Harvesting 529 gains

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orthodoc
Posts: 32
Joined: Wed Nov 05, 2008 10:36 pm

Harvesting 529 gains

Post by orthodoc » Thu Nov 08, 2018 6:23 pm

With the change in the tax law allowing use of a 529 for K-12, I have been contemplating withdrawing money out of my 529s for private school for our boys. We have been fortunate enough to have about half of the balances be gains from our initial investment. We don't actually plan on using the money for tuition. We would just add that back to our regular contributions to the 529s. This would effectively remove the gain and buy at a higher price.

My reasoning is if we were lucky enough to have scholarship money or unused funds that we wanted to withdraw (unlikely), it would have a higher basis. Therefore, less money subject to tax or penalty. I figure we may be able to harvest quite a bit of the gains we have and take a little of the overfunding risk out of the 529s.

I haven't seen this discussed and wondered if I was missing something. What are your thoughts?

PugetSoundguy
Posts: 203
Joined: Mon Jul 30, 2012 3:46 pm
Location: Seattle

Re: Harvesting 529 gains

Post by PugetSoundguy » Thu Nov 08, 2018 6:42 pm

It looks like distributions from 529 accounts with earnings (such as yours) are characterized as part earnings, part contribution per IRS rules. In other words, you don't get to characterize a partial withdrawal as 100% earnings, even if there would be enough earnings in the account to cover such a withdrawal. The character of the withdrawal is determined by the IRS formula as reported to you on a 1099. However, even with this characterization per IRS rules, it seems that you could effectively reduce the basis of your account by some amount through the method you describe. Does this seem right? I have never thought about this until your post.

rkhusky
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Joined: Thu Aug 18, 2011 8:09 pm

Re: Harvesting 529 gains

Post by rkhusky » Thu Nov 08, 2018 6:45 pm

If you can pay for the private school tuition with outside funds, I don't see a reason not to do it.

orthodoc
Posts: 32
Joined: Wed Nov 05, 2008 10:36 pm

Re: Harvesting 529 gains

Post by orthodoc » Thu Nov 08, 2018 6:45 pm

Yes, that is correct. It would be part gains and part contributions, but the increase the overall cost basis. I hadn't seen it discussed and thought I would see if anyone else was doing or considering this.

Soon2BXProgrammer
Posts: 488
Joined: Mon Nov 24, 2014 11:30 pm

Re: Harvesting 529 gains

Post by Soon2BXProgrammer » Fri Nov 09, 2018 8:22 am

i haven't done that myself, but yes, it is a reasonable strategy to keep lifting your basis level in your 529.

actually a second strategy would be to open a second 529 and make the contributions there, and only withdrawal from the first. gains/losses are on a per account basis, so this would allow you to keep withdrawing over multiple years out of the first account, and keep putting your new money in the second.

orthodoc
Posts: 32
Joined: Wed Nov 05, 2008 10:36 pm

Re: Harvesting 529 gains

Post by orthodoc » Fri Nov 09, 2018 8:54 am

Thanks, that may be an even better idea. I'm not sure If I can own two with the same beneficiary under the same plan but will check that out. I could have my wife be the owner of the new 529s. Thats why I love this site, always learning!

informal guide
Posts: 200
Joined: Mon Aug 29, 2016 10:26 am

Re: Harvesting 529 gains

Post by informal guide » Fri Nov 09, 2018 9:08 am

Two ideas to explore as you consider taking withdrawals for private school. 1) Does your state provide state income credits for contributions to 529s? If it does, doing qualified withdrawals and then subsequently making contributions for a state tax deduction is beneficial. 2) If you decide to open a 2nd 529 plan, your spouse can be the owner. That is entirely within regulations.

orthodoc
Posts: 32
Joined: Wed Nov 05, 2008 10:36 pm

Re: Harvesting 529 gains

Post by orthodoc » Fri Nov 09, 2018 9:13 am

Yes, that is an additional benefit. You can then use that reinvestment to get a deduction on state tax, if applicable.

ThisTimeItsDifferent
Posts: 220
Joined: Sat Jan 31, 2015 2:51 pm

Re: Harvesting 529 gains

Post by ThisTimeItsDifferent » Fri Nov 09, 2018 10:15 am

orthodoc wrote:
Fri Nov 09, 2018 8:54 am
Thanks, that may be an even better idea. I'm not sure If I can own two with the same beneficiary under the same plan but will check that out. I could have my wife be the owner of the new 529s. Thats why I love this site, always learning!
http://rpgplanner.com/smart-tax-plannin ... ngs-plans/ has some good articles on how to use 529 plans, including taking advantage of the non-aggregation to save on taxes and penalties both for qualified and non-qualified distributions

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