529: multiple accounts for the same beneficiary

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boglebrain
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529: multiple accounts for the same beneficiary

Post by boglebrain » Thu Oct 18, 2018 8:42 pm

I'm trying to understand the rules around the treatment of penalties for pulling money out of a 529 plan if needed.

Suppose I have put $10k into a 529 plan 10 years ago that is now worth $100k so there has been $90k in growth. Now suppose today I decide to put in another $20k into a 529 for the same beneficiary. If I deposit it into the same account then the total balance is $120k. Now suppose tomorrow I realize I need that $20k and I withdraw it and use for a non-educational purpose. This $20k is proportioned into a cost basis and the growth is subject to both income taxes and a 10% penalty. I'm not sure of the exact computation but the total cost basis is $30k and the growth is $90k and so any withdrawal might be treated as 75% growth ($90k/$120k) and so you face some pretty large amount of taxes and penalties.

If, instead, I open a new account for the same beneficiary with the new $20k and then tomorrow I decide to withdraw is that treated differently?

donaldfair71
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Re: 529: multiple accounts for the same beneficiary

Post by donaldfair71 » Thu Oct 18, 2018 9:19 pm

Your assumption is correct. If you change any of the big 3 on the new account it will be treated differently:

Owner
Investment
Beneficiary

So opening a new one would suffice to keep you out of the liability. If it's a worry, structure your portfolio across accounts. If you may take this second amount money out soon, go very conservative on the investment. Go more aggressive on the other to get your allocation overall where you want it.

boglebrain
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Re: 529: multiple accounts for the same beneficiary

Post by boglebrain » Thu Oct 18, 2018 9:20 pm

I think I found my answer here: http://rpgplanner.com/smart-tax-plannin ... ngs-plans/

These are some really good strategies to minimize the potential penalties.

letsgobobby
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Re: 529: multiple accounts for the same beneficiary

Post by letsgobobby » Fri Oct 19, 2018 5:17 pm

boglebrain wrote:
Thu Oct 18, 2018 8:42 pm
I'm trying to understand the rules around the treatment of penalties for pulling money out of a 529 plan if needed.

Suppose I have put $10k into a 529 plan 10 years ago that is now worth $100k so there has been $90k in growth. Now suppose today I decide to put in another $20k into a 529 for the same beneficiary. If I deposit it into the same account then the total balance is $120k. Now suppose tomorrow I realize I need that $20k and I withdraw it and use for a non-educational purpose. This $20k is proportioned into a cost basis and the growth is subject to both income taxes and a 10% penalty. I'm not sure of the exact computation but the total cost basis is $30k and the growth is $90k and so any withdrawal might be treated as 75% growth ($90k/$120k) and so you face some pretty large amount of taxes and penalties.

If, instead, I open a new account for the same beneficiary with the new $20k and then tomorrow I decide to withdraw is that treated differently?
This is why each of our children has four accounts.

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fredflinstone
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Re: 529: multiple accounts for the same beneficiary

Post by fredflinstone » Fri Oct 19, 2018 6:44 pm

It never occurred to me to open multiple accounts for the same beneficiary.

This gives me a devilish idea.

Suppose I am very wealthy and I want to pass on tens of millions tax-free to my children and grandchildren when I die. Can I set up fifty 529 plans for each child and grandchild -- one per beneficiary in each state -- and then deposit the maximum allowable amount in each plan? (To avoid gift taxes, I could spread the deposits out over a period of 10-15 years or whatever.) Would not all of these funds grow tax-deferred and be exempt from federal estate tax? Do 529 plans offer a backdoor way to dramatically reduce the size of one's taxable estate?
Last edited by fredflinstone on Fri Oct 19, 2018 6:50 pm, edited 1 time in total.

DIFAR31
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Re: 529: multiple accounts for the same beneficiary

Post by DIFAR31 » Fri Oct 19, 2018 6:48 pm

fredflinstone wrote:
Fri Oct 19, 2018 6:44 pm
It never occurred to me to open multiple accounts for the same beneficiary.

This gives me a devilish idea.

