529 vs CD's for college education

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dmh78
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Joined: Thu May 24, 2012 9:55 pm

529 vs CD's for college education

Post by dmh78 » Thu May 24, 2012 10:13 pm

My wife and I are looking to start saving for our daughters college education. The 529 seemed like the logical option, but then we thought what happens if our daughter elects not to go to college? Are we penalized for it? Are we better off putting our money in a long term CD?

Any recommendations?

Thanks!
DMH

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ofcmetz
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Location: Louisiana

Re: 529 vs CD's for college education

Post by ofcmetz » Fri May 25, 2012 5:10 am

dmh78 wrote:My wife and I are looking to start saving for our daughters college education. The 529 seemed like the logical option, but then we thought what happens if our daughter elects not to go to college? Are we penalized for it? Are we better off putting our money in a long term CD?

Any recommendations?

Thanks!
DMH



Make sure you are maxing out all your retirement accounts (ROTH IRA's and 401K's) prior to starting a 529 or CD for college savings.

There are some tax penalties for pulling your money out early from a 529 plan that you would not face on a CD. If I was maxing out my tax deferred retirement space and had an adequate amount of liquid assets for emergencies, then I would save an additional amount in a 529 plan without worrying about tax penalties if my daughter did not go to college.

Withdrawals from a 529 Savings Plan are considered non-qualified withdrawals if they are in excess of qualified education expenses. Non qualified withdrawals are taxed at the account owner's tax rate and subject to a 10% additional tax on the amount included in income


http://www.bogleheads.org/wiki/529_Plans
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dad2000
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Re: 529 vs CD's for college education

Post by dad2000 » Fri May 25, 2012 6:43 am

I agree with maxing out tax-advantaged/retirement first.

I-bonds are also a decent option for saving for education. They are tax-advantaged when used for education (subject to income threshold), but there is no penalty for non-educational use.

dmh78
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Joined: Thu May 24, 2012 9:55 pm

Re: 529 vs CD's for college education

Post by dmh78 » Fri May 25, 2012 7:21 am

Thank you for your feedback!

smartcar44
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Joined: Tue May 22, 2012 8:55 am

Re: 529 vs CD's for college education

Post by smartcar44 » Fri May 25, 2012 8:42 pm

(I think) A 529 has a 10% penalty and a payment of the tax you saved if it is not used for educational purposes (I think this is correct - help me out boglepeople if this is wrong). But, the educational purposes are very varied including things like trade schools, many educational necessities, etc. So, I do not think it is not difficult to think that using a 529 won't be penalized because of not being used for some sort of educational purpose. But things do happen, as we all know. The West Virginia 529 has options of index-based mutual funds that are good ones (the DFA funds available here seem to be exceedingly good).
However, is the tax savings worth even the seemingly small chance it won't work out? That would seem to be the crux of the matter. The CD option I don't like - you will lag behind inflation in many cases. You could use a fund such as Vanguard Wellesley in lieu of the CD option for safety purposes.
I am going through this same decision making process in regard gifts to my grandchildren. Are 529 plans worth it? I wish I knew the answer.

staustin
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Re: 529 vs CD's for college education

Post by staustin » Fri May 25, 2012 10:45 pm

Cd's........ My son did poorly his first year in school and is not returning. I'm glad my funds were not in a 529.

livesoft
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Re: 529 vs CD's for college education

Post by livesoft » Sat May 26, 2012 5:34 am

For non-qualified withdrawals, the 10% penalty and the tax applies only to the GAINS in the 529 plan and not to your contributions.

Too many people think, "I withdraw $50,000 from the 529 plan, but not for college, so I pay a $5,000 penalty." That will not be true in most cases. We actually got a tax deduction for withdrawing all of a 529 plan that had a loss a few years ago.
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Mrxyz
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Re: 529 vs CD's for college education

Post by Mrxyz » Sat May 26, 2012 7:48 am

livesoft wrote:For non-qualified withdrawals, the 10% penalty and the tax applies only to the GAINS in the 529 plan and not to your contributions.

Too many people think, "I withdraw $50,000 from the 529 plan, but not for college, so I pay a $5,000 penalty." That will not be true in most cases. We actually got a tax deduction for withdrawing all of a 529 plan that had a loss a few years ago.


So when you get a state tax exemption (6% for me) when you place money in a 529 = 6% is for $50,000, and then say for example, the money gains $10,000 over x years until a non-qualified withdrawal occurs, at which point, there is a 10% penalty and tax which applies only to $10,000 (the gains of the $50,000)? Have I got this right?

livesoft
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Re: 529 vs CD's for college education

Post by livesoft » Sat May 26, 2012 10:25 am

^ Probably not. I know of at least one state that tries to recapture the tax-break given on contributions if they are not used for a qualified expense.
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