529s, tax breaks, and plan options

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wxturtle
Posts: 19
Joined: Tue Apr 18, 2017 10:01 am

529s, tax breaks, and plan options

Post by wxturtle » Sat Jan 12, 2019 11:13 am

Wife/I have a 1 year old at home. We moved to Philly (Pennsylvania) a few months ago.

Her parents (living in Massachusetts) would like to make a sizable seed donation (~$10k) to a 529 for my son, but I've been dragging my feet on opening this (we haven't been able to max out our retirement savings this year, so the 529 isn't a top-top priority until we get more settled in a couple years).

It looks like in PA, there is a much larger deduction for contributions (up to 14k/28k) than in MA (up to 1k/2k). As such, her parents have proposed gifting us the money, which we then put in a PA 529 for him so we can take the larger deduction.

A.) Is this our best strategy here? Is there any issue with the gift -> contribution sequence of events?
B.) Am I correct in that the only plan options for 529 is from here: https://www.bogleheads.org/wiki/529_plan -- this is not like an IRA where I can shop individual brokerages (i.e., Vanguard vs. Schwab, etc.)?

mcraepat9
Posts: 1066
Joined: Thu Jul 16, 2015 11:46 am

Re: 529s, tax breaks, and plan options

Post by mcraepat9 » Sat Jan 12, 2019 11:20 am

wxturtle wrote:
Sat Jan 12, 2019 11:13 am
Wife/I have a 1 year old at home. We moved to Philly (Pennsylvania) a few months ago.

Her parents (living in Massachusetts) would like to make a sizable seed donation (~$10k) to a 529 for my son, but I've been dragging my feet on opening this (we haven't been able to max out our retirement savings this year, so the 529 isn't a top-top priority until we get more settled in a couple years). Right thinking - definitely max your tax-advantaged retirement before even thinking about 529

It looks like in PA, there is a much larger deduction for contributions (up to 14k/28k) than in MA (up to 1k/2k). As such, her parents have proposed gifting us the money, which we then put in a PA 529 for him so we can take the larger deduction. Sure - they can also contribute just enough to get their own deduction and gift you the difference.

A.) Is this our best strategy here? Is there any issue with the gift -> contribution sequence of events? No
B.) Am I correct in that the only plan options for 529 is from here: https://www.bogleheads.org/wiki/529_plan -- this is not like an IRA where I can shop individual brokerages (i.e., Vanguard vs. Schwab, etc.)? Some states only give a tax deduction for contributions to their in-state 529 plan. PA gives you a deduction for contribution for any 529 plan, so you can choose any plan available. 529s are state-sponsored plans - so it would not simply be going to Vanguard, Schwab. But Vanguard operates some state plans (Nevada) and Vanguard funds are available in many state plans (Utah, New York). So you can choose the best 529 to invest in and still get the PA state income tax deduction.
Amateur investors are not cool-headed logicians.

marcopolo
Posts: 1405
Joined: Sat Dec 03, 2016 10:22 am

Re: 529s, tax breaks, and plan options

Post by marcopolo » Sat Jan 12, 2019 11:24 am

wxturtle wrote:
Sat Jan 12, 2019 11:13 am
Wife/I have a 1 year old at home. We moved to Philly (Pennsylvania) a few months ago.

Her parents (living in Massachusetts) would like to make a sizable seed donation (~$10k) to a 529 for my son, but I've been dragging my feet on opening this (we haven't been able to max out our retirement savings this year, so the 529 isn't a top-top priority until we get more settled in a couple years).

It looks like in PA, there is a much larger deduction for contributions (up to 14k/28k) than in MA (up to 1k/2k). As such, her parents have proposed gifting us the money, which we then put in a PA 529 for him so we can take the larger deduction.

A.) Is this our best strategy here? Is there any issue with the gift -> contribution sequence of events?
B.) Am I correct in that the only plan options for 529 is from here: https://www.bogleheads.org/wiki/529_plan -- this is not like an IRA where I can shop individual brokerages (i.e., Vanguard vs. Schwab, etc.)?
I will let others opine on whether (A) would violate the "step doctrine".

Regarding (B), 529 plans are administered by each state. The state usually contracts with a provider such as Vanguard or Fidelity, or others, to actually run their plans. Fortunately, PA allows the tax deduction regardless of which state's plan you use. So, it helps to shop around to find the best plan for your circumstance. All the major brokerage houses will have several state plan available through them.

As an example, if you go to Fidelity's 529 page (https://www.fidelity.com/529-plans/investment-options), you will see (on the left panel) they have plans available from New Hampshire, Arizona, Delaware, and Mass.

This web site has a lot of good information comparing the different state plans:
https://www.savingforcollege.com/compare_529_plans/

Good luck, and congratulations in the (relatively) new born!
Once in a while you get shown the light, in the strangest of places if you look at it right.

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