Author Topic: Should I be doing a 529 or just a taxable account?  (Read 1048 times)

Easye418

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Should I be doing a 529 or just a taxable account?
« on: January 02, 2020, 01:57:23 PM »
Currently, I started a 529 for my son, it is small $50 a month.  However,  I don't get any state benefit from it (Texas) and I would prefer not to be locked into spending it on educational expenses.

Should I just open additional taxable accounts for my 2 children under my name and hand it over to them when they are 18?  or should I do the 529?

kawaivf1

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Re: Should I be doing a 529 or just a taxable account?
« Reply #1 on: January 02, 2020, 02:24:25 PM »
Well if you know for sure they are going to college the mathematically it probably makes sense to do just a 529.

Personally, I am doing both. Some family members want to give specially to the 529 so I put that money in there, and others just give her cash so I put it in a UTMA. I think later on if she wants to start a business, buy a car or house, or just keep it invested it gives them a ton of options.

I think our college savings plans will be a combination of things. We want her to have some skin in the game, and we plan on savings some money in a 529. But we are hoping to have some rentals among other things so we can cash flow her education so they can graduate debt free if they to go to college.


Easye418

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Re: Should I be doing a 529 or just a taxable account?
« Reply #2 on: January 02, 2020, 03:27:26 PM »
Well if you know for sure they are going to college the mathematically it probably makes sense to do just a 529.

Personally, I am doing both. Some family members want to give specially to the 529 so I put that money in there, and others just give her cash so I put it in a UTMA. I think later on if she wants to start a business, buy a car or house, or just keep it invested it gives them a ton of options.

I think our college savings plans will be a combination of things. We want her to have some skin in the game, and we plan on savings some money in a 529. But we are hoping to have some rentals among other things so we can cash flow her education so they can graduate debt free if they to go to college.

That is what I don't know and there is a very long timeframe until I do know. 

I would like to think that they WILL attend college however it is no guarantee.  Also, I am with you on your college savings plan.  I am going to build them a little nut and hand it off to them.  After that, they are on their own.  My Father told me if you live at home, I will pay your first 4. 

Worst case, if they don't go, I pay a 10% penalty and tax on the gains if they don't use it for education?
« Last Edit: January 02, 2020, 03:33:11 PM by Easye418 »

cchrissyy

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Re: Should I be doing a 529 or just a taxable account?
« Reply #3 on: January 02, 2020, 03:37:33 PM »
or you change the beneficiary to the other kid who will use it, or to another family member, even yourself. 
I have three kids but only one 529 plan because you can freely change the beneficiary as the years go by.

Chrissy

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Re: Should I be doing a 529 or just a taxable account?
« Reply #4 on: January 02, 2020, 05:51:48 PM »
If there's no tax advantage to the 529, I'd just do taxable in your own name.

We do 529s, but we get a tax break.

reeshau

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Re: Should I be doing a 529 or just a taxable account?
« Reply #5 on: January 02, 2020, 11:02:56 PM »
All of these options have uncertainty.  What do you do with a 529, if they don't go to college?  Then again, if you have an UTMA, they get it at 18, whether they are mature enough to handle it, or not.  A taxable account would be a large gift, so would need to be handled properly, with the extra tax form.  And I think the initial tax benefits can be over-emphasized:  tax *credits* are amazing, but Michigan gave us a tax deduction on its 4.25% rate.  I took the deal, as the state is stingy with deductions, but it wasn't *why* I did it.

While I am not driving my son to a particular field, he will likely need something beyond secondary education to have a comfortable life in the US.  So, I am funding a 529 set up for a bachelor's degree at a public university--something in the middle of the road.  If he wants a private uni or grad school, there needs to be a strong enough incentive for him to want to handle it: pay for it himself, work for scholarships, etc.  If he decides on a trade and gets an associate's degree in something, or just apprentices, then it's great he's happy, and I will decide what to do with the account at that time, very pleased with feeling the mission has been accomplished.

This is something as uncertain--maybe more uncertain--than retirement, so one size will not fit all.  Most important is that I am comfortable with my planned scenario, even in less than ideal circumstances.  The worst thing would be to have your financial decision drive you into pushing your child in a particular direction.

seattlecyclone

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Re: Should I be doing a 529 or just a taxable account?
« Reply #6 on: January 02, 2020, 11:16:54 PM »
If your son doesn't go to college (and you don't have another child or other relative you would want to use the funds for), the taxable account will prove to be the better deal. If he does, the 529 will prove to be the better deal. None of us have a crystal ball that says one outcome or the other is certain. All you can do is weigh the probabilities of either possibility based on your knowledge of your own son and your plans for raising him, and bet accordingly. Either way you go there's some possibility that you'll bet wrong. Such is the case with so many things in life.

