529 vs Taxable Account

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SteveJones
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529 vs Taxable Account

Post by SteveJones »

I have made it a point to save for my kid's college so they don't start their professional life with significant student loan debt like my wife and I were. I get nervous funding a 529 because I lose all control of the money. Has anyone every decided to use a taxable account to invest for college? I obviously know there is going to be a tax hit, but I also see the 529 management fees are higher than VTSAX. Just thinking out loud.
griswoldfamilyxmas
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Re: 529 vs Taxable Account

Post by griswoldfamilyxmas »

SteveJones wrote: Fri Oct 02, 2020 6:46 am I get nervous funding a 529 because I lose all control of the money.
What do you mean by losing control? As far as ownership is concerned, you'd be the account owner, and your child(ren) would simply be beneficiaries. As far as investment decisions are concerned, in addition to age-based plans, most states allow you to pick specific investments inside a 529.
Grt2bOutdoors
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Re: 529 vs Taxable Account

Post by Grt2bOutdoors »

SteveJones wrote: Fri Oct 02, 2020 6:46 am I have made it a point to save for my kid's college so they don't start their professional life with significant student loan debt like my wife and I were. I get nervous funding a 529 because I lose all control of the money. Has anyone every decided to use a taxable account to invest for college? I obviously know there is going to be a tax hit, but I also see the 529 management fees are higher than VTSAX. Just thinking out loud.
Let’s rephrase your post:
1) I get nervous because the thought of having money placed in a specific use, in this case, education, vehicle makes me uncomfortable. Myth - it’s locked up, well yes and no - it is in a specific account geared for educational use BUT it is not locked up. You as owner can take it out any time you like BUT if you don’t use it for qualified education expenses you will pay tax on the earnings just as you would on taxable investments AND a 10 percent penalty on the earning portion only. What part of you can’t get to your money are you worried about? The earnings or potential earnings?

2) Higher expense ratio? Okay - I make you an offer, you pay me .25% a year and I guarantee you will keep all of your gains and dividends tax-free? You don’t like that deal? Okay, you keep all your gains and dividends in return for paying me 15-20 percent in capital gains and up to 37 percent on ordinary interest. Like that better?
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KlangFool
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Re: 529 vs Taxable Account

Post by KlangFool »

OP,

What tax hit for the taxable account investing?


What is your marginal tax rate?


I do not invest in the 529. The tax benefit is minimal to me.


A) The stock index fund generates less than 2% dividend every year and 90+% of them are qualified dividends. I am at 0% LTCG rate. I pay 0% taxes.


B) If I am employed while the kids go to college, my annual saving pays for a college education.

C) If I am unemployed while the kids go to college, I will be paying 0% LTCG to pay for the college education.


KlangFool
Last edited by KlangFool on Fri Oct 02, 2020 7:46 am, edited 1 time in total.
KlangFool
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Re: 529 vs Taxable Account

Post by KlangFool »

Grt2bOutdoors wrote: Fri Oct 02, 2020 7:36 am
SteveJones wrote: Fri Oct 02, 2020 6:46 am I have made it a point to save for my kid's college so they don't start their professional life with significant student loan debt like my wife and I were. I get nervous funding a 529 because I lose all control of the money. Has anyone every decided to use a taxable account to invest for college? I obviously know there is going to be a tax hit, but I also see the 529 management fees are higher than VTSAX. Just thinking out loud.
Let’s rephrase your post:
1) I get nervous because the thought of having money placed in a specific use, in this case, education, vehicle makes me uncomfortable. Myth - it’s locked up, well yes and no - it is in a specific account geared for educational use BUT it is not locked up. You as owner can take it out any time you like BUT if you don’t use it for qualified education expenses you will pay tax on the earnings just as you would on taxable investments AND a 10 percent penalty on the earning portion only. What part of you can’t get to your money are you worried about? The earnings or potential earnings?

2) Higher expense ratio? Okay - I make you an offer, you pay me .25% a year and I guarantee you will keep all of your gains and dividends tax-free? You don’t like that deal? Okay, you keep all your gains and dividends in return for paying me 15-20 percent in capital gains and up to 37 percent on ordinary interest. Like that better?

Grt2bOutdoors,


That is only true if OP's income is in the 15% to 20% capital gains and 37% income tax bracket.

At 0% capital tax rate level, that advantage is not there.


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SchruteB&B
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Re: 529 vs Taxable Account

Post by SchruteB&B »

SteveJones wrote: Fri Oct 02, 2020 6:46 am I also see the 529 management fees are higher than VTSAX.
VTSAX is .04. Many state 529s offer pretty low cost total stocks funds, such that when you add in the tax free growth and state tax deduction, it makes it a much better deal. lL for example offers Total Stock Market for .1 and offers a tax credit up to $20k per year MFJ on a 4.95% state tax. What state are you in?
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KingRiggs
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Re: 529 vs Taxable Account

Post by KingRiggs »

OP, if your home state gives you a tax incentive for contributing to a 529, it's almost a no-brainer (providing you have taken care of funding your retirement accounts first). You retain full control of the money, the only limitation being the funds offered by the plan you choose. Most have access to good, low-expense index funds.
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mbasherp
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Re: 529 vs Taxable Account

Post by mbasherp »

It seems like 529 plans aren’t such a slam dunk of a deal if your state offers no tax benefits and you are in a low/moderate tax bracket.

Especially if you would be in the 0% LTCG bracket when selling, I believe there would be zero benefit to a 529. Above that, it would be weighing the potential taxes without it vs the potential penalty with it (if unused).

I’m currently in the same debate, but haven’t found 529 plans compelling due to being in the 12% bracket and a no income tax state.
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mmmodem
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Re: 529 vs Taxable Account

Post by mmmodem »

We do not use a 529, either.

As it is, we plan to cash flow for college. If we become unemployed or do not make enough to cash flow college, then I would argue that we cannot afford to save for college either.

The way FAFSA is set up, 529's are counted against the student for financial aid. Retirement accounts and the primary home are not. So at a minimum, we plan to pay off the home and have retirement maxed before we contribute to a 529. Some say they expect to receive zero free money and will only qualify for loans. At our income level, we expect zero free money as well. But our income level is not guaranteed when they go to college. Not using a 529 maximizes my children's chance at free money.

If there was a state tax credit, it would tip the favor for us to use a 529. If we made a lot more money, maxed tax advantaged accounts and the home was paid off, we would use a 529.
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Re: 529 vs Taxable Account

Post by Grt2bOutdoors »

mmmodem wrote: Fri Oct 02, 2020 9:26 am We do not use a 529, either.

