529 yes or no?

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vest74
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529 yes or no?

Post by vest74 » Tue Jan 01, 2019 10:09 am

what is the difference between having the money on hand and growing where it is, paying for grand children's college on an as need basis, or starting 529's------------------pro's and cons? i see that there may be rules that make some contributions required to be forfeited in the future if say the child decides not to attend college............

fabdog
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Re: 529 yes or no?

Post by fabdog » Tue Jan 01, 2019 10:30 am

The benefit of the 529 is the growth in the account is tax free as long as used for college expenses. And depending on your state you may get a state tax deduction for your contributions to the account

If the child does not attend college (or gets a full scholarship, etc) the account can be transferred to a number of other relatives (including the parents if they want to go back to school)

If it just gets cashed out pay tax on the earnings plus a 10% penalty

Mike

KlangFool
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Re: 529 yes or no?

Post by KlangFool » Tue Jan 01, 2019 10:36 am

OP,

I believe that 529 may affect the grandchildren's ability to get the financial aid. If you are paying the whole amount, then, it is not a problem.

https://www.savingforcollege.com/articl ... -529-plans

KlangFool

Ostentatious
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Re: 529 yes or no?

Post by Ostentatious » Tue Jan 01, 2019 10:38 am

That is right. But it looks like with the new law you can use the savings for expenses from K to college(not only college expenses). Another advantage.

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Taco Knight
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Re: 529 yes or no?

Post by Taco Knight » Tue Jan 01, 2019 10:39 am

It's impossible to fully answer without knowing what "having the money on hand and growing where it is" is. If you mean cash in a bank account, then not only are you likely only getting at most 2 or 3%, you are paying taxes on all of the interest as well. If you mean it's invested somewhere or somehow that could be anything. Your state (or the child's state) 529 website should have a detailed FAQ. I know the NYS one does.

DIFAR31
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Re: 529 yes or no?

Post by DIFAR31 » Tue Jan 01, 2019 10:41 am

KlangFool wrote:
Tue Jan 01, 2019 10:36 am
OP,

I believe that 529 may affect the grandchildren's ability to get the financial aid. If you are paying the whole amount, then, it is not a problem.

https://www.savingforcollege.com/articl ... -529-plans

KlangFool
For a grandchild on a standard academic progression, any funds from a grandparent's 529 used to pay qualified expenses from the spring semester of sophomore year forward would have no impact on need-based financial aid.

livesoft
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Re: 529 yes or no?

Post by livesoft » Tue Jan 01, 2019 11:16 am

The main difference is taxes on the gains. A secondary difference is that 529 money cannot be used to get education tax credits. So there is no one-size-fits-all answer and things will depend on your personal income and tax situation.

Generally, though, if you are wealthy, then education tax credits are not available to you and the 529 plan is. If you are poor, then education tax credits are better and you cannot afford a contribution to a 529 plan anyways. If you are in-between, then the advice will be somewhat in-between, too.
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goodenyou
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Re: 529 yes or no?

Post by goodenyou » Tue Jan 01, 2019 11:33 am

For me, it was a no brainer. I am in a high tax bracket with no other tax advantage college savings vehicles, 3 children with a very high probability of college attendance and zero chance of need-based financial aid. I had well over a hundred thousand of capital gains and dividends in the 529 accounts. That was FREE money. Your situation may be different depending on income and other options open for college savings.
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Spirit Rider
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Re: 529 yes or no?

Post by Spirit Rider » Tue Jan 01, 2019 11:34 am

DIFAR31 wrote:
Tue Jan 01, 2019 10:41 am
KlangFool wrote:
Tue Jan 01, 2019 10:36 am
OP,

I believe that 529 may affect the grandchildren's ability to get the financial aid. If you are paying the whole amount, then, it is not a problem.

https://www.savingforcollege.com/articl ... -529-plans
For a grandchild on a standard academic progression, any funds from a grandparent's 529 used to pay qualified expenses from the spring semester of sophomore year forward would have no impact on need-based financial aid.
Beginning with the 2017/18 school year FAFSA started using the prior prior tax year.

A grandparent 529 plan can now be used starting January 1st of the last 2 1/2 years without affecting financial aid. This is the junior year if no advanced programs.

Use of grandparent 529s have the same effect as if the grandparents gifted the money from any other source. It is considered untaxed income of the student.

DIFAR31
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Re: 529 yes or no?