Easye418

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Re: Should I be doing a 529 or just a taxable account?
« Reply #7 on: January 03, 2020, 09:09:47 AM »
All of these options have uncertainty.  What do you do with a 529, if they don't go to college?  Then again, if you have an UTMA, they get it at 18, whether they are mature enough to handle it, or not.  A taxable account would be a large gift, so would need to be handled properly, with the extra tax form.  And I think the initial tax benefits can be over-emphasized:  tax *credits* are amazing, but Michigan gave us a tax deduction on its 4.25% rate.  I took the deal, as the state is stingy with deductions, but it wasn't *why* I did it.

While I am not driving my son to a particular field, he will likely need something beyond secondary education to have a comfortable life in the US.  So, I am funding a 529 set up for a bachelor's degree at a public university--something in the middle of the road.  If he wants a private uni or grad school, there needs to be a strong enough incentive for him to want to handle it: pay for it himself, work for scholarships, etc.  If he decides on a trade and gets an associate's degree in something, or just apprentices, then it's great he's happy, and I will decide what to do with the account at that time, very pleased with feeling the mission has been accomplished.

This is something as uncertain--maybe more uncertain--than retirement, so one size will not fit all.  Most important is that I am comfortable with my planned scenario, even in less than ideal circumstances.  The worst thing would be to have your financial decision drive you into pushing your child in a particular direction.
If your son doesn't go to college (and you don't have another child or other relative you would want to use the funds for), the taxable account will prove to be the better deal. If he does, the 529 will prove to be the better deal. None of us have a crystal ball that says one outcome or the other is certain. All you can do is weigh the probabilities of either possibility based on your knowledge of your own son and your plans for raising him, and bet accordingly. Either way you go there's some possibility that you'll bet wrong. Such is the case with so many things in life.
If there's no tax advantage to the 529, I'd just do taxable in your own name.

We do 529s, but we get a tax break.

Very good points everyone.  Thank you.  I do think I will end up going with another 529.  I feel OK gambling on for college instead of against college.  In the end, they will decide. 

trollwithamustache

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Re: Should I be doing a 529 or just a taxable account?
« Reply #8 on: January 03, 2020, 09:22:53 AM »
how old is the kid? the longer the runway to college (or trade school or private high school now) the more the 529 is worth it.  If junior is failing his sophomore year of High School, its definitely not worth it...

StarBright

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Re: Should I be doing a 529 or just a taxable account?
« Reply #9 on: January 03, 2020, 09:43:13 AM »
I want to throw this one out there: if you have a Roth IRA, under current rules you can take out money for educational expenses (for yourself or dependents) without paying a penalty or (I believe) taxes on the gains.

Our state doesn't offer a meaningful deduction, we have access to extra-discounted degrees at several state schools because my husband is a professor and neither of our children is a sure fit for a 4 year school anyway. We just couldn't bring ourselves to squirrel money into a 529 when the chances of using it are less than 50%.  But we also felt weird not saving. On the chance that either of my children qualify for and want a pricier private option, we are planning on using our Roths to help subsidize the cost.

I am a huge Roth fan because of the super flexible rules.


seattlecyclone

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Re: Should I be doing a 529 or just a taxable account?
« Reply #10 on: January 03, 2020, 10:00:36 AM »
I want to throw this one out there: if you have a Roth IRA, under current rules you can take out money for educational expenses (for yourself or dependents) without paying a penalty or (I believe) taxes on the gains.

You believe wrong. The 10% early withdrawal tax wouldn't apply, but the tax on any withdrawal of growth would. Of course due to the ordering rules this only comes into play once you have exhausted your basis in the account.

Laura33

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Re: Should I be doing a 529 or just a taxable account?
« Reply #11 on: January 03, 2020, 10:03:52 AM »
Just to be clear, the 529 has three tax benefits:  immediate state tax deductions (in states that offer it -- obviously not an issue in TX where there's no income tax to deduct it from); tax-free growth; and tax-free withdrawals when used for educational expenses.  So not getting an immediate tax deduction is only part of the game -- and not necessarily the most important one.

IMO, there is so much flexibility built into a 529 that I am pretty confident it will be used somehow.  If your kid doesn't go to college, you can use it for private HS or trade school or comparable stuff (and many, if not most, careers that allow you to make a reasonable income require some version of post-HS education).  If your kid goes right to work, they can use it later on if they discover that, say, business or accounting classes are necessary if they want to open their own shop.  If your kid gets a scholarship, you can withdraw the equivalent amount, pay the taxes, but not pay the 10% penalty -- in which case you're no worse off than if you'd put it in a taxable account to start with.  You can also use it for books and other types of incidental expenses that scholarships don't typically cover.  If your kid really doesn't ever need to use it, you can roll it over to another kid, to yourself, or even to a niece/nephew/grandkid.  Or, yeah, worse comes to worst, you take it out, pay the taxes on the growth (same as if it was a regular taxable account), and then pay a 10% penalty on the growth.  Not exactly the end of the world. 

