Author Topic: 529 college saving plans- yay or nay?  (Read 18182 times)

resy

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529 college saving plans- yay or nay?
« on: November 15, 2014, 10:56:13 PM »
My son will be turning 10 in a few months and while I don't believe we will be able to pay for his entire college, we do want to help.
I don't know how to invest, pretty much still in the introduction stage actually but this is something important for me so excuse my ignorance.
I've been reading somr about it. I've read about the penalties if you don't use if for college, the different types of plans that exist, how financial aid ia affected, age-based portfolios, etc but I still feel overwhelmed in choosing where to buy it.
I saw vanguard offers them. I haven't yet read about the specifics of my state plan(oregon).
 Who did you go with and why? Any additional suggestions are greatly appreciated.
I know at almost 10 it's a late start but better than never, right?!

Lkxe

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Re: 529 college saving plans- yay or nay?
« Reply #1 on: November 16, 2014, 08:16:23 AM »
I used to like this site but haven't used it in a few years. http://www.savingforcollege.com/ can't hurt to look.

Wesmon

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Re: 529 college saving plans- yay or nay?
« Reply #2 on: November 16, 2014, 08:52:42 AM »
I don't see a point in doing it unless you will be doing it in your state and take advantage of the state tax deduction available to you.    We started 529's for both of our kids the month they were each born with an automatic monthly deduction (250/month each) and the aged based investment option.  They are aged 6 and 8.  The run up in the market has been insane and we expect that the 529's will pay for their college.  If they get scholarships or don't use all the money then it turns into an nice retirement nest egg for themselves or they can change the beneficiary to their own children down the road.

Here's Oregon's site:
https://www.oregoncollegesavings.com/benefits/index.shtml
It looks like they have aged based portfolios, which automatically adjust stock/bond mix based on the kid's age.  Set it and forget it!
The fees are 0.36% which isn't great but not bad. Vanguard is 0.19% but you will not get an Oregon state tax credit (a much bigger benefit).



resy

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Re: 529 college saving plans- yay or nay?
« Reply #3 on: November 16, 2014, 02:23:24 PM »
Thank you so much for your help!

Zamboni

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Re: 529 college saving plans- yay or nay?
« Reply #4 on: November 16, 2014, 02:59:14 PM »
Double check if your state still has the tax credit.  NC repealed ours this year.  Then again, the NC state legislature and governor have done more damage to normal families in the past two years than anyone thought possible . . . and now we are sending the leader of the pack to Washington.

I am moving once I'm FIREd.

BooksAreNerdy

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Re: 529 college saving plans- yay or nay?
« Reply #5 on: November 16, 2014, 05:55:43 PM »
On the other hand, Kansas allows a state deduction no matter what states plan you use. So,we use vanguard's Nevada plan.

hdatontodo

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Re: 529 college saving plans- yay or nay?
« Reply #6 on: November 16, 2014, 07:17:21 PM »
My 6 year old has 4 years prepaid 529 in MD. The Mrs and I each paid for 2 years. About $10K/yr.

If we wanted him to live on campus and have books paid for, the MD estimator says we need $80K additional.

resy

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Re: 529 college saving plans- yay or nay?
« Reply #7 on: November 16, 2014, 08:37:40 PM »
If I understood correctly  my reading, the kid doesn't have to go to the state you purchased it through, right?

PathtoFIRE

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Re: 529 college saving plans- yay or nay?
« Reply #8 on: November 17, 2014, 08:14:39 AM »
If I understood correctly  my reading, the kid doesn't have to go to the state you purchased it through, right?

That's correct, for the 529 accounts we normally talk about, they are portable, they are wholly owned by you (if you are the one opening it), and not state-specific in use. Some states have other programs (prepaid tuition, tuition guarantee, etc.) that are state specific, which may be what you are thinking about.

For 529, some essential points are:
1) for federal taxes, contributions are aftertax, earnings grow tax free, and withdrawals for qualified expenses are tax free (these are regardless of which state's plan you use)
2) for state taxes, contributions may be pretax but for many they are not (depends on the state), earnings grow tax free, and withdrawals for qualified expenses are tax free (again, the last 2 points are regardless of which state's plan you use)
3) you retain ownership of the account throughout, so have complete control over investment selections and disbursements
4) you can change beneficiaries at any time (there are some limits to who you can name, mostly family members/dependents/step-family members)

johnny847

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Re: 529 college saving plans- yay or nay?
« Reply #9 on: November 17, 2014, 12:55:04 PM »
If I understood correctly  my reading, the kid doesn't have to go to the state you purchased it through, right?

That's correct, for the 529 accounts we normally talk about, they are portable, they are wholly owned by you (if you are the one opening it), and not state-specific in use. Some states have other programs (prepaid tuition, tuition guarantee, etc.) that are state specific, which may be what you are thinking about.

