Author Topic: 529 plan  (Read 2472 times)

aceyou

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529 plan
« on: August 07, 2017, 11:47:12 AM »
Hi everyone,. Looking for clarification about how tax shelteing works for the 529.  It appears to have aspects of a Roth and traditional IRA when I looked online but I haven't been able to.really understand it.  Any clarification would be great.

kenaces

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Re: 529 plan
« Reply #1 on: August 07, 2017, 11:53:28 AM »
Money growths tax-defered, withdraws for education expense is tax free.

Don't know about other states but in NY you get NYS tax deduction for contributions to NYS 529 plan

seattlecyclone

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Re: 529 plan
« Reply #2 on: August 07, 2017, 12:09:42 PM »
You can think of it basically like a Roth IRA for college. You put in post-tax money that grows tax-free if it is withdrawn for college.

Certain states give you a state tax deduction for these contributions, so it can be tax-free both ways from a state tax perspective.
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aceyou

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Re: 529 plan
« Reply #3 on: August 07, 2017, 01:41:34 PM »
Thanks everyone, but it looks like I'm getting conflicting statements here. 

Kenaces, you say that money grows tax-deferred, and withdrawals for education expenses is tax free.  Do you have a link to where you see that, because that would be awesome.  It would basically mean that a 529 is an HSA for education, where you don't pay taxes on either end, as long as it's earmarked for education.  If that's the case, then a 529 is better than either a Roth or my 403B, and I should be filling up at least enough to cover college for the kiddos. 

seattlecyclone, you say that it is like a Roth, so post-tax money is used, then you don't pay tax again on it.  Do you have a link to see that.  If true, that would not be as good, but what I really want is to just fully understand this. 

Or if anyone else really understands it, please chime in.  From what I've read it seems more complicated than just a normal roth or traditional 401k. 

Thanks again. 

seattlecyclone

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Re: 529 plan
« Reply #4 on: August 07, 2017, 02:26:49 PM »
seattlecyclone, you say that it is like a Roth, so post-tax money is used, then you don't pay tax again on it.  Do you have a link to see that.  If true, that would not be as good, but what I really want is to just fully understand this.

Here's a summary from the IRS site.

Important bits:

Quote
Contributions made to a QTP aren't deductible.

This means you're contributing post-tax money (at least for federal tax purposes; your state may allow you to deduct the contributions on your state taxes).

Quote
Earnings accumulate tax free while in the account.

Just like a Roth, there's no tax on any dividends or capital gains as long as they stay in the account.

Quote
Distributions aren't taxable when used to pay qualified higher education expenses.

Just like a Roth, a qualifying distribution isn't taxable. The qualifications in this case relate to education expenses rather than retirement age, but the basic principle is the same.
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aceyou

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Re: 529 plan
« Reply #5 on: August 07, 2017, 06:40:14 PM »
Thanks Seattle.  I got another person to chime in a couple hours ago from another site, and they echoed the same information you just provided. 

I think the confusing part for me was that it all varied at the state level depending on what rules each state chose for their plan, which made the whole thing look a bit confusing to me. 

Doesn't look like the 529 is any better for me than just pumping money into my 403, 457, and Roth IRA.  I'll leave the 529 for someone else. 


seattlecyclone

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Re: 529 plan
« Reply #6 on: August 07, 2017, 09:46:23 PM »
I would agree that someone who isn't currently maxing out all of their retirement accounts shouldn't be contributing to a 529 plan. The rules for IRAs have favorable provisions for withdrawals for education expenses, while the rules for 529s don't have favorable provisions for retirement expenses. But for someone who is already maxing out their retirement accounts, a 529 can be a good option for a parent who is definitely expecting to put some money toward their childrens' college education.
I made a blog! https://seattlecyclone.com/

The Roth IRA was named after William Roth, who represented Delaware in the US senate from 1971-2001. "Roth" is a name, not an acronym. There's no need to capitalize the final three letters.

