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Use 529 Money Or Not?

Posted: Sat May 20, 2017 9:09 pm
by Goodman60
My son will start a top 14 law school this fall. All in it will cost about $250,000 to $300,000 including living expenses. I can pay for it from taxable savings or from his 529 account. I'm thinking of doing something else with the 529 and just paying for law school directly. Assuming he starts this Fall, how long do I have to decide? In other words, if I pay for law school directly, how long does the window remain open for to claim reimbursement from the 529? End of 2017? End of semester? End of academic year? April 15, 2018? End of law school?

Re: Use 529 Money Or Not?

Posted: Sat May 20, 2017 9:24 pm
by Jack FFR1846
The check will come in his name. I'd suggest having him put it in his account and then paying tuition from there. When you do your taxes, you're really only matching with documented school costs with what came out of the 529. I'm not aware of any more detail that's needed. As far as I know, it's all calendar year.

Re: Use 529 Money Or Not?

Posted: Sat May 20, 2017 9:43 pm
by Raabe34
Do you have other kids that you could use the 529 on? If not clean that out and avoid paying taxes on it.

Re: Use 529 Money Or Not?

Posted: Sat May 20, 2017 9:43 pm
by Goodman60
The check doesn't have to come in his name. The check CAN be sent to me, the account owner, if requested. But that's not the issue. I can lend him the money and pay directly on his behalf. If I decide, later, it can be deemed a direct payment with no reimbursement to me. I've been doing 529 withdrawals for years with two now adult kids. I understand the nuances of matching SS numbers and getting IRS inquiries. I'm just asking how long one has to request 529 disbursal for a given semester.

Re: Use 529 Money Or Not?

Posted: Sat May 20, 2017 9:47 pm
by Goodman60
Raabe34 wrote:Do you have other kids that you could use the 529 on? If not clean that out and avoid paying taxes on it.
No but I might want to kick the 529 money down the family tree and save it for grandkids from another child. Then take advantage of the "direct pay of education" allowance (no gift tax consequences) by paying for law school directly.

Re: Use 529 Money Or Not?

Posted: Sat May 20, 2017 9:52 pm
by samsmith
To answer your question - I believe you get a 1099-Q when you take a 529 distribution. The 1099-Q lists the earnings and your "basis" for the distribution. You compare the total distributions from the 529 from that year to your educational expenses for that year. So put another way, if you are paying for your son's first semester of law school in 2017, I believe you can take a 529 distribution basically anytime in 2017 (up thru 12/31) and appropriately claim it was used for 2017 educational expenses.

Re: Use 529 Money Or Not?

Posted: Sat May 20, 2017 9:56 pm
by Goodman60
samsmith wrote:To answer your question - I believe you get a 1099-Q when you take a 529 distribution. The 1099-Q lists the earnings and your "basis" for the distribution. You compare the total distributions from the 529 from that year to your educational expenses for that year. So put another way, if you are paying for your son's first semester of law school in 2017, I believe you can take a 529 distribution basically anytime in 2017 (up thru 12/31) and appropriately claim it was used for 2017 educational expenses.
Thank you. Isn't there some provision where you can withdraw into the next year for prior year payments? Withdraw in Jan for the prior Fall semester? Then I could pay for fall directly soon, but not decide until Jan if I want that to be a direct payment or just a payment that gets reimbursed from 529

Re: Use 529 Money Or Not?

Posted: Sat May 20, 2017 10:03 pm
by samsmith
I looked in IRS PUB 970 before I typed my first answer. I don't see anything like your talking about (withdrawing in 2018 and counting against a 2017 expense). I do see "kindof" the opposite. Meaning if you take a 529 withdrawal in 2017 it can be used for a 2017 payment made in 2017 that was for a spring 2018 educational expense.

Re: Use 529 Money Or Not?