For 529, some essential points are:
1) for federal taxes, contributions are aftertax, earnings grow tax free, and withdrawals for qualified expenses are tax free (these are regardless of which state's plan you use)
2) for state taxes, contributions may be pretax but for many they are not (depends on the state), earnings grow tax free, and withdrawals for qualified expenses are tax free (again, the last 2 points are regardless of which state's plan you use)
3) you retain ownership of the account throughout, so have complete control over investment selections and disbursements
4) you can change beneficiaries at any time (there are some limits to who you can name, mostly family members/dependents/step-family members)

Building on that - there are "prepaid" 529s where you are prepaying tuition credits. These prepaid credits are only applicable to the state from which you bought them. These are, like PathtoFire states, not the ones we generally talk about.

If the 529 talks about different portfolio/fund options, it is certainly one of the portable ones.


And I concur with the others - do it if you have a state tax benefit (quick look at the Oregon 529 site says there is a deduction on your state taxes).
Investing in a 529 beyond the deduction limit is a harder question to answer. Partly depends on things like what tax bracket you are in now/ in the future (such as, do you think you'll be in the 15% tax bracket so your long term capital gains rate is 0% when paying for college?). But this also depends on the tax code in the future.

seattlecyclone

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Re: 529 college saving plans- yay or nay?
« Reply #10 on: November 17, 2014, 01:54:59 PM »
Building on that - there are "prepaid" 529s where you are prepaying tuition credits. These prepaid credits are only applicable to the state from which you bought them.

This is not always the case. The payout value of the credits from Washington's GET program is tied to the current in-state tuition at the University of Washington, but this money can be applied to costs at any accredited American university.

I happen to think the GET program is probably a bad investment. The amount they're charging for the credits is 46% higher than current tuition rates. This means that future tuition increases would have to outpace stock market growth by a significant margin in order for GET to be a better investment than an alternative 529 plan, and I don't think that rate of tuition increase is sustainable in the long term. Already we've seen a bunch of political pressure about this issue, which has caused the university to freeze tuition rates for the past two years.

That said, if you disagree with me and you think tuition is likely to march upward faster than the stock market, and you or a relative happen to live in the state of Washington, this program could be worth a look.

johnny847

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Re: 529 college saving plans- yay or nay?
« Reply #11 on: November 17, 2014, 02:06:36 PM »
Building on that - there are "prepaid" 529s where you are prepaying tuition credits. These prepaid credits are only applicable to the state from which you bought them.

This is not always the case. The payout value of the credits from Washington's GET program is tied to the current in-state tuition at the University of Washington, but this money can be applied to costs at any accredited American university.

I happen to think the GET program is probably a bad investment. The amount they're charging for the credits is 46% higher than current tuition rates. This means that future tuition increases would have to outpace stock market growth by a significant margin in order for GET to be a better investment than an alternative 529 plan, and I don't think that rate of tuition increase is sustainable in the long term. Already we've seen a bunch of political pressure about this issue, which has caused the university to freeze tuition rates for the past two years.

That said, if you disagree with me and you think tuition is likely to march upward faster than the stock market, and you or a relative happen to live in the state of Washington, this program could be worth a look.

Huh. Interesting. I had only seen prepaid 529 credits only applicable to their own state, so I had just assumed.
I agree with you - it's probably a bad use of one's money.

MissPeach

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Re: 529 college saving plans- yay or nay?
« Reply #12 on: November 17, 2014, 02:32:26 PM »
I am currently on the nay side. My state doesn't provide any tax benefits so the only benefit for the loss of funds against FIRE or other expenses is the tax free disbursement. I am hoping to FIRE right around the time I need to use it so taking the money from my taxable accounts shouldn't bee too expensive. I have no idea right now what my child will want to do so I don't want to over fund it but might choose to put some money in later.

resy

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Re: 529 college saving plans- yay or nay?
« Reply #13 on: November 17, 2014, 06:51:52 PM »
Buying prepaid makes me nervous as I do not know what my son's college/state choice will be(although I do hope he stays near-room and board would be covered!). I think for us an age based plan will be perfect.
Thank you so much to all of you guys, I felt like an idiot when posting this question yet you guys have been very helpful  :)

Chuck

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Re: 529 college saving plans- yay or nay?
« Reply #14 on: November 18, 2014, 10:57:34 PM »
I'm a nay.

If I decide to help out my hypothetical college aged children out in +23 or so years, I will use the tax deferred accounts I set up to facilitate retirement. If.

MDM

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Re: 529 college saving plans- yay or nay?
« Reply #15 on: November 18, 2014, 11:04:39 PM »
Recently deposited the amount we will withdraw the first week of January 2015.  That gives us the state tax deduction for this year.

Not sure what (if anything) we will do beyond that.

johnny847

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Re: 529 college saving plans- yay or nay?
« Reply #16 on: November 19, 2014, 01:23:41 AM »
Recently deposited the amount we will withdraw the first week of January 2015.  That gives us the state tax deduction for this year.

Not sure what (if anything) we will do beyond that.

Always a great trick, I employ it every year as a grad student.

GoldenStache

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Re: 529 college saving plans- yay or nay?
« Reply #17 on: November 19, 2014, 06:33:39 AM »
For the younger crowd here, I wish I would have started a 529 plan for my unborn children from my unknown wife at the time.

Lets just say you are 23, maxing out your Roth IRA and have some extra cash (but are planning on meeting someone and having kids some day).