Suppose I am very wealthy and I want to pass on tens of millions tax-free to my children and grandchildren when I die. Can I set up fifty 529 plans for each child and grandchild -- one per beneficiary in each state -- and then deposit the maximum allowable amount in each plan? Would not all of these funds be exempt from federal estate tax?
You would still need to account for the annual gift tax exclusion and the lifetime gift tax exemption.

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fredflinstone
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Re: 529: multiple accounts for the same beneficiary

Post by fredflinstone » Fri Oct 19, 2018 6:53 pm

DIFAR31 wrote:
Fri Oct 19, 2018 6:48 pm
fredflinstone wrote:
Fri Oct 19, 2018 6:44 pm
It never occurred to me to open multiple accounts for the same beneficiary.

This gives me a devilish idea.

Suppose I am very wealthy and I want to pass on tens of millions tax-free to my children and grandchildren when I die. Can I set up fifty 529 plans for each child and grandchild -- one per beneficiary in each state -- and then deposit the maximum allowable amount in each plan? Would not all of these funds be exempt from federal estate tax?
You would still need to account for the annual gift tax exclusion and the lifetime gift tax exemption.
Sorry, I edited my post just as yours was published to make clear that the annual gift tax exclusion could be addressed by spreading out the gift over a period of years. I am not sure but I think the lifetime gift tax exclusion can be avoided as long as the donor stays underneath the annual gift limits.

DIFAR31
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Re: 529: multiple accounts for the same beneficiary

Post by DIFAR31 » Fri Oct 19, 2018 7:05 pm

You could do the same thing just by making regular gifts. I don't see how scores of different 529 accounts makes any difference.

letsgobobby
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Re: 529: multiple accounts for the same beneficiary

Post by letsgobobby » Fri Oct 19, 2018 7:29 pm

DIFAR31 wrote:
Fri Oct 19, 2018 7:05 pm
You could do the same thing just by making regular gifts. I don't see how scores of different 529 accounts makes any difference.
Main differences are

1. While a completed gift in the eyes of the IRS, you can still control the investments and take the gift back whenever you want.

2. You can front load 529 gifts using the five year election ($75,000 from each individual to any number of children and grandchildren on Day 1 with no gift or estate tax implications).

3. If used for qualified educational expenses, the 529 money will grow income, capital gain, and estate tax free forever. However there may be tax implications when a beneficiary is changed.

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fredflinstone
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Re: 529: multiple accounts for the same beneficiary

Post by fredflinstone » Fri Oct 19, 2018 7:31 pm

DIFAR31 wrote:
Fri Oct 19, 2018 7:05 pm
You could do the same thing just by making regular gifts. I don't see how scores of different 529 accounts makes any difference.
if you give the money away, you no longer have control over it. That is a big difference.

DIFAR31
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Re: 529: multiple accounts for the same beneficiary

Post by DIFAR31 » Fri Oct 19, 2018 7:41 pm

fredflinstone wrote:
Fri Oct 19, 2018 6:44 pm
It never occurred to me to open multiple accounts for the same beneficiary.

This gives me a devilish idea.

Suppose I am very wealthy and I want to pass on tens of millions tax-free to my children and grandchildren when I die. Can I set up fifty 529 plans for each child and grandchild -- one per beneficiary in each state -- and then deposit the maximum allowable amount in each plan? (To avoid gift taxes, I could spread the deposits out over a period of 10-15 years or whatever.) Would not all of these funds grow tax-deferred and be exempt from federal estate tax? Do 529 plans offer a backdoor way to dramatically reduce the size of one's taxable estate?
Let's say you have a total of 10 heirs (children and grandchildren) that you want to pass on your tens of millions to. Why is having 500 529 accounts a good way to do this?

letsgobobby
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Re: 529: multiple accounts for the same beneficiary

Post by letsgobobby » Fri Oct 19, 2018 7:46 pm

You can put different investments in each, and thus have many accounts with no gains or even losses, thus avoiding in those accounts taxes and penalties on non qualified withdrawals. Total taxes should be lower in this scenario.

