Author Topic: 529 plan for wife's grad school  (Read 8945 times)

nawhite

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529 plan for wife's grad school
« on: October 21, 2013, 02:35:25 PM »
My wife is currently attending gradschool and we pay $2500/semester and she is doing 3 semester's per year (summer classes).

I found out that Colorado (where I live) offers a 529 plan which allows you to invest in Vanguard funds and that contributions to the 529 are not taxed at the state level (4.3% but probably going up to 5% next year). I'm tempted to route payments to her school through the 529 to get the 5% benefit on state taxes. Basically, one week before we want to pay tuition, I'd contribute the money to the 529 and put in in a money market fund or something else that won't lose money. Then I'd take a disbursement for education expenses to pay for her tuition a week later. At tax time I'd get to write off $7500 from our state income taxes.

Are there any hiccups I'm likely to experience doing this? Is it worth it?

HamhockHammock

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Re: 529 plan for wife's grad school
« Reply #1 on: October 21, 2013, 05:45:21 PM »
Crafty idea! Saving $375 ain't nothing to sneeze at.  Would there be management fees for the safe asset? Regardless you'll still come out ahead, but you may not realize the whole $375.

And congratz on being allowed to deduct up to your taxable income - my state only allows up to a $2,000 deduction per year.

looking forward to reading what others think.


Daleth

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Re: 529 plan for wife's grad school
« Reply #2 on: October 21, 2013, 06:26:56 PM »
That sounds like a fantastic idea!

nawhite

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Re: 529 plan for wife's grad school
« Reply #3 on: October 22, 2013, 08:34:42 AM »
I looked up the management fees and because I live in Colorado, they'll waive the fixed $20/year fee. Then its just a 0.46% fee which they waive on the Money Market account so that you don't lose money. (basically the underlying vanguard money market fund pays 0.08% so the 529 plan just charges that much and gives you an effective return of 0.00%).

So I won't lose any money on transaction fees or on management fees. I also found out I can set up a payroll deduction so I don't need to worry about saving the money up myself in my own savings account for 4 months. And I do love paying myself first.

msilenus

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Re: 529 plan for wife's grad school
« Reply #4 on: October 23, 2013, 01:21:53 AM »
Why just tuition?  Books and equipment are definitely in.  If your family needs a computer upgrade before she's out, that can fall under it under some new rules.

You might want to look into how much of room and board you can get covered through the plan.  Some quick googling turned these up.  It looks like you can call her college's financial aid department and ask what they report for costs for students living at home:
http://www.savingforcollege.com/articles/avoid-these-529-withdrawal-traps
http://www.401kpsp.com/529faqs.php
http://www.irs.gov/irm/part7/irm_07-025-044.html#d0e238

(I suspect the second source is wrong, given that the IRS source seems to disagree, but I did find it and I don't want to withhold anything that might prove useful in your own due diligence.)
« Last Edit: October 23, 2013, 01:23:24 AM by msilenus »

nawhite

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Re: 529 plan for wife's grad school
« Reply #5 on: October 23, 2013, 09:54:19 AM »
Why just tuition?  Books and equipment are definitely in.  If your family needs a computer upgrade before she's out, that can fall under it under some new rules.

You might want to look into how much of room and board you can get covered through the plan.  Some quick googling turned these up.  It looks like you can call her college's financial aid department and ask what they report for costs for students living at home:
http://www.savingforcollege.com/articles/avoid-these-529-withdrawal-traps
http://www.401kpsp.com/529faqs.php
http://www.irs.gov/irm/part7/irm_07-025-044.html#d0e238

(I suspect the second source is wrong, given that the IRS source seems to disagree, but I did find it and I don't want to withhold anything that might prove useful in your own due diligence.)

Holy cow that's awesome! I'll need to call the financial aid office to confirm but looking at the website it looks like the "living with parents" living expenses is $6800! I can deduct like 6 months of mortgage payments. This seems too good to be true. I guess I'll call around and wait for the other shoe to drop.


nawhite

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Re: 529 plan for wife's grad school
« Reply #6 on: October 29, 2013, 12:46:43 PM »
Just wanted to let everyone browsing old threads know, I don't think the above idea is the best way to reduce our taxes on tuition anymore.

