Investing large sum into 529 plans wise?

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hesitantinvestor
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Investing large sum into 529 plans wise?

Post by hesitantinvestor » Tue Aug 13, 2019 3:13 pm

My husband and I recently surrendered two whole life plans totaling $26,601.95. I plan on maxing out our IRA plans and I would like to invest the rest into 529 plans for three children. One will graduate in 2020 and two graduate in 2022. I am wondering if this is the best avenue given their looming graduation dates. Is it too late for this route? I just took over my own investing recently, so to say I'm feeling a bit overwhelmed is an understatement!!

psteinx
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Re: Investing large sum into 529 plans wise?

Post by psteinx » Tue Aug 13, 2019 4:25 pm

529s have various advantages and disadvantages, but probably the strongest general advantages are tax-free growth (if the funds are ultimately used for qualifed purposes), and often, state tax sweeteners (credits or deductions on your state taxes for contributing to a 529).

Your time horizon would probably allow relatively limited benefit from the tax free growth (not much time for things to grow), but maybe a bit.

As for state tax sweeteners, it depends on your state, and perhaps your marginal state tax bracket. If you provide these, you may get more specific answers on this front.

Downsides include lack of flexibility and the possibility of penalties if the funds aren't used for qualified purposes (i.e. generally, if you withdraw the money for reasons that don't fit the educational-focused guidelines). But, given that your kids are all in college already, your remaining college expenses are probably fairly foreseeable, and with reasonable planning and execution you would probably have only a low chance of penalties.

megabad
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Re: Investing large sum into 529 plans wise?

Post by megabad » Tue Aug 13, 2019 4:34 pm

psteinx wrote:
Tue Aug 13, 2019 4:25 pm
As for state tax sweeteners, it depends on your state, and perhaps your marginal state tax bracket. If you provide these, you may get more specific answers on this front.

Downsides include lack of flexibility and the possibility of penalties if the funds aren't used for qualified purposes (i.e. generally, if you withdraw the money for reasons that don't fit the educational-focused guidelines). But, given that your kids are all in college already, your remaining college expenses are probably fairly foreseeable, and with reasonable planning and execution you would probably have only a low chance of penalties.
+1 I would definitely run all the qualified college expenses through a 529 if there is a state tax deduction up to the state deduction limit each year while student is in college. Other than that, the benefits may be minimal with some notable exceptions for students pursuing long education careers (like doctors, professors, etc).

Northern Flicker
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Re: Investing large sum into 529 plans wise?

Post by Northern Flicker » Tue Aug 13, 2019 4:51 pm

I would only contribute amounts for which you will get a state tax credit. The holding period will be too short for the tax-deferred growth to amount to much. But the downsides are a significant record-keeping overhead to avoid taxes and penalties on withdrawals as well as the risk of not using all of the funds for qualified educational expenses and facing a penalty on withdrawals.

If you don’t get state tax credits, you can use a combination of a US stock index fund for the stock allocation and US savings bonds for the fixed-income allocation to hold the assets in a taxable account. Interest on the savings bonds is tax-free if used for qualified educational expenses, but there is no penalty if not used in that way (just the normal tax paid upon liquidation of the bond). And the stock index fund will be tax efficient.

With not long until they start college, your allocation should be bond heavy. If you look at age-based portfolios in one or more 529 plans, you can get what that 529 provider considers an appropriate ratio of stocks and bonds suitable for the ages of your children at the present time. With such a short horizon, you could direct it all to savings bonds.

One other wrinkle is if your children will apply for financial aid, you have to be careful how the assets are titled. Also this can be an advantage of 539’s. Be sure to investigate that carefully if financial aid requests will be in the cards. This also includes requesting a package from a private university or college.

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hesitantinvestor
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Re: Investing large sum into 529 plans wise?

