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529 Accounts for Nephews and Nieces

1,714 Views | 25 Replies | Last: 4 days ago by htxag09
Ogre09
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6:47a, 11/14/24
AG
Thinking about helping out sibling's kids (and wife's sibling's kids). Anyone done this? Anything to consider here? Better to set up the account with me as the owner or contribute to accounts owned by their parents? I live in Texas. One set of family is in Texas and the other is in Connecticut if that matters.


Reading online looks like if I own it I get tax benefits now, I retain full control forever, I can change the beneficiary if needed, and the account balance doesn't count against financial aid. But withdraws count as student income for financial aid.

Parent owning it means I have no say over the money once I give it, the account balance counts against them for financial aid, but the distributions don't count against them.

I guess that last part is the biggest question. Which option has a bigger impact on financial aid?
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03TXAG
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6:53a, 11/14/24
AG
In case it impacts your decision, I don't believe there are any 529 tax benefits for Texas residents.
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Ogre09
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7:01a, 11/14/24
AG
Tax free growth, but I guess that helps either way.
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AggieDruggist89
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In reply to Ogre09 • 8:44a, 11/14/24
AG
Ogre09 said:
Thinking about helping out sibling's kids (and wife's sibling's kids). Anyone done this? Anything to consider here? Better to set up the account with me as the owner or contribute to accounts owned by their parents? I live in Texas. One set of family is in Texas and the other is in Connecticut if that matters.


Reading online looks like if I own it I get tax benefits now, I retain full control forever, I can change the beneficiary if needed, and the account balance doesn't count against financial aid. But withdraws count as student income for financial aid.

Parent owning it means I have no say over the money once I give it, the account balance counts against them for financial aid, but the distributions don't count against them.

I guess that last part is the biggest question. Which option has a bigger impact on financial aid?
I don't think so unless there has been a new change.
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gigemhilo
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In reply to AggieDruggist89 • 9:18a, 11/14/24
AG
The only tax benefit in Texas is tax free gains and investment income.
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txaggie_08
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In reply to gigemhilo • 10:35a, 11/14/24
AG
Yeah, but that's not really tax benefits for OP, but for his siblings/nieces/nephews.
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txaggie_08
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10:38a, 11/14/24
AG
My thought, as a parent, is I would want all 529s under my name and managed by me so I can keep track of the funds and know what's needed come time for college.

My father in law opened up his own separate 529 for my daughter; which is really nice of him, but now I have no insight into what he's saving for her and how that affects what I'm saving in our 529. I guess we'll just have to continue discussions over the years to track our savings and determine when we've hit our target.

I would have much rather he contributed whatever he wanted to contribute directly into the 529 that I manage to be able to keep an eye on funds and how investments should change over the years.
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gigemhilo
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In reply to txaggie_08 • 11:07a, 11/14/24
AG
txaggie_08 said:
Yeah, but that's not really tax benefits for OP, but for his siblings/nieces/nephews.


Yes agree, I was just stating facts for the OP and it would be relevant if the OP kept ownership.
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12thMan9
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11:47a, 11/14/24
AG
Well, w/o know what age these kids are & how much you plan to contribute you'll get all kinds of suggestions.

Things to consider:

Historical returns on 529's are around 6%.
You're assuming they will go to a post secondary school.
Post secondary education will continue to change, maybe not for the good.
There are much better options than 529's if you really want to make a dent in helping offset the rising costs.

Good luck!
Ronnie '88
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Towns03
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In reply to Ogre09 • 1:16p, 11/14/24
AG
Ogre09 said:


Parent owning it means I have no say over the money once I give it...

constructive feedback: This comment is a big red flag to me. What's wrong with giving a gift and not worrying about control later?

If I'm the parent I would read between the lines and decline your offer.
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Diggity
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In reply to 12thMan9 • 1:22p, 11/14/24
AG
12thMan9 said:
Well, w/o know what age these kids are & how much you plan to contribute you'll get all kinds of suggestions.