As it is, we plan to cash flow for college. If we become unemployed or do not make enough to cash flow college, then I would argue that we cannot afford to save for college either.

The way FAFSA is set up, 529's are counted against the student for financial aid. Retirement accounts and the primary home are not. So at a minimum, we plan to pay off the home and have retirement maxed before we contribute to a 529. Some say they expect to receive zero free money and will only qualify for loans. At our income level, we expect zero free money as well. But our income level is not guaranteed when they go to college. Not using a 529 maximizes my children's chance at free money.

If there was a state tax credit, it would tip the favor for us to use a 529. If we made a lot more money, maxed tax advantaged accounts and the home was paid off, we would use a 529.
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mmmodem
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Re: 529 vs Taxable Account

Post by mmmodem »

Grt2bOutdoors wrote: Fri Oct 02, 2020 9:41 am If free money is a “loan” then don’t be too excited.
I don't see how free money and loan can be the same thing. :confused
DeadLoad
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Re: 529 vs Taxable Account

Post by DeadLoad »

mmmodem wrote: Fri Oct 02, 2020 9:44 am
Grt2bOutdoors wrote: Fri Oct 02, 2020 9:41 am If free money is a “loan” then don’t be too excited.
I don't see how free money and loan can be the same thing. :confused
Tell that to a large amount of young college students receiving “financial aide”
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Re: 529 vs Taxable Account

Post by bloom2708 »

An 18 year window of tax free growth is pretty nice. People are overthinking.

Taxable you pay tax on the gains and on all the dividends over those 18 years.

A state tax deduction is an added benefit.

At least do 50% 529 and 50% taxable. If you have multiple kids, money can move from kid to kid if unused.
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zlandar
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Re: 529 vs Taxable Account

Post by zlandar »

SteveJones wrote: Fri Oct 02, 2020 6:46 am I have made it a point to save for my kid's college so they don't start their professional life with significant student loan debt like my wife and I were. I get nervous funding a 529 because I lose all control of the money. Has anyone every decided to use a taxable account to invest for college? I obviously know there is going to be a tax hit, but I also see the 529 management fees are higher than VTSAX. Just thinking out loud.
Going to assume you make more than $40k/year which makes you subject to current long-term capital gains.

Some of the best 529 plans have expenses in the the low teens. NY 529 as example is 0.13%. You are looking at a 0.10% expense difference vs paying 15% on capital gains.

Check if your state offers a state income tax deduction on 529 contributions.

You are not losing "all control" of your money. There are restrictions on how the money can be spent and penalties if you don't follow the rules.
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Re: 529 vs Taxable Account

Post by KlangFool »

zlandar wrote: Fri Oct 02, 2020 10:13 am
SteveJones wrote: Fri Oct 02, 2020 6:46 am I have made it a point to save for my kid's college so they don't start their professional life with significant student loan debt like my wife and I were. I get nervous funding a 529 because I lose all control of the money. Has anyone every decided to use a taxable account to invest for college? I obviously know there is going to be a tax hit, but I also see the 529 management fees are higher than VTSAX. Just thinking out loud.
Going to assume you make more than $40k/year which makes you subject to current long-term capital gains.

zlandar,

https://www.bankrate.com/investing/long ... gains-tax/

That is not true. The 40K is for taxable income of single


A) For single, the standard deduction is 12K, the gross income has to be greater than 52K. And, with 401K contribution of 19.5K, the income has to be greater than 71K


B) For married filed jointly, the standard deduction ins 24K and the taxable income has to be greater than 80K. With 2 X 401K contribution (19.5K x 2) = 39K and HSA, the gross income has to be greater than 143K.

In summary, for most of us, the long-term capital gain tax rate is 0%.


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zlandar
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Re: 529 vs Taxable Account

Post by zlandar »

KlangFool wrote: Fri Oct 02, 2020 10:37 am
zlandar wrote: Fri Oct 02, 2020 10:13 am
SteveJones wrote: Fri Oct 02, 2020 6:46 am I have made it a point to save for my kid's college so they don't start their professional life with significant student loan debt like my wife and I were. I get nervous funding a 529 because I lose all control of the money. Has anyone every decided to use a taxable account to invest for college? I obviously know there is going to be a tax hit, but I also see the 529 management fees are higher than VTSAX. Just thinking out loud.
Going to assume you make more than $40k/year which makes you subject to current long-term capital gains.

zlandar,

https://www.bankrate.com/investing/long ... gains-tax/

That is not true. The 40K is for taxable income of single


A) For single, the standard deduction is 12K, the gross income has to be greater than 52K. And, with 401K contribution of 19.5K, the income has to be greater than 71K


B) For married filed jointly, the standard deduction ins 24K and the taxable income has to be greater than 80K. With 2 X 401K contribution (19.5K x 2) = 39K and HSA, the gross income has to be greater than 143K.

In summary, for most of us, the long-term capital gain tax rate is 0%.


KlangFool
Yep your right looked up the wrong chart.

Whether the OP is subject to capital gains is unclear. I would hope so if he and his spouse had a lot of student loan debt.
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1789
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Re: 529 vs Taxable Account

Post by 1789 »

SteveJones wrote: Fri Oct 02, 2020 6:46 am I have made it a point to save for my kid's college so they don't start their professional life with significant student loan debt like my wife and I were. I get nervous funding a 529 because I lose all control of the money. Has anyone every decided to use a taxable account to invest for college? I obviously know there is going to be a tax hit, but I also see the 529 management fees are higher than VTSAX. Just thinking out loud.
I would just put some in 529 but not too much to overfund it. In our case we decided to accumulate 30k for each kid and then stop contributions. We will do the rest from taxable or cash flow when time comes. Anyway , if life brings us bad surprises this money in 529 is not untouchable and we will pay tax and penalty on earnings and take money and use whenever it is needed. You don't need to overthink this.
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FreddyC
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Re: 529 vs Taxable Account

Post by FreddyC »

Agree that, if it’s realistic, you should hope (and therefore incorporate into a plan) for financial aid. If you think your kid(s) are going to be a close call for grants, this may change your strategy. Remember, choosing 529 over taxable does not help you there in any meaningful way in this respect.

With the question as set forth originally - 529 or taxable- I think funding both is the best course of action. Taxable doesn’t get better FAFSA treatment. And there are ways (discussed in the thread below) to optimize your 529 contributions to make emergency withdrawals more palatable from a tax hit perspective.

viewtopic.php?f=10&t=325882&p=5504804#p5504804


The notion that you shouldn’t invest in taxable or 529 until your house is paid off is a personal preference that has been discussed in other threads at length. My leanings are to not accelerate the payoff of my mortgage.

