Author Topic: 529 Plan for Myself  (Read 6501 times)

kathryn1029

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529 Plan for Myself
« on: October 29, 2014, 12:40:08 PM »
Hi there,

I am currently working full-time, and will quit my job in the middle of December and begin a school program January 5. My fiance will continue working and will support us financially.

I just came across a general suggestion about opening a 529 plan for yourself, and it seems like an interesting alternative. We plan to pay $15,000 out of pocket for my program, with the other funds coming from Federal student loans.

I've done a bit of research, but there are so many different plans that it's hard to tell exactly what the benefits might be. I figured there were some people that were experts at 529 plans on here.

Does it make sense to start a 529 plan for myself when I'll only be working another ~5 weeks? I figure we can put my income to the 529 account, and then use the savings we were planning to use for tuition, to replace some of my income.  About $12,000 is due on January 5th, and the remaining $3,000 due on October 1. Is this too much work for too little benefit?

I have no idea if I've given enough information-- please let me know if you need more.

BaldingStoic

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Re: 529 Plan for Myself
« Reply #1 on: October 29, 2014, 01:25:22 PM »
Too much hassle given the short time horizon. Also you don't want to put your money at risk by investing much of it in stock, since you'll need to pull it out soon.  Skip the 529 plan and invest in something safe (checking account, money market).  Stocks are a great long-term investment but don't gamble with your tuition when you've got a 12 month horizon. 

PathtoFIRE

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Re: 529 Plan for Myself
« Reply #2 on: October 29, 2014, 01:52:54 PM »
Agree with BaldingStoic,

The main benefit to a 529 is tax-free earnings growth, and then tax-free distributions of those earnings when used for eligible expenditures. That means that you need time, years/decades, to see this benefit.

The other potential benefit for some is a deduction on your state income taxes. I live in Texas, where this doesn't apply, so you would have to determine this yourself. My understanding is that the deductions are typically not huge, but it varies by state. There is a cost to setup and maintain a 529, plus the time it would take your to do this, etc. There may be some small benefit, but I doubt it would be worthwhile.

BigRed

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Re: 529 Plan for Myself
« Reply #3 on: October 29, 2014, 02:20:02 PM »
My wife went back to school and has had her tuition covered by grants up to this point, but we are paying for her last year of tuition.  I've wondered whether this might make sense, but I came to the same conclusion, it isn't worth it, the single year tax free earnings wouldn't be worth much, even though we are at a pretty high marginal rate with my salary, her part-time jobs, and the child tax credit phaseout.

Are there any other strategies people know of for the single earner/tuition paying spouse situation to minimize taxes?  Does anyone know where to go for good tax advice for students with working spouses or online resources beyond 'read the IRS materials'?  I found our CPA didn't know any more that I did (so I went back to doing taxes myself) and the schools aren't allowed to give tax advice by law, for some reason.

Seems like as good a place as any to ask.

pksr

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Re: 529 Plan for Myself
« Reply #4 on: October 29, 2014, 02:40:02 PM »
For BigRed (and perhaps Kathryn 1029)

There is a way to deduct educational expenses as an itemized deduction, but it's both limited and tricky. I was able to deduct my MBA expenses, but it was because I stayed in the same industry and same type of position, and my coursework "maintained and improved" my already existing skills.

Check this out for some guidance http://www.forbes.com/2010/02/16/tax-deduction-mba-education-personal-finance-robert-wood.html and see if it's applicable to your specific situation.

Fair warning, though - I did get audited. But right now the score is me 1, IRS 0  :-)

La Bibliotecaria Feroz

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Re: 529 Plan for Myself
« Reply #5 on: October 29, 2014, 03:18:09 PM »
My savings on my state income taxes were noticeable when I funded my kids' plans. (It wasn't even my money! Thanks, Grandpa!) AND I had the choice of plans with a variety of risks levels, not just stocks. Find out what your state's rules and options are.

BigRed

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Re: 529 Plan for Myself
« Reply #6 on: October 29, 2014, 03:21:58 PM »
We're in California, so there's no state deduction for us for contributing to a 529 plan.

BigRed

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Re: 529 Plan for Myself
« Reply #7 on: October 29, 2014, 04:19:04 PM »
For BigRed (and perhaps Kathryn 1029)

There is a way to deduct educational expenses as an itemized deduction, but it's both limited and tricky. I was able to deduct my MBA expenses, but it was because I stayed in the same industry and same type of position, and my coursework "maintained and improved" my already existing skills.

Check this out for some guidance http://www.forbes.com/2010/02/16/tax-deduction-mba-education-personal-finance-robert-wood.html and see if it's applicable to your specific situation.