Things to consider:

Historical returns on 529's are around 6%.
You're assuming they will go to a post secondary school.
Post secondary education will continue to change, maybe not for the good.
There are much better options than 529's if you really want to make a dent in helping offset the rising costs.

Good luck!
I would argue that historical returns are a fairly meaningless metric as you can invest in a variety of buckets, from bonds to growth stocks. That's up to the account owner.

would like to know about the much better options though. Always looking for alternatives.
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12thMan9
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In reply to Diggity • 1:41p, 11/14/24
AG
Diggity said:
12thMan9 said:
Well, w/o know what age these kids are & how much you plan to contribute you'll get all kinds of suggestions.

Things to consider:

Historical returns on 529's are around 6%.
You're assuming they will go to a post secondary school.
Post secondary education will continue to change, maybe not for the good.
There are much better options than 529's if you really want to make a dent in helping offset the rising costs.

Good luck!
I would argue that historical returns are a fairly meaningless metric as you can invest in a variety of buckets, from bonds to growth stocks. That's up to the account owner.

would like to know about the much better options though. Always looking for alternatives.


I don't know how much 529 plans have changed, but my options were only time based funds depending on the year each of my 4 would start college. But you can look up historical growth & that 6% is accurate.

Better options? MLP's, RE, dividend growing companies/funds. Stuff I wish I'd done earlier.
Ronnie '88
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harge57
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In reply to 12thMan9 • 2:09p, 11/14/24
AG
Mine are in Vandguard SP 500 fund.

The oldest of my 4 is still 10 years from college.
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Ogre09
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2:22p, 11/14/24
AG
Thanks for the feedbck. I needed another cup of coffee researching this morning on the tax benefits side. Only helps state income tax in some places, so doesn't matter for my question.

As far as "control" I was mostly just repeating considerations that I'd read. It's not too big of deal to me and not really a deciding factor. But maybe I don't want to give the funds to them if they go to Austin…

As far as returns, I currently have accounts for my own kids and have them fully in s&p 500 index with returns that I'm happy with.

The other kids are currently 2-10. Vanguard has a min of $3k to start an account. I'd be contributing maybe $50 per month after that.
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12thMan9
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In reply to harge57 • 2:47p, 11/14/24
AG
harge57 said:
Mine are in Vandguard SP 500 fund.

The oldest of my 4 is still 10 years from college.


Ouch, still recovering from '22 then?

I have nothing against something like Vanguard, Fidelity, insert big fund name here. BUT, and I learned this a long time ago & have partnered with a guy who believes the same, businesses that are paying me consistently & have sound fundamentals will always be a better payoff.
Ronnie '88
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harge57
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In reply to 12thMan9 • 4:19p, 11/14/24
AG
12thMan9 said:
harge57 said:
Mine are in Vandguard SP 500 fund.

The oldest of my 4 is still 10 years from college.


Ouch, still recovering from '22 then?

I have nothing against something like Vanguard, Fidelity, insert big fund name here. BUT, and I learned this a long time ago & have partnered with a guy who believes the same, businesses that are paying me consistently & have sound fundamentals will always be a better payoff.
I guess I am not following your point. The fund basically mirrors the SP500 which is currently up ~25% from 2022 highs before it dropped. So no not recovering from 2022 and have been contributing monthly along the way so everything I contributed in 2022 is up ~50%.

I have no problem with higher risk investments as my goal is to cash flow college anyway and roll the max possible from 529s into roth IRAs (currently cash flowing full time private school, so won't be that big of a change.)
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V8Aggie
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8:50a, 11/15/24
AG
Apologies if mentioned previously but didn't they change the law fairly recently that allows you to convert to a Roth IRA in the event the beneficiary doesn't go to college?
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txaggie_08
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In reply to V8Aggie • 8:59a, 11/15/24
AG
Up to $35k can be converted. I believe account has to be open at least 15 years, and beneficiary has to be named at least 5 years.
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V8Aggie
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In reply to txaggie_08 • 9:06a, 11/15/24
AG
txaggie_08 said:
Up to $35k can be converted. I believe account has to be open at least 15 years, and beneficiary has to be named at least 5 years.