Likewise, the notion that you should avoid 529 because you may one day be laid off is, in my view, too pessimistic of a worldview. I have a comfortable emergency fund, use the mitigation strategy described above to access 529 (and taxable) as backup emergency funds, but also invest in index funds, stay the course, and remain optimistic.
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Brianmcg321
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Re: 529 vs Taxable Account

Post by Brianmcg321 »

This is what my wife and I did. My daughter is now 11.
We opened her 529 account when she was 2. So 9 years ago. A $3,000 deposit. We have averaged about $150 dollars a month. Some years more, some less. But the total deposits have been 22,500.

Her account has grown to about $40k. We have decided to stop contributing to it. One is that we don't get any state tax deduction. So it acts just like a Roth IRA for us. And also, we would rather put any additional savings in our own Roth IRAs.

In 10 years she may have about $80k. We are fine with that as we can either cash flow the rest, or take some money out of our Roth IRAs as needed.

I do not want to have any extra in the 529 account after she graduates.
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KlangFool
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Re: 529 vs Taxable Account

Post by KlangFool »

FreddyC wrote: Fri Oct 02, 2020 2:35 pm

Likewise, the notion that you should avoid 529 because you may one day be laid off is, in my view, too pessimistic of a worldview. I have a comfortable emergency fund, use the mitigation strategy described above to access 529 (and taxable) as backup emergency funds, but also invest in index funds, stay the course, and remain optimistic.

FreddyC,

Is it realistic to assume that someone would not have any significant period of unemployment that may use up all the emergency funds across 10 to 20 years and multiple recessions?


We have at least 30+ million unemployed now. And, it is not over yet.


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FreddyC
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Re: 529 vs Taxable Account

Post by FreddyC »

KlangFool wrote:

FreddyC,

Is it realistic to assume that someone would not have any significant period of unemployment that may use up all the emergency funds across 10 to 20 years and multiple recessions?


We have at least 30+ million unemployed now. And, it is not over yet.
There is risk on both sides of the equation. Your views on the 529 and its utility are stated and restated in numerous threads. I think they’re helpful as an extreme perspective and a reminder to get your house in order before prioritizing other expenses.

If all our planning is only worst case scenario, then we are limiting downside but missing out on upside (which means in this case, paying more in capital gains and dividends taxation than necessary). When you combine the positive factors for a 529 with ways to mitigate the downside, a more moderate position than planning for 20 years of unemployment would serve the majority better, especially those who have several kids and intend to fund their education.

529 funding for the vast majority should only be done after maximizing other retirement vehicles, like 401(k), IRA, and HSA. It then takes close to equal footing with taxable for me. For some, the individual tax breaks beyond deferment would suggest priority for 529 before taxable to that level.

You seem to think the extra security of sending any extra dollar to taxable in the event of an unforeseen emergency is worth the cost of the tax deferment (from the state each year and from the feds with QEE). That’s a personal choice. If the person who follows the priority of funding (tax-advantaged accounts before 529) makes the same choice and never funds 529 but still pays for what would have been QEE, they are probably going to have a heftier tax bill come tuition time (and each year leading up to it).
KlangFool
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Re: 529 vs Taxable Account

Post by KlangFool »

FreddyC wrote: Fri Oct 02, 2020 3:20 pm
KlangFool wrote:

FreddyC,

Is it realistic to assume that someone would not have any significant period of unemployment that may use up all the emergency funds across 10 to 20 years and multiple recessions?


We have at least 30+ million unemployed now. And, it is not over yet.
There is risk on both sides of the equation. Your views on the 529 and its utility are stated and restated in numerous threads. I think they’re helpful as an extreme perspective and a reminder to get your house in order before prioritizing other expenses.

If all our planning is only worst case scenario,

FreddyC,

Why do you assume that the planning only works out in the worst-case? It works out in the best case scenario too. Aka, if OP early retired a few years before the kids go to college, then, the income would be low enough for financial aid while he lives off the taxable account.

Or in any situation when OP has a gap between employment. Or, when the kids go to college education, OP can spend from the taxable account while max up the tax-advantaged accounts. In this case, the money can grow tax-free much longer than 529.


529 only works out in only one possible scenario. Aka, OP has the same and consistent level of income across the 10 to 20 years. The taxable account works out in any other combination of scenarios. Why is that good planning? How is that not overly optimistic?


If OP's household income is at 200K or above, then, 529 may be a good answer. For the rest of us, the benefit is minimal.

At 0% Long-term capital gain rate.


A) Invest the money in the 529, let it grow for 10 to 20 years tax-free.


B) Invest the money in the taxable account, let it grows close to tax-free. Then, when the kid goes to college, spend from the taxable account and move the money from the taxable account to the tax-advantaged accounts. Let it grows tax-free.

(A) let you grow tax-free 10 to 20 years. (B) let you grow near tax-free for 10 to 20 years and tax-free another 10 to 20 years. (B) is better than (A).

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Last edited by KlangFool on Sun Oct 11, 2020 8:31 pm, edited 1 time in total.
FreddyC
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Re: 529 vs Taxable Account

Post by FreddyC »

Each person should consider their individual needs- it’s not one-sized fits all. I agree that the higher the income level, the more likely that a 529 makes sense. Many people have kids in their mid-20s to late 30s and their kids go to college while they are at their peak earning ages early 40s to late 50s. For the early retiree (well done!), the taxable will count against you worse than 529 (because dividends/capital gains are treated as income as it relates to your expected financial contribution- way worse treatment than a 529 gets!), but I guess in your scenario, having that security blanket justifies paying a whole lot more taxes. Remember, the question is taxable vs 529, with the assumption there is spare money that will go to one of those two places. Taxable is worse than 529 for paying college expenses.
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Re: 529 vs Taxable Account

Post by KlangFool »

FreddyC wrote: Fri Oct 02, 2020 4:13 pm Each person should consider their individual needs- it’s not one-sized fits all. I agree that the higher the income level, the more likely that a 529 makes sense. Many people have kids in their mid-20s to late 30s and their kids go to college while they are at their peak earning ages early 40s to late 50s. For the early retiree (well done!), the taxable will count against you worse than 529 (because dividends/capital gains are treated as income as it relates to your expected financial contribution- way worse treatment than a 529 gets!), but I guess in your scenario, having that security blanket justifies paying a whole lot more taxes. Remember, the question is taxable vs 529, with the assumption there is spare money that will go to one of those two places. Taxable is worse than 529 for paying college expenses.

