I made a big 529 investment Feb. 13. Stay the course or tax-loss harvest?

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merrickm
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Joined: Fri Aug 03, 2012 5:32 pm

I made a big 529 investment Feb. 13. Stay the course or tax-loss harvest?

Post by merrickm » Fri Mar 20, 2020 12:43 pm

I'll start by saying I'm incredibly blessed to be able to earn as much as I do, save as much as I am, and live in a place where I have such opportunities (Silicon Valley, California) without being broke. I'm grateful my employer allows me to work at home. I know many more people are suffering much more as a result of the health crisis and resulting economic impacts.

That being said, I do have a question about tax-loss harvesting from a 529.

I put $60k into two 529s for two of our (my and my wife's) kids (ages 6 and 4) on Feb. 13 using my529 (hindsight is 20/20!). For both kids I did a 50/50 split between Vanguard Total Stock Market Index and Vanguard Short-Term Investment-Grade. Right now I'm down about $10k from then. I'm generally a stay-the-course person. I'm not concerned at all about the impact this will have on them by the time they reach college age. I'm tempted to go in more, in fact, with some of my "dry powder." But I do wonder if tax-loss harvesting would be wise. From my understanding I'd have to withdraw the 529 down to zero to be able to do so, which for these 529s would be no problem. Let's say I did that. When would I be allowed to go back in? Would it be no sooner than 2021 because of gift tax laws? Which means I effectively wouldn't be able to contribute more to these two kids' accounts in 2021? Ignoring gift tax laws and contribution limits around that, are there other time limit requirements around tax-loss harvesting from a 529?

livesoft
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Re: I made a big 529 investment Feb. 13. Stay the course or tax-loss harvest?

Post by livesoft » Fri Mar 20, 2020 12:46 pm

You can sell for a loss, but I don't think you can deduct the loss on your federal tax return. I suppose you can on your state tax return.

There is no minimum holding period as far as I am aware.

With no special benefit to tax-loss harvesting these assets, I would let them ride and/or add more.

I get that the $60K was split behind the scenes as $15K each from you and your spouse for each child. 4 x $15K = $60K.
Last edited by livesoft on Fri Mar 20, 2020 12:50 pm, edited 1 time in total.
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Iorek
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Re: I made a big 529 investment Feb. 13. Stay the course or tax-loss harvest?

Post by Iorek » Fri Mar 20, 2020 12:48 pm

I think you would subject to a 10% penalty if you withdraw to realize the loss, wouldn’t you?

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White Coat Investor
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Re: I made a big 529 investment Feb. 13. Stay the course or tax-loss harvest?

Post by White Coat Investor » Fri Mar 20, 2020 12:50 pm

You don't tax loss harvest 529s.

Stay the course. If you're always buying like I am, then of course you'll be buying at any market top. The good news is you will also be buying at market bottom. In the long run, it works out fine.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

livesoft
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Re: I made a big 529 investment Feb. 13. Stay the course or tax-loss harvest?

Post by livesoft » Fri Mar 20, 2020 12:50 pm

Iorek wrote:
Fri Mar 20, 2020 12:48 pm
I think you would subject to a 10% penalty if you withdraw to realize the loss, wouldn’t you?
10% penalty is only on gains, so with no gains, no penalty.
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Topic Author
merrickm
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Re: I made a big 529 investment Feb. 13. Stay the course or tax-loss harvest?

Post by merrickm » Fri Mar 20, 2020 12:59 pm

Two key parts in this: https://www.irs.gov/pub/irs-pdf/p970.pdf

Are Distributions Taxable?
The part of a distribution representing the amount paid or contributed to a QTP doesn't have to be included in income. This is a return of the investment in the plan.

Losses on QTP Investments
For tax years beginning after 2017 and before 2026, if you have a loss on your investment in a QTP account, you can’t claim the loss on your income tax return. You have a loss only when all amounts from that account have been distributed and the total distributions are less than your unrecovered basis. Your basis is the total amount of contributions to that QTP account.
(emphasis added)

livesoft
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Re: I made a big 529 investment Feb. 13. Stay the course or tax-loss harvest?

Post by livesoft » Fri Mar 20, 2020 1:27 pm

I actually tax-loss harvested two 529 plans back after 2008-2009. At the time, the tax laws allowed the loss deducted if one itemized the loss as a miscellaneous itemized expense subject to the 2%-of-AGI floor. I know that tax laws have changed, so that isn't something one can do nowadays especially if one's income is rather high.

Here's the pertinent text from IRS Pub 529:
What's New
No miscellaneous itemized deductions allowed.
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Topic Author
merrickm
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Re: I made a big 529 investment Feb. 13. Stay the course or tax-loss harvest?

Post by merrickm » Sat Mar 21, 2020 3:00 pm

I keep rereading these and I think I can't harvest this loss.
For tax years beginning after 2017 and before 2026, if you have a loss on your investment in a QTP account, you can’t claim the loss on your income tax return. You have a loss only when all amounts from that account have been distributed and the total distributions are less than your unrecovered basis. Your basis is the total amount of contributions to that QTP account.
I think if they put that first sentence at the end instead of the beginning it would have been clearer:
You have a loss only when all amounts from that account have been distributed and the total distributions are less than your unrecovered basis. Your basis is the total amount of contributions to that QTP account. For tax years beginning after 2017 and before 2026, if you have a loss on your investment in a QTP account, you can’t claim the loss on your income tax return.
Thanks, everyone. I'll ride it out. Even if it doesn't turn out great for my kids, it should be helpful to my grandkids. :P

livesoft
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Re: I made a big 529 investment Feb. 13. Stay the course or tax-loss harvest?