I'll be talking to a Tax accountant, but after doing a lot of research, the 529 redirect mentioned above is likely not the best plan for the first $14,000 in grad school tuition or $8000 for undergrad tuition due to the federal deductions. After that point it is possible that the 529 redirect makes sense but you'll have to talk to your own tax guy/gal.

There are 2 federal programs: 1. The American Opportunity Tax Credit and 2. The Lifetime Learning credit.

1. The American Opportunity Tax Credit can only be used on the first 4 years of post-secondary education so only works for people doing undergraduate work. But it gives a federal tax decrease of 100% on the first $2000 of tuition and 25% of the second $2000 of tuition. Also up to $1000 of the $2500 can be a tax refund (where they pay you)

2. The Lifetime Learning Credit pays for 20% of up to the first $10,000 of qualified expenses. Anyone can claim it for any number of years.

You also can deduct up to $4000 of qualified higher education expenses from your income (not sure if this is instead of or in addition to the standard deduction).

So with my case, we'll likely have $7500 of tuition expenses plus about $7000 of other qualified expenses. So we'd deduct the first $4000 to save the 25% federal taxes we'd pay, then use the lifetime learning Credit to pay for 20% of the next $10k. We'd have about $500 left that we could do a 529 redirect with but with a state tax rate of 4.3% we'd only be saving $21 in state taxes so I'm not sure its worth it.

msilenus

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Re: 529 plan for wife's grad school
« Reply #7 on: October 29, 2013, 01:40:08 PM »
Does a 529 redirect render you ineligible for those credits?  (I'm guessing so, since you're posting that, but you didn't explicitly say, so I just want to make sure you're not assuming something that might not be true.)

nawhite

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Re: 529 plan for wife's grad school
« Reply #8 on: October 29, 2013, 01:50:44 PM »
Does a 529 redirect render you ineligible for those credits?  (I'm guessing so, since you're posting that, but you didn't explicitly say, so I just want to make sure you're not assuming something that might not be true.)

Yeah unfortunately you can't double-dip. Money you pay out of a 529 plan is already tax exempt and thus cannot also be used to qualify for these credits or deductions.

mlipps

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Re: 529 plan for wife's grad school
« Reply #9 on: October 29, 2013, 03:17:52 PM »
You can do both in a year if you have sufficient expenses though.

mlipps

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Re: 529 plan for wife's grad school
« Reply #10 on: October 29, 2013, 03:34:59 PM »
Just wanted to let everyone browsing old threads know, I don't think the above idea is the best way to reduce our taxes on tuition anymore.

I'll be talking to a Tax accountant, but after doing a lot of research, the 529 redirect mentioned above is likely not the best plan for the first $14,000 in grad school tuition or $8000 for undergrad tuition due to the federal deductions. After that point it is possible that the 529 redirect makes sense but you'll have to talk to your own tax guy/gal.

There are 2 federal programs: 1. The American Opportunity Tax Credit and 2. The Lifetime Learning credit.

1. The American Opportunity Tax Credit can only be used on the first 4 years of post-secondary education so only works for people doing undergraduate work. But it gives a federal tax decrease of 100% on the first $2000 of tuition and 25% of the second $2000 of tuition. Also up to $1000 of the $2500 can be a tax refund (where they pay you)

2. The Lifetime Learning Credit pays for 20% of up to the first $10,000 of qualified expenses. Anyone can claim it for any number of years.

You also can deduct up to $4000 of qualified higher education expenses from your income (not sure if this is instead of or in addition to the standard deduction).

So with my case, we'll likely have $7500 of tuition expenses plus about $7000 of other qualified expenses. So we'd deduct the first $4000 to save the 25% federal taxes we'd pay, then use the lifetime learning Credit to pay for 20% of the next $10k. We'd have about $500 left that we could do a 529 redirect with but with a state tax rate of 4.3% we'd only be saving $21 in state taxes so I'm not sure its worth it.

You can't do both the LLC & the tuition & fee deduction in the same year. See pg. 20 of IRS pub. 970: http://www.irs.gov/Individuals/Education-Credits

Daleth

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Re: 529 plan for wife's grad school
« Reply #11 on: November 04, 2013, 01:31:22 PM »
Also, those credits get phased out or eliminated if your AGI is above a certain amount. For instance:
http://www.irs.gov/uac/American-Opportunity-Tax-Credit