Post by DIFAR31 » Tue Jan 01, 2019 12:07 pm

Spirit Rider wrote:
Tue Jan 01, 2019 11:34 am
DIFAR31 wrote:
Tue Jan 01, 2019 10:41 am
KlangFool wrote:
Tue Jan 01, 2019 10:36 am
OP,

I believe that 529 may affect the grandchildren's ability to get the financial aid. If you are paying the whole amount, then, it is not a problem.

https://www.savingforcollege.com/articl ... -529-plans
For a grandchild on a standard academic progression, any funds from a grandparent's 529 used to pay qualified expenses from the spring semester of sophomore year forward would have no impact on need-based financial aid.
Beginning with the 2017/18 school year FAFSA started using the prior prior tax year.

A grandparent 529 plan can now be used starting January 1st of the last 2 1/2 years without affecting financial aid. This is the junior year if no advanced programs.

Use of grandparent 529s have the same effect as if the grandparents gifted the money from any other source. It is considered untaxed income of the student.
Given a conventional academic calendar and progression, the last 2 1/2 years of an undergraduate degree starts with the spring (second) semester of sophomore year.

Spirit Rider
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Re: 529 yes or no?

Post by Spirit Rider » Tue Jan 01, 2019 12:19 pm

DIFAR31 wrote:
Tue Jan 01, 2019 12:07 pm
Given a conventional academic calendar and progression, the last 2 1/2 years of an undergraduate degree starts with the spring (second) semester of sophomore year.
:oops:

Obviously I am not smarter than a 5th grader on New Year's morning.

It is also not a good idea to smack yourself in the forehead New Year's morning :beer

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Re: 529 yes or no?

Post by nigel_ht » Tue Jan 01, 2019 1:19 pm

For grandchildren your should fold the 529s into your overall estate planning...you could as easily earmark those funds for education in a spendthrift trust minus the tax benefits.

One benefit of the 529 is that it counts as a completed present interest gift under the $15K annual gift tax exclusion. But as the owner of the account you still have control and if you need the money you can pull the original funds out. If you need to pull earnings out too its subject to tax and a 10% penalty.

Most folks, even here, aren't as likely to hit the new estate tax limits...but those limits have changed before. Plus, it's nice to be able to give while you are still alive and its yet another reinforcement to the kids that education is important. Sitting down with them and their parents once a year to go over their college fund isn't a terrible thing to do...

But yeah, you should talk to your estate planning folks and see what fits your desires best.

DIFAR31
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Re: 529 yes or no?

Post by DIFAR31 » Tue Jan 01, 2019 1:32 pm

nigel_ht wrote:
Tue Jan 01, 2019 1:19 pm
One benefit of the 529 is that it counts as a completed present interest gift under the $15K annual gift tax exclusion. But as the owner of the account you still have control and if you need the money you can pull the original funds out. If you need to pull earnings out too its subject to tax and a 10% penalty.
There is no choice when taking a distribution from a 529 for a non-qualified expense to only take the after-tax contributions and therefore avoid paying tax (and potentially the 10% additional tax) on any earnings. 529 distributions are always done on a pro-rata basis.

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vest74
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Re: 529 yes or no?

Post by vest74 » Tue Jan 01, 2019 8:35 pm

I am in Indiana, the grandchildren are here and AZ. The monies are currently growing in Roth, Rollover, and Traditional IRA's There is no guarantee that they will attend college (although likely - maybe :oops: ) so why take a risk and just fund as needed later - or would / does the payment later effect the gifting laws if girt exceeds then "free" limits?

JGoneRiding
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Re: 529 yes or no?

Post by JGoneRiding » Tue Jan 01, 2019 8:47 pm

vest74 wrote:
Tue Jan 01, 2019 8:35 pm
I am in Indiana, the grandchildren are here and AZ. The monies are currently growing in Roth, Rollover, and Traditional IRA's There is no guarantee that they will attend college (although likely - maybe :oops: ) so why take a risk and just fund as needed later - or would / does the payment later effect the gifting laws if girt exceeds then "free" limits?
Payments made directly to the university are not considered gifts. Though my grandparents transferred stock which of course was in order to get my lower tax bracket.

OnTrack2020
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Re: 529 yes or no?

Post by OnTrack2020 » Tue Jan 01, 2019 8:57 pm

We didn't do the 529. Monies are in taxable accounts for our 4 kids---2 are currently in college. We always felt that in case any of them did not/do not want to attend/would rather work, etc., the money could then be used toward a future starter home.

tony_roach
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Re: 529 yes or no?