Post by livesoft » Sat Mar 21, 2020 7:29 pm

Claiming a 529 loss on a tax return is just like those tax-prep software would say "Your purchase price is tax deductible." It's not for most people and never was. Sure you could certainly put it on your Schedule A, but it would get zeroed out because you didn't meet the 2% of AGI floor under the old tax laws anyways.

The year we claimed our 529 loss was still under the old tax laws and I was unemployed, so income was very low, thus 2%-of-AGI was a low floor. Even so, we had to donate a lot to charity in order make itemizing worthwhile in the first place.
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jqgatsby
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Re: I made a big 529 investment Feb. 13. Stay the course or tax-loss harvest?

Post by jqgatsby » Tue Mar 24, 2020 8:52 pm

Appending to thread since I am in a very similar situation as OP. I superfunded two Vanguard 529 accounts for my children (age 8 and 6) back in January 2020. I put $150K in each initially, and now they're down to around $110K each.

I'm assuming that over the course of the next ten years the funds will recover, so I'm not trying to exit the market. Rather, I'd like to understand what my tax loss harvesting options are, if any, as well as my superfunding options in the event I liquidate the account.

Looking at the language of form p970, it is a bit confusing and ambiguous to me:

"Losses on QTP Investments
For tax years beginning after 2017 and before 2026, if you have a loss on your investment in a QTP account, you can’t claim the loss on your income tax return. You have a loss only when all amounts from that account have been distributed and the total distributions are less than your unrecovered basis. Your basis is the total amount of contributions to that QTP account."

My proposed strategy is to withdraw all funds, close the accounts, and then immediately open new accounts and re-superfund the new accounts (to the tune of $150K each again so that they are where I wanted them to be initially). I'm trying to find answers to the following questions:

1) Would I have to pay the 10% penalty on the principal? (I believe the answer to this is no)

2) Would I be able to tax loss harvest on my federal return (because the liquidation of the account would be mean that "all amounts from that account have been distributed and the total distributions are less than your unrecovered basis"? (This one is weird to me because the language of the tax code seems to say I *could* tax loss harvest, but people seem to be saying you *can't* ever tax loss harvest on a 529. Maybe my interpretation of "distribution" is incorrect, i.e. it has to be a qualified distribution? it say "you can't claim the loss", but maybe this is referring to the case where you don't distribute the "all amounts" and rather are just doing some kind of internal investment reshuffling while keeping the account open)

3) If I can't tax loss harvest on my federal return, would I be able to tax loss harvest on my state return? (Someone earlier in the thread suggested that I could)

4) If I were to liquidate and close the accounts, would I be able to open new accounts and then superfund those accounts? Or would I have to wait five years to re-superfund?

Thank you so much in advance for your help! This site has been a life-changer for me and this is the first time I'm asking a question. :)

annu
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Joined: Mon Nov 04, 2019 7:55 pm

Re: I made a big 529 investment Feb. 13. Stay the course or tax-loss harvest?

Post by annu » Wed Mar 25, 2020 2:05 pm

jqgatsby wrote:
Tue Mar 24, 2020 8:52 pm
Appending to thread since I am in a very similar situation as OP. I superfunded two Vanguard 529 accounts for my children (age 8 and 6) back in January 2020. I put $150K in each initially, and now they're down to around $110K each.

I'm assuming that over the course of the next ten years the funds will recover, so I'm not trying to exit the market. Rather, I'd like to understand what my tax loss harvesting options are, if any, as well as my superfunding options in the event I liquidate the account.

Looking at the language of form p970, it is a bit confusing and ambiguous to me:

"Losses on QTP Investments
For tax years beginning after 2017 and before 2026, if you have a loss on your investment in a QTP account, you can’t claim the loss on your income tax return. You have a loss only when all amounts from that account have been distributed and the total distributions are less than your unrecovered basis. Your basis is the total amount of contributions to that QTP account."

My proposed strategy is to withdraw all funds, close the accounts, and then immediately open new accounts and re-superfund the new accounts (to the tune of $150K each again so that they are where I wanted them to be initially). I'm trying to find answers to the following questions:

1) Would I have to pay the 10% penalty on the principal? (I believe the answer to this is no)

2) Would I be able to tax loss harvest on my federal return (because the liquidation of the account would be mean that "all amounts from that account have been distributed and the total distributions are less than your unrecovered basis"? (This one is weird to me because the language of the tax code seems to say I *could* tax loss harvest, but people seem to be saying you *can't* ever tax loss harvest on a 529. Maybe my interpretation of "distribution" is incorrect, i.e. it has to be a qualified distribution? it say "you can't claim the loss", but maybe this is referring to the case where you don't distribute the "all amounts" and rather are just doing some kind of internal investment reshuffling while keeping the account open)

3) If I can't tax loss harvest on my federal return, would I be able to tax loss harvest on my state return? (Someone earlier in the thread suggested that I could)

4) If I were to liquidate and close the accounts, would I be able to open new accounts and then superfund those accounts? Or would I have to wait five years to re-superfund?

Thank you so much in advance for your help! This site has been a life-changer for me and this is the first time I'm asking a question. :)

I did start 529 for our kids, a lot less amount though, but intersted in the answer as well. But I still have considerable losses that if possible, will like to use them for taxes.

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