Should you always use a 529?

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jj45
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Re: Should you always use a 529?

Post by jj45 » Sat Dec 15, 2018 11:46 am

This thread got me curious about my benefit from using a 529 for my kid. The kid graduated from college last June. We started their 529 when they were 4, invested over the next 14 years, and withdrew over 4 years of college. The 529 eventually had enough to pay for their entire college expenses after accounting for the $4K AOC.

Our state 529 is through Vanguard and we invested in a “moderate age-based portfolio”. By the time the kid was in college the account was 2/3 principal and 1/3 earnings. I was first surprised by how low the return was, 50% over 14 years. I then realized that I had invested over the course of the 14 years rather than putting the money in all at once, and that the age-based portfolio moved out of stocks as the kid aged with an allocation that started at 87.5% stocks at age 4 and went down to no stocks at all by age 17. So I have no complaints about the 50% return.

With fed and state taxes our marginal tax rate is roughly 30%. We also received a state tax deduction that saved roughly 5% of the contributions. So the tax savings from using the 529 was an additional 20% of the amount invested bringing our return from 50% to 70%. Pretty big impact.

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Re: Should you always use a 529?

Post by LadyGeek » Sat Dec 15, 2018 1:53 pm

I removed an off-topic interchange regarding scholarship qualifications based on racial background. The discussion was getting derailed.

Please stay focused on the investing aspects.
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Terri-bh
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Re: Should you always use a 529?

Post by Terri-bh » Sat Dec 15, 2018 4:36 pm

LadyGeek wrote:
Sat Dec 15, 2018 1:53 pm
I removed an off-topic interchange regarding scholarship qualifications based on racial background. The discussion was getting derailed.

Please stay focused on the investing aspects.
I'm sorry to hear that it was removed. It is relevant to each individual whether or not and how much they should invest in a 529 based on how much they might also get in scholarships either merit or finaid. The racial part of it is significant to understand whether you as a family have more or fewer opportunities in this regard.

Terri-bh
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Re: Should you always use a 529?

Post by Terri-bh » Sun Dec 16, 2018 2:02 pm

Bacchus01 wrote:
Sat Dec 15, 2018 9:04 am
Actual experience.

The University of Wisconsin does not provide scholarships, but they do provide access to the Wisconsin Scholarship Hub. This database contains 1400+ scholarship opportunities. When screening first for merit vs need-based, and then based on gender and race, he is eligible for exactly 3. 3 scholarships out of 1400+.

Do you need some more information?
Bacchus01, can you tell me what site you used to search for scholarships?

This is relevant because how much and whether I "should... always use a 529" (topic of the thread) for my daughter (last of the kids) would depend greatly on how much I thought my daughter could get in scholarships. Plus this thread is under "personal finance", and I assume that it would be part of planning my personal finances.

Bacchus01
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Re: Should you always use a 529?

Post by Bacchus01 » Sun Dec 16, 2018 2:48 pm

https://financialaid.wisc.edu/introduci ... -hub-wish/

But you likely need a NetID (applied already to UW) to access it.

Terri-bh
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Re: Should you always use a 529?

Post by Terri-bh » Sun Dec 16, 2018 3:21 pm

Ahh! I see. I'll have to look for a list not linked to a school then.

Oddball
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Re: Should you always use a 529?

Post by Oddball » Tue Jan 29, 2019 2:11 pm

Good thread, instead of starting my own I was hoping to get feedback on my current situation and if we should open a 529. The main questions I have are 1) does the value of the 529 count against the student for financial aid (and is that a big deal?) 2) if the kid decides not to go to college is it just a 10% hit to pull the funds out? Transfer funds to another family member i.e. the kids cousins?

Our situation: Married with 1 child (4 months old) hope to have 1 more child in about 2 years
Current income =$90k and DW is back at school since daycare costs are so high. Once DW gets back into the workforce in about 2 years we will be at ~$200k annual income. We also have a couple of rental properties which help pay the bills a bit. We went from being DINKS to single income with a child.
State: IL
As we are not maxing out our 401k or ROTH IRA accounts due to going to 1 income, we will not contribute to a 529 until DW gets back to work in a couple of years. But, the grandparents would like to give for education so that would be the seed funds for the account. Both I and DW value college education and we would expect our children to attend college and will 100% steer them that direction. My wife's parents paid for her education and she wants to do the same for our child(ren).
So, any real reason not to open a 529 plan?

Cmnilz87
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Re: Should you always use a 529?

Post by Cmnilz87 » Tue Jan 29, 2019 4:33 pm

I heard of a bill going through the house right now where the 529 could be used to pay off student loans. So if it passes you could have the kids take out the loans, pay them off then use the AOTC 4K write off per kid a year.

I’m guessing after the first year though, most kids move off campus. I’ve heard instead of paying rent for your kid at some place close to campus, you could actually buy a house with the 529 if your child was to live in it. She gets a few more chicks to move in, they pay decent rent and voila. Maybe that’s crazy talk

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unclescrooge
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Re: Should you always use a 529?

Post by unclescrooge » Tue Jan 29, 2019 6:22 pm

Cmnilz87 wrote:
Tue Jan 29, 2019 4:33 pm
I heard of a bill going through the house right now where the 529 could be used to pay off student loans. So if it passes you could have the kids take out the loans, pay them off then use the AOTC 4K write off per kid a year.

I’m guessing after the first year though, most kids move off campus. I’ve heard instead of paying rent for your kid at some place close to campus, you could actually buy a house with the 529 if your child was to live in it. She gets a few more chicks to move in, they pay decent rent and voila. Maybe that’s crazy talk
Fingers crossed!

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teen persuasion
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Re: Should you always use a 529?

Post by teen persuasion » Tue Jan 29, 2019 6:36 pm

Oddball wrote:
Tue Jan 29, 2019 2:11 pm
Good thread, instead of starting my own I was hoping to get feedback on my current situation and if we should open a 529. The main questions I have are 1) does the value of the 529 count against the student for financial aid (and is that a big deal?) 2) if the kid decides not to go to college is it just a 10% hit to pull the funds out? Transfer funds to another family member i.e. the kids cousins?

