Any reason not to open a 529? (young investor)

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bogglehead125
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Joined: Thu Nov 23, 2017 9:40 pm

Any reason not to open a 529? (young investor)

Post by bogglehead125 » Tue Mar 13, 2018 6:20 pm

I’m 22. Is there any reason not to fund a 529 plan up to the state tax deductible maximum (I think $5500 in NYC) after filling an e-fund & maxing out an IRA and 401(k)? For example, is changing the fund to a new beneficiary costly or a taxable event?

For context, in all likelihood I will use the fund to pay for a future child’s K-12 and college, but I may also dip into the 529 to pay the non-employer portion of any further schooling (unlikely to be > $10k) or for a SO’s graduate school (could be quite a lot, unclear how much of a contribution would be accepted by my SO).

cncm
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Re: Any reason not to open a 529? (young investor)

Post by cncm » Tue Mar 13, 2018 6:40 pm

I do this already, even though we don't have kids yet. I figure we should save now when financial pressures are minimal (we're DINKs) and effective tax rates are high, and once we have kids and one/both of us take lower paying jobs, we can just watch the balance grow (compounding returns FTW). Right now we already have about $60k saved in a 529 and we're planning to have kids in 2-3 years.

dash1s
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Re: Any reason not to open a 529? (young investor)

Post by dash1s » Tue Mar 13, 2018 6:49 pm

I kick myself for not doing this at 22 for the all the reasons you listed below.

dash1s
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Re: Any reason not to open a 529? (young investor)

Post by dash1s » Tue Mar 13, 2018 6:56 pm

cncm wrote:
Tue Mar 13, 2018 6:40 pm
I do this already, even though we don't have kids yet. I figure we should save now when financial pressures are minimal (we're DINKs) and effective tax rates are high, and once we have kids and one/both of us take lower paying jobs, we can just watch the balance grow (compounding returns FTW). Right now we already have about $60k saved in a 529 and we're planning to have kids in 2-3 years.
What age did you start?

cncm
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Joined: Sun Apr 19, 2015 2:41 pm

Re: Any reason not to open a 529? (young investor)

Post by cncm » Tue Mar 13, 2018 7:01 pm

dash1s wrote:
Tue Mar 13, 2018 6:56 pm
cncm wrote:
Tue Mar 13, 2018 6:40 pm
I do this already, even though we don't have kids yet. I figure we should save now when financial pressures are minimal (we're DINKs) and effective tax rates are high, and once we have kids and one/both of us take lower paying jobs, we can just watch the balance grow (compounding returns FTW). Right now we already have about $60k saved in a 529 and we're planning to have kids in 2-3 years.
What age did you start?

We started about 5-6 years ago. We're now in our early 30s.

bogglehead125
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Re: Any reason not to open a 529? (young investor)

Post by bogglehead125 » Tue Mar 13, 2018 7:08 pm

If I help my girlfriend with grad school, it would not be a tax-free 529 distribution, correct? :(

jumppilot
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Re: Any reason not to open a 529? (young investor)

Post by jumppilot » Tue Mar 13, 2018 7:17 pm

I started funding a 529 when I started dating my now-wife.

Fast forward 8 years and two kids later, I'm glad I did. We now have $30,000 in 529 assets with my oldest being 2.

My wife is now a SAHM - make hay while the sun shines!

Finridge
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Re: Any reason not to open a 529? (young investor)

Post by Finridge » Tue Mar 13, 2018 8:21 pm

I wish I had done this!

But the first priority should be maxing out your Roth IRA's (and also probably your other retirement accounts). If you have funds left over after maxing those out, put them in your 529.

Finridge
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Re: Any reason not to open a 529? (young investor)

Post by Finridge » Tue Mar 13, 2018 8:26 pm

Question: If it's possible to open a 529 in your own name and then just switch it over to your child after he/she is born, and to do this without adverse tax consequences, then what is stopping us from doing this *after the child is born? What if someone establishes a 529 for both her child and also opens one in her own name, maxing out the contributions to each (and with the intention of transferring the one in her name to the child)? I'm skeptical this would work... and for the same reasons I'm not sure the IRS would look favorably on 529's that are in your own name before you have children. Has anyone looked into this?

