We all know the "limited but obvious" reasons for contributing to the 529 plan(s).Many reasons for NOT funding a 529
include (these are NOT necessarily universally applicable, depends on income brackets, life-stages;
These reasons mostly appeal to medium/middle/upper-middle/low income families:
(*including a few reasons listed by 'ThankYouJack')
- Not getting a state tax deduction from the 529 (this is a big reason! In states with NO income tax, means no tax deduction is applicable!)
- Nobody talks about this, though may sound silly: there is NO matching-contributions made by employers, Feds, States or other entities. Hence, these is NO additional incentive/motivation towards 529 contributions (or at least let govt contribute: American opportunity tax credit or something to sweeten 529-deal)
- would lose flexibility if the money is "tied" up ONLY for education reasons - Granted we could always give this money away to other college kids
- would be paying a considerably higher ExpenseRatio/ER in limited funds offered in 529 plans (some 529 plan high ER is 1.13% !; where as typical Vanguard ETFs carry 0.09%)
- would not be getting some of tax credits for the college payments if the 529 is overly/fully funded
- It could negatively affect financial aide for the kids (and it could affect FAFSA loans, loan-rates too!)
- would NOT be able to tax loss harvesting or donating shares which had large-gains
- the 529 withdrawls NEGATIVELY affect other tax credits (Earned income tax credit, American Opportunity Tax Credit etc) http://blogs.wsj.com/totalreturn/2015/0 ... ax-credit/
- Low/medium income household better benefit from American Opportunity Tax Credit,
Deduction using Lifetime Learning Tax Credit (LLTC).
The LLTC allows greater benefit due to reduction in AGI
(reduced AGI could lead to other tax benefits -
Child Tax credit, Eeaned Income Tax Credit, allowing IRA-contribution
or allowing other passive-income/depreciation deductions etc)
Ref: https://www.edvisors.com/education-tax- ... -benefits/
- what if the amount grow too much (due to contributions and market growth), and if your kid(s)
got scholarships ? You will end-up with 'excess' 529 monies - you have to give to somebody else ?
Unfortunately - you can't tax-deduct the 'given-away' monies (if left in regular brokerage accounts,
Giving Stocks to charity is an amazing thing - you don't pay tax on growth, let alone fully tax-deduct the donation !!)
- What if kids do NOT go to college - or do not get admissions to good colleges, instead end-up in local County college - which doesn't cost much to begin with !?
- You can't get some lower-tax-bracket dividend income (tax-advantage, unless you are making over 400K/year!)
if the money is stuck/tied-up in 529 (insted of brokerage)
- What if there are higher priorities in life such as "life-and-death or medical-help" instead of future-college costs?
How do you withdraw 529 monies ?
- Most importantly - have you already maximized your "tax-sheltered/deffered" accounts to maximum: 401k, IRA, roth-IRA, back-door Roth conversion,
your spouse's 401k, IRA, roth-IRA yada-yada-yada ..
- What if new regulations/proposals comes into effect such as - "proposal for a federal-state partnership to provide tuition-free access to community college students" -- or study "two-years at community college" then move to "UT Austin or other reputed state college which allows upto 2-years of credits from in-state Community colleges! (Every kid is smart, but not all of them will invariably land in Ivy-leagues! Otherwise - community colleges be vacant/dead by now!). May be community college is the reason why you atleast allow your baby-kid to grow with you 2-or-more years at home, without needing to send them farther way (excessive bullying, partying, self-control or the lack of, drugs - among many other vices; not that you can fully stop those vices, at very least you are 'more' aware of those and plan future life events better if kid stays home or locally !?)
- If state goes bankrupt (we know cities/munis do! San Bernandino, Detroit, Jefferson/Alabama etc ..) -- what would happen to 529 funds, let alone access to those funds while your kids then in college ??
- States do NOT offer backstop/protection if 529 funds get mis-appropriated/lost/defrauded
where as SIPC, FINRA offers $500K protection at individual brokerage level ?
(Search: "Utah's 529 plan settles fraud case - InvestmentNews"
and "Illinois college savings plan is $560 million short")
- How do you plan to "Handling 529 Plan College Money in a Divorce or Separation or re-marriage" ?
- Creditor protection is limited to only about half the states offer such protection, that too on "limited amounts" !
- Lets say, at the time of "withdrawals" the market tanked (anybody remember 2008-2009?), and you actually
lose significant chunk of invested monies in your 529 plan. You can NOT take tax-loss, or tax-loss-harvest those losses!!
- Worse yet, if you withdraw any monies for non-education purpose, you may be dinged with 10% penalty plus TAX on grown set of stocks/funds which are sold! Guessing there is "tax" on the grown stocks/funds (which have been withdrawn), where as you can't deduct "lost" stocks (withdrawls) Someone welcome to clarify .. ?
- Isn't it better to be FREE from mortgage/student-loan/credit-card-balance/debt, before thinking about 529 contributions ?
- Would it be better to fully pay-off the house prior your first-kid high-school junior-year -- since primary residence is not considered part of FAFSA ?
BTW - anybody can "directly" pay to educational institution or Medical-bills without incurring TAX or gift-tax, so its not like a rich uncle or grandparent can not contribute to your education without 529 setup !!
If you still decide a strong case (and very high income
for 529 plan -
this article is not complete without Kitches suggestions regarding correctly planning your 529 strategy:https://www.kitces.com/blog/grandparent ... ncial-aid/
** Please note that some of the points may appear overlapping
, but elaborated nonetheless: for clarifying some not-so-obvious scenarios. NOT a tax expert here, nor fully comprehend some IRS publications; do seek CPA/TAX-advisers assistance at times. References have been attributed to the extent possible. Comments/improvements are welcome !