Our situation: Married with 1 child (4 months old) hope to have 1 more child in about 2 years
Current income =$90k and DW is back at school since daycare costs are so high. Once DW gets back into the workforce in about 2 years we will be at ~$200k annual income. We also have a couple of rental properties which help pay the bills a bit. We went from being DINKS to single income with a child.
State: IL
As we are not maxing out our 401k or ROTH IRA accounts due to going to 1 income, we will not contribute to a 529 until DW gets back to work in a couple of years. But, the grandparents would like to give for education so that would be the seed funds for the account. Both I and DW value college education and we would expect our children to attend college and will 100% steer them that direction. My wife's parents paid for her education and she wants to do the same for our child(ren).
So, any real reason not to open a 529 plan?
The 529 account is included in Available Assets on the FAFSA, along with savings, checking, and taxable accounts. Retirement account balances are not reported.

Twelve percent of Available Assets (after a small asset protection amount, $13k this year for us) are included in the EFC calculation, added to Available Income. That total has a progressive rate applied to it; the top rate is 47%. So at the top rate, 5.64% (12% of 47%) of 529 funds are added to the EFC.

Thus it's better to save to retirement accounts to the max before 529 accounts or taxable accounts.

Income is the bigger component of the EFC, though, especially at higher incomes. If you can frontload your retirement accounts early on, you could pause on retirement savings during college years and cash flow college costs. Retirement contributions don't reduce Available Income, as current year retirement contributions are added back to income in the EFC calculation.

bryansmile
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Re: Should you always use a 529?

Post by bryansmile » Tue Jan 29, 2019 10:26 pm

Bacchus01 wrote:
Sat Dec 15, 2018 9:04 am
Grt2bOutdoors wrote:
Sat Dec 15, 2018 8:29 am


Proof that more than 90% of all scholarships out there specifically exclude based on gender and race?
Actual experience.

The University of Wisconsin does not provide scholarships, but they do provide access to the Wisconsin Scholarship Hub. This database contains 1400+ scholarship opportunities. When screening first for merit vs need-based, and then based on gender and race, he is eligible for exactly 3. 3 scholarships out of 1400+.

Do you need some more information?
Can confirm it's true. If you don't have a 'hook' (low-income, certain race, certain gender, disability, illegal immigrant, etc), you are ineligible for 99% of the scholarships. You best bet is the local scholarships that do not mention the above words. My son spent many hours and applied to hundreds and got 4, all local, merit based.

bryansmile
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Re: Should you always use a 529?

Post by bryansmile » Tue Jan 29, 2019 10:31 pm

Terri-bh wrote:
Sat Dec 15, 2018 4:36 pm
LadyGeek wrote:
Sat Dec 15, 2018 1:53 pm
I removed an off-topic interchange regarding scholarship qualifications based on racial background. The discussion was getting derailed.

Please stay focused on the investing aspects.
I'm sorry to hear that it was removed. It is relevant to each individual whether or not and how much they should invest in a 529 based on how much they might also get in scholarships either merit or finaid. The racial part of it is significant to understand whether you as a family have more or fewer opportunities in this regard.
+1.

HereToLearn
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Re: Should you always use a 529?

Post by HereToLearn » Wed Jan 30, 2019 12:53 am

Oddball wrote:
Tue Jan 29, 2019 2:11 pm
Good thread, instead of starting my own I was hoping to get feedback on my current situation and if we should open a 529. The main questions I have are 1) does the value of the 529 count against the student for financial aid (and is that a big deal?) 2) if the kid decides not to go to college is it just a 10% hit to pull the funds out? Transfer funds to another family member i.e. the kids cousins?

Our situation: Married with 1 child (4 months old) hope to have 1 more child in about 2 years
Current income =$90k and DW is back at school since daycare costs are so high. Once DW gets back into the workforce in about 2 years we will be at ~$200k annual income. We also have a couple of rental properties which help pay the bills a bit. We went from being DINKS to single income with a child.
State: IL
As we are not maxing out our 401k or ROTH IRA accounts due to going to 1 income, we will not contribute to a 529 until DW gets back to work in a couple of years. But, the grandparents would like to give for education so that would be the seed funds for the account. Both I and DW value college education and we would expect our children to attend college and will 100% steer them that direction. My wife's parents paid for her education and she wants to do the same for our child(ren).
So, any real reason not to open a 529 plan?
To clarify, the 10% hit is on the earnings portion of the non-education distribution. So, if the account consisted of 2/3 contributions and 1/3 earnings, you would pay a 10% penalty on 1/3 of the distribution that is not used for education purposes.

One way to limit some of the hit would be to open a second (or third) 529 account when your child is a bit older. This would keep the high earnings 529 money separate from the new contributions. You could then spend down the old money first, leaving the new money to be disbursed to yourself if not needed for college.

If the reason you do not need to use all of the 529 funds to pay for college is that your child was awarded a scholarship, you will still pay tax on the earnings portion of the money you disburse to yourself but you will not pay the 10% penalty.

pdavi21
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Re: Should you always use a 529?

Post by pdavi21 » Wed Jan 30, 2019 1:08 am

No. You should never use one unless you have a pretty good idea:
1. Your kid is going to an expensive college
2. You are going to pay for a lot of it
3. They aren't going to get massive scholarships (EDIT: I would like to add that I got massive scholarships that were merit and race based. Race is 100% relevent to discussion. I could never have received 100% room and board scholarships if not for race.)
4. 529 exempts you from state tax, or you are in a huge cap gains tax bracket and maxing everything else out
5. The plan has low expenses and has a reasonable fund that fits your portfolio.

Otherwise, I wouldn't. Too many losses
1. Higher ER
2. Slightly lower financial aid
3. Lower access to funds
4. 10% Federal penalty
5. Being willing to spend more on college
For the potential gains
1. 15-20 years of ROTH gains and state tax exemption.
2. Upfront state tax credits
3. Estate tax reduction
"We spend a great deal of time studying history, which, let's face it, is mostly the history of stupidity." -Stephen Hawking

WhiteMaxima
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Re: Should you always use a 529?

Post by WhiteMaxima » Thu Feb 13, 2020 6:28 pm

Yes, you should always save and use 529. The reason: a forced saving, not Roth, not HSA. the money is there whenever you kids need it.

chocolateolive
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Re: Should you always use a 529?

Post by chocolateolive » Sun Feb 16, 2020 12:58 am

Mister Whale wrote:
Fri Apr 13, 2018 10:33 am
taguscove wrote:
Fri Apr 13, 2018 8:51 am
Once the roth ira and 401k are maxed out, 529 is often the next major tax shelter for professional high income earners. It is a fantadtic tax break for the wealthy top 3-5% of income households. No annual contribution limit.

I have a few investment banking friends in their thirties who can use 529 to pay for NYC private schools now thanks to the GOP tax cuts. Theyre putting $500k in this year for their young children and all gains are tax free. One of my friends doesn't even have children yet, it is so good. Just put the 529 under your name and gift the amount to the child over time.