Man that's just silly. (Limits, not you.)
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Saxsoon
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In reply to Towns03 • 12:27p, 11/15/24
AG
Towns03 said:
Ogre09 said:


Parent owning it means I have no say over the money once I give it...

constructive feedback: This comment is a big red flag to me. What's wrong with giving a gift and not worrying about control later?

If I'm the parent I would read between the lines and decline your offer.


I read that as having no control of the kids choose not to go to school
Fighting Texas Aggie Class of 2012
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htxag09
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In reply to Saxsoon • 12:56p, 11/15/24
AG
Saxsoon said:
Towns03 said:
Ogre09 said:


Parent owning it means I have no say over the money once I give it...

constructive feedback: This comment is a big red flag to me. What's wrong with giving a gift and not worrying about control later?

If I'm the parent I would read between the lines and decline your offer.


I read that as having no control of they kids choose not to go to school
Yeah, I'm curious about the "reading between the lines" comment....

I have two kids, have 529's for both of them. I have some family members that don't have kids and every year will contribute to their 529's. Just an ease thing for them.

If someone were to approach me about a 529 in their own name but intended for the kids, I'd have no issue with that. I'd just be extremely and genuinely thankful. It's a 529, by definition, strings are attached. Why should I get to keep it if the kids don't go to school? Why shouldn't that family member have the right to decide to still leave it for them (for their kids) or give it to someone else?
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OldArmyCT
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4:37p, 11/15/24
AG
Some of you guys are putting out lousy info and would benefit from talking to an FA. I was an FA for 28 years and told every client what to do AND told them to buy their 529's from a no load fund company because my company was too expensive for small dollars. Here are the basics:
-529's HAVE to be invested with a mutual fund company. So you can't buy individual stocks or MLP's.
-Most default suggestions by MF companies for 529's are Target Date Funds and those typically suck, period, so pick a company that has a good S&P Index fund fund and buy it. Whoever said 529's average 6% pulled that out of his rear end.
-If it's for a relative keep it in your name. If the relative doesn't go to college you can either change the beneficiary or pay the tax and keep what's leftover. If it's in the relatives father's name that father gets to decide what happens to the money.
-Vanguard, Fidelity, Schwab all have good plans, extremely low cost, as do many others (T Rowe Price). If you need an FA insist on American Funds, they have sales charges but their stock funds are low cost and perform well. Not as well as an S&P Index but not bad either.
One last thing for the guy who mentioned MLP's. You do know that interest over $1000 from an MLP invested in a tax-sheltered account is taxable, don't you? That means if your IRA has an MLP generating income, as they all do, you may be liable for income tax. I had a potential client once show me his IRA he had invested by himself, his largest holding was a muni income fund. I asked him why he put a muni in an IRA. "Because it was paying 6%." Corporates were paying over 8% then, he said "Yeah but munis are safer and tax free."
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cadetjay02
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4:47p, 11/15/24
AG
I have a high school senior and sophomore and I've been the custodian of their 529 the entire time. They have grown with the market because you can basically put them in whatever mutual fund you would like.

My understanding is that it is actually better to have the grandparents or uncle as the custodian because then the parents don't have to declare it on the FAFSA. This would possibly benefit the kid for any need based aid.

My youngest son may go the military route and I'll push some of it into a Roth and the rest just leave for a grandkid or maybe grad school for the older one.
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ac04
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6:44p, 11/15/24
very interested in alternatives that outperform tax free growth and tax free withdrawals. seriously all ears
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OldArmyCT
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In reply to ac04 • 4:45a, 11/16/24
AG
ac04 said:
very interested in alternatives that outperform tax free growth and tax free withdrawals. seriously all ears
The only thing that is tax free on both ends is an inheritance. Anything that grows in a taxable account can be invested in a tax advantaged account.
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htxag09
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In reply to OldArmyCT • 12:31p, 11/16/24
AG
HSA…very limited but still.
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