FreddyC,

<<For the early retiree (well done!), the taxable will count against you worse than 529 (because dividends/capital gains are treated as income as it relates to your expected financial contribution- way worse treatment than a 529 gets!), >>


As long as the early retiree retired a few years earlier, the taxable account could be spent down and/or used to pay off the mortgage. Then. the money/income would not be counted. That option is not possible with the 529 without significant cost.


The taxable account is a lot more flexible than 529.


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FreddyC
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Re: 529 vs Taxable Account

Post by FreddyC »

So you have retired early enough to have a few years to spend down taxable before the kids are going to school (retiring in your 40s?) and then you no longer have a taxable. So to fund the college costs, you are doing what? And how does it affect FAFSA? My guess is it will not be as advantageous as using a 529. There are few real world examples where your scenario comports with how people actually live their lives.

A spork is more flexible than a spoon, but if you are reasonably certain soup is on the menu, I’d rather have a spoon. 529 is not as flexible as taxable but is better for paying for college.
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Re: 529 vs Taxable Account

Post by KlangFool »

FreddyC wrote: Fri Oct 02, 2020 4:56 pm
So you have retired early enough to have a few years to spend down taxable before the kids are going to school (retiring in your 40s?) and then you no longer have a taxable. So to fund the college costs, you are doing what? And how does it affect FAFSA? My guess is it will not be as advantageous as using a 529.
FreddyC,

Spend down does not necessarily spending all of them. I have the flexibility to decide a few years before the kid goes to college.

In any case, it would be more advantageous than a 529. In fact, I could not think of any case that it would not.


I could spend from taxable, Roth IRA contribution, and Roth conversion. I could generate any level of income to qualify for any benefits.


As per my life experience, I made a big mistake. I gambled on Telecom stock during the "Telecom Bust" and lost 50% of my whole life savings. Or else, I would have retired before my kids go to college. After that, I was unemployed for more than 1 year a few times.


In the end, I "cash flow" my kids' college education (2X 30K X 4 = 240K) from my annual savings and move my money from my taxable account to the tax-advantaged account.

In summary, if someone earning less than 200K per year and max up all the tax-advantaged accounts and have spare money for either the taxable account and/or 529, the person has enough savings for early retirement in less than 20 years. Aka, before the kids goes to college.


KlangFool
BernardShakey
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Re: 529 vs Taxable Account

Post by BernardShakey »

Grt2bOutdoors wrote: Fri Oct 02, 2020 7:36 am
SteveJones wrote: Fri Oct 02, 2020 6:46 am I have made it a point to save for my kid's college so they don't start their professional life with significant student loan debt like my wife and I were. I get nervous funding a 529 because I lose all control of the money. Has anyone every decided to use a taxable account to invest for college? I obviously know there is going to be a tax hit, but I also see the 529 management fees are higher than VTSAX. Just thinking out loud.
Let’s rephrase your post:
1) I get nervous because the thought of having money placed in a specific use, in this case, education, vehicle makes me uncomfortable. Myth - it’s locked up, well yes and no - it is in a specific account geared for educational use BUT it is not locked up. You as owner can take it out any time you like BUT if you don’t use it for qualified education expenses you will pay tax on the earnings just as you would on taxable investments AND a 10 percent penalty on the earning portion only. What part of you can’t get to your money are you worried about? The earnings or potential earnings?

2) Higher expense ratio? Okay - I make you an offer, you pay me .25% a year and I guarantee you will keep all of your gains and dividends tax-free? You don’t like that deal? Okay, you keep all your gains and dividends in return for paying me 15-20 percent in capital gains and up to 37 percent on ordinary interest. Like that better?
+1. One of the better decisions I made was to invest in 529s early and often. Tens of thousands in tax free growth over the years, even while pretty conservatively invested. Retirement savings must come first but 529 is great for folks that can fill up the tax advantage accounts and have a few dollars leftover to invest. Especially when you hit the income cap for Roth contributions.
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mike_in_ny
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Re: 529 vs Taxable Account

Post by mike_in_ny »

I've said this on different threads here before -- but you really need to think about
what asset allocation is in 529. If you get no gains, there is no benefit to the tax-free
account....so you sort of need to swing for the fences (perhaps compensating elsewhere
for ideal AA) until you get some gains that are worth protecting.

I've been very happy with NY's Vanguard 529, relatively low fees, in state tax deduction
and I was fortunate to be growing in them over the last 10 years. I'll reap a substantial
(~$40k) tax savings when added up across my three kids and at my tax bracket.

YMMV
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SmileyFace
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Re: 529 vs Taxable Account

Post by SmileyFace »

I saved many thousands in taxes through the use of 529 plans for my kids. There are plans with low fees. 20+ years of tax free growth.
If you don't want to use them, as a US taxpayer - I thank you for the additional tax payments ;)
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Miriam2
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Re: 529 vs Taxable Account

Post by Miriam2 »

BernardShakey wrote: . . . One of the better decisions I made was to invest in 529s early and often. Tens of thousands in tax free growth over the years, even while pretty conservatively invested. Retirement savings must come first but 529 is great for folks that can fill up the tax advantage accounts and have a few dollars leftover to invest. Especially when you hit the income cap for Roth contributions.
Bernard - how conservative was or is your 529 investment? Did you use an age-based sliding asset allocation, perhaps a moderate or conservative age-based rather than an aggressive age-based?
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Harry Livermore
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Re: 529 vs Taxable Account

Post by Harry Livermore »

mike_in_ny wrote: Fri Oct 02, 2020 8:02 pm
I've been very happy with NY's Vanguard 529, relatively low fees, in state tax deduction
and I was fortunate to be growing in them over the last 10 years. I'll reap a substantial
(~$40k) tax savings when added up across my three kids and at my tax bracket.

YMMV
+1 with Mike. My situation is identical to his. Very happy with NY plan's low fees and many VG choices. State tax deduction is capped at $10K per year, but anything helps.
OP, you can do both (we did) for some flexibility.
I approached it like a glidepath. When the kids were little, I had their 529s in VG all-equity funds* (VTSAX-like) When they approached middle school I switched them to a VG balanced fund. When they entered high school, I switched them to a VG MM-like fund. Our youngest, currently a freshman in high school, is in the VG "Income Fund". We also started Coverdells when they were babies, but stopped contributing to them at some point when 529s became a better deal (I can't really remember but 529s were initially very limited at higher incomes for some reason, so we started off with the Coverdells) The younger two still have some money in the Coverdells. I spend those down first because the 529s are more flexible and fungible.
Cheers

* the NY plan has unique VG funds that seem to mimic the retail funds but with different names. Not sure why.
Last edited by Harry Livermore on Sat Oct 03, 2020 6:56 am, edited 1 time in total.
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StevieG72
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Re: 529 vs Taxable Account

Post by StevieG72 »

I use a 529 for my kiddo. My state has a $4,000 per account state tax deduction. ( I have been funding about $10,000 per year for the last few years) all of which qualifies for the tax break. (multiple accounts funded) This really helps keep my state tax bill manageable .

