How much to put in 529? Does it even make sense?

[jamesbond007]

I have about $60K sitting in my bank account for random reasons. I have been slowly making contributions to my brokerage account buying VTSAX for about $5K each month. This is not including my 401k, HSA, ESPP and regular monthly investments. One thing I haven't planned much is DD's college. I am thinking I'd save up to $300K for tuition and boarding. I'd want her to take care of her food, social and technology expenses while in college.


I don't if $300K is too much. It sounds like a lot. But let's say I am preparing for a worst-case scenario (Or best?) depending on how you see it. So, my question is, does it even make sense to put money in a 529? I am in CA, so I get no benefit. Even if I superfund, I am limited to $75K. DD enters second grade this fall. So, she has another 11 years before she goes to college and the $75K I put in 529 could be $150K by then (Assuming 7% growth YoY).


Does it make sense? Shall I do it? I am thinking, if she doesn't go to college, then I can make that 529 available to her kids (Is this even possible?). If not, if I take the money out for our travel and pay penalty and taxes, we'd still come out ahead. If she goes to a good college to get a medical degree, then the $150K in 529 could cover maybe about 50% of the tuition and boarding and I could pitch in the other 50%.

[PDXTabs]

I'm in a similar position, and I vote: no. If you get no tax benefit upfront, then the back end tax benefit of the 529 comes with too many strings attached. Keeping in mind that you can gift shares to your child and they will almost certainly be in the 0% LTGC tax bracket when they sell them.

[nereo]

You can transfer a 529 to whomever you like, whenever you want - even to yourself!

How old is your daughter? How many years till that money is needed?

Have you maxed out all other tax advantages accounts? In other words, are you following the investment order? If not, what are your reasons to deviate?

In general, investing in a 529 makes sense if (only one need apply)
1.Your state offers deductions and you qualify for them
2. You have no where else to put that money besides a taxable account

[PDXTabs]

You can transfer a 529 to whomever you like, whenever you want - even to yourself!

Everything that I've read says that is not true. You can only transfer them to some family members, but yourself and your grandchild would count.
https://www.edmit.me/blog/to-whom-can-i-transfer-the-money-in-a-529-plan

[nereo]

You can transfer a 529 to whomever you like, whenever you want - even to yourself!

Everything that I've read says that is not true. You can only transfer them to some family members, but yourself and your grandchild would count.
https://www.edmit.me/blog/to-whom-can-i-transfer-the-money-in-a-529-plan

I stand corrected - thanks for catching that. 

You can transfer a 529 to any close family member you like, whenever you like (though only once per 12 months... though I’d question why anyone would want to change such a plan more than once per year).

[jamesbond007]

You can transfer a 529 to whomever you like, whenever you want - even to yourself!

How old is your daughter? How many years till that money is needed?

Have you maxed out all other tax advantages accounts? In other words, are you following the investment order? If not, what are your reasons to deviate?

In general, investing in a 529 makes sense if (only one need apply)
1.Your state offers deductions and you qualify for them
2. You have no where else to put that money besides a taxable account

I am maxing out all possible tax advantaged accounts. 401k, HSA. I don't qualify for Roth IRA so I contribute backdoor Roth. I would like to start mega backdoor roth but I am planning to do it from next year, for no reason. I don't know what else I could do.

[EvenSteven]

If I were in your situation, I would aim to fund a 529 at a little bit lower level than 300k.

If you use it all for educational expenses you will come out a little bit ahead of a taxable account. If not then you come out a little bit behind a taxable account. Either way won't make or break you, but I usually go somewhere in the middle in these situations. Taxable brokerage accounts can still be a nice way to fund education for your kids.

[JJ-]

I have been musing on 529s vs taxable for a few weeks now. I live in a state with a tax benefit. Secondcor has added a few thoughts here that I found valuable to my journal post here.

Keep in mind that the 529 allows the beneficiary to take the tax burden (and fill their own standard deduction) while using taxable puts it on you assuming it is your account. There is also the American Opportunity Tax Credit that helps with taxable gains.

I will probably be doing a mix of 529 and taxable. I plan on detailing this a bit more in my journal at some point.