There are few guarantees in life, but investing heavily in children's education has large demonstrated financial returns.
I don't understand this post. How were they able to put $500k into their 529 accounts without having to pay gift tax? :confused
Is there a limit to the growth of a 529 fund or can the funds grow indefinitely?

I thought I remember reading somewhere that it varies by state, but what happens if a 529 reaches its growth limit (ie. $500,000)? Does it automatically get cashed out and the cash just sits there until you use it or take it out?

mottooscillator
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Re: Should you always use a 529?

Post by mottooscillator » Sun Feb 16, 2020 1:06 am

chocolateolive wrote:
Sun Feb 16, 2020 12:58 am
<snip>

I thought I remember reading somewhere that it varies by state, but what happens if a 529 reaches its growth limit (ie. $500,000)? Does it automatically get cashed out and the cash just sits there until you use it or take it out?
Sits.

The limits are typically per state per beneficiary and control contributions only.

Source: https://www.savingforcollege.com/compar ... _questions

Example:


The Vanguard 529 College Savings Plan
Nevada

"Accepts contributions until all account balances in Nevada's 529 plans for the same beneficiary reach $500,000."

JBTX
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Re: Should you always use a 529?

Post by JBTX » Sun Feb 16, 2020 1:25 am

To me, assuming all retirement account opportunities have been maxed out, funding a 529 to approximately half of the amount needed for a 4 year state college is a reasonable compromise between taking advantage of 529 benefits and risks of overfunding if both do not go to college.

GAAP
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Re: Should you always use a 529?

Post by GAAP » Sun Feb 16, 2020 1:36 pm

willthrill81 wrote:
Fri Apr 13, 2018 11:08 am
But even beyond that, I don't like being locked into having to use 529 money for educational expenses. We only have one child, and if she decides to not go to college (even though I'm a professor, I will most certainly not push her into it for a variety of reasons), we would be significantly worse off with a 529 compared to other tax-advantaged accounts.
+1

Lock-in is why I never did it either. You really don't know now what will happen -- one of mine went to college on the GI bill, for example. Flexibility -- especially over a long time period -- is very important. If I were starting over today, I would consider I-bonds, but not a 529.
“Adapt what is useful, reject what is useless, and add what is specifically your own.” ― Bruce Lee

cshell2
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Re: Should you always use a 529?

Post by cshell2 » Sun Feb 16, 2020 1:55 pm

Mister Whale wrote:
Fri Apr 13, 2018 10:33 am
taguscove wrote:
Fri Apr 13, 2018 8:51 am
Once the roth ira and 401k are maxed out, 529 is often the next major tax shelter for professional high income earners. It is a fantadtic tax break for the wealthy top 3-5% of income households. No annual contribution limit.

I have a few investment banking friends in their thirties who can use 529 to pay for NYC private schools now thanks to the GOP tax cuts. Theyre putting $500k in this year for their young children and all gains are tax free. One of my friends doesn't even have children yet, it is so good. Just put the 529 under your name and gift the amount to the child over time.

There are few guarantees in life, but investing heavily in children's education has large demonstrated financial returns.
I don't understand this post. How were they able to put $500k into their 529 accounts without having to pay gift tax? :confused
You really don't pay gift tax unless the gift is over 11 million or something like that...and then you don't actually pay it until you die. You have to fill out a form and include any gift over 15K annually towards that lifetime exclusion, but gifting 500K doesn't trigger having to pay taxes.

EddyB
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Re: Should you always use a 529?

Post by EddyB » Sun Feb 16, 2020 1:59 pm

GAAP wrote:
Sun Feb 16, 2020 1:36 pm
willthrill81 wrote:
Fri Apr 13, 2018 11:08 am
But even beyond that, I don't like being locked into having to use 529 money for educational expenses. We only have one child, and if she decides to not go to college (even though I'm a professor, I will most certainly not push her into it for a variety of reasons), we would be significantly worse off with a 529 compared to other tax-advantaged accounts.
+1

Lock-in is why I never did it either. You really don't know now what will happen -- one of mine went to college on the GI bill, for example. Flexibility -- especially over a long time period -- is very important. If I were starting over today, I would consider I-bonds, but not a 529.
Personally, and no doubt for at least some others, this feels like saying “why save for retirement at all, when I’ve got no guarantee I’ll live that long.” Of course, it helps that my tax rate on qualified dividends is approximately 33%, and I think there’s a decent chance my ordinary income tax rate will be 22% or lower during the years I am most likely to withdraw from our 529 accounts.

GAAP
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Re: Should you always use a 529?

Post by GAAP » Sun Feb 16, 2020 2:43 pm

EddyB wrote:
Sun Feb 16, 2020 1:59 pm
GAAP wrote:
Sun Feb 16, 2020 1:36 pm
willthrill81 wrote:
Fri Apr 13, 2018 11:08 am
But even beyond that, I don't like being locked into having to use 529 money for educational expenses. We only have one child, and if she decides to not go to college (even though I'm a professor, I will most certainly not push her into it for a variety of reasons), we would be significantly worse off with a 529 compared to other tax-advantaged accounts.
+1

Lock-in is why I never did it either. You really don't know now what will happen -- one of mine went to college on the GI bill, for example. Flexibility -- especially over a long time period -- is very important. If I were starting over today, I would consider I-bonds, but not a 529.
Personally, and no doubt for at least some others, this feels like saying “why save for retirement at all, when I’ve got no guarantee I’ll live that long.” Of course, it helps that my tax rate on qualified dividends is approximately 33%, and I think there’s a decent chance my ordinary income tax rate will be 22% or lower during the years I am most likely to withdraw from our 529 accounts.
I'm not sure why you see it that way, I-Bonds offer:
  • Tax-deferral for up to 30 years.
  • Free from state and local taxes.
  • Inflation protection.
  • Tax-free redemption for qualified educational expenses.
  • No additional tax penalties for non-educational expenses.
Not using a 529 plan is not the same thing as doing nothing for the future.
“Adapt what is useful, reject what is useless, and add what is specifically your own.” ― Bruce Lee

EddyB
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Re: Should you always use a 529?