Post by tony_roach » Tue Jan 01, 2019 9:14 pm

While I started late I'm still doing 529's for the kids up to the PA State tax savings limit.

HereToLearn
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Re: 529 yes or no?

Post by HereToLearn » Tue Jan 01, 2019 9:18 pm

livesoft wrote:
Tue Jan 01, 2019 11:16 am
The main difference is taxes on the gains. A secondary difference is that 529 money cannot be used to get education tax credits. So there is no one-size-fits-all answer and things will depend on your personal income and tax situation.

Generally, though, if you are wealthy, then education tax credits are not available to you and the 529 plan is. If you are poor, then education tax credits are better and you cannot afford a contribution to a 529 plan anyways. If you are in-between, then the advice will be somewhat in-between, too.
Not correcting you, just clarifying, and asking a question.

If a parent's income falls below the AOTC eligibility cutoff ($160K MFJ, phased out up to $180K), can't the parents claim the tax credit by using $4000 of own non-529 funds to pay the cost of tuition, fees & textbooks, and still use 529 funds to pay other eligible education expenses?

Unless the grandparent intended to pay the full cost of attendance, or if the student earned a full tuition scholarship, I don't see a downside in funding a 529.

Question: if a parent claims the AOTC, can a grandparent also claim AOTC for the same student in the same year? I am guessing no, but thought you might know.

I am a big believer in the plans due to the tax-free earnings realized.

livesoft
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Re: 529 yes or no?

Post by livesoft » Tue Jan 01, 2019 9:24 pm

I don't believe a grandparent can claim AOTC unless perhaps the parents are dead and the grandparent is the legal guardian and the child is their dependent? Or maybe they just need to be the legal guardian, but I doubt there is double-dipping since the AOTC goes with the student anyways.

And of course one can use AOTC along with 529 if they follow the rules. Or LLC and 529.

The main downside that I see to a 529 plan is that it causes less wealthy parents to divert money to it when they should be putting that money in 401(k) / 403(b) / tIRA / and Roth IRA instead. Many families don't have to pay income taxes and others that do may have no Long-Term Capital gains taxes, so a 529 isn't necessarily better for them than saving in regular taxable account which allows tax-loss harvesting and no restrictions on contributions nor withdrawals. That is, a 529 plan wouldn't save them on taxes they weren't paying anyways.
Last edited by livesoft on Tue Jan 01, 2019 9:34 pm, edited 1 time in total.
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delamer
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Re: 529 yes or no?

Post by delamer » Tue Jan 01, 2019 9:28 pm

vest74 wrote:
Tue Jan 01, 2019 8:35 pm
I am in Indiana, the grandchildren are here and AZ. The monies are currently growing in Roth, Rollover, and Traditional IRA's There is no guarantee that they will attend college (although likely - maybe :oops: ) so why take a risk and just fund as needed later - or would / does the payment later effect the gifting laws if girt exceeds then "free" limits?
Make sure at a minimum that you coordinate with your kids regarding any 529 or other savings you do for your grandchildren. They need to know your plans in terms of dollars and where the money is held so they can do their own planning.

Better yet, gift the money in lump sum(s) or annually to the grandchildren through your kids and let your kids decide how/where to invest it.

My parents gave my kids a fixed amount every birthday that was identified as college money and I invested it appropriately for our circumstances. It was much appreciated and it gave us control.

shortfatelephant
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Re: 529 yes or no?

Post by shortfatelephant » Tue Jan 01, 2019 9:32 pm

I-Bonds are another option to look into for college savings. They grow tax free and are tax free if used for education. They can also be used for anything else with out any penalties.

livesoft
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Re: 529 yes or no?

Post by livesoft » Tue Jan 01, 2019 9:36 pm

shortfatelephant wrote:
Tue Jan 01, 2019 9:32 pm
I-Bonds are another option to look into for college savings. They grow tax free and are tax free if used for education. They can also be used for anything else with out any penalties.
This is true, but there is an income limit to allow to be used tax-free for college. And the money cannot be the money used for the AOTC.

I cashed in an I-bond in 2018 to get rid of the account and will say I used the money for college, so will not pay tax on the paltry return. See Form 8815.
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HereToLearn
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Re: 529 yes or no?

Post by HereToLearn » Tue Jan 01, 2019 10:18 pm

livesoft wrote:
Tue Jan 01, 2019 9:24 pm
I don't believe a grandparent can claim AOTC unless perhaps the parents are dead and the grandparent is the legal guardian and the child is their dependent? Or maybe they just need to be the legal guardian, but I doubt there is double-dipping since the AOTC goes with the student anyways.
Thanks! That makes sense as I had thought that only parents could claim AOTC.