Post by hesitantinvestor » Wed Aug 14, 2019 9:48 am

renue74 wrote:
Tue Aug 13, 2019 4:20 pm
Sometimes I hesitant myself to reply to 1st post threads like this. I've seen trolls lead these poor guys along for pages and pages and then ghost them.

My quick answer - you didn't share enough info for anybody to help.
I apologize, I am so new to this and I really don't know what information is needed to answer this question. What information would help you help me?!

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hesitantinvestor
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Re: Investing large sum into 529 plans wise?

Post by hesitantinvestor » Wed Aug 14, 2019 9:59 am

megabad wrote:
Tue Aug 13, 2019 4:34 pm
psteinx wrote:
Tue Aug 13, 2019 4:25 pm
As for state tax sweeteners, it depends on your state, and perhaps your marginal state tax bracket. If you provide these, you may get more specific answers on this front.

Downsides include lack of flexibility and the possibility of penalties if the funds aren't used for qualified purposes (i.e. generally, if you withdraw the money for reasons that don't fit the educational-focused guidelines). But, given that your kids are all in college already, your remaining college expenses are probably fairly foreseeable, and with reasonable planning and execution you would probably have only a low chance of penalties.
+1 I would definitely run all the qualified college expenses through a 529 if there is a state tax deduction up to the state deduction limit each year while student is in college. Other than that, the benefits may be minimal with some notable exceptions for students pursuing long education careers (like doctors, professors, etc).
I am in Virginia and they allow up to $4,000 per account per year.

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hesitantinvestor
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Re: Investing large sum into 529 plans wise?

Post by hesitantinvestor » Wed Aug 14, 2019 10:05 am

Northern Flicker wrote:
Tue Aug 13, 2019 4:51 pm
I would only contribute amounts for which you will get a state tax credit. The holding period will be too short for the tax-deferred growth to amount to much. But the downsides are a significant record-keeping overhead to avoid taxes and penalties on withdrawals as well as the risk of not using all of the funds for qualified educational expenses and facing a penalty on withdrawals.

If you don’t get state tax credits, you can use a combination of a US stock index fund for the stock allocation and US savings bonds for the fixed-income allocation to hold the assets in a taxable account. Interest on the savings bonds is tax-free if used for qualified educational expenses, but there is no penalty if not used in that way (just the normal tax paid upon liquidation of the bond). And the stock index fund will be tax efficient.

With not long until they start college, your allocation should be bond heavy. If you look at age-based portfolios in one or more 529 plans, you can get what that 529 provider considers an appropriate ratio of stocks and bonds suitable for the ages of your children at the present time. With such a short horizon, you could direct it all to savings bonds.

One other wrinkle is if your children will apply for financial aid, you have to be careful how the assets are titled. Also this can be an advantage of 539’s. Be sure to investigate that carefully if financial aid requests will be in the cards. This also includes requesting a package from a private university or college.
I can contribute up to $4,000 per beneficiary. Thanks for pointing that out, had not thought about that. When you mention using a combination of US Stock Index Funds and US Savings Bonds, are you suggesting setting this up myself (I recently created a Vanguard account) or using these strategies within a 529 fund? My oldest daughter has already graduated, and she didn't use all of her 529 funds because she received money through FASFA and scholarships. That is one of the reasons I am hesitant to sink such large amounts into 529 funds. What if they get financial aid, what if they get a scholarship, what if they decide not to go??!!

mattshwink
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Re: Investing large sum into 529 plans wise?

Post by mattshwink » Wed Aug 14, 2019 10:08 am

hesitantinvestor wrote:
Wed Aug 14, 2019 10:05 am
I can contribute up to $4,000 per beneficiary. Thanks for pointing that out, had not thought about that. When you mention using a combination of US Stock Index Funds and US Savings Bonds, are you suggesting setting this up myself (I recently created a Vanguard account) or using these strategies within a 529 fund? My oldest daughter has already graduated, and she didn't use all of her 529 funds because she received money through FASFA and scholarships. That is one of the reasons I am hesitant to sink such large amounts into 529 funds. What if they get financial aid, what if they get a scholarship, what if they decide not to go??!!

