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529 Plan

5,659 Views | 50 Replies | Last: 6 yr ago by libertyag
BB675
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AG
Have a one year old daughter and would like to start a college account for her. What are the benefits of a 529 plan over a brokerage account or some of the other account types out there?
Casey TableTennis
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AG
For most people, the benefits of a 529 are simply tax deferral/tax-free distribution if used for qualified expenses. Many benefit from having it in a vehicle that can be accessed for personal use, but it is enough of a hurdle to get that they don't do so unless it is an emergency.

Depending on the state you live in, there could be some other benefit of your own state's plan. There are also estate reduction benefits available to those with significant wealth.

If your daughter doesn't go to college, gets a full ride, or really just doesn't use some/all of the money. You can pass on to another kid, cousin, grandkid, or random stranger. You could even pull back into your estate at a modest tax burden or use for your own accredited higher education expenses. The IRS is very friendly with these plans.
libertyag
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AG
The new beneficiary can't be a random stranger though.
BB675
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AG
Could I pull the money out of a 529 for personal use if needed in an emergency? If so, what is the penalty?
HoustonAg2014
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AG
Would it be possible/legal to ever open a Roth 401k for your child? I am not familiar with the tax benefits of a 529 but I am interested in the possibility of this.
fourth deck
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cloeren13 said:

Could I pull the money out of a 529 for personal use if needed in an emergency? If so, what is the penalty?
I think you would incur the 10% penalty if it's not related to the beneficiary's non-need for education funds.

https://www.forbes.com/sites/brianboswell/2017/01/12/4-ways-to-avoid-the-529-penalty-box/#101778a64a32

GE
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Aggiesincebirth said:

Would it be possible/legal to ever open a Roth 401k for your child? I am not familiar with the tax benefits of a 529 but I am interested in the possibility of this.
Coverdell ESA functions exactly like a Roth IRA but there are both contribution limits, income limits, and limits on what distributions can be used for. Family member of mine is looking into setting one up for our one month old daughter at the moment.
GE
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Aggiesincebirth said:

Would it be possible/legal to ever open a Roth 401k for your child? I am not familiar with the tax benefits of a 529 but I am interested in the possibility of this.
Specifically speaking to the Roth IRA question, you can open one for a child but the contribution is limited to whatever the child himself earned in a given year.
GE
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cloeren13 said:

Have a one year old daughter and would like to start a college account for her. What are the benefits of a 529 plan over a brokerage account or some of the other account types out there?
1. Fund (or have someone fund who isn't income limited out) a Coverdell ESA to the max contribution of $2k annually. Invest in mutual funds every year from ages 1 through 18 and you should have over $100k tax-free to go towards college at age 18.
2. To the extent you believe necessary, fund a 529 plan. 529 distributions can be used to cover technology purchases too, so if your daughter needs the top end iMac to take to college at age 18, you can use a distribution to purchase it. IRS guidance says you can invest in a 529 plan across state lines, but Im not sure what the best one is. Just make sure that whichever one you invest in allows you to withdraw the funds to be used for any school, in or out of state.
Bird Poo
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So my mother-n-law is hoping to help with our kids' college. Each of my kids have a 529 with about 10K in them.

Her financial planner has told her to NOT have any money in my kids' name, as this will disqualify them for student financial aid such as low interest loans and/or grants.

WTF? If this is true, should I just transfer the funds from one kids' account to another when it comes time for financial aid application?
GE
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kayakag said:

So my mother-n-law is hoping to help with our kids' college. Each of my kids have a 529 with about 10K in them.

Her financial planner has told her to NOT have any money in my kids' name, as this will disqualify them for student financial aid such as low interest loans and/or grants.

WTF? If this is true, should I just transfer the funds from one kids' account to another when it comes time for financial aid application?
What types of grants or low interest loans were you expecting to be able to get? Aren't grants typically need-based according to family situation, and aren't student loans something that should be avoided generally?
HoustonAg2014
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AG
Would me giving hypothetical child $5,500 a year in allowances be considered money that they earn? Seems like a great way to get around the limits and set your kid up for a long term tax free account.
GE
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Aggiesincebirth said:

Would me giving hypothetical child $5,500 a year in allowances be considered money that they earn? Seems like a great way to get around the limits and set your kid up for a long term tax free account.
I do happen to be a CPA but that is outside my area of expertise...if i had to guess, there would be tax implications around the child's earnings sufficient to wipe out the benefits of that sort of structure.

If you focus on fully funding yours and your spouses tax advantaged retirement and savings accounts and the child's education accounts first, you can figure out a tax-sheltered way to transfer the wealth you earn to your child later.