This appears on an IRS site, so I was a bit confused:
Qualified education expenses must be paid by:

You or your spouse if you file a joint return,
A student you claim as a dependent on your return, or
A third party including relatives or friends.
https://www.irs.gov/credits-deductions/ ... d-expenses

DIFAR31
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Re: 529 yes or no?

Post by DIFAR31 » Tue Jan 01, 2019 10:28 pm

The AOTC can only be claimed by the student, the student's spouse, or someone claiming the student as a tax dependent.

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Re: 529 yes or no?

Post by KlangFool » Tue Jan 01, 2019 10:42 pm

vest74 wrote:
Tue Jan 01, 2019 8:35 pm
I am in Indiana, the grandchildren are here and AZ. The monies are currently growing in Roth, Rollover, and Traditional IRA's There is no guarantee that they will attend college (although likely - maybe :oops: ) so why take a risk and just fund as needed later - or would / does the payment later effect the gifting laws if girt exceeds then "free" limits?
vest74,

https://www.fastweb.com/financial-aid/a ... gift-taxes

Anyone can pay a student's tuition fee and avoid gift tax.

KlangFool

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teen persuasion
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Re: 529 yes or no?

Post by teen persuasion » Wed Jan 02, 2019 10:11 am

JGoneRiding wrote:
Tue Jan 01, 2019 8:47 pm
vest74 wrote:
Tue Jan 01, 2019 8:35 pm
I am in Indiana, the grandchildren are here and AZ. The monies are currently growing in Roth, Rollover, and Traditional IRA's There is no guarantee that they will attend college (although likely - maybe :oops: ) so why take a risk and just fund as needed later - or would / does the payment later effect the gifting laws if girt exceeds then "free" limits?
Payments made directly to the university are not considered gifts. Though my grandparents transferred stock which of course was in order to get my lower tax bracket.
Consider the kiddie tax if gifting appreciated stock. My DS2's friend had an unexpected large tax bill, because her dad gifted her stock to pay college expenses, but the kiddie tax hit her at her mom and step dad's higher tax rate. I believe the tax reform has changed the kiddie tax rules, again, now using trust tax rates.

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Re: 529 yes or no?

Post by nigel_ht » Wed Jan 02, 2019 9:12 pm

DIFAR31 wrote:
Tue Jan 01, 2019 1:32 pm
nigel_ht wrote:
Tue Jan 01, 2019 1:19 pm
One benefit of the 529 is that it counts as a completed present interest gift under the $15K annual gift tax exclusion. But as the owner of the account you still have control and if you need the money you can pull the original funds out. If you need to pull earnings out too its subject to tax and a 10% penalty.
There is no choice when taking a distribution from a 529 for a non-qualified expense to only take the after-tax contributions and therefore avoid paying tax (and potentially the 10% additional tax) on any earnings. 529 distributions are always done on a pro-rata basis.
Oh, thanks. Missed that.

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Re: 529 yes or no?

Post by ryanshook » Wed Jan 02, 2019 9:26 pm

OnTrack2020 wrote:
Tue Jan 01, 2019 8:57 pm
We didn't do the 529. Monies are in taxable accounts for our 4 kids---2 are currently in college. We always felt that in case any of them did not/do not want to attend/would rather work, etc., the money could then be used toward a future starter home.
You opted out of a 529 because you weren’t sure they would attend higher education. In hindsight, wouldn’t you have rather been saving that in a 529 vs a taxable account?

People often cite the fact that children may not attend higher education but I think most (not all) of the audience on this forum have kids that ultimately end up attending. The argument doesn’t seem as credible to me as it initially sounds.

delamer
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Re: 529 yes or no?

Post by delamer » Wed Jan 02, 2019 10:07 pm

ryanshook wrote:
Wed Jan 02, 2019 9:26 pm
OnTrack2020 wrote:
Tue Jan 01, 2019 8:57 pm
We didn't do the 529. Monies are in taxable accounts for our 4 kids---2 are currently in college. We always felt that in case any of them did not/do not want to attend/would rather work, etc., the money could then be used toward a future starter home.
You opted out of a 529 because you weren’t sure they would attend higher education. In hindsight, wouldn’t you have rather been saving that in a 529 vs a taxable account?