As far as losing control of the money, I am not too concerned. The money needs to be spent on education, otherwise it will be subject to a penalty. If 100% of the funds are not used for my daughters education then I will leave it for grandchildren. ( New regulations allow funds to be used for private school primary education.)
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SSide1967
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Re: 529 vs Taxable Account

Post by SSide1967 »

Through the luck of good markets and scholarships, we are in the fortunate circumstance of having an overfunded 529 plan for my older child. We now have 220% of what we invested and expect it to continue to grow.

As I have thought about stopping contributions or moving the excess to his younger sibling's 529 I am instead thinking the 529 might be a great place to park tax-free investment money and possibly can build start a grandchild 529 fund.  Has anyone used it this way?
inbox788
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Re: 529 vs Taxable Account

Post by inbox788 »

SteveJones wrote: Fri Oct 02, 2020 6:46 am I have made it a point to save for my kid's college so they don't start their professional life with significant student loan debt like my wife and I were. I get nervous funding a 529 because I lose all control of the money. Has anyone every decided to use a taxable account to invest for college? I obviously know there is going to be a tax hit, but I also see the 529 management fees are higher than VTSAX. Just thinking out loud.
Which 529 program are you looking at? At one point expenses and management fees might have been a problem, but these days, they're mostly negligible (compared to the tax effects).

The tax effects go both ways depending on whether the funds are used for qualified expenses or not. It's a modest benefit and a modest penalty. You don't lose all control.

How old are the kids now? How many years and what kind of risk rewards to you have left might help you decide. I missed the best early years, but those are also the most difficult to scrape up enough extra for many people.

Anyway, it's likely a good idea to put at least a minimum amount you know you will you into the 529 and all the way up to an average amount.
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Re: 529 vs Taxable Account

Post by BernardShakey »

Miriam2 wrote: Sat Oct 03, 2020 2:54 am
BernardShakey wrote: . . . One of the better decisions I made was to invest in 529s early and often. Tens of thousands in tax free growth over the years, even while pretty conservatively invested. Retirement savings must come first but 529 is great for folks that can fill up the tax advantage accounts and have a few dollars leftover to invest. Especially when you hit the income cap for Roth contributions.
Bernard - how conservative was or is your 529 investment? Did you use an age-based sliding asset allocation, perhaps a moderate or conservative age-based rather than an aggressive age-based?
HI Miriam2 --- my AA within the 529 plans varied a little over the years, but generally I stuck with passively managed, moderate/conservative allocations, using age-based portfolios for much of the money. I didn't do that great....looking at my statements, about 5.2% annual return over the life of the 529s (and many of those years were good for equities). However, I never felt like I was taking too much risk even during the 2008-09 recession. As the kids started college I adjusted to keep about 25% in stocks instead of sticking with age-based which would have been essentially 100% cash and short-term bonds. I think the key is starting early and using automatic investment features. I also have a credit card (Fidelity) that throws the 2% cash back right into one of the 529s. Good luck!
An important key to investing is having a well-calibrated sense of your future regret.
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Re: 529 vs Taxable Account

Post by marcopolo »

KlangFool wrote: Fri Oct 02, 2020 5:11 pm
FreddyC wrote: Fri Oct 02, 2020 4:56 pm
So you have retired early enough to have a few years to spend down taxable before the kids are going to school (retiring in your 40s?) and then you no longer have a taxable. So to fund the college costs, you are doing what? And how does it affect FAFSA? My guess is it will not be as advantageous as using a 529.
FreddyC,

Spend down does not necessarily spending all of them. I have the flexibility to decide a few years before the kid goes to college.

In any case, it would be more advantageous than a 529. In fact, I could not think of any case that it would not.


I could spend from taxable, Roth IRA contribution, and Roth conversion. I could generate any level of income to qualify for any benefits.


As per my life experience, I made a big mistake. I gambled on Telecom stock during the "Telecom Bust" and lost 50% of my whole life savings. Or else, I would have retired before my kids go to college. After that, I was unemployed for more than 1 year a few times.


In the end, I "cash flow" my kids' college education (2X 30K X 4 = 240K) from my annual savings and move my money from my taxable account to the tax-advantaged account.

In summary, if someone earning less than 200K per year and max up all the tax-advantaged accounts and have spare money for either the taxable account and/or 529, the person has enough savings for early retirement in less than 20 years. Aka, before the kids goes to college.


KlangFool

Many of those early retirees will use ACA Tax Credits to help fund their health insurance expenses.

Withdrawals from 529 are tax free and do NOT count towards MAGI used for determining Tax credit amount.

Capital gains from taxable account, even if in the 0% tax bracket, count in MAGI, and reduce the tax credit at a ~9.8% rate. Depending on the gains and other income, it could also potentially push one over the ACA cliff, costing $10-$20k more in taxes in many cases.

529 plans are not for every situation, but for many they provide a pretty substantial tax benefit. (We have saved 10's of thousands of dollars using them).

There should not be any blanket fear of them.
Once in a while you get shown the light, in the strangest of places if you look at it right.
KlangFool
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Re: 529 vs Taxable Account

Post by KlangFool »

marcopolo wrote: Sun Oct 11, 2020 10:17 pm
KlangFool wrote: Fri Oct 02, 2020 5:11 pm
FreddyC wrote: Fri Oct 02, 2020 4:56 pm
So you have retired early enough to have a few years to spend down taxable before the kids are going to school (retiring in your 40s?) and then you no longer have a taxable. So to fund the college costs, you are doing what? And how does it affect FAFSA? My guess is it will not be as advantageous as using a 529.
FreddyC,

Spend down does not necessarily spending all of them. I have the flexibility to decide a few years before the kid goes to college.

In any case, it would be more advantageous than a 529. In fact, I could not think of any case that it would not.


I could spend from taxable, Roth IRA contribution, and Roth conversion. I could generate any level of income to qualify for any benefits.


As per my life experience, I made a big mistake. I gambled on Telecom stock during the "Telecom Bust" and lost 50% of my whole life savings. Or else, I would have retired before my kids go to college. After that, I was unemployed for more than 1 year a few times.