So the next question is since you appear to already have two children in college, so what funds are using right now to pay for college? Funding the VA529 will give you a state tax break, its not huge but you can contribute, then withdraw and reap the benefit. While you can contribute $4,000 per account in the VA529 Invest program each investment is an account, so you can contribute more than $4,000 per child (this is something that a lot of people who use the VA529 do not know).

What happened to the older daughter's unused 529 funds?

Have you fully funded your IRAs for the year ($6,000 per year if under 50, $7,000 if over)?

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RickBoglehead
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Re: Investing large sum into 529 plans wise?

Post by RickBoglehead » Wed Aug 14, 2019 10:09 am

hesitantinvestor wrote:
Wed Aug 14, 2019 10:05 am
Northern Flicker wrote:
Tue Aug 13, 2019 4:51 pm
I would only contribute amounts for which you will get a state tax credit. The holding period will be too short for the tax-deferred growth to amount to much. But the downsides are a significant record-keeping overhead to avoid taxes and penalties on withdrawals as well as the risk of not using all of the funds for qualified educational expenses and facing a penalty on withdrawals.

If you don’t get state tax credits, you can use a combination of a US stock index fund for the stock allocation and US savings bonds for the fixed-income allocation to hold the assets in a taxable account. Interest on the savings bonds is tax-free if used for qualified educational expenses, but there is no penalty if not used in that way (just the normal tax paid upon liquidation of the bond). And the stock index fund will be tax efficient.

With not long until they start college, your allocation should be bond heavy. If you look at age-based portfolios in one or more 529 plans, you can get what that 529 provider considers an appropriate ratio of stocks and bonds suitable for the ages of your children at the present time. With such a short horizon, you could direct it all to savings bonds.

One other wrinkle is if your children will apply for financial aid, you have to be careful how the assets are titled. Also this can be an advantage of 539’s. Be sure to investigate that carefully if financial aid requests will be in the cards. This also includes requesting a package from a private university or college.
I can contribute up to $4,000 per beneficiary. Thanks for pointing that out, had not thought about that. When you mention using a combination of US Stock Index Funds and US Savings Bonds, are you suggesting setting this up myself (I recently created a Vanguard account) or using these strategies within a 529 fund? My oldest daughter has already graduated, and she didn't use all of her 529 funds because she received money through FASFA and scholarships. That is one of the reasons I am hesitant to sink such large amounts into 529 funds. What if they get financial aid, what if they get a scholarship, what if they decide not to go??!!
Your oldest daughter's 529 funds are transferable to other recipients.

As to "what if they get a scholarship" and similar questions - you can withdraw up to the amount of the scholarship and use it for anything - you pay normal income tax but no 10% penalty. And, while a scholarship may cover tuition, it often won't cover all room and board, books, etc.

Lastly, you can retain 529s for future grandchildren. We plan to do exactly that. Or for yourself.
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Topic Author
hesitantinvestor
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Re: Investing large sum into 529 plans wise?

Post by hesitantinvestor » Wed Aug 14, 2019 10:21 am

mattshwink wrote:
Wed Aug 14, 2019 10:08 am
hesitantinvestor wrote:
Wed Aug 14, 2019 10:05 am
I can contribute up to $4,000 per beneficiary. Thanks for pointing that out, had not thought about that. When you mention using a combination of US Stock Index Funds and US Savings Bonds, are you suggesting setting this up myself (I recently created a Vanguard account) or using these strategies within a 529 fund? My oldest daughter has already graduated, and she didn't use all of her 529 funds because she received money through FASFA and scholarships. That is one of the reasons I am hesitant to sink such large amounts into 529 funds. What if they get financial aid, what if they get a scholarship, what if they decide not to go??!!