Edit: I looked it up and withdraw my previous speculative objection. As long as the earned income is for legitimate work, it appears you could do this for chores done around the house. To maximise just make sure they are paid enough to max-contribute to the Roth IRA ($5,500) and little enough so they don't have to file a tax return ($6,300). I have not looked into what tax implications on your return would be for income of a dependent.
Seanzy2012
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GE said:

Aggiesincebirth said:

Would me giving hypothetical child $5,500 a year in allowances be considered money that they earn? Seems like a great way to get around the limits and set your kid up for a long term tax free account.
I do happen to be a CPA but that is outside my area of expertise...if i had to guess, there would be tax implications around the child's earnings sufficient to wipe out the benefits of that sort of structure.

If you focus on fully funding yours and your spouses tax advantaged retirement and savings accounts and the child's education accounts first, you can figure out a tax-sheltered way to transfer the wealth you earn to your child later.

Edit: I looked it up and withdraw my previous speculative objection. As long as the earned income is for legitimate work, it appears you could do this for chores done around the house. To maximise just make sure they are paid enough to max-contribute to the Roth IRA ($5,500) and little enough so they don't have to file a tax return ($6,300). I have not looked into what tax implications on your return would be for income of a dependent.
Seems like as long as they are dependent it wouldn't be considered income. Just money a parent is giving to a kid.

Wouldn't use a 529 for this purpose unless it's used for qualified education expenses. If you are just using it for tax deferral then you get knocked with a penalty for every withdrawal used not for the intended purposes.

libertyag
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He mentioned "giving" which would not be taxable but can't fund a Roth without earned income.
GE
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libertyag said:

He mentioned "giving" which would not be taxable but can't fund a Roth without earned income.
Good point. I would think he could structure it such that if the kid does do chores (as she should once she is able to) then he could pay her to do them and contribute the earned amount paid for the chores to an IRA in her name.
ktownag08
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Use the Utah 529 and have been happy with it. We keep it to $200/month and it's doing well.
GE
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ktownag08 said:

Use the Utah 529 and have been happy with it. We keep it to $200/month and it's doing well.
Out of curiosity why did you settle on Utah?
ktownag08
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Low fees and good investment options that I was familiar with (Vanguard products).
libertyag
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GE said:

libertyag said:

He mentioned "giving" which would not be taxable but can't fund a Roth without earned income.
Good point. I would think he could structure it such that if the kid does do chores (as she should once she is able to) then he could pay her to do them and contribute the earned amount paid for the chores to an IRA in her name.
I have done that with my three children, but then I have a business. Not sure how it would fly if the parents had no business. I could see that being challenged. Maybe someone else has come across parents doing this. The only time I have seen it with my own clients was when the parents had a business.
Husky Boy Jr.
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in order to have earned income I don't see how you get around payroll taxes
gougler08
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ktownag08 said:

Low fees and good investment options that I was familiar with (Vanguard products).
Same here...been pleased with the product so far and it's easy for me and my parents to do a monthly small payment in to the fund
libertyag
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Husky Boy Jr. said:

in order to have earned income I don't see how you get around payroll taxes
If the child is working for a parent (not a parent's corporation) and under 18, Social Security wouldn't apply and neither would federal withholding unless the amount of pay was much larger than is being talked about.
CapCity12thMan
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AG

Quote:

Out of curiosity why did you settle on Utah?
I set my Utah plan up in 2007 when our first was born. Reasons why I settled on Utah:

At the time...

1) The rates among Iowa, Utah and New York were the lowest. I chose Utah because their online experience was superior to Iowa and NY.

2) Clark Howard's Deans List consisted of the above 3, and it looks like more have been added since: http://clark.com/education/clarks-529-plan-guide/

Of course it is 10 years later so things might have changed but compare the fee structures along with investment options and make a decision...good luck


DAM
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I went with New York State for my 529.

dam
cheeky
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libertyag said:

The new beneficiary can't be a random stranger though.
Challenge
libertyag
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Stagecoach said:

libertyag said:

The new beneficiary can't be a random stranger though.
Challenge
Pardon?
Seanzy2012
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libertyag said:

Stagecoach said:

libertyag said:

The new beneficiary can't be a random stranger though.
Challenge
Pardon?
I'd have to check but I'm pretty sure you can add just about anybody as beneficiary to the 529.
Seanzy2012
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I get a real small state income tax deduction for my Ark Gift 529. The amount is miniscule though so it's not that beneficial compared to the crappy Vanguard mixed fund they have for an aggressive risk category. I'd rather just have a S&P index fund but they one they offer (the most aggressive option mind you) is some fund of fund that has 50% international and 50% domestic. Would prefer maybe 10-20% international and the rest domestic.