In the end, I "cash flow" my kids' college education (2X 30K X 4 = 240K) from my annual savings and move my money from my taxable account to the tax-advantaged account.

In summary, if someone earning less than 200K per year and max up all the tax-advantaged accounts and have spare money for either the taxable account and/or 529, the person has enough savings for early retirement in less than 20 years. Aka, before the kids goes to college.


KlangFool

Many of those early retirees will use ACA Tax Credits to help fund their health insurance expenses.

Withdrawals from 529 are tax free and do NOT count towards MAGI used for determining Tax credit amount.

Capital gains from taxable account, even if in the 0% tax bracket, count in MAGI, and reduce the tax credit at a ~9.8% rate. Depending on the gains and other income, it could also potentially push one over the ACA cliff, costing $10-$20k more in taxes in many cases.

529 plans are not for every situation, but for many they provide a pretty substantial tax benefit. (We have saved 10's of thousands of dollars using them).

There should not be any blanket fear of them.
marcopolo,

<<Withdrawals from 529 are tax free and do NOT count towards MAGI used for determining Tax credit amount.>>


Withdrawal from Roth IRA contribution do not count towards MAGI too. Spending CASH do not generate taxable income. You do not need the 529. And, one of the advantage to be early retired is to maximize the possible college financial aid. 529 is counter-productive towards that goal.


<<529 plans are not for every situation, but for many they provide a pretty substantial tax benefit. (We have saved 10's of thousands of dollars using them).>>


To be very precise, it provides substantial tax benefits for those with an annual gross household income above 200K. It is a great tax break for the rich.


<<There should not be any blanket fear of them.>>

It is not a blanket fear. For folks with a lowered household income, 529 should not be our default option for college education savings. It provides little to no tax benefits.


KlangFool
NS_Bane
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Re: 529 vs Taxable Account

Post by NS_Bane »

KlangFool wrote: Mon Oct 12, 2020 7:31 am
<<529 plans are not for every situation, but for many they provide a pretty substantial tax benefit. (We have saved 10's of thousands of dollars using them).>>

To be very precise, it provides substantial tax benefits for those with an annual gross household income above 200K. It is a great tax break for the rich.
KlangFool, I used to get a little frustrated when I would read your posts about 529 accounts but I think you have laid it out here very clearly and I finally understand your reasoning. As you’ve pointed out, long term capital gains are only an issue once you reach a certain level of income. If you don’t have that income, 529s are definitely not worth it. Even if you get a state tax deduction the amount will probably not be enough to warrant giving up flexibility.

529s really are a tax break for people making a lot of money, and it definitely makes sense to use them if you’ve got that money. I don’t even have a kid yet, and my wife and I have already contributed a lot to a 529 in my name over the past few years. We are in a high tax bracket and would pay LTCGs, so it makes sense for us. For most people, it probably doesn’t.

I’d suggest next time there’s a 529 post that you raise the income / LTCG points. You may have done that before in these posts but I may have missed it.
KlangFool
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Re: 529 vs Taxable Account

Post by KlangFool »

NS_Bane wrote: Mon Oct 12, 2020 7:57 am
KlangFool wrote: Mon Oct 12, 2020 7:31 am
<<529 plans are not for every situation, but for many they provide a pretty substantial tax benefit. (We have saved 10's of thousands of dollars using them).>>

To be very precise, it provides substantial tax benefits for those with an annual gross household income above 200K. It is a great tax break for the rich.
KlangFool, I used to get a little frustrated when I would read your posts about 529 accounts but I think you have laid it out here very clearly and I finally understand your reasoning. As you’ve pointed out, long term capital gains are only an issue once you reach a certain level of income. If you don’t have that income, 529s are definitely not worth it. Even if you get a state tax deduction the amount will probably not be enough to warrant giving up flexibility.

529s really are a tax break for people making a lot of money, and it definitely makes sense to use them if you’ve got that money. I don’t even have a kid yet, and my wife and I have already contributed a lot to a 529 in my name over the past few years. We are in a high tax bracket and would pay LTCGs, so it makes sense for us. For most people, it probably doesn’t.

I’d suggest next time there’s a 529 post that you raise the income / LTCG points. You may have done that before in these posts but I may have missed it.
NS_Bane,

That point is only relevant for folks that had maxed up all their tax-advantaged accounts and choosing the 529 versus the taxable account. The main 529 problem is people that choose to pay a lot of federal income taxes by foregoing the 401K and contribute to the 529. That is the main group that I tried to educate.

KlangFool
marcopolo
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Re: 529 vs Taxable Account

Post by marcopolo »

KlangFool wrote: Mon Oct 12, 2020 7:31 am
marcopolo wrote: Sun Oct 11, 2020 10:17 pm
KlangFool wrote: Fri Oct 02, 2020 5:11 pm
FreddyC wrote: Fri Oct 02, 2020 4:56 pm
So you have retired early enough to have a few years to spend down taxable before the kids are going to school (retiring in your 40s?) and then you no longer have a taxable. So to fund the college costs, you are doing what? And how does it affect FAFSA? My guess is it will not be as advantageous as using a 529.
FreddyC,

Spend down does not necessarily spending all of them. I have the flexibility to decide a few years before the kid goes to college.

In any case, it would be more advantageous than a 529. In fact, I could not think of any case that it would not.


I could spend from taxable, Roth IRA contribution, and Roth conversion. I could generate any level of income to qualify for any benefits.


As per my life experience, I made a big mistake. I gambled on Telecom stock during the "Telecom Bust" and lost 50% of my whole life savings. Or else, I would have retired before my kids go to college. After that, I was unemployed for more than 1 year a few times.


In the end, I "cash flow" my kids' college education (2X 30K X 4 = 240K) from my annual savings and move my money from my taxable account to the tax-advantaged account.

In summary, if someone earning less than 200K per year and max up all the tax-advantaged accounts and have spare money for either the taxable account and/or 529, the person has enough savings for early retirement in less than 20 years. Aka, before the kids goes to college.


KlangFool

Many of those early retirees will use ACA Tax Credits to help fund their health insurance expenses.

Withdrawals from 529 are tax free and do NOT count towards MAGI used for determining Tax credit amount.

Capital gains from taxable account, even if in the 0% tax bracket, count in MAGI, and reduce the tax credit at a ~9.8% rate. Depending on the gains and other income, it could also potentially push one over the ACA cliff, costing $10-$20k more in taxes in many cases.

529 plans are not for every situation, but for many they provide a pretty substantial tax benefit. (We have saved 10's of thousands of dollars using them).