[epritch7]

[/quote]

I am maxing out all possible tax advantaged accounts. 401k, HSA. I don't qualify for Roth IRA so I contribute backdoor Roth. I would like to start mega backdoor roth but I am planning to do it from next year, for no reason. I don't know what else I could do.
[/quote]

I'm in the same boat, 529s make little or no sense to me and I'm in a state that gets a deduction and that's assuming nothing changes.  As a single income household I also can contribute to a traditional IRA and a spousal IRA, I think the threshold for doing both 401k and IRA is $103k of annual income (19.5k 401k, 7.2k Family HSA, 6k IRA, 6k spousal IRA = $38,700 deferred).  My gut tells me that more subsidies are coming for college tuition in the future and if you RE you can structure you're income as your child approaches college age to allow for significant help through FASFA.  I'm just buying index funds in a brokerage account with the money I have left that doesn't fit in a pretax bucket.

[fraylock]

I've wondered on this question also, so thank you for posting.  I'm a little surprised at the number of people who feel the 529 isn't worth it.  Why wouldn't it be?

Even if you live in a state with no state income tax, if you fund a 529 when your child is young, the dollars saved from not paying taxes on those earning should put you ahead, correct?  Granted, that is assuming you don't over-contribute and your child does in fact go to college.

I personally opened a 529 with $15k for each of our children when they were born (actually opened prior to their birth in my name, then transferred to them).  If market continues to perform, that should equate to 75-100k when they are 18, which adds up to tax savings on 50-85k in income.  Worse case, if one doesn't go to college or doesn't need financial assistance, I could transfer to the other child, or myself, or grandkids, etc.  I also like that it ear marks the money for the kids' education, so I can just forget about it and move on.

[nereo]

I've wondered on this question also, so thank you for posting.  I'm a little surprised at the number of people who feel the 529 isn't worth it.  Why wouldn't it be?

Even if you live in a state with no state income tax, if you fund a 529 when your child is young, the dollars saved from not paying taxes on those earning should put you ahead, correct?  Granted, that is assuming you don't over-contribute and your child does in fact go to college.

I personally opened a 529 with $15k for each of our children when they were born (actually opened prior to their birth in my name, then transferred to them).  If market continues to perform, that should equate to 75-100k when they are 18, which adds up to tax savings on 50-85k in income.  Worse case, if one doesn't go to college or doesn't need financial assistance, I could transfer to the other child, or myself, or grandkids, etc.  I also like that it ear marks the money for the kids' education, so I can just forget about it and move on.

It’s about what the best use for each dollar is. Money is fungible. A 529 isn’t nearly as beneficial as an HSA, or a 401(k) with match, or (in most cases) an IRA.  That’s the reason it’s so far down in the investment order.

If you are able to put $15k towards each child and still fill all your taxable buckets, that’s great. 

[fraylock]

It’s about what the best use for each dollar is. Money is fungible. A 529 isn’t nearly as beneficial as an HSA, or a 401(k) with match, or (in most cases) an IRA.  That’s the reason it’s so far down in the investment order.

If you are able to put $15k towards each child and still fill all your taxable buckets, that’s great.
[/quote]

Makes sense, thanks.  If I understand OP's position, all tax advantaged accounts are fully funded, so I'd vote yes on funding a 529.

I guess this is case in point on how 529s are so regressive and really only benefit those who don't need them.  But if it's there, I suppose one might add well use it.

[secondcor521]

My gut tells me that more subsidies are coming for college tuition in the future and if you RE you can structure you're income as your child approaches college age to allow for significant help through FASFA.

This is true and an overlooked part of the pay off the mortgage debate.  I paid mine off maybe nine years ago, which means my cash flow is low, which means my taxable income can be low, which means I have the flexibility to optimize my taxes for FAFSA.

I popped in to point out that it doesn't have to be either/or (except for anti-double dipping rules).  You can do 529s *and* taxable savings *and* FAFSA optimization *and* AOTC.  And scholarships.  And wise and thoughtful school shopping.  And lots of other things.  The combination of multiple things has worked really well for my family.

On 529s, one thing to keep in mind is that some can be somewhat high in fees.  There can be the investment fees, as well as either a wrap fee and/or account fees.  Some are relatively low fees - Utah's plan used to be.  So I'd try to balance the upfront tradeoff of the state tax benefit with the fee difference if any.

Someone mentioned the 0% cap gains rate for stock in the kids' name.  True as long as (a) the kid's cap gains dollar amount is low enough and (b) if the kid is not subject to the kiddie tax, which I think is currently based on the kids' age.  Of course 529 withdrawals used for QHEE are completely tax free regardless of the dollar amount of QHEE.