We rolled it over from Louisiana which was really a mistake because Louisiana had the index funds I wanted and they offered a small match (was like dollar for dollar up to $100 bucks).

Yeah so I'd shop the state plans. You don't have to live there (unless its a tax deduction or credit (Oregon I think has a state credit)). If you'd rather have a plan not hooked to the state then just start a private one with an advisor or online brokerage.

Great discussion, solid post guys!
soul_
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i use wealthfront's 529 plan, they do a pretty decent job in terms of managing the money. your first $10,000 is managed for free, then the fee for the additional funds would be 0.25% a year, which is about $25 a year for every $10,000.

They also have a referral where you get additional $5000 managed for free, you can use my referral link if you decide to go ahead with them. They invest the contributions in indexes, which is usually have the lowest fees, there are no trading costs. And I would do indexes as that is pretty much following the markets. where you don't have to worry if a single stock is going up or down, you make returns in par with the markets which is pretty stable in the long run, considering you need to use the funds for your daughter's college or education expenses.

I have been doing it for my 1 year old as well since Nov 2016... they give you a good understanding of what it is, and what universities you can go to based on your contribution, they have an automated deposit from your account as well, i do that on a weekly basis.

All the various links used:
wealthfront - https://www.wealthfront.com
529 plan - https://www.wealthfront.com/college
referral link - https://wlth.fr/28HtdmD
investorAg83
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Holy cow there's all kinds of ridiculousness going on here. Scrolled through quickly so I'll try and hit everything I saw:

No, you can NOT just change bene's on a 529 to a random person. They still need to be a family member although the term 'family' extends pretty far (nephews, cousins, etc count). You can't just change it to anyone you want like a neighbor or something.

Allowance does not count as earned income so a minor can stash ROTH money. Nice try, but no. As mentioned earlier, if there's a family business where they earn wages, that's different. But magically calling allowance 'earned wages' won't fly no matter how you try to dress it up.

To help the OP, 529 earnings are taxed and penalized if withdrawn. However, unlike the ROTH where you can withdraw contributions before gains, 529 withdrawals are weighted. Example...15k in a 529 and 10k was contributions (5k gain). You take out 3k or 20% of the acct...that 3k is 2k of contribution and 1k of gain meaning that 1k results in a 10% penalty and ordinary income taxes.

Money in a 529 is not the child's...it's still the custodian's. So it doesn't count against the child on the FAFSA. UTMA's and accounts that ARE in the name of the child will count as the child's asset and have a greater impact when/if they apply for aid. As a side note...529's where the custodian is ANYONE other than the parent has an adverse effect for FAFSA as well. Too long to explain but it's normally better to have grandma and grandpa contribute to the 529 that you open as the parent.

I can't remember what else I saw that was being debated. I get that robo-advisors have a place but stuff like this is why advisors exist.

Forgive typos...on my mobile and it's almost 1a.
GE
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www.fidelity.com/retirement-ira/roth-ira-kids

According to Fidelity, earned income for the child can come from a job or self-employment. The examples given are mowing lawns, babysitting, and shovelling snow. I'm not advocating lying to the IRS so don't just say they did these things and contribute for them, but if they do legitimate work of this nature there is no reason you can't contribute for them up to their qualifying earnings.
Shiner Bock
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As an Oklahoma resident, any contributions to oklahoma 529 plan are deductible to state income tax. win win.
investorAg83
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GE said:

www.fidelity.com/retirement-ira/roth-ira-kids

According to Fidelity, earned income for the child can come from a job or self-employment. The examples given are mowing lawns, babysitting, and shovelling snow. I'm not advocating lying to the IRS so don't just say they did these things and contribute for them, but if they do legitimate work of this nature there is no reason you can't contribute for them up to their qualifying earnings.


I can't tell if you're getting it or not. Are they filing and paying taxes? If they aren't reporting income, the IRS is going to wonder where the income is coming from that they're setting aside until retirement.

If junior has a business (Billy's lawn mowing, inc.). Keeps record of income. Reports it as 1099 income. Then there is no problem...it's 'qualified income'

Getting 20 bucks cash for mowing a yard with no taxes paid on it is not 'qualified income'. Performing chores around the house is not 'qualified income'. It has to be reported. If everything is legitimate, it's fine.
libertyag
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Seanzy2012 said:

libertyag said:

Stagecoach said:

libertyag said:

The new beneficiary can't be a random stranger though.
Challenge
Pardon?
I'd have to check but I'm pretty sure you can add just about anybody as beneficiary to the 529.
Where this was first mentioned, the poster indicated that if the child did not need or use the funds in the 529 it could be passed on to other family members or a random stranger. That cannot be done, only family members are qualified to be the new beneficiary.
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