Max out 529?

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BobaTeaGood
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Joined: Wed Oct 10, 2018 1:07 pm

Max out 529?

Post by BobaTeaGood » Wed Nov 07, 2018 12:05 pm

My first child will be starting college in 5.5 years and my second child in 7.5 years.

So far, I have been putting about $1200/month into each child's 529 plan. However, we deduct $10K of that for each child's current private school.

At this time, we have about $140K in each child's 529 plan.

Question: while I have idea where they'd be going to college (In-state UC? Out-of-State Tier 1/2 school? Ivy League?), should I try to put more in their 529 with the extra un-needed cash on hand?

I have the choice of putting that un-needed cash into my brokerage account or WF bank. Home mortgage is about to be paid off.

brad.clarkston
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Location: Kansas City, MO

Re: Max out 529?

Post by brad.clarkston » Wed Nov 07, 2018 12:19 pm

That's a nice problem to have :)

I'd say it doesn't really matter ether 529 or brokerage works equally well so the question is what do you plan to do with any money not used in the 529? You could always keep the plan in your control and use it as a surprise grandchild college fund in the future. The brokerage account is probably easier to manage tho.

BobaTeaGood
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Re: Max out 529?

Post by BobaTeaGood » Wed Nov 07, 2018 4:09 pm

We will likely just take out the money not used in 529. I guess we can save for potential grad school, if that's in their plans. We can save for grandkids private school too. Are there any penalties to take money out of 529? What are tax implications?

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willthrill81
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Re: Max out 529?

Post by willthrill81 » Wed Nov 07, 2018 4:16 pm

I've never seen an instance where it was beneficial to max out a 529 plan unless all other tax-advantaged plans of all types were maxed out first.
BobaTeaGood wrote:
Wed Nov 07, 2018 4:09 pm
Are there any penalties to take money out of 529? What are tax implications?
Yes. Withdrawals in excess of your contributions for anything other than qualified expenses are subject to a 10% penalty and then taxed as taxable income.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

BobaTeaGood
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Re: Max out 529?

Post by BobaTeaGood » Wed Nov 07, 2018 4:23 pm

Gotcha. Would it be taxed as Long-term gains income or Short-term gains?

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bligh
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Re: Max out 529?

Post by bligh » Wed Nov 07, 2018 4:28 pm

BobaTeaGood wrote:
Wed Nov 07, 2018 4:23 pm
Gotcha. Would it be taxed as Long-term gains income or Short-term gains?
It would be at your marginal income tax rate. Not capital gains (long or short) tax rate.

You sound like you are in a high income tax bracket. If you do have excess money in a 529 plan after your kids are done with college, I would leave it in there if I were you. I'd wait for a time I was either in a lower income tax bracket, or my grand kids were going to school, or else leave it to my kids in my inheritance to worry about after I'm 6 feet under.

BobaTeaGood
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Re: Max out 529?

Post by BobaTeaGood » Wed Nov 07, 2018 4:30 pm

Thanks. :)

Would my 2 kids be able to "pass on" the 529 to their kids (who are my grandkids)?

Any taxes/penalties involved with this "pass on"?

Thegame14
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Re: Max out 529?

Post by Thegame14 » Wed Nov 07, 2018 4:39 pm

BobaTeaGood wrote:
Wed Nov 07, 2018 4:09 pm
We will likely just take out the money not used in 529. I guess we can save for potential grad school, if that's in their plans. We can save for grandkids private school too. Are there any penalties to take money out of 529? What are tax implications?
It is shocking that you have put that much money into an account and don't know how the account works, yes there are BIG tax implications. If you just plan to "take it out" if it isn't used, you shouldn't have put it there in the first place, the whole benefit of it is using it.....

RickBoglehead
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Re: Max out 529?

Post by RickBoglehead » Wed Nov 07, 2018 4:59 pm

BobaTeaGood wrote:
Wed Nov 07, 2018 4:30 pm
Thanks. :)

Would my 2 kids be able to "pass on" the 529 to their kids (who are my grandkids)?

Any taxes/penalties involved with this "pass on"?
The owner of the account can change beneficiaries to another family member with no issues.

The owner can transfer ownership to another family member IF the plan allows it.

My kids had plans owned by a relative. Relative transferred ownership to me. After they were done with grad school, I changed beneficiary on an account to myself to pay for some courses. No issues.

Once grandchildren exist, I will change beneficiary to them and retain ownership.

Having $280,000 in 529s without understanding these types of issues seems quite risky.

BobaTeaGood
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Joined: Wed Oct 10, 2018 1:07 pm

Re: Max out 529?

Post by BobaTeaGood » Thu Nov 08, 2018 3:51 pm

Thanks! Yes, we put money into the 529... and before was looking that it'll be just for our kids.

We're glad that the IRS defines a member of the family as below... so I guess we have several options/areas to pass on the remaining funds:
• The father, mother, or the ancestor of either parent
• A child (including a legally adopted child) or the descendant of a child
• A stepfather or stepmother
• A stepson or stepdaughter
• A brother, sister, stepbrother, stepsister, half-brother, or half-sister
• A brother or sister of the father or mother
• A brother-in-law, sister-in-law, son-in-law, daughter-in-law, father-in-law, or mother-in-law
• A son or daughter of a brother or sister
• A spouse of any person mentioned above
• A spouse of the beneficiary
• A first cousin

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