FWIW, I also think the 529 can be especially valuable if your kid is out of the norm.  My DD, for ex, has pretty bad ADHD.  We were lucky that she got her act together and is doing fine.  But for a few years, I was pretty convinced that "college" was going to need to be a specialty college that caters to ADHD kids -- and, boy, those are not cheap.  But even without needing to go to that extreme, her issues made our local StateU a non-option -- that school can barely graduate normal kids in 4-5 years, and I wasn't going to pay for a kid to fall through the cracks.  Having the 529 allowed us to focus on schools that were more likely to fit her particular learning needs and personality issues.  Sure, we could have saved to pay the same amount of tuition in a taxable account, but we'd have gotten a lot less bang for our buck.

There are also issues with the other options as well.  Roths are great and highly flexible -- but I'd use that for college only if I was 100% confident that I was on track for my retirement savings without the Roth.  IMO, there are only so many tax-favored options for savings, so I'd rather use the Roth/tIRA for retirement and the 529 for college, vs. the Roth for college and a taxable account for retirement.  UTMAs are great, but if you're looking for financial aid, those are counted as the student's assets and will be sucked completely dry, whereas 529s are counted as the parents' assets (in most cases; some schools do their own calculus and treat them differently) -- and, of course, as noted above, those are legally the kid's property at 18, whether you want them to have it then or not. 

Basically, there is no perfect option.  Me, I'm erring on the side of college + maximizing taxable accounts.  And it's certainly paid off so far (knock on wood!).

seattlecyclone

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Re: Should I be doing a 529 or just a taxable account?
« Reply #12 on: January 03, 2020, 10:08:41 AM »
IMO, there is so much flexibility built into a 529 that I am pretty confident it will be used somehow.  If your kid doesn't go to college, you can use it for private HS or trade school or comparable stuff (and many, if not most, careers that allow you to make a reasonable income require some version of post-HS education).  If your kid goes right to work, they can use it later on if they discover that, say, business or accounting classes are necessary if they want to open their own shop.  If your kid gets a scholarship, you can withdraw the equivalent amount, pay the taxes, but not pay the 10% penalty -- in which case you're no worse off than if you'd put it in a taxable account to start with.  You can also use it for books and other types of incidental expenses that scholarships don't typically cover.  If your kid really doesn't ever need to use it, you can roll it over to another kid, to yourself, or even to a niece/nephew/grandkid.  Or, yeah, worse comes to worst, you take it out, pay the taxes on the growth (same as if it was a regular taxable account), and then pay a 10% penalty on the growth.  Not exactly the end of the world. 

The bolded bits aren't quite accurate, as the growth in a 529 is taxed as regular income rather than capital gains, but I agree with the general sentiment.

honeybbq

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Re: Should I be doing a 529 or just a taxable account?
« Reply #13 on: January 03, 2020, 10:33:08 AM »
I totally agree with Laura. The gains are tax free. You have almost 20 years of tax free gains ahead of you. Why wouldn't you use it?

(I'm also in a tax free state and we contribute 12k/year to our 529)

Car Jack

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Re: Should I be doing a 529 or just a taxable account?
« Reply #14 on: January 03, 2020, 10:45:57 AM »
I'll tell you what I did.  I never put in a cent until my state (Massachusetts) started giving a tax deduction for doing so, which was 2 years ago and only for $2k per couple.  With 2 kids in college now, I contribute through my 2% Fidelity card, then around October fill it to $2k and a week later, take it out.

Instead, I used iBonds for a long time.  Then Roth IRAs. 

StarBright

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Re: Should I be doing a 529 or just a taxable account?
« Reply #15 on: January 03, 2020, 11:10:02 AM »
I want to throw this one out there: if you have a Roth IRA, under current rules you can take out money for educational expenses (for yourself or dependents) without paying a penalty or (I believe) taxes on the gains.

You believe wrong. The 10% early withdrawal tax wouldn't apply, but the tax on any withdrawal of growth would. Of course due to the ordering rules this only comes into play once you have exhausted your basis in the account.

Thanks for the correction! I looked at a few sites before I posted but didn't see that answer. I appreciate it!


FWIW, I also think the 529 can be especially valuable if your kid is out of the norm.  My DD, for ex, has pretty bad ADHD.  We were lucky that she got her act together and is doing fine.  But for a few years, I was pretty convinced that "college" was going to need to be a specialty college that caters to ADHD kids -- and, boy, those are not cheap.  But even without needing to go to that extreme, her issues made our local StateU a non-option -- that school can barely graduate normal kids in 4-5 years, and I wasn't going to pay for a kid to fall through the cracks.  Having the 529 allowed us to focus on schools that were more likely to fit her particular learning needs and personality issues.  Sure, we could have saved to pay the same amount of tuition in a taxable account, but we'd have gotten a lot less bang for our buck.


^this is a great point and one I hadn't (but should have) thought of. My kids are young enough that I didn't even know there were colleges that catered to students with different learning needs!
« Last Edit: January 03, 2020, 11:15:56 AM by StarBright »