So the next question is since you appear to already have two children in college, so what funds are using right now to pay for college? Funding the VA529 will give you a state tax break, its not huge but you can contribute, then withdraw and reap the benefit. While you can contribute $4,000 per account in the VA529 Invest program each investment is an account, so you can contribute more than $4,000 per child (this is something that a lot of people who use the VA529 do not know).

What happened to the older daughter's unused 529 funds?

Have you fully funded your IRAs for the year ($6,000 per year if under 50, $7,000 if over)?
No children in college right now. My oldest son is a senior and graduates in 2020. I have 2 twins that graduate in 2022. I rolled my daughter's unused funds to my oldest son. We have not fully funded our IRAs yet and were planning on doing so. That still leaves almost $22,000 to possibly invest into 3 529 funds.

mattshwink
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Re: Investing large sum into 529 plans wise?

Post by mattshwink » Wed Aug 14, 2019 10:35 am

hesitantinvestor wrote:
Wed Aug 14, 2019 10:21 am

No children in college right now. My oldest son is a senior and graduates in 2020. I have 2 twins that graduate in 2022. I rolled my daughter's unused funds to my oldest son. We have not fully funded our IRAs yet and were planning on doing so. That still leaves almost $22,000 to possibly invest into 3 529 funds.
So I would also hold back $12,000-$14,000 for next years IRAs (depending on your age), if you already do not have a plan to fund your IRAs next year.

That leaves you with $8,000-$10,000.

I would use that for your oldest son (this assumes you already do not have enough 529 to cover his expected future college expenses, if that is already covered I would split it up amongst the twins). You could contribute two ways:
1. Contribute all right now, you will get a $4,000 tax deduction for this year (2019TY), and then $4,000 (2020TY) to next year, and then possibly $2,000 for the following year (2021TY). This is because VA allows unlimited rollover of excess contributions
2. Contribute all this year. $4,000 into the Inflation Protected Security Portfolio. $4,000 into the FDIC Insured Portfolio. $2,000 into the Total Bond Portfolio. If you have more funds fully fund Total Bond and anything over $4,000 (up to $4,000) into the 2021 portfolio. This is what I would do and you would realize the benefit for this years taxes (due April 2020).

Topic Author
hesitantinvestor
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Re: Investing large sum into 529 plans wise?

Post by hesitantinvestor » Wed Aug 14, 2019 11:07 am

mattshwink wrote:
Wed Aug 14, 2019 10:35 am
hesitantinvestor wrote:
Wed Aug 14, 2019 10:21 am

No children in college right now. My oldest son is a senior and graduates in 2020. I have 2 twins that graduate in 2022. I rolled my daughter's unused funds to my oldest son. We have not fully funded our IRAs yet and were planning on doing so. That still leaves almost $22,000 to possibly invest into 3 529 funds.
So I would also hold back $12,000-$14,000 for next years IRAs (depending on your age), if you already do not have a plan to fund your IRAs next year.

That leaves you with $8,000-$10,000.

I would use that for your oldest son (this assumes you already do not have enough 529 to cover his expected future college expenses, if that is already covered I would split it up amongst the twins). You could contribute two ways:
1. Contribute all right now, you will get a $4,000 tax deduction for this year (2019TY), and then $4,000 (2020TY) to next year, and then possibly $2,000 for the following year (2021TY). This is because VA allows unlimited rollover of excess contributions
2. Contribute all this year. $4,000 into the Inflation Protected Security Portfolio. $4,000 into the FDIC Insured Portfolio. $2,000 into the Total Bond Portfolio. If you have more funds fully fund Total Bond and anything over $4,000 (up to $4,000) into the 2021 portfolio. This is what I would do and you would realize the benefit for this years taxes (due April 2020).
Wow! Thank you so much. This is very helpful!

Topic Author
hesitantinvestor
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Re: Investing large sum into 529 plans wise?