Spirit Rider
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Re: Any reason not to open a 529? (young investor)

Post by Spirit Rider » Tue Mar 13, 2018 8:27 pm

bogglehead125 wrote:
Tue Mar 13, 2018 7:08 pm
If I help my girlfriend with grad school, it would not be a tax-free 529 distribution, correct? :(
Correct, it can only one of the below list or it is a non-qualified distribution. You would have to marry your SO.

Members of the beneficiary's family. For these purposes, the beneficiary's family includes the beneficiary's spouse and the following other relatives of the beneficiary.
1. Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them.
2. Brother, sister, stepbrother, or stepsister.
3. Father or mother or ancestor of either.
4. Stepfather or stepmother.
5. Son or daughter of a brother or sister.
6. Brother or sister of father or mother.
7. Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.
8. The spouse of any individual listed above.
9. First cousin

Note: If the beneficiary of a change or rollover is a lower generation it will be subject to gift tax rules.

youngpleb
Posts: 171
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Location: VA, USA

Re: Any reason not to open a 529? (young investor)

Post by youngpleb » Tue Mar 13, 2018 8:35 pm

bogglehead125 wrote:
Tue Mar 13, 2018 6:20 pm
I’m 22. Is there any reason not to fund a 529 plan up to the state tax deductible maximum (I think $5500 in NYC) after filling an e-fund & maxing out an IRA and 401(k)? For example, is changing the fund to a new beneficiary costly or a taxable event?

For context, in all likelihood I will use the fund to pay for a future child’s K-12 and college, but I may also dip into the 529 to pay the non-employer portion of any further schooling (unlikely to be > $10k) or for a SO’s graduate school (could be quite a lot, unclear how much of a contribution would be accepted by my SO).
This is actually a really cool idea. I tried looking into this myself a few months ago but lacked the Google skills necessary to find anything useful :mrgreen:
27. Always learning.

ThankYouJack
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Re: Any reason not to open a 529? (young investor)

Post by ThankYouJack » Tue Mar 13, 2018 8:48 pm

I think the state tax break is a good reason to assuming you are completely set in other areas financially.

But one reason not to would be if you wanted to use the money instead for a downpayment on a home. Or life plans change. Or you simply don't want to have the strings attached

bogglehead125
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Joined: Thu Nov 23, 2017 9:40 pm

Re: Any reason not to open a 529? (young investor)

Post by bogglehead125 » Tue Mar 13, 2018 8:51 pm

Spirit Rider wrote:
Tue Mar 13, 2018 8:27 pm
Note: If the beneficiary of a change or rollover is a lower generation it will be subject to gift tax rules.
Can you clarify "gift tax rules"? Hypothetically, let's say I contribute $5k/yr to a 529 for 10 years before my first child is born and get 4% returns per year, so my child would become the beneficiary of a $60k 529. Would I pay any tax upfront, or do you just mean that I would be able to give the child $60k less over my lifetime exempt from the estate tax?

angelescrest
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Re: Any reason not to open a 529? (young investor)

Post by angelescrest » Tue Mar 13, 2018 8:56 pm

jumppilot wrote:
Tue Mar 13, 2018 7:17 pm
I started funding a 529 when I started dating my now-wife.
:shock:

bogglehead125
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Joined: Thu Nov 23, 2017 9:40 pm

Re: Any reason not to open a 529? (young investor)

Post by bogglehead125 » Tue Mar 13, 2018 8:59 pm

ThankYouJack wrote:
Tue Mar 13, 2018 8:48 pm
I think the state tax break is a good reason to assuming you are completely set in other areas financially.
Yea, in NYC I think I would get something like a $300 tax break for funding $5k, which isn't bad at all.

bogglehead125
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Joined: Thu Nov 23, 2017 9:40 pm

Re: Any reason not to open a 529? (young investor)

Post by bogglehead125 » Tue Mar 13, 2018 9:03 pm

Finridge wrote:
Tue Mar 13, 2018 8:21 pm
I wish I had done this!