There should not be any blanket fear of them.
marcopolo,

<<Withdrawals from 529 are tax free and do NOT count towards MAGI used for determining Tax credit amount.>>


Withdrawal from Roth IRA contribution do not count towards MAGI too. Spending CASH do not generate taxable income. You do not need the 529. And, one of the advantage to be early retired is to maximize the possible college financial aid. 529 is counter-productive towards that goal.



KlangFool

I know you have an irrational fear of 529 plans. But, that is no reason to shift the goal posts.

The title of the thread is about 529 vs. taxable. You have been beating the drum above about how taxable is just as good because you can pay 0% LTCG in some cases. Of course you ignore tax drag on dividends along the way during accumulation( paid at incomes well below $200k) and when I point out a scenario where taxable is much more costly, you shift your argument to now taking money out of a Roth account to pay for college.
Once in a while you get shown the light, in the strangest of places if you look at it right.
KlangFool
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Re: 529 vs Taxable Account

Post by KlangFool »

marcopolo wrote: Mon Oct 12, 2020 11:53 am

I know you have an irrational fear of 529 plans. But, that is no reason to shift the goal posts.

The title of the thread is about 529 vs. taxable. You have been beating the drum above about how taxable is just as good because you can pay 0% LTCG in some cases. Of course you ignore tax drag on dividends along the way during accumulation( paid at incomes well below $200k) and when I point out a scenario where taxable is much more costly, you shift your argument to now taking money out of a Roth account to pay for college.
marcopolo,


<<I know you have an irrational fear of 529 plans. But, that is no reason to shift the goal posts.>>

I had been unemployed for more than 1 year a few times. Many of my peers are forced into permanent unemployment and under-employment in their 40s and 50s. My fear is perfectly rational.


<<Of course you ignore tax drag on dividends along the way during accumulation( paid at incomes well below $200k)>>


Qualified dividend are taxed at the LTCG tax rate of 0%. 90+% of the stock index fund's dividends are qualified dividends.

Typical dividend yield is about 2%. Only 10% of that dividend has to pay about 20+% tax. Let's call this about 25%. So, the tax burden is 2% X 10% X 25% = 0.05% of the taxable account. Is this a big tax drag?


<<Capital gains from taxable account, even if in the 0% tax bracket, count in MAGI,>>

A) Withdrawal of CASH in the taxable account generate no taxable income. You do not need the 529. If someone is early retiring, keeping 1 year to 2 years of expense in CASH makes a lot more sense than 529.


B) Conversely, a person could generate capital loss aka TLH to reduce the MAGI.


C) The person could use the taxable account to pay off the mortgage a few years before the kids goes to college and before using the ACA insurance.

The bottom line is very simple. Taxable account is a lot more flexible than 529 for the early retiree.


KlangFool
marcopolo
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Re: 529 vs Taxable Account

Post by marcopolo »

KlangFool wrote: Mon Oct 12, 2020 12:17 pm
marcopolo wrote: Mon Oct 12, 2020 11:53 am

I know you have an irrational fear of 529 plans. But, that is no reason to shift the goal posts.

The title of the thread is about 529 vs. taxable. You have been beating the drum above about how taxable is just as good because you can pay 0% LTCG in some cases. Of course you ignore tax drag on dividends along the way during accumulation( paid at incomes well below $200k) and when I point out a scenario where taxable is much more costly, you shift your argument to now taking money out of a Roth account to pay for college.
marcopolo,


<<I know you have an irrational fear of 529 plans. But, that is no reason to shift the goal posts.>>

I had been unemployed for more than 1 year a few times. Many of my peers are forced into permanent unemployment and under-employment in their 40s and 50s. My fear is perfectly rational.


<<Of course you ignore tax drag on dividends along the way during accumulation( paid at incomes well below $200k)>>


Qualified dividend are taxed at the LTCG tax rate of 0%. 90+% of the stock index fund's dividends are qualified dividends.

Typical dividend yield is about 2%. Only 10% of that dividend has to pay about 20+% tax. Let's call this about 25%. So, the tax burden is 2% X 10% X 25% = 0.05% of the taxable account. Is this a big tax drag?


<<Capital gains from taxable account, even if in the 0% tax bracket, count in MAGI,>>

A) Withdrawal of CASH in the taxable account generate no taxable income. You do not need the 529. If someone is early retiring, keeping 1 year to 2 years of expense in CASH makes a lot more sense than 529.


B) Conversely, a person could generate capital loss aka TLH to reduce the MAGI.


C) The person could use the taxable account to pay off the mortgage a few years before the kids goes to college and before using the ACA insurance.

The bottom line is very simple. Taxable account is a lot more flexible than 529 for the early retiree.


KlangFool
Well sure, the main advantage of 529 is to provide tax-free growth. You are now suggesting on could put the money into cash in a taxable account to avoid the taxes on the growth. I guess that works, as long as you do not mind giving up the growth!. Then you are right no TAX benefit for the 529, just a lot more money.

A bit of "cutting your nose to spite your face"
Once in a while you get shown the light, in the strangest of places if you look at it right.
ThankYouJack
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Re: 529 vs Taxable Account

Post by ThankYouJack »

This comes up frequently and depends on one personal situation. I don't get a state tax benefit and I don't bother with a 529. I don't like having the strings attached incase I need to withdrawal the money for non-educational purposes.

Jack Bogle himself on 529s:

reuters.com/article/us-column-taylor-bogle/me-and-my-money-jack-bogle-idUSBRE88A0LI20120911
Q: Do you set a little aside for those grandkids in 529 college-savings plans? (Vanguard has about $40 billion in assets in 27 state 529 plans.)

A: I don’t really like the idea of tying up your money in 529 plans, because of all the restrictions on withdrawals. I’m not against them, I just like having more flexibility than being required to use those funds specifically for educational purposes. We do save a little money for all my grandkids every year, but we just chose the Vanguard Balanced Index Fund (VBINX). It’s about 60 percent stocks, 40 percent bonds, and it’s been wonderful. We give them what we can within annual gift-tax limitations, and put it all into that very tax-efficient fund.
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Re: 529 vs Taxable Account

Post by KlangFool »

marcopolo wrote: Mon Oct 12, 2020 12:40 pm

Well sure, the main advantage of 529 is to provide tax-free growth. You are now suggesting on could put the money into cash in a taxable account to avoid the taxes on the growth. I guess that works, as long as you do not mind giving up the growth!. Then you are right no TAX benefit for the 529, just a lot more money.