Post by hesitantinvestor » Wed Aug 14, 2019 12:45 pm

Northern Flicker wrote:
Tue Aug 13, 2019 4:51 pm
If you don’t get state tax credits, you can use a combination of a US stock index fund for the stock allocation and US savings bonds for the fixed-income allocation to hold the assets in a taxable account. Interest on the savings bonds is tax-free if used for qualified educational expenses, but there is no penalty if not used in that way (just the normal tax paid upon liquidation of the bond). And the stock index fund will be tax efficient.

With not long until they start college, your allocation should be bond heavy. If you look at age-based portfolios in one or more 529 plans, you can get what that 529 provider considers an appropriate ratio of stocks and bonds suitable for the ages of your children at the present time. With such a short horizon, you could direct it all to savings bonds.

Thank you--very helpful! :)

miamivice
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Re: Investing large sum into 529 plans wise?

Post by miamivice » Wed Aug 14, 2019 2:42 pm

hesitantinvestor wrote:
Tue Aug 13, 2019 3:13 pm
My husband and I recently surrendered two whole life plans totaling $26,601.95. I plan on maxing out our IRA plans and I would like to invest the rest into 529 plans for three children. One will graduate in 2020 and two graduate in 2022. I am wondering if this is the best avenue given their looming graduation dates. Is it too late for this route? I just took over my own investing recently, so to say I'm feeling a bit overwhelmed is an understatement!!
I am struggling with seeing a lot of benefit to the 529s. Since you don't have a lot of years until needing the money (essentially 1 year for one student and 2 years for the other students), you will invest in a stable value fund rather than the stock market. You won't have gains to speak of that the 529 will help you with.

Since you do receive a tax credit of up to $4,000 per year, I would invest $4,000 per year for every year that you have kids in college, assuming that your state doesn't require the money be in the 529 for any length of time.

miamivice
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Re: Investing large sum into 529 plans wise?

Post by miamivice » Wed Aug 14, 2019 2:49 pm

Northern Flicker wrote:
Tue Aug 13, 2019 4:51 pm
I would only contribute amounts for which you will get a state tax credit. The holding period will be too short for the tax-deferred growth to amount to much. But the downsides are a significant record-keeping overhead to avoid taxes and penalties on withdrawals as well as the risk of not using all of the funds for qualified educational expenses and facing a penalty on withdrawals.
No, this isn't quite right.

You only owe taxes / penalties on growth, not total withdrawals. So if the $22,000 turns into $22,100 and none of the kids go to college, she'll owe ordinary income tax on $100, not $22,100.

There isn't a lot of record keeping for 529s, especially for $22,000 or so split among 3 kids.
If you don’t get state tax credits, you can use a combination of a US stock index fund for the stock allocation and US savings bonds for the fixed-income allocation to hold the assets in a taxable account. Interest on the savings bonds is tax-free if used for qualified educational expenses, but there is no penalty if not used in that way (just the normal tax paid upon liquidation of the bond). And the stock index fund will be tax efficient.
SInce the first kid is going to school in 1 year and the second two kids are going to school in 2 years, I would not recommend investing in either a bond or stock portfolio. I would only recommend doing stable value funds to preserve capital.

SchruteB&B
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Re: Investing large sum into 529 plans wise?

Post by SchruteB&B » Wed Aug 14, 2019 3:16 pm

miamivice wrote:
Wed Aug 14, 2019 2:49 pm


SInce the first kid is going to school in 1 year and the second two kids are going to school in 2 years, I would not recommend investing in either a bond or stock portfolio. I would only recommend doing stable value funds to preserve capital.
I agree. Take the state deduction, then preserve the money. It looks like Virginia’s 529 has a stable value option and some FDIC insured accounts.

mattshwink
Posts: 359
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Re: Investing large sum into 529 plans wise?