People often cite the fact that children may not attend higher education but I think most (not all) of the audience on this forum have kids that ultimately end up attending. The argument doesn’t seem as credible to me as it initially sounds.
The argument has even less credibility when you have multiple kids. The funds in a 529 can be transferred among siblings without penalty.

HereToLearn
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Re: 529 yes or no?

Post by HereToLearn » Wed Jan 02, 2019 10:54 pm

delamer wrote:
Wed Jan 02, 2019 10:07 pm
ryanshook wrote:
Wed Jan 02, 2019 9:26 pm
OnTrack2020 wrote:
Tue Jan 01, 2019 8:57 pm
We didn't do the 529. Monies are in taxable accounts for our 4 kids---2 are currently in college. We always felt that in case any of them did not/do not want to attend/would rather work, etc., the money could then be used toward a future starter home.
You opted out of a 529 because you weren’t sure they would attend higher education. In hindsight, wouldn’t you have rather been saving that in a 529 vs a taxable account?

People often cite the fact that children may not attend higher education but I think most (not all) of the audience on this forum have kids that ultimately end up attending. The argument doesn’t seem as credible to me as it initially sounds.
The argument has even less credibility when you have multiple kids. The funds in a 529 can be transferred among siblings without penalty.
I believe that the 10% penalty is waived if the student is awarded a scholarship and the parents withdraw the corresponding amount from the 529 in the same year that the student receives the scholarship. I am not 100% confident of my answer, as I have not experienced it personally. Along the same lines, if a parent should want to take advantage of the AOTC but has a fully-funded 529 plan, he can withdraw $4000 from the 529 to reimburse himself for the non-529 funds he used to take advantage of the AOTC, pay taxes on the earnings, but not pay the 10% penalty.

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Re: 529 yes or no?

Post by DIFAR31 » Wed Jan 02, 2019 11:11 pm

HereToLearn wrote:
Wed Jan 02, 2019 10:54 pm
I believe that the 10% penalty is waived if the student is awarded a scholarship and the parents withdraw the corresponding amount from the 529 in the same year that the student receives the scholarship.
There is no IRS guidance I am aware of that says the scholarship award and the corresponding penalty-free 529 distribution must take place in the same year. In fact, the general consensus is that they do not have to take place in the same year.

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Re: 529 yes or no?

Post by yogesh » Wed Jan 02, 2019 11:12 pm

https://www.savingforcollege.com/articl ... -529-plans


You can avoid the penalty if you get a college scholarship.

There are a few special exceptions to the 10% penalty rule, including when the beneficiary becomes incapacitated, attends a U.S. Military Academy or gets a scholarship. In the case of a scholarship, non-qualified withdrawals up to the amount of the tax-free scholarship can be taken out penalty-free, but you'll have to pay income tax on the earnings. As Savingforcollege.com founder Joe Hurley likes to say, "the scholarships have turned your tax-free 529 investment into a tax-deferred 529 investment".
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HereToLearn
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Re: 529 yes or no?

Post by HereToLearn » Wed Jan 02, 2019 11:29 pm

DIFAR31 wrote:
Wed Jan 02, 2019 11:11 pm
HereToLearn wrote:
Wed Jan 02, 2019 10:54 pm
I believe that the 10% penalty is waived if the student is awarded a scholarship and the parents withdraw the corresponding amount from the 529 in the same year that the student receives the scholarship.
There is no IRS guidance I am aware of that says the scholarship award and the corresponding penalty-free 529 distribution must take place in the same year. In fact, the general consensus is that they do not have to take place in the same year.
I agree with you on the lack of IRS guidance, but I have decided that it is safer to do so. I would prefer not to withdraw the $4000 right now, but am afraid to do otherwise. (Irrational, I know....)

DIFAR31
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Re: 529 yes or no?

Post by DIFAR31 » Wed Jan 02, 2019 11:45 pm

HereToLearn wrote:
Wed Jan 02, 2019 11:29 pm
I agree with you on the lack of IRS guidance, but I have decided that it is safer to do so. I would prefer not to withdraw the $4000 right now, but am afraid to do otherwise. (Irrational, I know....)
It wouldn't make sense and would go against the purpose of saving for a four year college degree to require a non-qualified 529 distribution in the same year that a corresponding scholarship was received in order to avoid the 10% penalty. If that was required, 529 money would need to be pulled out of the account for a non-qualified purpose at the very beginning of the student's college experience for a scholarship received in the first semester, with the earnings portion taxed, meaning that same 529 money would not be available later on for its intended purpose.

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