Fair warning, though - I did get audited. But right now the score is me 1, IRS 0  :-)

I doubt that would work for us, my wife worked in higher ed administration, and is getting a PhD in Higher Ed.  A PhD qualifies her for new jobs, I think, so that probably doesn't work, and she's not actually still in her old job (and won't go back to it).  So, I think we're likely limited to the Lifetime Learning Credit, which we're also in the phaseout for, unless Congress restores the Tuition and Fees deduction.  That would give us, in CA, a 49.3% marginal rate, I guess I should just max out FSAs and tax-deferred savings for next year, to the extent I can, unless anyone knows of any other ideas.

epipenguin

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Re: 529 Plan for Myself
« Reply #8 on: October 29, 2014, 04:47:59 PM »
When I went back to school, my college allowed me to pay tuition monthly on a credit card with no additional fees. I had previously opened up a UPromise credit card that was tied to a 529 account that I funded with the minimum to open the account (I think it was $250). I ran all the tuition through that credit card and got 1% cash back which went into the 529 account. I also ran other school expenses such as book spending on that card, and there were some stores that gave out extra UPromise points so I'd put spending at those stores on the same cc too. By the end of a 3 year program, I had enough in the 529 account to pay the last month's tuition. I managed to gain about $800 of free money in earnings on the account and 5-6 years of cash back points. So it was worth it for me. Most schools DO charge extra fees for putting tuition on credit cards, however, so you'd have to see if it was worth it.

Something else I looked into was using I bonds to pay for tuition. You are supposed to be able to keep the gains on I bonds tax free if you're cashing the bond in for educational purposes, and I had some old I bonds hanging around. But there is a salary cap above which this tax free gains situation isn't allowed, and I was at the time above that.

pksr

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Re: 529 Plan for Myself
« Reply #9 on: October 29, 2014, 09:36:49 PM »
For BigRed (and perhaps Kathryn 1029)

There is a way to deduct educational expenses as an itemized deduction, but it's both limited and tricky. I was able to deduct my MBA expenses, but it was because I stayed in the same industry and same type of position, and my coursework "maintained and improved" my already existing skills.

Check this out for some guidance http://www.forbes.com/2010/02/16/tax-deduction-mba-education-personal-finance-robert-wood.html and see if it's applicable to your specific situation.

Fair warning, though - I did get audited. But right now the score is me 1, IRS 0  :-)

I doubt that would work for us, my wife worked in higher ed administration, and is getting a PhD in Higher Ed.  A PhD qualifies her for new jobs, I think, so that probably doesn't work, and she's not actually still in her old job (and won't go back to it).  So, I think we're likely limited to the Lifetime Learning Credit, which we're also in the phaseout for, unless Congress restores the Tuition and Fees deduction.  That would give us, in CA, a 49.3% marginal rate, I guess I should just max out FSAs and tax-deferred savings for next year, to the extent I can, unless anyone knows of any other ideas.

If she's going from higher ed to higher ed, I think you might actually be the poster child for this type of deduction. The clear cases where you can't deduct are when you learn a new trade you could not practice but-for the education expenses (e.g., lawyer, doctor). The IRS has lost in tax court arguing that things like an MBA qualify you for other careers (other than the one you're pursuing / continuing to pursue) - what's relevant is what she is doing it for / how it will help her career. There is no limit on how long you can take pursuing your "maintain & improve" education, and there's no requirement that you stay in the same job. Just remember - she is not going to be a student (and signing her tax return with profession of "student" kills your case), she's a higher education professional who is maintaining and improving her higher education skills and powers :-)

I felt like I had a slam dunk case, and I was aided by some valiant trailblazers who had already won cases like mine in Tax Court. Plus I actually enjoyed the audit while all of my friends were terrified for me and encouraged me to settle immediately. If you don't enjoy reading the tax code and prepping for an audit, you might want to get a knowledgeable CPA to advise you if you rethink this route.

In any event good luck!

secondcor521

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Re: 529 Plan for Myself
« Reply #10 on: October 30, 2014, 12:41:38 AM »
Depends on the state tax deduction for 529 contributions and your tolerance for hassle.

In my state (Idaho), a married couple can deduct contributions up to $8,000 each year.  The top marginal rate in Idaho is about 8%, so that is about $640 in state income tax savings.

Hassle factor (using Idaho as an example):

1.  Open a 529 with yourself as the owner and beneficiary.
2.  Contribute $8,000; put it in the stable value fund.
3.  Before your tuition is due, withdraw the $8,000 from the 529.
4.  Use the $8,000 that you just withdrew to pay for your tuition.
5.  Deduct the $8,000 contribution on your taxes and save about $640.
6.  Close the 529 account or, if you think your education might span multiple years, keep it open and go to step 2 the next year.

Also, in general most states only allow deductions if the contributions are made to your own state's 529 plan.

kathryn1029

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Re: 529 Plan for Myself
« Reply #11 on: November 03, 2014, 12:25:52 PM »
Thank you for your helpful replies! I think after perusing them it probably is too much of a hassle for me, with such short notice. I was also temporarily confusing the details of a 529 plan, and thinking that I could contribute tax-free income to the plan (so obviously, it would have made a LOT more sense).

I am going to ask about putting tuition on my credit card-- an obvious benefit that I had not thought of!


mlipps

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Re: 529 Plan for Myself
« Reply #12 on: November 03, 2014, 12:50:40 PM »
I think you're crazy NOT to use a 529 if you live in a state that gives the deduction.