Post by mattshwink » Wed Aug 14, 2019 3:21 pm

hesitantinvestor wrote:
Wed Aug 14, 2019 11:07 am
mattshwink wrote:
Wed Aug 14, 2019 10:35 am
hesitantinvestor wrote:
Wed Aug 14, 2019 10:21 am

No children in college right now. My oldest son is a senior and graduates in 2020. I have 2 twins that graduate in 2022. I rolled my daughter's unused funds to my oldest son. We have not fully funded our IRAs yet and were planning on doing so. That still leaves almost $22,000 to possibly invest into 3 529 funds.
So I would also hold back $12,000-$14,000 for next years IRAs (depending on your age), if you already do not have a plan to fund your IRAs next year.

That leaves you with $8,000-$10,000.

I would use that for your oldest son (this assumes you already do not have enough 529 to cover his expected future college expenses, if that is already covered I would split it up amongst the twins). You could contribute two ways:
1. Contribute all right now, you will get a $4,000 tax deduction for this year (2019TY), and then $4,000 (2020TY) to next year, and then possibly $2,000 for the following year (2021TY). This is because VA allows unlimited rollover of excess contributions
2. Contribute all this year. $4,000 into the Inflation Protected Security Portfolio. $4,000 into the FDIC Insured Portfolio. $2,000 into the Total Bond Portfolio. If you have more funds fully fund Total Bond and anything over $4,000 (up to $4,000) into the 2021 portfolio. This is what I would do and you would realize the benefit for this years taxes (due April 2020).
Wow! Thank you so much. This is very helpful!
Welcome. One "wrinkle" I forgot to mention is that if you are married you can actually do this twice - once per spouse per investment. Example:
Spouse 1: Contributes $4,000 in 2019 to Inflation Protected Security Portfolio
Spouse 2: Contributes $4,000 in 2019 to Inflation Protected Security Portfolio
Spouse 1: Contributes $4,000 in 2019 to FDIC Insured Portfolio
Spouse 2: Contributes $4,000 in 2019 to FDIC Insured Portfolio
....etc

In the VA529 Invest program, each of these is a separate account (each spouse is distinct and each investment for each spouse is distinct) so in the above scenario, you would be able to deduct $16,000 from your VA income to reduce your tax burden in the 2019TY (due April 2020). Doing it this way avoids having to deal with carryover. This is what my wife and I do (we contribute $8,000 total a year to my daughter, and $600 total to my niece and nephew, and we subtract $8,600 every year from our VA income).

As a completely non-relevant aside: God Bless you for raising twins. I am a twin (two boys) and we did not make it easy for my parents :)

Topic Author
hesitantinvestor
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Re: Investing large sum into 529 plans wise?

Post by hesitantinvestor » Wed Aug 14, 2019 4:42 pm

Welcome. One "wrinkle" I forgot to mention is that if you are married you can actually do this twice - once per spouse per investment. Example:
Spouse 1: Contributes $4,000 in 2019 to Inflation Protected Security Portfolio
Spouse 2: Contributes $4,000 in 2019 to Inflation Protected Security Portfolio
Spouse 1: Contributes $4,000 in 2019 to FDIC Insured Portfolio
Spouse 2: Contributes $4,000 in 2019 to FDIC Insured Portfolio
....etc

In the VA529 Invest program, each of these is a separate account (each spouse is distinct and each investment for each spouse is distinct) so in the above scenario, you would be able to deduct $16,000 from your VA income to reduce your tax burden in the 2019TY (due April 2020). Doing it this way avoids having to deal with carryover. This is what my wife and I do (we contribute $8,000 total a year to my daughter, and $600 total to my niece and nephew, and we subtract $8,600 every year from our VA income).

As a completely non-relevant aside: God Bless you for raising twins. I am a twin (two boys) and we did not make it easy for my parents :)
[/quote]

I wish I could download all of the investing knowledge from this website and users like you into my brain! I just recently decided to take over my own investments and it has been overwhelming. :confused Thank you for the clarification on this; I am married, so this helps.

My twin boys came along 2 years after my second child, also a boy, so I have 3 sons ages 15-17...it is not quiet at my house!! :shock:

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