Throw $1k or $3k into the Vanguard plan (you can start a 529 in your name and transfer it penalty free).  20/25 years of tax free growth could be really nice.  I like the Vanguard plan more because of its ease of use rather than picking a state plan (even though you are probably losing a tax deduction) because you have no idea where your future kids will want to go to school or even what state/country you will be living in.

johnny847

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Re: 529 college saving plans- yay or nay?
« Reply #18 on: November 19, 2014, 06:48:27 AM »
For the younger crowd here, I wish I would have started a 529 plan for my unborn children from my unknown wife at the time.

Lets just say you are 23, maxing out your Roth IRA and have some extra cash (but are planning on meeting someone and having kids some day).

Throw $1k or $3k into the Vanguard plan (you can start a 529 in your name and transfer it penalty free).  20/25 years of tax free growth could be really nice.  I like the Vanguard plan more because of its ease of use rather than picking a state plan (even though you are probably losing a tax deduction) because you have no idea where your future kids will want to go to school or even what state/country you will be living in.

I exactly meet your hypothetical situation - I am maxing my Roth, and have extra cash left over that I put into taxable investments. And I do hope to meet someone and have kids one day.

But I don't think your plan would be wise. The obvious is if I don't meet somebody, or I do meet somebody and change my mind about having kids. Now the money is stuck in a 529, and I have to pay a 10% penalty on the gains to pull the money out.
Also, at least until I actually have a child, I would do better by just using taxable investing. A taxable investment from Vanguard can be used for any purpose whatsoever. Also, their expense ratios are lower than those found in even the best 529s (although marginally so if we're looking at the best 529s). Still, the lower expense ratio is guaranteed. Using 529 money for education of a hypothetical child is not.
And, if an investor can use tax gain harvesting because he or she is in a low tax bracket, using taxable investments can be incredibly efficient because he or she can raise the basis of their investments for free (at least on a federal level. Depends on which state for those taxes).
Finally, in that situation you'd probably end up naming yourself as the beneficiary of the 529. When you change the beneficiary of a 529 across generous(EDIT: brain fart, meant generations), it is subject to gift taxes (for which up to $14k per donor donee pair is excluded from tax each year). Disadvantageous for large balances of 529s (which probably wouldn't happen in your scenario of just putting a couple thousand in). Fortunately, it could be mitigated by rolling over some of the balance into a new 529. Then, change the beneficiary of the old 529 in the current year and the beneficiary of the new 529 in a future year.


Hindsight is 20/20.
« Last Edit: November 19, 2014, 08:41:47 AM by johnny847 »

sb_NoVA

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Re: 529 college saving plans- yay or nay?
« Reply #19 on: November 19, 2014, 08:39:23 AM »
For the younger crowd here, I wish I would have started a 529 plan for my unborn children from my unknown wife at the time.

Lets just say you are 23, maxing out your Roth IRA and have some extra cash (but are planning on meeting someone and having kids some day).

Throw $1k or $3k into the Vanguard plan (you can start a 529 in your name and transfer it penalty free).  20/25 years of tax free growth could be really nice.  I like the Vanguard plan more because of its ease of use rather than picking a state plan (even though you are probably losing a tax deduction) because you have no idea where your future kids will want to go to school or even what state/country you will be living in.

I exactly meet your hypothetical situation - I am maxing my Roth, and have extra cash left over that I put into taxable investments. And I do hope to meet someone and have kids one day.

But I don't think your plan would be wise. The obvious is if I don't meet somebody, or I do meet somebody and change my mind about having kids. Now the money is stuck in a 529, and I have to pay a 10% penalty on the gains to pull the money out.
Also, at least until I actually have a child, I would do better by just using taxable investing. A taxable investment from Vanguard can be used for any purpose whatsoever. Also, their expense ratios are lower than those found in even the best 529s (although marginally so if we're looking at the best 529s). Still, the lower expense ratio is guaranteed. Using 529 money for education of a hypothetical child is not.
And, if an investor can use tax gain harvesting because he or she is in a low tax bracket, using taxable investments can be incredibly efficient because he or she can raise the basis of their investments for free (at least on a federal level. Depends on which state for those taxes).
Finally, in that situation you'd probably end up naming yourself as the beneficiary of the 529. When you change the beneficiary of a 529 across generous, it is subject to gift taxes (for which up to $14k per donor donee pair is excluded from tax each year). Disadvantageous for large balances of 529s (which probably wouldn't happen in your scenario of just putting a couple thousand in). Fortunately, it could be mitigated by rolling over some of the balance into a new 529. Then, change the beneficiary of the old 529 in the current year and the beneficiary of the new 529 in a future year.


Hindsight is 20/20.

Thanks for laying out everything so clearly!

Scandium

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Re: 529 college saving plans- yay or nay?
« Reply #20 on: November 19, 2014, 08:41:16 AM »
I like the Vanguard plan more because of its ease of use rather than picking a state plan (even though you are probably losing a tax deduction) because you have no idea where your future kids will want to go to school or even what state/country you will be living in.
The Vanguard plan is just the Nevada 529 plan. I don't understand what you mean by:
"you have no idea where your future kids will want to go to school"
That does not matter. You can use money in the alaska plan to go to Florida state, or whatever. (There might be some exceptions is some crappy state plans. But for most this is true)

The NY plan is just Vanguard funds as well. With a 0.17% ER. That's what I plan to use. I don't plan to go crazy with it, but just to have some tax free growth in addition to taxable investments.