Post by EddyB » Sun Feb 16, 2020 3:12 pm

GAAP wrote:
Sun Feb 16, 2020 2:43 pm
EddyB wrote:
Sun Feb 16, 2020 1:59 pm
GAAP wrote:
Sun Feb 16, 2020 1:36 pm
willthrill81 wrote:
Fri Apr 13, 2018 11:08 am
But even beyond that, I don't like being locked into having to use 529 money for educational expenses. We only have one child, and if she decides to not go to college (even though I'm a professor, I will most certainly not push her into it for a variety of reasons), we would be significantly worse off with a 529 compared to other tax-advantaged accounts.
+1

Lock-in is why I never did it either. You really don't know now what will happen -- one of mine went to college on the GI bill, for example. Flexibility -- especially over a long time period -- is very important. If I were starting over today, I would consider I-bonds, but not a 529.
Personally, and no doubt for at least some others, this feels like saying “why save for retirement at all, when I’ve got no guarantee I’ll live that long.” Of course, it helps that my tax rate on qualified dividends is approximately 33%, and I think there’s a decent chance my ordinary income tax rate will be 22% or lower during the years I am most likely to withdraw from our 529 accounts.
I'm not sure why you see it that way, I-Bonds offer:
  • Tax-deferral for up to 30 years.
  • Free from state and local taxes.
  • Inflation protection.
  • Tax-free redemption for qualified educational expenses.
  • No additional tax penalties for non-educational expenses.
Not using a 529 plan is not the same thing as doing nothing for the future.
I meant that it seems like planning centered on what seems to be an improbable outcome, likely to come at the expense of a better outcome in most cases, by people who don’t otherwise seem to be in a position where they are still securing their own minimum level of financial stability. I don’t think that everyone should use a 529, I just find it surprising that lock-in is often cited as the primary reason not to, by people who seem likely to incur college expenses and for whom the (unlikely) penalty scenario isn’t going to jeopardize their situation.

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willthrill81
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Re: Should you always use a 529?

Post by willthrill81 » Sun Feb 16, 2020 3:24 pm

EddyB wrote:
Sun Feb 16, 2020 3:12 pm
GAAP wrote:
Sun Feb 16, 2020 2:43 pm
EddyB wrote:
Sun Feb 16, 2020 1:59 pm
GAAP wrote:
Sun Feb 16, 2020 1:36 pm
willthrill81 wrote:
Fri Apr 13, 2018 11:08 am
But even beyond that, I don't like being locked into having to use 529 money for educational expenses. We only have one child, and if she decides to not go to college (even though I'm a professor, I will most certainly not push her into it for a variety of reasons), we would be significantly worse off with a 529 compared to other tax-advantaged accounts.
+1

Lock-in is why I never did it either. You really don't know now what will happen -- one of mine went to college on the GI bill, for example. Flexibility -- especially over a long time period -- is very important. If I were starting over today, I would consider I-bonds, but not a 529.
Personally, and no doubt for at least some others, this feels like saying “why save for retirement at all, when I’ve got no guarantee I’ll live that long.” Of course, it helps that my tax rate on qualified dividends is approximately 33%, and I think there’s a decent chance my ordinary income tax rate will be 22% or lower during the years I am most likely to withdraw from our 529 accounts.
I'm not sure why you see it that way, I-Bonds offer:
  • Tax-deferral for up to 30 years.
  • Free from state and local taxes.
  • Inflation protection.
  • Tax-free redemption for qualified educational expenses.
  • No additional tax penalties for non-educational expenses.
Not using a 529 plan is not the same thing as doing nothing for the future.
I meant that it seems like planning centered on what seems to be an improbable outcome, likely to come at the expense of a better outcome in most cases, by people who don’t otherwise seem to be in a position where they are still securing their own minimum level of financial stability. I don’t think that everyone should use a 529, I just find it surprising that lock-in is often cited as the primary reason not to, by people who seem likely to incur college expenses and for whom the (unlikely) penalty scenario isn’t going to jeopardize their situation.
I don't personally estimate the probability of our daughter attending college to be worth the benefit of a 529. We live in a no-tax state, so the only advantage would be tax-free growth and distributions, but we could achieve almost the same thing with a taxable account and stock index funds (which have extremely low tax drag) since we would be in the 0% LTCG tax rate when she's in college. Further, we can already save above 50% of our household income via retirement accounts with far greater tax benefits. Our 'worst case' scenario is having to reduce retirement contributions, assuming I'm not retired already, to cash flow her college expenses.

Those with multiple children in states that offer significant tax advantages to 529s can likely make better use of them than we can.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

MarkBarb
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Re: Should you always use a 529?

Post by MarkBarb » Sun Feb 16, 2020 4:24 pm

pdavi21 wrote:
Wed Jan 30, 2019 1:08 am
No. You should never use one unless you have a pretty good idea:
1. Your kid is going to an expensive college
2. You are going to pay for a lot of it
3. They aren't going to get massive scholarships (EDIT: I would like to add that I got massive scholarships that were merit and race based. Race is 100% relevent to discussion. I could never have received 100% room and board scholarships if not for race.)
4. 529 exempts you from state tax, or you are in a huge cap gains tax bracket and maxing everything else out
5. The plan has low expenses and has a reasonable fund that fits your portfolio.

Otherwise, I wouldn't. Too many losses
1. Higher ER
2. Slightly lower financial aid
3. Lower access to funds
4. 10% Federal penalty
5. Being willing to spend more on college
For the potential gains
1. 15-20 years of ROTH gains and state tax exemption.
2. Upfront state tax credits
3. Estate tax reduction

One thing that we did to mitigate the risks of tying up money in a 529 was to set aside only enough to cover about 60% of our expected contribution in them. We saved the rest in taxable accounts. That simplified the paperwork because we could use it for the easy to justify stuff (tuition, rent, meal plans) and not have to deal with receipts for textbooks, computers, and iffy expenses like study-abroad programs. It reduced the risk because, if one of the children didn't appear to be college bound, we could shift the money and use it for other children.

My thought process was that, when your child is 0 years old, you have 18-22 years for a dollar that you set aside to grow tax free and an extremely high likelihood that you'll be able to spend that dollar on an eligible expense. As you set aside more money and high school graduation gets closer, the tax benefit for an additional dollar saved is reduced that the likelihood that it will not be used increases. So the smart play is to save some money in a 529 each year when your children are young but then shift to taxable savings as they get older.

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willthrill81
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Re: Should you always use a 529?

Post by willthrill81 » Sun Feb 16, 2020 4:34 pm

WhiteMaxima wrote:
Thu Feb 13, 2020 6:28 pm
Yes, you should always save and use 529. The reason: a forced saving, not Roth, not HSA. the money is there whenever you kids need it.
Of course, that's built on the assumption that your kids will need it. That's certainly not always the case.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

EnjoyIt
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Re: Should you always use a 529?