Wallerstein

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Re: 529 plan
« Reply #7 on: August 09, 2017, 10:23:13 AM »
What about the notion it is better to work on ensuring your retirement is taken care of first before worrying about paying for (or offsetting) your kid's education costs?

After all, the kid will have much more time to deal with a student loan debt than a parent has time to set aside money for retirement. And I don't want my kid to have to worry about taking care of me in retirement.

Heroes821

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Re: 529 plan
« Reply #8 on: August 09, 2017, 12:59:44 PM »
So having recently had an infant, like 8 days ago, I did more research into 529 plans to prep.

I think the basics were covered but each State has it's own 529 plan.  You can use a state that is not your state of residence if you want.  The Vanguard 529 has a minimum initial investment of $3000 and uses the state of Nevada (no state income tax deduction for putting money in a 529.

My state, South Carolina, has a minimum initial investment of $25 and you can deduct 100% of contributions from your state income tax per year.

My previous home state that I was researching for possibly moving there later has a minimum initial investment of $25 and you can deduct $2000 per year on your state income taxes, with unlimited carry forward.  Meaning you can put $10000 into a 529 this year and claim $2000 off your state income tax for 5 years without adding more to the account.


If you move or decide that Vanguard wins in all things and want to transfer the 529 plan, similar to an HSA, you get 1 rollover per 12 months.

Federal Income Tax does not care about money you put into these accounts. 


seattlecyclone

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Re: 529 plan
« Reply #9 on: August 09, 2017, 01:25:59 PM »
What about the notion it is better to work on ensuring your retirement is taken care of first before worrying about paying for (or offsetting) your kid's education costs?

After all, the kid will have much more time to deal with a student loan debt than a parent has time to set aside money for retirement. And I don't want my kid to have to worry about taking care of me in retirement.

I agree with this sentiment. I was merely pointing out that an IRA is a more flexible tax shelter than a 529. The money can be withdrawn without penalty for educational expenses (though any regular taxes still apply). If you haven't yet maxed out your retirement accounts you probably shouldn't be contributing to a 529 yet, even if you intend for some of that money to pay for your kid's college.

Whether it's wise to pay for a kid's college before you've taken care of your own retirement savings is another question entirely.
I made a blog! https://seattlecyclone.com/

The Roth IRA was named after William Roth, who represented Delaware in the US senate from 1971-2001. "Roth" is a name, not an acronym. There's no need to capitalize the final three letters.

aceyou

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Re: 529 plan
« Reply #10 on: August 11, 2017, 08:06:17 PM »
What about the notion it is better to work on ensuring your retirement is taken care of first before worrying about paying for (or offsetting) your kid's education costs?

After all, the kid will have much more time to deal with a student loan debt than a parent has time to set aside money for retirement. And I don't want my kid to have to worry about taking care of me in retirement.

Totally agree.  Paying for our kids education will never come at the expense of my wife and I being able to retire how and when we want.  That said, see the benefit of helping pay for some of our kids college expenses.  Our plan right now is to pay for half of their tuition and housing expenses.  That way they won't be saddled with debt, but they may feel more skin in the game to do well and make sensible choices than they'd make if it were all free.  My wife's was totally paid for by parents, and I paid for everything myself.  We both turned out absolutely fine, but we think the best way is probably somewhere in the middle.   


teen persuasion

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Re: 529 plan
« Reply #11 on: August 13, 2017, 08:45:06 AM »
Another thing to consider is the effects on FAFSA calculations.  Assets in retirement accounts are NOT included in the EFC calculation, while assets in 529 accounts are included as available assets in the EFC calculation.  So if you have not maxed out retirement contributions, it is better to put additional savings in retirement accounts before 529 accounts.

seattlecyclone

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Re: 529 plan
« Reply #12 on: August 13, 2017, 09:44:40 AM »
Another thing to consider is the effects on FAFSA calculations.  Assets in retirement accounts are NOT included in the EFC calculation, while assets in 529 accounts are included as available assets in the EFC calculation.  So if you have not maxed out retirement contributions, it is better to put additional savings in retirement accounts before 529 accounts.