MDM

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Re: 529 college saving plans- yay or nay?
« Reply #21 on: November 19, 2014, 09:33:04 AM »
Recently deposited the amount we will withdraw the first week of January 2015.  That gives us the state tax deduction for this year.

Not sure what (if anything) we will do beyond that.

Always a great trick, I employ it every year as a grad student.

Not sure how one does this every year (highlighted part of quote above).  Isn't the tax deduction equal to "amount deposited minus amount withdrawn"?  If I deposit X to the 529 in 2014, then withdraw X from the 529 to pay tuition in 2015, I would have to deposit 2X later in 2015 to get the same tax deduction as in 2014.  Or am I missing something?

johnny847

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Re: 529 college saving plans- yay or nay?
« Reply #22 on: November 19, 2014, 09:40:30 AM »
Recently deposited the amount we will withdraw the first week of January 2015.  That gives us the state tax deduction for this year.

Not sure what (if anything) we will do beyond that.

Always a great trick, I employ it every year as a grad student.

Not sure how one does this every year (highlighted part of quote above).  Isn't the tax deduction equal to "amount deposited minus amount withdrawn"?  If I deposit X to the 529 in 2014, then withdraw X from the 529 to pay tuition in 2015, I would have to deposit 2X later in 2015 to get the same tax deduction as in 2014.  Or am I missing something?

Depends on state law. My understanding is only a few states do what you said. My state certainly does not.

MDM

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Re: 529 college saving plans- yay or nay?
« Reply #23 on: November 19, 2014, 02:19:34 PM »
Depends on state law. My understanding is only a few states do what you said. My state certainly does not.
Good deal for you - thanks for clarifying.

johnny847

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Re: 529 college saving plans- yay or nay?
« Reply #24 on: November 19, 2014, 03:26:54 PM »
Depends on state law. My understanding is only a few states do what you said. My state certainly does not.
Good deal for you - thanks for clarifying.

Haha yea I was certainly proud the first time I exploited this "loophole." Man our tax system doesn't make sense more often than it does.

GoldenStache

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Re: 529 college saving plans- yay or nay?
« Reply #25 on: November 20, 2014, 09:32:35 AM »
@johnny847
You are correct about the taxes but you can transfer the $14k a year into the new 529 to avoid them.  If I would have put in the extra $2k that I probably spent on booze at the time it would probably be worth about $6k now.  Not a lot but a nice start.. Hind sight of course. 

@Scandium
I haven't really looked into the NY plan, I like the state of NV better than NY (and I like Vanguard)
Several state plans require the funds to be used in that state and several more were are talking about removing the tax break if the funds are not used in that state.  It was a wsj article that I am not finding now, sounded like a huge headache trying to repay taxes that were paid years ago because your child went out of state. 

There was a big thing around 2004ish about prepaying for college, had to be within the state, at the time was about $10k per year, and had to be at least 15 years out.  I thought it was an interesting concept but the limitation and the no refunds clause was off putting.   

johnny847

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Re: 529 college saving plans- yay or nay?
« Reply #26 on: November 20, 2014, 09:54:11 AM »
@johnny847
You are correct about the taxes but you can transfer the $14k a year into the new 529 to avoid them.  If I would have put in the extra $2k that I probably spent on booze at the time it would probably be worth about $6k now.  Not a lot but a nice start.. Hind sight of course. 
That's exactly why I said
Fortunately, it could be mitigated by rolling over some of the balance into a new 529. Then, change the beneficiary of the old 529 in the current year and the beneficiary of the new 529 in a future year.
Which I guess is the opposite direction of cash flow (moving all but $14k into a new 529 under your name). But the effect is the same.

The problem I have with your advice is as you say, hindsight. You (presumably) have a kid now. Giving advice to a 23 year old like me to use a 529 to save for a hypothetical kid is flawed when they have better options that don't lock up their money.

Several state plans require the funds to be used in that state
There are no 529 plans that I am aware of are not of the prepaid college credits variety that require you to use the funds only for their state. Websites such as http://www.savingforcollege.com/intro_to_529s/are-529-plans-only-for-my-states-public-colleges.php agree with me. I was not able to find any IRS or US code about the matter though. If you know of any state 529 that is of the savings variety, not the prepaid, that does not allow you to use your 529 funds for out of state colleges, please let me know so I can tell others to avoid such plans. Otherwise, please do not dissuade others from using a savings 529 because you have currently unsubstantiated doubts that there exist 529s where you can only use savings 529 funds for that state's colleges.

brooklynguy

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Re: 529 college saving plans- yay or nay?
« Reply #27 on: November 20, 2014, 10:02:31 AM »
I use the NY 529 plan and benefit from the state tax deduction, and there is no requirement to use the funds in NY.