Post by EnjoyIt » Sun Feb 16, 2020 4:43 pm

MarkBarb wrote:
Sun Feb 16, 2020 4:24 pm
pdavi21 wrote:
Wed Jan 30, 2019 1:08 am
No. You should never use one unless you have a pretty good idea:
1. Your kid is going to an expensive college
2. You are going to pay for a lot of it
3. They aren't going to get massive scholarships (EDIT: I would like to add that I got massive scholarships that were merit and race based. Race is 100% relevent to discussion. I could never have received 100% room and board scholarships if not for race.)
4. 529 exempts you from state tax, or you are in a huge cap gains tax bracket and maxing everything else out
5. The plan has low expenses and has a reasonable fund that fits your portfolio.

Otherwise, I wouldn't. Too many losses
1. Higher ER
2. Slightly lower financial aid
3. Lower access to funds
4. 10% Federal penalty
5. Being willing to spend more on college
For the potential gains
1. 15-20 years of ROTH gains and state tax exemption.
2. Upfront state tax credits
3. Estate tax reduction

One thing that we did to mitigate the risks of tying up money in a 529 was to set aside only enough to cover about 60% of our expected contribution in them. We saved the rest in taxable accounts. That simplified the paperwork because we could use it for the easy to justify stuff (tuition, rent, meal plans) and not have to deal with receipts for textbooks, computers, and iffy expenses like study-abroad programs. It reduced the risk because, if one of the children didn't appear to be college bound, we could shift the money and use it for other children.

My thought process was that, when your child is 0 years old, you have 18-22 years for a dollar that you set aside to grow tax free and an extremely high likelihood that you'll be able to spend that dollar on an eligible expense. As you set aside more money and high school graduation gets closer, the tax benefit for an additional dollar saved is reduced that the likelihood that it will not be used increases. So the smart play is to save some money in a 529 each year when your children are young but then shift to taxable savings as they get older.
We saved a sizable chunk of cash in a 529 by the time each kid was 1 year old. We figure it has 18-22 years to grow making it probably valuable even in a no tax state. We figure it will cover 50% to 100% of expenses depending on growth.

We also plan to do Roth contributions when they are of working age.

Lastly, we spend $x per child while living at home. Some of that money once they leave for college can be used to pay for college.

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Re: Should you always use a 529?

Post by SpaghettiMonster » Sun Feb 16, 2020 4:45 pm

Even if your kid doesn’t use it, your grandkids or nieces and nephews may.

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Re: Should you always use a 529?

Post by manatee2005 » Sun Feb 16, 2020 6:24 pm

WhiteMaxima wrote:
Thu Feb 13, 2020 6:28 pm
Yes, you should always save and use 529. The reason: a forced saving, not Roth, not HSA. the money is there whenever you kids need it.
Only Sith deal in absolutes.

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Re: Should you always use a 529?

Post by manatee2005 » Sun Feb 16, 2020 6:29 pm

EddyB wrote:
Sun Feb 16, 2020 1:59 pm
GAAP wrote:
Sun Feb 16, 2020 1:36 pm
willthrill81 wrote:
Fri Apr 13, 2018 11:08 am
But even beyond that, I don't like being locked into having to use 529 money for educational expenses. We only have one child, and if she decides to not go to college (even though I'm a professor, I will most certainly not push her into it for a variety of reasons), we would be significantly worse off with a 529 compared to other tax-advantaged accounts.
+1

Lock-in is why I never did it either. You really don't know now what will happen -- one of mine went to college on the GI bill, for example. Flexibility -- especially over a long time period -- is very important. If I were starting over today, I would consider I-bonds, but not a 529.
Personally, and no doubt for at least some others, this feels like saying “why save for retirement at all, when I’ve got no guarantee I’ll live that long.” Of course, it helps that my tax rate on qualified dividends is approximately 33%, and I think there’s a decent chance my ordinary income tax rate will be 22% or lower during the years I am most likely to withdraw from our 529 accounts.
No, retirement savings for you self and 529 are not the same thing at all and can’t be compared like what you tried to do.

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Re: Should you always use a 529?

Post by willthrill81 » Sun Feb 16, 2020 6:36 pm

manatee2005 wrote:
Sun Feb 16, 2020 6:24 pm
WhiteMaxima wrote:
Thu Feb 13, 2020 6:28 pm
Yes, you should always save and use 529. The reason: a forced saving, not Roth, not HSA. the money is there whenever you kids need it.
Only Sith deal in absolutes.
Isn't 'only' an absolute? :wink:

'All generalizations are false, including this one.'
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Should you always use a 529?

Post by EddyB » Sun Feb 16, 2020 7:51 pm

manatee2005 wrote:
Sun Feb 16, 2020 6:29 pm
EddyB wrote:
Sun Feb 16, 2020 1:59 pm
GAAP wrote:
Sun Feb 16, 2020 1:36 pm
willthrill81 wrote:
Fri Apr 13, 2018 11:08 am
But even beyond that, I don't like being locked into having to use 529 money for educational expenses. We only have one child, and if she decides to not go to college (even though I'm a professor, I will most certainly not push her into it for a variety of reasons), we would be significantly worse off with a 529 compared to other tax-advantaged accounts.
+1

Lock-in is why I never did it either. You really don't know now what will happen -- one of mine went to college on the GI bill, for example. Flexibility -- especially over a long time period -- is very important. If I were starting over today, I would consider I-bonds, but not a 529.
Personally, and no doubt for at least some others, this feels like saying “why save for retirement at all, when I’ve got no guarantee I’ll live that long.” Of course, it helps that my tax rate on qualified dividends is approximately 33%, and I think there’s a decent chance my ordinary income tax rate will be 22% or lower during the years I am most likely to withdraw from our 529 accounts.
No, retirement savings for you self and 529 are not the same thing at all and can’t be compared like what you tried to do.
I’m not saying there aren’t other fine reasons for skipping a 529, but “you really don’t know ... what will happen” (that’s what I responded to), as if that means one can’t consider likelihoods, seems like a bad way to plan.

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Re: Should you always use a 529?

