a year. I literally put it into Fidelity....wait till it settles....and then ach it back to myself. I'll get about $100 in tax advantage for my trouble.

I never opened a 529 before that because savings bonds covered what I'd need and then some. If your state gives you tons of tax advantage, then sure....do it.
To be clear - the max where you can get anything in tax advantage would have been putting the full amount you are paying into 529 when your kids are born.
I know you probably meant the max you could get from a State Deduction perspective but wanted to clarify for others (The 20+ years of tax-free growth have been the main advantage for me - the $100 in minor compared to the decades of tax-free growth).

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Re: 529 plan with State Tax deduction

Post by mcraepat9 » Fri Nov 08, 2019 3:28 pm

DaftInvestor wrote:
Fri Nov 08, 2019 2:42 pm
Jack FFR1846 wrote:
Fri Nov 08, 2019 2:38 pm
I'm perhaps part of the many...but until 2 years ago in my state, we got zip for investing in a 529. Now, with 2 kids in college, I invest the max where I can get anything in tax advantage....$2k a year. I literally put it into Fidelity....wait till it settles....and then ach it back to myself. I'll get about $100 in tax advantage for my trouble.

I never opened a 529 before that because savings bonds covered what I'd need and then some. If your state gives you tons of tax advantage, then sure....do it.
To be clear - the max where you can get anything in tax advantage would have been putting the full amount you are paying into 529 when your kids are born.
I know you probably meant the max you could get from a State Deduction perspective but wanted to clarify for others (The 20+ years of tax-free growth have been the main advantage for me - the $100 in minor compared to the decades of tax-free growth).
I think where I (and maybe others) struggle is comparing throwing it all in at once Vs maximizing the state tax deduction. In NYC we’re talking about ~10% state and local income tax on a $10k contribution for MFJ so it’s a bit more consequential than $100. More valuable now that the SALT deduction is essentially eliminated.
Amateur investors are not cool-headed logicians.

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RickBoglehead
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Re: 529 plan with State Tax deduction

Post by RickBoglehead » Fri Nov 08, 2019 3:42 pm

shortduck wrote:
Fri Nov 08, 2019 11:30 am
Admiral wrote:
Fri Nov 08, 2019 10:40 am
In general I would make sure your retirement accounts, including Roth IRAs, are maxed before using a 529 plan.

Contributions to a Roth can always be used for education expenses tax and penalty free, but the reverse is not true: 529 monies cannot be used for retirement (at least, not without penalty).

If retirement accounts are all maxed--because you've paid yourself first, and college can be funded with loans or grants, while retirement cannot--then a 529 plan is appropriate, provided you have a good emergency fund in a taxable account (savings, brokerage, etc).
What you mentioned about "Contributions to a Roth can always be used for education", but the fact is contribution might not be enough vs the growth in 529 plan.
Your statement is not correct. Given that a 529 can be invested in the same investment as a Roth IRA, there is zero difference in potential growth. Did you mean that a Roth IRA's annual contribution is limited each year, as compared to a 529?
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RickBoglehead
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Re: 529 plan with State Tax deduction

Post by RickBoglehead » Fri Nov 08, 2019 3:57 pm

There are zero penalties on a 529 account if your child does not go to college. Zero. There can be penalties if you withdraw 529 funds for non-qualified expenses.

If your child does not go to college, 529 funds can be used for:

- another child(ren)
- your education - I got a Certificate in a specialty
- your contributions can be withdrawn for any purpose, without penalty, unless you got a tax break from your state for making that contribution (per what I read)
- grandchildren's college or
other immediate family member, defined as -Spouse, Son, daughter, stepchild, foster child, adopted child or a descendant, Son-in-law, daughter-in-law, Siblings or step-siblings, Brother-in-law, sister-in-law, Father-in-law, mother-in-law, Father or mother or ancestor of either, stepmother, stepfather, Aunt, uncle or their spouse, Niece, nephew or their spouse, First cousin or their spouse. Note there may be gift tax ramifications to some recipients.

Our sons are done with college and grad school. The 529s have enough money to pay for the next generation, unless someone has more than an expected number of kids. 100% in Vanguard Total Stock Market Index.
Avid user of forums on variety of interests-financial, home brewing, F-150, PHEV, home repair, etc. Enjoy learning & passing on knowledge. It's PRINCIPAL, not PRINCIPLE. I ADVISE you to seek ADVICE.

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