For those of you who are concerned about locking up too much money in a 529 plan, take a look at this discussion, and in particular this post by msilenus:

The penalty is not good, but it's better worse than the alternative for lots of people.  What's your marginal tax rate on investment income?  What do you expect it to be when kids go off to college?  I pay AMT in California, so my marginal rate is about 45%.  That's half my dividends every year.  When I last ran the numbers, it turned out that undercontributing to a 529 by $1 was worse than overcontributing by $4 and paying a penalty on earnings on those $4.

The benefit goes beyond taxes, too.  When you liquidate your 529 to pay for college, you don't realize income for FAFSA purposes.  For the mustache crowd, that's a pretty big deal, as you're likely to be retired and earning not a whole lot at that point.  Hide the rest of your assets in your home equity and ERISA-qualified retirement accounts, and you can look positively destitute.  Go run some numbers over at Havard's financial aid office using their calculator, and see what falls out for you.

But perhaps most important is having contingency plans to avoid the penalty.  Mine shift around, but they might look like this some of the time:

Plan A: Use the money to pay for my kids' college, and/or take money out when they get scholarships and/or financial aid (with no penalty.)

Plan B: Point the account at a nephew or niece.  I don't have any nephews, yet.  But let's say I eventually do, and let's say that my siblings don't use a 529 to save for their college, and that they go.  Kid goes to school, incurs education expenses.  Now I'm eligible to withdraw money from the account penalty free.  Maybe I pay for the tuition and then they pay me back, you're thinking?  Unnecessary, actually.  If you check the IRS rules, all that matters to avoid the penalty is that there existed eligible education expenses.  It's just really important to make sure that your 529 is the only one being used for those expenses.

Plan C: Point the account at me and my wife.  Use the money to pay qualified education expenses, including room and board.  Attending a community college 50% time doesn't cost a lot, but room and board allowances are something like $10k/yr around where I am now.  We can keep doing this in good faith for as long as we want to learn.  I expect that will be a long time.

Plan D: Point a diminished balance at grandkids, with an epic compounding horizon.  How great would it be to relieve my kids of the burden of paying for their kids' college?  Maybe we can get a dynastic wealth thing going on, esp. if my other investments have done well and the 'stache has grown.  Doing that for education expenses isn't socially toxic and affluenza-breeding like it is with cash.

Plan E: Pay a penalty if the balance is still looking too high, or I need the money, and still come out ahead.  By the time we get to Plan E, how old am I, do you think, given Plans A-D?  Probably pretty old.  According to my spreadsheet, after about 30 years a 529 is better than a taxable account even with the penalty.  So if I can put off withdrawals into my seventies, I can't lose.

Plan F: Okay, I guess I apparently come out behind.  But see my first paragraph again.  Overshooting a bit is perfectly rational for me.

Plan G: I wildly overshot.  Oops?  How terrible this is basically boils down to how much you like or hate your job.  It means you could have quit a bit earlier, but now you have more money than you planned on, less 10% on the earnings.  How bad is that, really?

johnny847

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Re: 529 college saving plans- yay or nay?
« Reply #28 on: November 20, 2014, 10:15:02 AM »
I use the NY 529 plan and benefit from the state tax deduction, and there is no requirement to use the funds in NY.

For those of you who are concerned about locking up too much money in a 529 plan, take a look at this discussion, and in particular this post by msilenus:

The penalty is not good, but it's better worse than the alternative for lots of people.  What's your marginal tax rate on investment income?  What do you expect it to be when kids go off to college?  I pay AMT in California, so my marginal rate is about 45%.  That's half my dividends every year.  When I last ran the numbers, it turned out that undercontributing to a 529 by $1 was worse than overcontributing by $4 and paying a penalty on earnings on those $4.

The benefit goes beyond taxes, too.  When you liquidate your 529 to pay for college, you don't realize income for FAFSA purposes.  For the mustache crowd, that's a pretty big deal, as you're likely to be retired and earning not a whole lot at that point.  Hide the rest of your assets in your home equity and ERISA-qualified retirement accounts, and you can look positively destitute.  Go run some numbers over at Havard's financial aid office using their calculator, and see what falls out for you.

But perhaps most important is having contingency plans to avoid the penalty.  Mine shift around, but they might look like this some of the time:

Plan A: Use the money to pay for my kids' college, and/or take money out when they get scholarships and/or financial aid (with no penalty.)

Plan B: Point the account at a nephew or niece.  I don't have any nephews, yet.  But let's say I eventually do, and let's say that my siblings don't use a 529 to save for their college, and that they go.  Kid goes to school, incurs education expenses.  Now I'm eligible to withdraw money from the account penalty free.  Maybe I pay for the tuition and then they pay me back, you're thinking?  Unnecessary, actually.  If you check the IRS rules, all that matters to avoid the penalty is that there existed eligible education expenses.  It's just really important to make sure that your 529 is the only one being used for those expenses.

Plan C: Point the account at me and my wife.  Use the money to pay qualified education expenses, including room and board.  Attending a community college 50% time doesn't cost a lot, but room and board allowances are something like $10k/yr around where I am now.  We can keep doing this in good faith for as long as we want to learn.  I expect that will be a long time.

Plan D: Point a diminished balance at grandkids, with an epic compounding horizon.  How great would it be to relieve my kids of the burden of paying for their kids' college?  Maybe we can get a dynastic wealth thing going on, esp. if my other investments have done well and the 'stache has grown.  Doing that for education expenses isn't socially toxic and affluenza-breeding like it is with cash.