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fredflinstone
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Re: 529: multiple accounts for the same beneficiary

Post by fredflinstone » Sun Oct 21, 2018 9:27 pm

DIFAR31 wrote:
Fri Oct 19, 2018 7:41 pm
fredflinstone wrote:
Fri Oct 19, 2018 6:44 pm
It never occurred to me to open multiple accounts for the same beneficiary.

This gives me a devilish idea.

Suppose I am very wealthy and I want to pass on tens of millions tax-free to my children and grandchildren when I die. Can I set up fifty 529 plans for each child and grandchild -- one per beneficiary in each state -- and then deposit the maximum allowable amount in each plan? (To avoid gift taxes, I could spread the deposits out over a period of 10-15 years or whatever.) Would not all of these funds grow tax-deferred and be exempt from federal estate tax? Do 529 plans offer a backdoor way to dramatically reduce the size of one's taxable estate?
Let's say you have a total of 10 heirs (children and grandchildren) that you want to pass on your tens of millions to. Why is having 500 529 accounts a good way to do this?
because you can substantially reduce estate taxes.

DIFAR31
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Re: 529: multiple accounts for the same beneficiary

Post by DIFAR31 » Sun Oct 21, 2018 9:42 pm

fredflinstone wrote:
Sun Oct 21, 2018 9:27 pm
DIFAR31 wrote:
Fri Oct 19, 2018 7:41 pm
fredflinstone wrote:
Fri Oct 19, 2018 6:44 pm
It never occurred to me to open multiple accounts for the same beneficiary.

This gives me a devilish idea.

Suppose I am very wealthy and I want to pass on tens of millions tax-free to my children and grandchildren when I die. Can I set up fifty 529 plans for each child and grandchild -- one per beneficiary in each state -- and then deposit the maximum allowable amount in each plan? (To avoid gift taxes, I could spread the deposits out over a period of 10-15 years or whatever.) Would not all of these funds grow tax-deferred and be exempt from federal estate tax? Do 529 plans offer a backdoor way to dramatically reduce the size of one's taxable estate?
Let's say you have a total of 10 heirs (children and grandchildren) that you want to pass on your tens of millions to. Why is having 500 529 accounts a good way to do this?
because you can substantially reduce estate taxes.
If you have $10M that you want to gift away to 10 future heirs and you want to stay at or under the annual gift tax exclusion amount as you previously stated, that will take you 66 years at the current $15k exclusion (obviously fewer years as the annual exclusion amount increases over time, but I'm not going to guess how that will go). I'm still not seeing why having 50 529 accounts for each heir is a thing to do. Opening and managing 500 529 accounts would be, shall we say, onerous.

HereToLearn
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Re: 529: multiple accounts for the same beneficiary

Post by HereToLearn » Sun Oct 21, 2018 9:59 pm

letsgobobby wrote:
Fri Oct 19, 2018 7:29 pm
DIFAR31 wrote:
Fri Oct 19, 2018 7:05 pm
You could do the same thing just by making regular gifts. I don't see how scores of different 529 accounts makes any difference.
Main differences are

1. While a completed gift in the eyes of the IRS, you can still control the investments and take the gift back whenever you want.

2. You can front load 529 gifts using the five year election ($75,000 from each individual to any number of children and grandchildren on Day 1 with no gift or estate tax implications).

3. If used for qualified educational expenses, the 529 money will grow income, capital gain, and estate tax free forever. However there may be tax implications when a beneficiary is changed.
I don't know of tax implications when changing a beneficiary? Does this vary by state?

letsgobobby
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Re: 529: multiple accounts for the same beneficiary

Post by letsgobobby » Tue Oct 23, 2018 12:26 am

HereToLearn wrote:
Sun Oct 21, 2018 9:59 pm
letsgobobby wrote:
Fri Oct 19, 2018 7:29 pm
DIFAR31 wrote:
Fri Oct 19, 2018 7:05 pm
You could do the same thing just by making regular gifts. I don't see how scores of different 529 accounts makes any difference.
Main differences are

1. While a completed gift in the eyes of the IRS, you can still control the investments and take the gift back whenever you want.

