Author Topic: 529 plan - simple version  (Read 2367 times)

Allen

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529 plan - simple version
« on: August 26, 2014, 11:09:37 AM »
Here are my simplified understanding of 529 plans.  Can someone tell me if any of these assumptions are wrong?

I live in WA state, but I can invest in any state's 529 plan.

A plan like CA lets me contribute dollars that can be invested into low cost index funds, with low fees.

Contributions are like an IRA in that they can directly reduce my income for tax purposes. (This one I'm least sure about)

The money can grow tax free.

The money can be withdrawn tax free if used for qualified educational expenses.

State Taxes are irrelevant to me because I'm in a state with no income tax (sales tax only in WA)


Am I missing anything?  Seems like a no brainer to max this out and reduce my federal taxable income.

/edit: My bolded assumption is WRONG.  There are no pre-tax sheltering benefits to a 529 plan as corrected below.
« Last Edit: August 26, 2014, 11:27:13 AM by Allen »

Mister Fancypants

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Re: 529 plan - simple version
« Reply #1 on: August 26, 2014, 11:16:13 AM »
Here are my simplified understanding of 529 plans.  Can someone tell me if any of these assumptions are wrong?

I live in WA state, but I can invest in any state's 529 plan.

A plan like CA lets me contribute dollars that can be invested into low cost index funds, with low fees.

Contributions are like an IRA in that they can directly reduce my income for tax purposes. (This one I'm least sure about)

The money can grow tax free.

The money can be withdrawn tax free if used for qualified educational expenses.

State Taxes are irrelevant to me because I'm in a state with no income tax (sales tax only in WA)


Am I missing anything?  Seems like a no brainer to max this out and reduce my federal taxable income.


Sorry there is no federal tax deduction on contributions only certain states. Since you like in state with no income tax that doesn't benefit you.

NYS has the cheapest plan, but is not the most friendly to move if you want to transfer it later. It is managed by Vanguard.

Everything else you have stated is correct.

-Mister FancyPants

Cardinal12

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Re: 529 plan - simple version
« Reply #2 on: August 26, 2014, 11:21:08 AM »
From Wikipedia:

Quote
First, although contributions are not deductible from the donor's federal income tax liability, many states provide state income tax deductions for all or part of the contributions of the donor. Beyond the potential state income tax deduction possibilities, a prime benefit of the 529 plan is that the principal grows tax-deferred and distributions for the beneficiary's college costs are exempt from tax.

Thanks for bringing this up, I'd been meaning to find out more about the tax advantages of 529 plans.

Allen

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Re: 529 plan - simple version
« Reply #3 on: August 26, 2014, 11:22:54 AM »
So it is more like a Roth IRA than an IRA? 

So it is good to max this out (and a good deal for college savings), but not above true pre-tax savings like 401k and HSA and IRA.

Mister Fancypants

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Re: 529 plan - simple version
« Reply #4 on: August 26, 2014, 11:37:45 AM »
So it is more like a Roth IRA than an IRA? 

So it is good to max this out (and a good deal for college savings), but not above true pre-tax savings like 401k and HSA and IRA.

It's likes Roth IRA and in some states also tax deductible.

It is very useful for college savings

EscapeVelocity2020

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Re: 529 plan - simple version
« Reply #5 on: August 26, 2014, 01:57:48 PM »
Other nice features of the 529 is that the contributor retains control of the funds (not the beneficiary), how flexible it is when it comes to changing the beneficiary (once per year), and that it is relatively lightly counted in the 'Expected Financial Contribution' of the family (Unlike the Uniform Gifts / Transfers to Minor or Coverdell ESA).  Although you should consult a CPA for your own planning, I am funding a 529 for the oldest child, and then plan to transfer any 'left-overs' to the second child, and also allows for flexibility in the range of expense outcomes and options.  I do not plan for the 529 to cover 8 years of out-of-state private college, but do hope to have enough for 8 years in-state public (4 years x 2 children).

According to http://www.usnews.com/education/best-colleges/paying-for-college/articles/2012/11/14/4-things-to-consider-when-changing-529-plan-beneficiaries:
"... families who want to change the beneficiary can choose among multiple generations, she notes. For instance, if a couple's oldest offspring receives a scholarship, they could reassign funds to nearly anyone else related to the child, such as siblings, parents, grandparents, first cousins, aunts, and uncles, McNeill says." 

Any 529 funds left over after the 2 children attend college can be used by parents, or even grandchildren, I believe, and there is no 'required distribution' age (currently).  I'm not sure what happens if the 529 owner dies, I assume that's the one downside that penalty and interest applies when it gets transferred...