Plan E: Pay a penalty if the balance is still looking too high, or I need the money, and still come out ahead.  By the time we get to Plan E, how old am I, do you think, given Plans A-D?  Probably pretty old.  According to my spreadsheet, after about 30 years a 529 is better than a taxable account even with the penalty.  So if I can put off withdrawals into my seventies, I can't lose.

Plan F: Okay, I guess I apparently come out behind.  But see my first paragraph again.  Overshooting a bit is perfectly rational for me.

Plan G: I wildly overshot.  Oops?  How terrible this is basically boils down to how much you like or hate your job.  It means you could have quit a bit earlier, but now you have more money than you planned on, less 10% on the earnings.  How bad is that, really?
His math on the penalty doesn't quite max sense to me. Maybe somebody can shed some light on it, but when you make a nonqualified withdrawal from a 529, you have to pay both penalties and taxes on the gains.

Some drawbacks to msilenus's plans that he or she didn't seem to point out:

Contingency plan B and D may again rely on hypothetical family members coming into being. Which is arguably worse than hypothetical children of your own, because having children is partly under your control. If you already have a nephew or niece though, this could be a viable option. Of course, in order to get that money back, your brother or sister would have to pay you back for the money you're spending on their kid.

Contingency C is interesting. But, room and board use of a 529 requires that a student be enrolled at least half time. So the math on this situation may work out, if your local community college is that cheap even to be a half time student. But it's something everybody would have to evaluate for themselves. Also, again, this relies on the assumption that you would be living near a cheap community college sometime in the future.

Contingency E - Huh? I'm still confused by msilenus's math. Expense ratios in a taxable accounts at Vanguard are lower than in any 529, so that's a compounding loss right there. And then you pay a tax and penalty on gains for money pulled out of a 529 not used for educational expenses.

Contingency F - I agree, overshooting a bit is perfectly rational. But you can overshoot in a taxable account instead and not have to deal with this headache.

EDIT: I think I'll revive that thread and ask msilenus myself.

GoldenStache

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Re: 529 college saving plans- yay or nay?
« Reply #29 on: November 20, 2014, 10:23:29 AM »
@johnny847

"please do not dissuade others from using a savings 529"

If you thought my post was dissuading others to not use a 529 you completely missed the point of my post.  The point was to start using a 529 before you have children (if you are planning on it) if you are already maximizing other tax saving abilities.

johnny847

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Re: 529 college saving plans- yay or nay?
« Reply #30 on: November 20, 2014, 10:29:09 AM »
@johnny847

"please do not dissuade others from using a savings 529"

If you thought my post was dissuading others to not use a 529 you completely missed the point of my post.  The point was to start using a 529 before you have children (if you are planning on it) if you are already maximizing other tax saving abilities.
I know that was the point of your original post. But you specifically said
Several state plans require the funds to be used in that state and several more were are talking about removing the tax break if the funds are not used in that state.  It was a wsj article that I am not finding now, sounded like a huge headache trying to repay taxes that were paid years ago because your child went out of state. 

There was a big thing around 2004ish about prepaying for college, had to be within the state, at the time was about $10k per year, and had to be at least 15 years out.  I thought it was an interesting concept but the limitation and the no refunds clause was off putting.   
Is that not trying to dissuade people from using certain savings 529s that you think have such clauses? I later go on to say
Otherwise, please do not dissuade others from using a savings 529 because you have currently unsubstantiated doubts that there exist 529s where you can only use savings 529 funds for that state's colleges.
You purposely left this part out while quoting me. I guess to be crystal clear, I mean please do not discourage people into thinking that you should be cautious about using savings 529s because they might restrict you to only their state.

If you can fund such a savings 529, I will gladly retract all such claims.

brooklynguy

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Re: 529 college saving plans- yay or nay?
« Reply #31 on: November 20, 2014, 10:46:00 AM »
His math on the penalty doesn't quite max sense to me. Maybe somebody can shed some light on it, but when you make a nonqualified withdrawal from a 529, you have to pay both penalties and taxes on the gains.

Yes, but when you make a nonqualified withdrawal you are paying taxes at your marginal rate then in effect (for an early retiree, probably lower than it was during the years when the earnings were sheltered from tax).  Everyone has to run the numbers for their own situation, but the deferral of taxes while invested in the 529 plan and the upfront state tax deduction (if any, and if not subject to clawback upon nonqualified withdrawal--which some plans (like NY) are) could result in better returns than taxable investing even for nonqualified withdrawals after taking the penalty into account.

johnny847

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Re: 529 college saving plans- yay or nay?
« Reply #32 on: November 20, 2014, 10:55:30 AM »
His math on the penalty doesn't quite max sense to me. Maybe somebody can shed some light on it, but when you make a nonqualified withdrawal from a 529, you have to pay both penalties and taxes on the gains.