But the first priority should be maxing out your Roth IRA's (and also probably your other retirement accounts). If you have funds left over after maxing those out, put them in your 529.
Thanks! I am sort of new to this so maybe I'm missing some obvious retirement accounts, but I will definitely be maxing my IRA and 401(k) first. My rough investment account priority order is IRA > 401(k) > 529 > taxable and I don't have anything else (maybe I should?).

Spirit Rider
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Re: Any reason not to open a 529? (young investor)

Post by Spirit Rider » Tue Mar 13, 2018 10:22 pm

bogglehead125 wrote:
Tue Mar 13, 2018 8:51 pm
Spirit Rider wrote:
Tue Mar 13, 2018 8:27 pm
Note: If the beneficiary of a change or rollover is a lower generation it will be subject to gift tax rules.
Can you clarify "gift tax rules"? Hypothetically, let's say I contribute $5k/yr to a 529 for 10 years before my first child is born and get 4% returns per year, so my child would become the beneficiary of a $60k 529. Would I pay any tax upfront, or do you just mean that I would be able to give the child $60k less over my lifetime exempt from the estate tax?
Each donor can gift to each donee up to the annual exclusion limit (2018 = $15K) each year. So a husband and wife could gift up to $30K this year to each child. There is a special five-year gift provision for 529 plans that would allow a husband and wife to gift $150K this year and a new five year gift every five years.

When you exceed the annual gift exclusion, only then are gift amounts applied against the gift/estate tax lifetime exclusion which was increased to $11.2M/person in the recent tax reform. For pretty much everyone except for the wealthiest, gift tax issues are just about proper structuring and reporting.

APB
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Re: Any reason not to open a 529? (young investor)

Post by APB » Tue Mar 13, 2018 11:07 pm

This post sent me down an hour and a half rabbit hole learning everything about 529s.

For me, seems like it's worth at least getting the NY state tax break for the $5K / year contribution.

Worst case, I have sufficient family options to change the beneficiary in the unlikely event that a change in plans results in no children.

Plus, if one doesn't have children, expected expenses are dramatically lower. Good to plan for the worst case financially! :)

FWIW, I'm already maxing 401K, Roth IRA, and have sufficient taxable investments and savings / year. Which is why I agree with this premise for myself. YMMV
My posts represent my own opinion and do not constitute financial advice. I am simply a hobbyist. :)

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BL
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Re: Any reason not to open a 529? (young investor)

Post by BL » Tue Mar 13, 2018 11:20 pm

If you are eligible, a Health Savings Account would also be worth filling each year. This requires a qualifying high deductible health insurance plan. Some consider an HSA even better than an IRA or 401k.

soccerrules
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Re: Any reason not to open a 529? (young investor)

Post by soccerrules » Wed Mar 14, 2018 8:03 am

As long as you have ALL tax advantaged space filled, contributing up to the tax deduction in your state would be reasonable.
Don't let your outflow exceed your income or your upkeep will be your downfall.

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Smorgasbord
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Re: Any reason not to open a 529? (young investor)

Post by Smorgasbord » Wed Mar 14, 2018 9:39 am

I started contributing to a 529 plan in the year I got married (2012) and with our second (and final) kid due in June I'm getting ready to switch over the accounts to list the little ones as the beneficiaries. Overall, there seems to be a bit of paperwork involved in the process (such as having to set up new 529 accounts for each kid rather than being able to just change the name of the beneficiary of the account), but overall the process seems relatively painless.

As others have pointed out, unless you are seriously front-loading the 529 plan, gift taxes are not much of a concern when 529 plans are set up for kids who haven't gotten out of diapers yet.

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