Posted: Sat May 20, 2017 11:50 pm
by marcopolo
Goodman60 wrote:My son will start a top 14 law school this fall. All in it will cost about $250,000 to $300,000 including living expenses. I can pay for it from taxable savings or from his 529 account. I'm thinking of doing something else with the 529 and just paying for law school directly. Assuming he starts this Fall, how long do I have to decide? In other words, if I pay for law school directly, how long does the window remain open for to claim reimbursement from the 529? End of 2017? End of semester? End of academic year? April 15, 2018? End of law school?

Not a tax lawyer, but i am pretty sure the withdrawal and the payment of the qualified expenses have to be in the same calendar year in order for the withdrawal to be tax free. So, if you pay spring semester bill in december 2017, you need to make associated withdrawal in 2017. if you wait until Jan 2018 to pay the bill, you have all of 2018 to make the withdrawal.

Re: Use 529 Money Or Not?

Posted: Sun May 21, 2017 6:28 am
by MikeG62
marcopolo wrote:
Goodman60 wrote:My son will start a top 14 law school this fall. All in it will cost about $250,000 to $300,000 including living expenses. I can pay for it from taxable savings or from his 529 account. I'm thinking of doing something else with the 529 and just paying for law school directly. Assuming he starts this Fall, how long do I have to decide? In other words, if I pay for law school directly, how long does the window remain open for to claim reimbursement from the 529? End of 2017? End of semester? End of academic year? April 15, 2018? End of law school?

Not a tax lawyer, but i am pretty sure the withdrawal and the payment of the qualified expenses have to be in the same calendar year in order for the withdrawal to be tax free. So, if you pay spring semester bill in december 2017, you need to make associated withdrawal in 2017. if you wait until Jan 2018 to pay the bill, you have all of 2018 to make the withdrawal.
This is my understanding as well. Read point three here...

http://www.savingforcollege.com/article ... aps?page=3

Re: Use 529 Money Or Not?

Posted: Sun May 21, 2017 8:36 am
by JonnyDVM
This is the second post like this recently. I can't understand why one would save in a 529 account, have the opportunity to use that money to pay for higher education as intended and then not spend it.

Re: Use 529 Money Or Not?

Posted: Sun May 21, 2017 8:48 am
by Goodman60
JonnyDVM wrote:This is the second post like this recently. I can't understand why one would save in a 529 account, have the opportunity to use that money to pay for higher education as intended and then not spend it.
Estate planning. The opportunity to pay direct for education and not be subject to gift tax (or eating into the estate tax exemption) is a good deal for those subject to federal estate tax. If you have the money. Thus leaving the existing 529 money for the grandkids. Multigenerational estate planning

Re: Use 529 Money Or Not?

Posted: Sun May 21, 2017 9:11 am
by SimonJester
Use the 529 money. There is no guarantee you will have grandchildren or that the 529 plan will be available in the future or using the same rules.
I could easily see the IRS changing the rules down the road to make beneficiary changes now applicable to gift tax.

If you had leftover money after paying for your son's schooling then yes save that for future generations...

Re: Use 529 Money Or Not?

Posted: Sun May 21, 2017 10:25 am
by Goodman60
I appreciate that point of view. I DO feel like I'd be paying twice by NOT using the 529 money. And I can always superfund a 529 for grandkids as they arrive, assuming I live the 5 years that superfunding requires (in order to not be clawed back into a deceased estate for estate taxation counting). And, as you say, there's no way to know what future tax laws will be, including all the discussions about estate taxes (some want a lower exemption/higher tax and some what no estate tax). On the other hand, it's a way to effectively buy a $300,000 law degree for $150,000 (give or take), and my experience, like with the Roth IRA, is to take advantage of whatever legal tax breaks are available when they are available. The downside is that it costs ME $300,000 of real cash money to save my kids $150,000 later. Back on that first hand, though, it would feel nice to have funded two undergraduate educations ($150,000, all in, for Penn State, for instance, today) for grandkids.

Re: Use 529 Money Or Not?