Yes, but when you make a nonqualified withdrawal you are paying taxes at your marginal rate then in effect (for an early retiree, probably lower than it was during the years when the earnings were sheltered from tax).  Everyone has to run the numbers for their own situation, but the deferral of taxes while invested in the 529 plan and the upfront state tax deduction (if any, and if not subject to clawback upon nonqualified withdrawal--which some plans (like NY) are) could result in better returns than taxable investing even for nonqualified withdrawals after taking the penalty into account.
Ah right. I forgot about taxes now vs taxes later. Now that part sort of makes sense. I say sort of because there's still the fact that long term capital gains tax rates are lower than 529 withdrawal tax rates (normal income tax rates). But msilenus said he/she was subject to AMT, which basically throws all these rules out the window. And AMT is not something I care to understand =P. I'll take msilenus's word for it that such situations do exist, at the very least when AMT is incurred. And may still occur with high tax rates without AMT.

Gin1984

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Re: 529 college saving plans- yay or nay?
« Reply #33 on: November 20, 2014, 10:57:31 AM »
In my opinion the only reason to use a 529 is if you have maxed out every single tax advantage account and the money would otherwise sit in a taxable account.

johnny847

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Re: 529 college saving plans- yay or nay?
« Reply #34 on: November 20, 2014, 11:07:57 AM »
In my opinion the only reason to use a 529 is if you have maxed out every single tax advantage account and the money would otherwise sit in a taxable account.
Agreed with your underlying message - your kid can borrow for college, but you can't borrow for your retirement.

sol

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Re: 529 college saving plans- yay or nay?
« Reply #35 on: November 20, 2014, 11:33:12 AM »
529 plans make sense for some people, but there are a ton of options.  Where to put the money?

I've about convinced myself that my state's equivalent GET program is pretty much a scam, unless your kid is like six years old or younger AND you think we're entering a decade-long bear market.  So I've been looking at Vanguard's 529 plans, based in Nevada.  They are pretty terrible too.

Why are they terrible?  Because they don't give you access to all Vanguard funds, you instead have to invest in one of 28 predetermined Vanguard "portfolios" and there is no prospectus for those portfolios, so you can't really see what you're investing in.  They make it clear that these are not mutual funds or ETFs, but some other Vanguard product that Nevada administers.

For example, the Vanguard 529 "Moderate Growth" portfolio looks like it might be a good option for a college savings fund, but if you compare its returns, expense ratio, and tracking indices to the Vanguard "Moderate Growth" fund (VSMGX) the numbers don't match up.  The 529 is charging you a higher expense ratio for lower returns.  If you read the really fine print on the tracking indices they use for comparisons, you can see that VSMGX is roughly 60/40 stocks/bonds but the 529 equivalent looks like it's 50/50.  It took me almost an hour to figure that out, though, because the information is hidden, almost like the 529 plans are deliberately obscuring their investment plan details.

I want control of my investments, even my 529 plans.  How can you responsibly invest in anything when you can't see what it really is?
« Last Edit: November 20, 2014, 11:42:17 AM by sol »

sol

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Re: 529 college saving plans- yay or nay?
« Reply #36 on: November 20, 2014, 11:40:06 AM »
The other big hiccup here is that a 529 plan is only a valuable tax shelter if you're investing in something that generates taxable income.  Otherwise it's a waste.

If you're putting your Vanguard 529 into the Total Stock Market Index, then your taxable gains are miniscule anyway.  You might as well just invest that money into VTSAX since it won't generate much in taxable income and you aren't expecting to pay any capital gains in retirement, and save yourself the exta 0.16% in expense ratio over the 529 plan while you're at it.  Or even better, buy the ETF equivalent VTI and bypass the $3000 minimum contribution on the 529, too.

brooklynguy

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Re: 529 college saving plans- yay or nay?
« Reply #37 on: November 20, 2014, 11:52:00 AM »
529 plans make sense for some people, but there are a ton of options.  Where to put the money?

I've about convinced myself that my state's equivalent GET program is pretty much a scam, unless your kid is like six years old or younger AND you think we're entering a decade-long bear market.  So I've been looking at Vanguard's 529 plans, based in Nevada.  They are pretty terrible too.

Why are they terrible?  Because they don't give you access to all Vanguard funds, you instead have to invest in one of 28 predetermined Vanguard "portfolios" and there is no prospectus for those portfolios, so you can't really see what you're investing in.  They make it clear that these are not mutual funds or ETFs, but some other Vanguard product that Nevada administers.

For example, the Vanguard 529 "Moderate Growth" portfolio looks like it might be a good option for a college savings fund, but if you compare it's returns, expense ratio, and tracking indices to the Vanguard "Moderate Growth" fund (VSMGX) the numbers don't match up.  The 529 is charging you a higher expense ratio for lower returns.  If you read the really fine print on the tracking indices they use for comparisons, you can see that VSMGX is roughly 60/40 stocks/bonds but the 529 equivalent looks like its 50/50.  It took me almost an hour to figure that out, though, because the information is hidden, almost like the 529 plans are deliberately obscuring their investment plan details.

I want control of my investment, even my 529 plans.  How can you responsibly invest in anything when you can't see what it really is?