[JJ-]

Someone mentioned the 0% cap gains rate for stock in the kids' name.  True as long as (a) the kid's cap gains dollar amount is low enough and (b) if the kid is not subject to the kiddie tax, which I think is currently based on the kids' age.

Can you explain part b a little more? I understand a but not what you're referencing in part b. Everything I find in a search on child tax just shows up for the credit but not a tax.

[secondcor521]

Someone mentioned the 0% cap gains rate for stock in the kids' name.  True as long as (a) the kid's cap gains dollar amount is low enough and (b) if the kid is not subject to the kiddie tax, which I think is currently based on the kids' age.  Of course 529 withdrawals used for QHEE are completely tax free regardless of the dollar amount of QHEE.

Just received the Schwab newsletter in the mail, where they mention the kiddie tax.  They indicate (and I think they usually get these things right) that the tax applies to any dependent children under age 18 or full-time students younger than 24.  It applies on any unearned income (including cap gains and interest and dividends) over $2,200.  That amount would be taxed at the parent's rate.

[JJ-]

Someone mentioned the 0% cap gains rate for stock in the kids' name.  True as long as (a) the kid's cap gains dollar amount is low enough and (b) if the kid is not subject to the kiddie tax, which I think is currently based on the kids' age.  Of course 529 withdrawals used for QHEE are completely tax free regardless of the dollar amount of QHEE.

Just received the Schwab newsletter in the mail, where they mention the kiddie tax.  They indicate (and I think they usually get these things right) that the tax applies to any dependent children under age 18 or full-time students younger than 24.  It applies on any unearned income (including cap gains and interest and dividends) over $2,200.  That amount would be taxed at the parent's rate.

Gotcha, unearned income being the kicker here which disqualifies them for the standard deduction.

[secondcor521]

Someone mentioned the 0% cap gains rate for stock in the kids' name.  True as long as (a) the kid's cap gains dollar amount is low enough and (b) if the kid is not subject to the kiddie tax, which I think is currently based on the kids' age.  Of course 529 withdrawals used for QHEE are completely tax free regardless of the dollar amount of QHEE.

Just received the Schwab newsletter in the mail, where they mention the kiddie tax.  They indicate (and I think they usually get these things right) that the tax applies to any dependent children under age 18 or full-time students younger than 24.  It applies on any unearned income (including cap gains and interest and dividends) over $2,200.  That amount would be taxed at the parent's rate.

Gotcha, unearned income being the kicker here which disqualifies them for the standard deduction.

To be precise and accurate, any tax dependent (typically young kids, college students, and adult parents relying on their kids for support) does not get the "standard" standard deduction.  They have to go to a separate chart and worksheet to determine their standard deduction based on their earned and unearned income.

Once they figure that out, then they can calculate their taxable income (which is approximately adjusted gross income minus the above mentioned standard deduction or itemized deduction).

Then they calculate their tax due on that taxable income.  If the kiddie tax applies, they'll calculate that on Form 8615, which determines the actual tax on line 16 of Form 1040.

[JJ-]

Someone mentioned the 0% cap gains rate for stock in the kids' name.  True as long as (a) the kid's cap gains dollar amount is low enough and (b) if the kid is not subject to the kiddie tax, which I think is currently based on the kids' age.  Of course 529 withdrawals used for QHEE are completely tax free regardless of the dollar amount of QHEE.

Just received the Schwab newsletter in the mail, where they mention the kiddie tax.  They indicate (and I think they usually get these things right) that the tax applies to any dependent children under age 18 or full-time students younger than 24.  It applies on any unearned income (including cap gains and interest and dividends) over $2,200.  That amount would be taxed at the parent's rate.

Gotcha, unearned income being the kicker here which disqualifies them for the standard deduction.

To be precise and accurate, any tax dependent (typically young kids, college students, and adult parents relying on their kids for support) does not get the "standard" standard deduction.  They have to go to a separate chart and worksheet to determine their standard deduction based on their earned and unearned income.

Once they figure that out, then they can calculate their taxable income (which is approximately adjusted gross income minus the above mentioned standard deduction or itemized deduction).

Then they calculate their tax due on that taxable income.  If the kiddie tax applies, they'll calculate that on Form 8615, which determines the actual tax on line 16 of Form 1040.

As a new parent this is incredibly helpful. The form 8615 page also has references to pub 929 which talks about taxes for kids. Thank you.