2. You can front load 529 gifts using the five year election ($75,000 from each individual to any number of children and grandchildren on Day 1 with no gift or estate tax implications).

3. If used for qualified educational expenses, the 529 money will grow income, capital gain, and estate tax free forever. However there may be tax implications when a beneficiary is changed.
I don't know of tax implications when changing a beneficiary? Does this vary by state?
there are rules for who beneficiaries can be, relationship to prior beneficiaries, etc. gift taxes may apply.

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fredflinstone
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Re: 529: multiple accounts for the same beneficiary

Post by fredflinstone » Tue Oct 23, 2018 7:30 am

DIFAR31 wrote:
Sun Oct 21, 2018 9:42 pm
fredflinstone wrote:
Sun Oct 21, 2018 9:27 pm
DIFAR31 wrote:
Fri Oct 19, 2018 7:41 pm
fredflinstone wrote:
Fri Oct 19, 2018 6:44 pm
It never occurred to me to open multiple accounts for the same beneficiary.

This gives me a devilish idea.

Suppose I am very wealthy and I want to pass on tens of millions tax-free to my children and grandchildren when I die. Can I set up fifty 529 plans for each child and grandchild -- one per beneficiary in each state -- and then deposit the maximum allowable amount in each plan? (To avoid gift taxes, I could spread the deposits out over a period of 10-15 years or whatever.) Would not all of these funds grow tax-deferred and be exempt from federal estate tax? Do 529 plans offer a backdoor way to dramatically reduce the size of one's taxable estate?
Let's say you have a total of 10 heirs (children and grandchildren) that you want to pass on your tens of millions to. Why is having 500 529 accounts a good way to do this?
because you can substantially reduce estate taxes.
If you have $10M that you want to gift away to 10 future heirs and you want to stay at or under the annual gift tax exclusion amount as you previously stated, that will take you 66 years at the current $15k exclusion (obviously fewer years as the annual exclusion amount increases over time, but I'm not going to guess how that will go). I'm still not seeing why having 50 529 accounts for each heir is a thing to do. Opening and managing 500 529 accounts would be, shall we say, onerous.
Fair point. I clearly did not think this through.

The strategy is not practical when dealing with a massive amount of money and -- you are right -- it would be a pain in the ass to set up 50 different accounts per heir.

But on a smaller scale, the basic strategy still makes sense. For example, I have two children. Wilma and I have already topped off their 529s in Colorado. I love putting money into their 529s because it's an asset protection tool (the money is not available to creditors if I go bankrupt) and it's an estate tax tool (the money is not considered part of my estate when I die) and I do not lose control of the money, i.e., it's still my money. Also, the earnings grow tax-deferred. It never occurred to me (until now) that I can open up 529 accounts in other states. Something I will consider.

Spirit Rider
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Re: 529: multiple accounts for the same beneficiary

Post by Spirit Rider » Tue Oct 23, 2018 3:41 pm

Your numbers are way overkill when the plan maximums is many states are $400K - $500K+. The vast majority of people are not going to exceed one plan's limits. At most you might need two or three plans, certainly not 50.

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fredflinstone
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Re: 529: multiple accounts for the same beneficiary

Post by fredflinstone » Wed Oct 24, 2018 6:04 am

Spirit Rider wrote:
Tue Oct 23, 2018 3:41 pm
Your numbers are way overkill when the plan maximums is many states are $400K - $500K+. The vast majority of people are not going to exceed one plan's limits. At most you might need two or three plans, certainly not 50.
Did you see my most recent post?

letsgobobby
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Re: 529: multiple accounts for the same beneficiary

Post by letsgobobby » Wed Oct 24, 2018 12:52 pm

For a given beneficiary, multiple 529s does nothing to change gift taxes or estate taxes, unless you would exceed a plan's maximum. The advantage is in segregating gains by account, so that non qualified withdrawals can be limited to those accounts with the fewest gains, thus limiting taxation and penalties.

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