Post by H. E. Pennypacker » Sun Feb 16, 2020 8:28 pm

Bacchus01 wrote:
Sat Dec 15, 2018 11:07 am
willthrill81 wrote:
Sat Dec 15, 2018 11:03 am
Bacchus01 wrote:
Sat Dec 15, 2018 8:18 am
willthrill81 wrote:
Fri Dec 14, 2018 7:23 pm
Terri-bh wrote:
Fri Dec 14, 2018 3:25 pm


Good point. I think we're unlikely to qualify for fin-aid at all though either way (Bay Area--high COL, higher than average salary). Merit Scholarships are his only hope in that regard.
From what I've heard, there are literally thousands of scholarships out there that don't involve need. I know of one young lady who didn't have a stellar academic record but applied for everything that she thought there was a remote chance she could get. IIRC, she got over $80k of scholarships, enough to easily fund her entire undergraduate degree. It took a lot of time, but that was time well spent.
While this is true, we are going though it right now with my oldest son, and being a white male excludes him from more than 90% of all of them out there.
I would suggest that you expand your search to include national scholarships (i.e. those that aren't specific to a particular university).
Those are national scholarships. While not all inclusive, they are national and not specific to UW at all.

We will expand. And I’m sure we’ll find some some he is eligible for. But again, outside of financial need, white males are excluded from the vast majority of scholarships. I’m actually fine with that. But it doesn’t change the facts.
I went to the webpage and clicked on the first four scholarships listed in alphabetical order, and none of them contain language restricting them from white men, so I am confident that being a white man does not disqualify you from all but three scholarships.

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Re: Should you always use a 529?

Post by cshell2 » Mon Feb 17, 2020 8:44 am

Bacchus01 wrote:
Sat Dec 15, 2018 11:07 am
willthrill81 wrote:
Sat Dec 15, 2018 11:03 am
Bacchus01 wrote:
Sat Dec 15, 2018 8:18 am
willthrill81 wrote:
Fri Dec 14, 2018 7:23 pm
Terri-bh wrote:
Fri Dec 14, 2018 3:25 pm


Good point. I think we're unlikely to qualify for fin-aid at all though either way (Bay Area--high COL, higher than average salary). Merit Scholarships are his only hope in that regard.
From what I've heard, there are literally thousands of scholarships out there that don't involve need. I know of one young lady who didn't have a stellar academic record but applied for everything that she thought there was a remote chance she could get. IIRC, she got over $80k of scholarships, enough to easily fund her entire undergraduate degree. It took a lot of time, but that was time well spent.
While this is true, we are going though it right now with my oldest son, and being a white male excludes him from more than 90% of all of them out there.
I would suggest that you expand your search to include national scholarships (i.e. those that aren't specific to a particular university).
Those are national scholarships. While not all inclusive, they are national and not specific to UW at all.

We will expand. And I’m sure we’ll find some some he is eligible for. But again, outside of financial need, white males are excluded from the vast majority of scholarships. I’m actually fine with that. But it doesn’t change the facts.
Well, nobody says you have to go to UW either... My white male son got lots of scholarships to NE, Iowa, Iowa State and Alabama.

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Re: Should you always use a 529?

Post by 1789 » Mon Feb 17, 2020 9:27 am

manatee2005 wrote:
Sun Feb 16, 2020 6:26 pm
SpaghettiMonster wrote:
Sun Feb 16, 2020 4:45 pm
Even if your kid doesn’t use it, your grandkids or nieces and nephews may.
I don’t agree with using 529 for nieces and nephews. It’s basically a transfer of wealth from you to your siblings, or worse, siblings of your spouse.
Agreed. If our kids don't use it i would pay 10% penalty and tax on “GAINS” and get money out and spend it somewhere. Why not?
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Re: Should you always use a 529?

Post by Grt2bOutdoors » Mon Feb 17, 2020 11:01 am

GAAP wrote:
Sun Feb 16, 2020 2:43 pm
EddyB wrote:
Sun Feb 16, 2020 1:59 pm
GAAP wrote:
Sun Feb 16, 2020 1:36 pm
willthrill81 wrote:
Fri Apr 13, 2018 11:08 am
But even beyond that, I don't like being locked into having to use 529 money for educational expenses. We only have one child, and if she decides to not go to college (even though I'm a professor, I will most certainly not push her into it for a variety of reasons), we would be significantly worse off with a 529 compared to other tax-advantaged accounts.
+1

Lock-in is why I never did it either. You really don't know now what will happen -- one of mine went to college on the GI bill, for example. Flexibility -- especially over a long time period -- is very important. If I were starting over today, I would consider I-bonds, but not a 529.
Personally, and no doubt for at least some others, this feels like saying “why save for retirement at all, when I’ve got no guarantee I’ll live that long.” Of course, it helps that my tax rate on qualified dividends is approximately 33%, and I think there’s a decent chance my ordinary income tax rate will be 22% or lower during the years I am most likely to withdraw from our 529 accounts.
I'm not sure why you see it that way, I-Bonds offer:
  • Tax-deferral for up to 30 years.
  • Free from state and local taxes.
  • Inflation protection.
  • Tax-free redemption for qualified educational expenses.
  • No additional tax penalties for non-educational expenses.
Not using a 529 plan is not the same thing as doing nothing for the future.
I bonds are a poor comparison to a 529 plan invested in a diversified portfolio containing equities. Apples and oranges, and even worse is the fact that the tax-free redemption for qualified educational expenses is subject to income limitations whereas a 529 plan has no such restriction. I bond returns have been piddling when compared to the most of the age based allocations in a 529 plan over the last 15 years.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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Re: Should you always use a 529?

Post by mmmodem » Mon Feb 17, 2020 11:04 am

pdavi21 wrote:
Wed Jan 30, 2019 1:08 am
No. You should never use one unless you have a pretty good idea:
1. Your kid is going to an expensive college
2. You are going to pay for a lot of it
3. They aren't going to get massive scholarships (EDIT: I would like to add that I got massive scholarships that were merit and race based. Race is 100% relevent to discussion. I could never have received 100% room and board scholarships if not for race.)
4. 529 exempts you from state tax, or you are in a huge cap gains tax bracket and maxing everything else out
5. The plan has low expenses and has a reasonable fund that fits your portfolio.

Otherwise, I wouldn't. Too many losses
1. Higher ER
2. Slightly lower financial aid
3. Lower access to funds
4. 10% Federal penalty
5. Being willing to spend more on college
For the potential gains
1. 15-20 years of ROTH gains and state tax exemption.
2. Upfront state tax credits
3. Estate tax reduction
Agree with all of the above. Also, something that very few Bogleheads mention because we all selflesslessly sacrifice for our children, is risk to our own retirement.

I cannot convey to you how devastating it is for a child to admonish their parents' spending habits because the child is subsidizing their parents' retirement. We grew up poor so my parents were unable to save for college or retirement. Their retirement shortfall is now on the children. Paying for their home and their expenses is one thing. Paying for their car and then seeing them lend it to my deadbeat uncle to drive to Vegas to gamble is another.