You should pay the first $10k out of pocket to max out the Lifetime Learning Credit. No double benefit allowed so you can't take this credit for amounts paid w/the 529 money.

Then, if you live in a state w/a 529 deduction, throw the money in a 529, pull it out, and pay your bill. I live in IL and get a deduction on up to $10k/person on our taxes. Between my husband and I, that's $860 for 2014 in tuition savings!! Don't pass up free money for what amounts to a few minutes hassle.

And yes, definitely look into the CC thing. Most schools charge a fee, but if yours doesn't, it's an AWESOME way to get signup bonuses on cards that would normally have too high of spending requirements for your normal spending to meet it. On top of that, some cards will give you the 0% on purchases, which personally is helping out my cash flow a good bit with school being so expensive. The double whammy for me was the Wells Fargo World Propel, with $400 cash or $600 travel credit on $3k spend AND 12 months 0% interest. SO MUCH FREE MONEY!!

kathryn1029

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Re: 529 Plan for Myself
« Reply #13 on: November 03, 2014, 12:59:44 PM »
mlipps- thanks. If we pay the first $10,000 out of pocket, that leaves only $5,000 to use for the 529 plan. You still think that's worth it (not sarcastic, actual question)?

Another complicating factor is that we're moving from NY to CO for my school-- so I will finish my full time work in NY at the end of this December, and immediately move to CO for school. CO 529s deduct the full contribution, NY deducts up to $5,000. I'll admit that I am very illiterate when it comes to taxes, so I'm not sure in this case if I would need to contribute to the NY or CO plan (I believe you only get the deduction if you contribute to your own state's plan).

mlipps

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Re: 529 Plan for Myself
« Reply #14 on: November 03, 2014, 01:07:36 PM »
mlipps- thanks. If we pay the first $10,000 out of pocket, that leaves only $5,000 to use for the 529 plan. You still think that's worth it (not sarcastic, actual question)?

Another complicating factor is that we're moving from NY to CO for my school-- so I will finish my full time work in NY at the end of this December, and immediately move to CO for school. CO 529s deduct the full contribution, NY deducts up to $5,000. I'll admit that I am very illiterate when it comes to taxes, so I'm not sure in this case if I would need to contribute to the NY or CO plan (I believe you only get the deduction if you contribute to your own state's plan).

Yes, I definitely think it's worth it! Double check the state rules to make sure there are no restrictions on how long the money has to be there to get the deduction, but why not take the deduction if you're eligible!

Since you can essentially deduct the full amount no matter which state you contribute to, I would contribute to your state's plan while living in which ever state has higher taxes. So, you could do it today if NY taxes are higher, or next year if CO's rates are higher. Plus, having two states to look at means if one of them has restrictions on how long the money needs to be there, you still have another possibility!

And just to clarify, in case this isn't obvious, for a 529, you get the state deduction when you make the contribution, not when you spend the money. So, it makes no difference which plan you use & you can use whichever one has a bigger benefit to you!

kathryn1029

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Re: 529 Plan for Myself
« Reply #15 on: November 03, 2014, 02:26:06 PM »
I hate to keep asking for clarification, but I can't really find an answer for this on any of the official 529 or IRS websites...

NY has a higher state tax than CO. So, let's say I do contribute the $5,000 to a NY plan and I do it on December 1 of this year. Then, I stop working in NY state on December 20th. I will withdraw the balance around Jan 2. There shouldn't be an issue with my receiving the deduction during next year's tax season, even though I'll be living in Colorado at the time (and earning no income from any state), right?

To put it into tangible terms, if I was on path to receive exactly $0 in tax refunds from NY state next year and I proceeded to carry out the above plan, I would instead receive about $400 in refunds (8% state tax x $5000 contribution) after I filed my NY state taxes next April? Even though I'll be living in CO?

La Bibliotecaria Feroz

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Re: 529 Plan for Myself
« Reply #16 on: November 03, 2014, 02:40:28 PM »
I am not a tax expert and have no experience with NY in particular, but I have moved many times and in general, when I file tax returns for a state I no longer live in, everything goes down as it should. Any deductions, income, etc. all get shunted to the state you were living in when they happened.

mlipps

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Re: 529 Plan for Myself
« Reply #17 on: November 03, 2014, 04:00:54 PM »
I am not a tax expert and have no experience with NY in particular, but I have moved many times and in general, when I file tax returns for a state I no longer live in, everything goes down as it should. Any deductions, income, etc. all get shunted to the state you were living in when they happened.

Agree with frugalparagon. Some states DO do funny things occasionally (looking at you Ohio, and your prorating by income instead of days...), but living in the state all but 10 days, especially if you're not going to be working when you move to CO, I can't foresee any issues. I do multi-state returns a lot at my VITA site, although I will admit I haven't done NY yet & only do the 529 on my own return. Still, I can't see any reason why you would have issues w/what you've laid out.