A bit of "cutting your nose to spite your face"
marcopolo,


<<Well sure, the main advantage of 529 is to provide tax-free growth.>>

<<You are now suggesting on could put the money into cash in a taxable account >>

The CASH could be harvested at an LTCG tax rate of 0% before the ACA subsidy is needed. Hence, you could get both tax-free growth and no ACA MAGI impact.


KlangFool
hoffse
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Re: 529 vs Taxable Account

Post by hoffse »

We contribute to a 529 up to the state tax break - $10k/year - and then taxable over and above that.

We have every expectation that our kid will attend college and probably graduate school. He would be a huge outlier in our family if he did not. We view college as baseline and graduate school as more likely than not.

We max out all of our other tax-advantaged space first. We get an immediate/guaranteed 5% return in our contribution year through the state tax break. We expect to cross into the 20% LTCG bracket within the next 3 years (and we are already subject to NIIT). We don’t have a fear of being unemployed because I am self employed right now, and my husband will be self employed in January. We don’t have the same risks as a single income household subject to the hiring and firing whims of megacorp.

For us, the 529 makes sense. YMMV.
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Miriam2
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Re: 529 vs Taxable Account

Post by Miriam2 »

Miriam2 wrote:
BernardShakey wrote: . . . One of the better decisions I made was to invest in 529s early and often. Tens of thousands in tax free growth over the years, even while pretty conservatively invested. Retirement savings must come first but 529 is great for folks that can fill up the tax advantage accounts and have a few dollars leftover to invest. Especially when you hit the income cap for Roth contributions.
Bernard - how conservative was or is your 529 investment? Did you use an age-based sliding asset allocation, perhaps a moderate or conservative age-based rather than an aggressive age-based?
BernardShakey wrote: Hi Miriam2 --- my AA within the 529 plans varied a little over the years, but generally I stuck with passively managed, moderate/conservative allocations, using age-based portfolios for much of the money. I didn't do that great....looking at my statements, about 5.2% annual return over the life of the 529s (and many of those years were good for equities). However, I never felt like I was taking too much risk even during the 2008-09 recession. As the kids started college I adjusted to keep about 25% in stocks instead of sticking with age-based which would have been essentially 100% cash and short-term bonds. I think the key is starting early and using automatic investment features. I also have a credit card (Fidelity) that throws the 2% cash back right into one of the 529s. Good luck!
Thank you for your explanation. Your approach appeals to me. I just opened a 529 for our granddaughter invested in the Aggressive Global Age-Based portfolio, which would be my risk tolerance for my account at the beginning of an 18-year investment period. But your approach is sensible and keeps nagging at my increased watch-out-for-risk outlook in life. Especially since the 529 will eventually be turned over to our son to manage, it's hard to know how risky they should have it.
John Bogle, "The Twelve Pillars of [Financial] Wisdom"- Pillar 6: The Eternal Triangle. Risk, return & cost are the 3 sides of the eternal triangle of investing and are too powerful to ignore.
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Miriam2
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Re: 529 vs Taxable Account

Post by Miriam2 »

ThankYouJack wrote: This comes up frequently and depends on one's personal situation.
This is so accurate. Why are there arguments about this? Personal finance is personal and investing in 529 Plans has to fit into one's overall personal financial plan in their personal life.

Mr. Bogle did not use 529's for his grandchildren because he wanted more flexibility than the plans offered.

Other families may find the inflexibility inconsequential.

Other families may need the discipline that a 529 Plan provides for them to be able to save something for college.

A 529 Plan helps to reduce behavioral finance problems. Many families may be too tempted to raid other types of college savings accounts such as taxable accounts to pay for something else the family believes is more important now, with the aim of replenishing the money for college "as soon as possible." But that "as soon as possible" time may be difficult to achieve. A 529 Plan, especially one with automatic contributions from a paycheck, helps keep them on track.
John Bogle, "The Twelve Pillars of [Financial] Wisdom"- Pillar 6: The Eternal Triangle. Risk, return & cost are the 3 sides of the eternal triangle of investing and are too powerful to ignore.
BernardShakey
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Re: 529 vs Taxable Account

Post by BernardShakey »

Miriam2 wrote: Mon Oct 12, 2020 2:30 pm
ThankYouJack wrote: This comes up frequently and depends on one's personal situation.
This is so accurate. Why are there arguments about this? Personal finance is personal and investing in 529 Plans has to fit into one's overall personal financial plan in their personal life.

Mr. Bogle did not use 529's for his grandchildren because he wanted more flexibility than the plans offered.

Other families may find the inflexibility inconsequential.

Other families may need the discipline that a 529 Plan provides for them to be able to save something for college.

A 529 Plan helps to reduce behavioral finance problems. Many families may be too tempted to raid other types of college savings accounts such as taxable accounts to pay for something else the family believes is more important now, with the aim of replenishing the money for college "as soon as possible." But that "as soon as possible" time may be difficult to achieve. A 529 Plan, especially one with automatic contributions from a paycheck, helps keep them on track.
+1 nicely stated, Miriam2. The scenario you describe is one reason I used 529's. A taxable account, Roth, etc can be "robbed" for other things. Relative to your other post about AA, I really think the passive, age-based approach is best. You don't want to save for 17-18 years and then right as the kid goes off to college you endure a market crash. You can always "fudge" the age-based approach by shifting a couple years younger than student's actual age. Just like some folks do with lifecycle retirement funds.
An important key to investing is having a well-calibrated sense of your future regret.
csmath
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Re: 529 vs Taxable Account

Post by csmath »

One other possible kink in the calculations. Some states allow passing money through 529's without a requirement on how long funds are invested before withdrawal. And even so some are quite short. It is possible that simply running "cash flowed" college expenses through certain state 529's still offer the state tax benefit. In this case money can be invested in taxable, withdrawn when needed and passed through the 529 en-route to paying bills.

I have no idea how many states allow this but I'm under the impression some do.
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dogagility
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Joined: Fri Feb 24, 2017 6:41 am

Re: 529 vs Taxable Account

Post by dogagility »

csmath wrote: Tue Oct 13, 2020 12:22 am One other possible kink in the calculations. Some states allow passing money through 529's without a requirement on how long funds are invested before withdrawal. And even so some are quite short. It is possible that simply running "cash flowed" college expenses through certain state 529's still offer the state tax benefit. In this case money can be invested in taxable, withdrawn when needed and passed through the 529 en-route to paying bills.

I have no idea how many states allow this but I'm under the impression some do.
Indiana appears to be one state that allows the tax benefit without requiring a certain investment duration. One can deposit $5000 into the account on December 31, withdraw $5000 on January 1 to pay for qualified education costs, and receive a $1000 state income tax credit. :happy
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