Posted: Sun May 21, 2017 10:41 am
by cherijoh
Goodman60 wrote:I appreciate that point of view. I DO feel like I'd be paying twice by NOT using the 529 money. And I can always superfund a 529 for grandkids as they arrive, assuming I live the 5 years that superfunding requires (in order to not be clawed back into a deceased estate for estate taxation counting). And, as you say, there's no way to know what future tax laws will be, including all the discussions about estate taxes (some want a lower exemption/higher tax and some what no estate tax). On the other hand, it's a way to effectively buy a $300,000 law degree for $150,000 (give or take), and my experience, like with the Roth IRA, is to take advantage of whatever legal tax breaks are available when they are available. The downside is that it costs ME $300,000 of real cash money to save my kids $150,000 later. Back on that first hand, though, it would feel nice to have funded two undergraduate educations ($150,000, all in, for Penn State, for instance, today) for grandkids.
As you have realized, your strategy implicitly assumes that you would be subject to estate tax on the full $300K. Personally I wouldn't implement a strategy whose main benefit is dependent on making a bet on FUTURE tax policy. If you already had grandkids and were committed to paying for their college education, then it could be framed as a pay now/pay later question with the potential for future tax benefits.

Re: Use 529 Money Or Not?

Posted: Sun May 21, 2017 11:06 am
by Goodman60
This is a VERY good discussion. Thank you all for helping me think this out. To the post just above, yes, you make a great point. On the other hand, don't we generally make most financial decisions based on the assumption that current tax law will be future tax law, even though we know there will be changes in tax laws? Because it's the best we can do. I'll probably be subject to estate tax. I'll probably have grandchildren. I can afford to pay for law school out of pocket. I still own the 529 and can claw it back (but having to pay tax on the earnings) if need be. Or I can change the beneficiary to an existing young relative who I'd feel good about funding, if I don't have grandkids. There are very few legal estate and gift tax "work arounds" available to me. I'm happy with how my kids turned out and am OK helping them educate their own kids. I don't think it will cause them to "whiz away" money on wasteful consumption, knowing that they don't have to save for their own kids' college. I'd rather gift a 529 than pay for new cars or other "gratification consumption" stuff.

For me it's about utility of wealth. I'd rather fund a worthy young relative's (hopefully grandchild/ren) college, than buy more stuff that I don't need which won't make me any happier. It just makes SOME sense to me to spend $300,000 of real out-of-pocket money now, knowing that in the big picture, it really only costs my family half that. Or saying it the other way around, it bothers me to know that I'd be passing up a chance to save my kids $150,000 that will otherwise go to taxes. Yeah, I guess that's my main issue.

(On the other hand, $300,000 is real money and I already paid once, funding the 529 in the first place).

Re: Use 529 Money Or Not?

Posted: Sun May 21, 2017 12:49 pm
by ModifiedDuration
Do you have any concerns about the generation-skipping transfer tax when you change the beneficiary of the 529 Plan account from your child to your grandchild?

Re: Use 529 Money Or Not?

Posted: Sun May 21, 2017 1:09 pm
by Goodman60
I do not

Re: Use 529 Money Or Not?

Posted: Sun May 21, 2017 1:14 pm
by JonnyDVM
Goodman60 wrote:
JonnyDVM wrote:This is the second post like this recently. I can't understand why one would save in a 529 account, have the opportunity to use that money to pay for higher education as intended and then not spend it.
Estate planning. The opportunity to pay direct for education and not be subject to gift tax (or eating into the estate tax exemption) is a good deal for those subject to federal estate tax. If you have the money. Thus leaving the existing 529 money for the grandkids. Multigenerational estate planning
The son is going to a top tier law school and will come out without a huge burden of student loans! I suspect he'll be able to pay for his children's education no problem. Also, and I'm sure I'm not the only one with this opinion- the inflated cost of higher education cannot continue as is. This is a "bubble" that we will see pop in our lifetimes. It just seems counterintuitive to me to not use the money. Especially when we see posts from others bemoaning that they saved in a 529 and their children ended up not going to college so now what?

Re: Use 529 Money Or Not?

Posted: Sun May 21, 2017 4:26 pm
by Goodman60
My own guess is that the bubble will not pop for those at or above upper middle class. As with healthcare, I plan, financially, for continued high costs for family education.