What I can say is maximizing tax advantaged retirement accounts before a 529 effectively maximizes college for our children and for our own retirement. If our children ever get burdened by our retirement, it won't be because we funded a 529. Speaking as a couple that both paid their own way through college and currently have to pay for our parents' retirement, we much prefer paying our own student loans.

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Re: Should you always use a 529?

Post by cshell2 » Mon Feb 17, 2020 11:19 am

Grt2bOutdoors wrote:
Mon Feb 17, 2020 11:03 am
manatee2005 wrote:
Sun Feb 16, 2020 6:26 pm
SpaghettiMonster wrote:
Sun Feb 16, 2020 4:45 pm
Even if your kid doesn’t use it, your grandkids or nieces and nephews may.
I don’t agree with using 529 for nieces and nephews. It’s basically a transfer of wealth from you to your siblings, or worse, siblings of your spouse.
I suppose you don't believe in gifting either right?
+1

I already have a couple kids in mind that I wouldn't mind helping out if there were funds left over from my own. I think it would be amazing to be able to do that honestly. Part of the reason I have not had to save a lot is grandparents are kicking in a bunch.

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Re: Should you always use a 529?

Post by GAAP » Mon Feb 17, 2020 11:42 am

SpaghettiMonster wrote:
Sun Feb 16, 2020 4:45 pm
Even if your kid doesn’t use it, your grandkids or nieces and nephews may.
That requires an even larger cascading series of assumptions to justify. For the first example, I have to assume that my child who doesn't go to college still raises a child that will. The second example assumes the existence of siblings, the existence of one or more children of those siblings, and that those children will go to college. Both examples also assume the need for those funds. I'm retired, and none of those things would have applied.
“Adapt what is useful, reject what is useless, and add what is specifically your own.” ― Bruce Lee

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Re: Should you always use a 529?

Post by EddyB » Mon Feb 17, 2020 11:58 am

GAAP wrote:
Mon Feb 17, 2020 11:42 am
SpaghettiMonster wrote:
Sun Feb 16, 2020 4:45 pm
Even if your kid doesn’t use it, your grandkids or nieces and nephews may.
That requires an even larger cascading series of assumptions to justify. For the first example, I have to assume that my child who doesn't go to college still raises a child that will. The second example assumes the existence of siblings, the existence of one or more children of those siblings, and that those children will go to college. Both examples also assume the need for those funds. I'm retired, and none of those things would have applied.
So it may make sense to consider individual circumstances and how likely they are to give rise to various potential outcomes?!

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Re: Should you always use a 529?

Post by GAAP » Mon Feb 17, 2020 11:58 am

Grt2bOutdoors wrote:
Mon Feb 17, 2020 11:01 am
I bonds are a poor comparison to a 529 plan invested in a diversified portfolio containing equities. Apples and oranges, and even worse is the fact that the tax-free redemption for qualified educational expenses is subject to income limitations whereas a 529 plan has no such restriction. I bond returns have been piddling when compared to the most of the age based allocations in a 529 plan over the last 15 years.
Inflation has been quite low over the last 15 years. Even the most aggressive of those age-based allocations have a significant allocation to bonds in their final glidepath. If the bad times of the 1970s return, I-bonds may very well be a better choice. Combine that glidepath with current interest rates, and you had better be saving a lot more than you think you needed. Stocks in the 1970s didn't do much better than bonds and paid a lot more interest than today. I-bonds at least would keep even. 18 years of consistent saving via I-bonds would certainly go a long way toward funding that education.

I-bonds can also serve as a secondary source of funds for emergencies (NOT as the primary emergency fund), with much lower tax consequences -- flexibility again.

Completing college after high school was in-doubt for both of my kids. It took the army experience for one of them to go (now finishing a masters program). It took a while working in restaurant jobs for the other (now starting a masters program). It could just as easily have gone the other way. I don't have grandchildren or nieces/nephews needing help. Finding other ways to handle the eventual costs for the one child not using the GI bill allowed me the flexibility to retire early without having to worry about tax penalties on a 529.
“Adapt what is useful, reject what is useless, and add what is specifically your own.” ― Bruce Lee

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Re: Should you always use a 529?

Post by GAAP » Mon Feb 17, 2020 12:01 pm

EddyB wrote:
Mon Feb 17, 2020 11:58 am
GAAP wrote:
Mon Feb 17, 2020 11:42 am
SpaghettiMonster wrote:
Sun Feb 16, 2020 4:45 pm
Even if your kid doesn’t use it, your grandkids or nieces and nephews may.
That requires an even larger cascading series of assumptions to justify. For the first example, I have to assume that my child who doesn't go to college still raises a child that will. The second example assumes the existence of siblings, the existence of one or more children of those siblings, and that those children will go to college. Both examples also assume the need for those funds. I'm retired, and none of those things would have applied.
So it may make sense to consider individual circumstances and how likely they are to give rise to various potential outcomes?!
Certainly. The question in the topic uses the word "always". My response -- and most responses in this thread -- clearly indicates that the absolutism expressed is not appropriate.
“Adapt what is useful, reject what is useless, and add what is specifically your own.” ― Bruce Lee

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Re: Should you always use a 529?

Post by SpaghettiMonster » Mon Feb 17, 2020 12:17 pm

GAAP wrote:
Mon Feb 17, 2020 11:42 am
SpaghettiMonster wrote:
Sun Feb 16, 2020 4:45 pm
Even if your kid doesn’t use it, your grandkids or nieces and nephews may.
That requires an even larger cascading series of assumptions to justify. For the first example, I have to assume that my child who doesn't go to college still raises a child that will. The second example assumes the existence of siblings, the existence of one or more children of those siblings, and that those children will go to college. Both examples also assume the need for those funds. I'm retired, and none of those things would have applied.
The thing is, out of all of those assumptions, only one has to occur for you to transfer the money and benefit your kin. Sure, your only child may not have children. But he/she may have nieces/nephews to whom they want to gift. Even if they don’t you may have them. It is not A must happen, then B, then C. It is A or B or C. The probability of any one situation happening is greater than them all happening.

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Re: Should you always use a 529?

