basic 529 questions for a friend's new born

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Coco nuts
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basic 529 questions for a friend's new born

Post by Coco nuts » Tue Sep 11, 2018 2:51 pm

Hello, helping my friend set up the right educational fund for their (very cute) newborn daughter.

They are Washington state residents.
Extended family in Oregon.

Since we are not really sure where the baby will grow up and go to college, and since WA has no state tax, what's the best flexible way to save for educational expenses? Also perhaps the baby will just not go to college, either an outdated institution by then or baby not interested ...

is a taxable account the way to go? Is this how most people handle their kids' educational funds in WA?

Should the taxable account be held in daughter's name or parent's name?

Thanks for your help in advance.

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Re: basic 529 questions for a friend's new born

Post by psteinx » Tue Sep 11, 2018 2:58 pm

I'm in Missouri, not WA or OR. We have a state tax, and it affects 529 decision making.

That said, 529s have appealing features that go beyond any state tax benefits.

Growth in 529s is federally tax-free, if used for qualifying purposes (basically, most costs of attending standard US colleges).

Not just tax-deferred, but tax free. This is a big bonus. ~18-22 years of compounding, then no federal tax when used (in compliance with the relevant rules).

Moreover, if there is some desire for folks other than the parents to contribute to the 529, the 529 structure itself likely offers some reassurance. It's not a perfect vehicle. The standard form of it - with a parent as account owner and a child as beneficiary, doesn't prevent the parent from withdrawing all the funds for, say, a Vegas gambling binge (though there would often be penalties involved). But I think that psychologically, for most parents, the segregation of 529 funds would make it more difficult to use the funds for frivolous purposes versus certain other kinds of accounts.

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Re: basic 529 questions for a friend's new born

Post by DaftInvestor » Tue Sep 11, 2018 3:31 pm

If your relatively sure you want to use the funds for education a 529 plan is the way to go. Your money can grow TAX-FREE for 20+ years.
The downside is if you don't use the money for education of someone you will pay a 10% earnings + income taxes on the earnings.
So you need to weigh the risk that you won't use if for college at which point you will pay a small amount of extra tax - with benefit if you do you use it for education you could save thousands in taxes.

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Re: basic 529 questions for a friend's new born

Post by Rupert » Tue Sep 11, 2018 3:55 pm

Direct your friend to this website: It doesn't matter where the baby will grow up and go to college, as most states permit you to invest in out-of-state 529 plans without tax penalty (Alabama is the lone exception, I think). Many states offer state tax deductions for 529 contributions though, which makes investing in the plan of the state in which you live advantageous from a tax perspective.

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Re: basic 529 questions for a friend's new born

Post by SNIPER338 » Tue Sep 11, 2018 10:40 pm

Im in the middle of this now.

I opened two 529s through new yorks plan. (i think). These teo are for my neices. Named them beneficiary, im the owner. You can print out a cupon and mail it in with a check so anyone in the family can help fund it. This accounts portfolios are managed my vanguard. Each birthday, christmas, special occasion, we put money into their accounts. It wont pay for college, but when they get there ita help somwhere... you can roll a 529 to a different plan one time a year. When these accts get above 3k ill move them to vanguard... just depends of they do with the portfolios offered.

My newborn on the other hand.. I opened a vanguard 529 with vanguard. Min is 3k to open an acct. Then I selected vanguard portfolios to invest in.

It dont effect most... but max is 75k can be put in, then you gotta wait 5 years before you can add more, but most arent opening an acct with 75k down.

Start early, build it up asap... thats my game plan... hopefully in 18 years it pays for my babys college...

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Re: basic 529 questions for a friend's new born

Post by workerbeeengineer » Tue Sep 11, 2018 11:17 pm

Agree with the others who have replied that 529 plans are a good thing. Useful info regarding 529 plans and Saving for College in general can be found on Morningstar. The "More" pull-down menu, Personal Finance. We live in California (no state tax deduction), and use Vanguard Nevada 529 plan.

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