This is not necessarily accurate advice. A retirement account is not counted as an asset on the FAFSA, true. However, the amount you withdraw from one counts as income on the FAFSA, even if it's an untaxed Roth withdrawal. Parental assets are converted to income on the FAFSA at a rate of 12%, meaning $1,000 sitting in your 529 will count against you just as much as withdrawing $120 from an IRA would. Of course that unspent 529 cash will count against you each year on the FAFSA while the IRA withdrawal will only count for one year. For this reason if are planning to fund a kid's college with both 529 funds and IRA funds, depleting the 529 first might be the best plan.
I made a blog! https://seattlecyclone.com/

The Roth IRA was named after William Roth, who represented Delaware in the US senate from 1971-2001. "Roth" is a name, not an acronym. There's no need to capitalize the final three letters.

Laserjet3051

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Re: 529 plan
« Reply #13 on: August 13, 2017, 10:38:14 AM »
Another thing to consider is the effects on FAFSA calculations.  Assets in retirement accounts are NOT included in the EFC calculation, while assets in 529 accounts are included as available assets in the EFC calculation.  So if you have not maxed out retirement contributions, it is better to put additional savings in retirement accounts before 529 accounts.

This is not necessarily accurate advice. A retirement account is not counted as an asset on the FAFSA, true. However, the amount you withdraw from one counts as income on the FAFSA, even if it's an untaxed Roth withdrawal. Parental assets are converted to income on the FAFSA at a rate of 12%, meaning $1,000 sitting in your 529 will count against you just as much as withdrawing $120 from an IRA would. Of course that unspent 529 cash will count against you each year on the FAFSA while the IRA withdrawal will only count for one year. For this reason if are planning to fund a kid's college with both 529 funds and IRA funds, depleting the 529 first might be the best plan.

Vanguard has an interesting (recent) whitepaper on the strategic, time-dependency, of moving around assets (e.g. 529s, etc), to minimize expected family contribution (EFC). It goes into detail on several scenarios thats worth reading. That said, the web-based EFC calculators made by the colleges my daughter is interested in going to, all give me EXACTLY the same EFC, whether I put in that I have $100,000 in the 529, $10,000, or even $0. I'm starting to think student FIN aid is far more complex than I originally thought.

teen persuasion

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Re: 529 plan
« Reply #14 on: August 13, 2017, 12:51:28 PM »
Another thing to consider is the effects on FAFSA calculations.  Assets in retirement accounts are NOT included in the EFC calculation, while assets in 529 accounts are included as available assets in the EFC calculation.  So if you have not maxed out retirement contributions, it is better to put additional savings in retirement accounts before 529 accounts.

This is not necessarily accurate advice. A retirement account is not counted as an asset on the FAFSA, true. However, the amount you withdraw from one counts as income on the FAFSA, even if it's an untaxed Roth withdrawal. Parental assets are converted to income on the FAFSA at a rate of 12%, meaning $1,000 sitting in your 529 will count against you just as much as withdrawing $120 from an IRA would. Of course that unspent 529 cash will count against you each year on the FAFSA while the IRA withdrawal will only count for one year. For this reason if are planning to fund a kid's college with both 529 funds and IRA funds, depleting the 529 first might be the best plan.

Very true, IF you intend to withdraw from retirement accounts (even Roth accounts).  I was merely suggesting that when you have a choice of where to save, saving in retirement accounts makes those assets essentially invisible, vs saving in 529 or taxable accounts.  As I see it, I don't want to shoot myself in the foot by unnecessarily saving in visible accounts, and thus reducing my kids' aid by increasing our EFC.  I have also made the decision to hold off on Roth conversions during FAFSA filing years for DS5, as it would artificially increase his EFC.