Post by SpaghettiMonster » Mon Feb 17, 2020 12:17 pm

GAAP wrote:
Mon Feb 17, 2020 11:42 am
SpaghettiMonster wrote:
Sun Feb 16, 2020 4:45 pm
Even if your kid doesn’t use it, your grandkids or nieces and nephews may.
That requires an even larger cascading series of assumptions to justify. For the first example, I have to assume that my child who doesn't go to college still raises a child that will. The second example assumes the existence of siblings, the existence of one or more children of those siblings, and that those children will go to college. Both examples also assume the need for those funds. I'm retired, and none of those things would have applied.
The thing is, out of all of those assumptions, only one has to occur for you to transfer the money and benefit your kin. Sure, your only child may not have children. But he/she may have nieces/nephews to whom they want to gift. Even if they don’t you may have them. It is not A must happen, then B, then C. It is A or B or C. The probability of any one situation happening is greater than them all happening.

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Re: Should you always use a 529?

Post by WhiteMaxima » Mon Feb 17, 2020 12:23 pm

willthrill81 wrote:
Sun Feb 16, 2020 4:34 pm
WhiteMaxima wrote:
Thu Feb 13, 2020 6:28 pm
Yes, you should always save and use 529. The reason: a forced saving, not Roth, not HSA. the money is there whenever you kids need it.
Of course, that's built on the assumption that your kids will need it. That's certainly not always the case.
Even if your children don't need it. Still a good estate planning tool. You don't want to leave a whole garage of grandpa toys for estate sales or leave a lot of money for heirs to waste for vacation and luxury car. 529 is a scholarship fund pool for future generations.

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Re: Should you always use a 529?

Post by LadyGeek » Mon Feb 17, 2020 4:51 pm

I removed an off-topic post and several replies conjecturing on the benefits of gifting to family members or relatives. As a reminder, see: General Etiquette
At all times we must conduct ourselves in a respectful manner to other posters.
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Re: Should you always use a 529?

Post by manatee2005 » Mon Feb 17, 2020 9:58 pm

willthrill81 wrote:
Sun Feb 16, 2020 6:36 pm
manatee2005 wrote:
Sun Feb 16, 2020 6:24 pm
WhiteMaxima wrote:
Thu Feb 13, 2020 6:28 pm
Yes, you should always save and use 529. The reason: a forced saving, not Roth, not HSA. the money is there whenever you kids need it.
Only Sith deal in absolutes.
Isn't 'only' an absolute? :wink:

'All generalizations are false, including this one.'
I guess I am a Sith :twisted:

capran
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Re: Should you always use a 529?

Post by capran » Mon Feb 17, 2020 10:28 pm

It's been a long time since we used one for our son, but I seem to remember there were some limits on some kind of opportunity tax credit or something like that if you were paying with 529 plan proceeds. I think it affected the first 2 years, so we went ahead and paid out of pocket at a community college and the tax credit nearly paid for tuition. Then we used the 529 which paid for the last 2 years at a state university including living expenses and also paid for the first year of grad school at a private university. don't know if the IRS regulations have changed since then, but it might be worth doing some research. (sorry I don't have the specifics, but am traveling)

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Re: Should you always use a 529?

Post by HereToLearn » Mon Feb 17, 2020 10:41 pm

capran wrote:
Mon Feb 17, 2020 10:28 pm
It's been a long time since we used one for our son, but I seem to remember there were some limits on some kind of opportunity tax credit or something like that if you were paying with 529 plan proceeds. I think it affected the first 2 years, so we went ahead and paid out of pocket at a community college and the tax credit nearly paid for tuition. Then we used the 529 which paid for the last 2 years at a state university including living expenses and also paid for the first year of grad school at a private university. don't know if the IRS regulations have changed since then, but it might be worth doing some research. (sorry I don't have the specifics, but am traveling)
I think you may be talking about the AOTC, American Opportunity Tax Credit. $4000 in spending toward tuition and fees nets one a $2500 tax credit as long as income is below $160 MFJ and $80K single. (There's a phase out up to $180K & $90K.) This credit can be claimed for four years, so it pays to structure college funding with that in mind.

If a family ends up with an over-funded 529 plan, they can elect to pay the $4000 in college expenses out of own checking account, then reimburse themselves $4000 from the 529 account, and pay taxes on the earnings portion of the 529. This situation is exempt from the 10% penalty that would normally be assessed when using 529 funds for anything other than college expenses.

The above may have been discussed already on this 529 thread. There are so many 529 threads that they all start to blur together.

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Re: Should you always use a 529?

Post by 986racer » Tue Feb 18, 2020 9:59 am

It’s important to remember that a 529 isn’t some magical investment vehicle. Instead, it is a vehicle that allows for tax free growth and tax free distributions provided that you use the investment for educational purposes. The flip side is that if you make distributions for non-educational expenses then there are two severe penalties that can potentially negate all of the 529 advantages. Those penalties are that gains are taxed at marginal rates rather than long-term capital gains rate and also an additional 10% penalty on the gains.

So, in an ideal world, you would save exactly the right amount for college and not a penny more. Given that you don’t know which college the beneficiary will attend and therefore the cost of that college, what financial aid will be received, and the growth of the 529 accounts, obviously it is near impossible to save the exact right amount. GIven the penalties, it is far better from a tax perspective to undersave than oversave. However, most want take full advantage of the tax savings opportunities available...

The vehicle that adds a lot of flexibility is the AOTC (American Opportunity Tax Credit). Even if your income is too high for you to claim the AOTC, your child can take advantage of it. For your child to take advantage, he/she needs unearned income. To do that, you can gift stock that has doubled to the child, let them sell it, and then use the AOTC to cover the capital gains. If you are in a very high tax bracket, you can gift 30K of doubled stock (so, 15K in capital gains) and that will almost exactly offset the AOTC. (Remember that the child will be taxed at kiddie tax rates)

The advantage of using the AOTC is that the money stays in your taxable account up until the year that you decide to gift it to the child. As such, you can use it for any purpose that you like if you find yourself with too much 529 money.

Putting this all together... my general rule follows that of Klangfool: make sure to contribute to all tax deferred opportunities first. E.g., 401k, Roth IRA (or backdoor Roth IRA or traditional IRA), mega Backdoor Roth IRA, solo 401K, etc.

After you have fully funded the tax deferred accounts and you have money that you are considering putting in a taxable account, then you start trying to find the balance between 529 and taxable accounts. To do this, I’d suggest creating a spreadsheet that shows growth in accounts and growth in college costs and adjust contributions to get to the levels that you want. I use a 4% college cost growth rate, an 8% investment growth rate, and a 2% inflation rate in my spreadsheets.

Personally, I aimed for fully funding the flagship state college via 529 and using AOTC to cover the difference between public and private. Even with that, I’m still funding some of college from current income.

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