One other distinction to make is that retirement assets already in the accounts are invisible as assets, but retirement contributions in the prior-prior year's tax info are added back to income.  So traditional contributions reduce your AGI, and may make you eligible for some threshold tests like the Simplified Needs Test or Auto EFC =0, but after the thresholds are tested, the retirement contributions get added back to the regular EFC calculation.  It's a tricky loophole some may be able to navigate, if everything aligns right.  If you are eligible for the Simplified Needs Test, assets are ignored, and my original point is moot, but you can't predict that years in advance. 

I've been doing the FAFSA dance since 2008, and they have moved the thresholds in unpredictable ways.  The Asset Protection amounts have shrunk noticeably in a decade, and the Auto EFC =0 threshold was retroactively dropped from $32k AGI to $23k a few years ago.  It has been inflation adjusted gradually back to $25k now, but that's a tougher line to cross now than the $29k or so back when our oldest started college.

3mNewb

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Re: 529 plan
« Reply #15 on: August 30, 2017, 05:08:53 PM »

Vanguard has an interesting (recent) whitepaper on the strategic, time-dependency, of moving around assets (e.g. 529s, etc), to minimize expected family contribution (EFC). It goes into detail on several scenarios thats worth reading. That said, the web-based EFC calculators made by the colleges my daughter is interested in going to, all give me EXACTLY the same EFC, whether I put in that I have $100,000 in the 529, $10,000, or even $0. I'm starting to think student FIN aid is far more complex than I originally thought.

Could you point me in the direction of this Vanguard white paper? Iíve tried hunting it down on their site and via Google with no luck. TIA.

Heron

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Re: 529 plan
« Reply #16 on: August 30, 2017, 06:31:25 PM »
As some have stated earlier, a Roth IRA has a lot of flexibility.  Before you consider a 529, I would see if you can do a "mega backdoor Roth" at your workplace's 401(k) plan.  The forum has a lot of helpful posts on this topic.  In theory, you can put 36K in a mega backdoor Roth in FY 2017, in addition to 18K in a traditional 401(k).  Amazing if you have the money to save.

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Re: 529 plan
« Reply #17 on: August 31, 2017, 09:08:14 AM »

Vanguard has an interesting (recent) whitepaper on the strategic, time-dependency, of moving around assets (e.g. 529s, etc), to minimize expected family contribution (EFC). It goes into detail on several scenarios thats worth reading. That said, the web-based EFC calculators made by the colleges my daughter is interested in going to, all give me EXACTLY the same EFC, whether I put in that I have $100,000 in the 529, $10,000, or even $0. I'm starting to think student FIN aid is far more complex than I originally thought.

Could you point me in the direction of this Vanguard white paper? Iíve tried hunting it down on their site and via Google with no luck. TIA.

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seattlecyclone

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Re: 529 plan
« Reply #18 on: August 31, 2017, 02:28:53 PM »
Was it this one?
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Laserjet3051

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Re: 529 plan
« Reply #19 on: August 31, 2017, 02:55:02 PM »
Was it this one?

Yes, thank you for finding this.  I couldn't seem to track it down on the Vanguard site, but I do think it is a great read for seeing to maximize the utility/efficiency of 529 funds for college.

3mNewb

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Re: 529 plan
« Reply #20 on: August 31, 2017, 03:10:06 PM »
Was it this one?

Yes, thank you for finding this.  I couldn't seem to track it down on the Vanguard site, but I do think it is a great read for seeing to maximize the utility/efficiency of 529 funds for college.

Thanks to both of you!

Asalbeag

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Re: 529 plan
« Reply #21 on: September 06, 2017, 06:42:58 PM »
Do also consider that not everyone is contributing just their own money. If your child gets gifts of cash then it's not really appropriate to contribute that to your own retirement account so a 529 might make sense there instead of simply investing it in a taxable account.

SuperSecretName

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Re: 529 plan
« Reply #22 on: September 06, 2017, 07:35:45 PM »