Wow, that does seem shady.  NY's plan is pretty transparent about the underlying investments, but what I don't like is that the cost is the same regardless of the cost of the underlying investment--everyone pays the same 0.16% fee.  People like me who are entirely invested in the Vanguard Institutional Total Stock Market Index Fund (which has a staggeringly low underlying expense ratio of 0.02%) are charged a 0.14% "program management fee" to get to the 0.16% figure, while someone invested in a more expensive underlying fund will be charged a lower program management fee to get to the same total number.

johnny847

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Re: 529 college saving plans- yay or nay?
« Reply #38 on: November 20, 2014, 12:06:16 PM »
The other big hiccup here is that a 529 plan is only a valuable tax shelter if you're investing in something that generates taxable income.  Otherwise it's a waste.

If you're putting your Vanguard 529 into the Total Stock Market Index, then your taxable gains are miniscule anyway.  You might as well just invest that money into VTSAX since it won't generate much in taxable income and you aren't expecting to pay any capital gains in retirement, and save yourself the exta 0.16% in expense ratio over the 529 plan while you're at it.  Or even better, buy the ETF equivalent VTI and bypass the $3000 minimum contribution on the 529, too.

This is exactly the point I raised on the other thread! A tax efficient fund with a lower ER does really well.

By the way, NY doesn't have the $3000 minimum despite the fact they use Vanguard funds.

Gin1984

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Re: 529 college saving plans- yay or nay?
« Reply #39 on: November 20, 2014, 12:07:53 PM »
In my opinion the only reason to use a 529 is if you have maxed out every single tax advantage account and the money would otherwise sit in a taxable account.
Agreed with your underlying message - your kid can borrow for college, but you can't borrow for your retirement.
Actually that was not my underlying message.  Even if you had enough to do both, I would still save in your tax advantage accounts over the 529 because that money won't be counted against you in the FAFSA plus you have more options.  For example, I have about $15000 in a Roth IRA.  If when my daughter is in college and I need more, I can always tap that.  I save more than I need for retirement because I was to be FI but that does not mean I can't use that money for her college. 

johnny847

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Re: 529 college saving plans- yay or nay?
« Reply #40 on: November 20, 2014, 12:11:28 PM »
In my opinion the only reason to use a 529 is if you have maxed out every single tax advantage account and the money would otherwise sit in a taxable account.
Agreed with your underlying message - your kid can borrow for college, but you can't borrow for your retirement.
Actually that was not my underlying message.  Even if you had enough to do both, I would still save in your tax advantage accounts over the 529 because that money won't be counted against you in the FAFSA plus you have more options.  For example, I have about $15000 in a Roth IRA.  If when my daughter is in college and I need more, I can always tap that.  I save more than I need for retirement because I was to be FI but that does not mean I can't use that money for her college.
Oops sorry to assume.

resy

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Re: 529 college saving plans- yay or nay?
« Reply #41 on: November 20, 2014, 05:41:06 PM »
Recently deposited the amount we will withdraw the first week of January 2015.  That gives us the state tax deduction for this year.

Not sure what (if anything) we will do beyond that.

Always a great trick, I employ it every year as a grad student.
WHAAAAT?! Are you saying that if I'm in school myself (which I am) I can open one for myself for the tax deduction?

Gin1984

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Re: 529 college saving plans- yay or nay?
« Reply #42 on: November 20, 2014, 05:44:20 PM »
Recently deposited the amount we will withdraw the first week of January 2015.  That gives us the state tax deduction for this year.

Not sure what (if anything) we will do beyond that.

Always a great trick, I employ it every year as a grad student.
WHAAAAT?! Are you saying that if I'm in school myself (which I am) I can open one for myself for the tax deduction?
If your state has one, but then you are unable to use the federal tax credit.

MDM

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Re: 529 college saving plans- yay or nay?
« Reply #43 on: November 20, 2014, 06:13:52 PM »
WHAAAAT?! Are you saying that if I'm in school myself (which I am) I can open one for myself for the tax deduction?
If your state has one, but then you are unable to use the federal tax credit.
Which federal tax credit (e.g., which line item on which tax form)?  Not disagreeing, just looking to understand.

Gin1984

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Re: 529 college saving plans- yay or nay?
« Reply #44 on: November 20, 2014, 06:21:16 PM »
WHAAAAT?! Are you saying that if I'm in school myself (which I am) I can open one for myself for the tax deduction?
If your state has one, but then you are unable to use the federal tax credit.
Which federal tax credit (e.g., which line item on which tax form)?  Not disagreeing, just looking to understand.
http://www.irs.gov/Individuals/LLC

MDM

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Re: 529 college saving plans- yay or nay?
« Reply #45 on: November 20, 2014, 06:48:42 PM »
I'm looking...but can't find anything that says use of 529 funds makes one ineligible for the Lifetime Learning Credit.

From http://www.irs.gov/Individuals/Education-Benefits-No-Double-Benefits-Allowed (emphasis added):
"Also, if you receive tax-free educational assistance, such as a grant, you need to subtract that amount from your qualified education expenses."  Grants are much different that use of 529 funds.

From http://www.dgslaw.com/images/materials/111130.pdf (unfortunately note 39 is missing in the Notes section):
"The above [529 Plans] federal tax benefits are available without precluding individuals who otherwise qualify for
Hope and Lifetime Learning Credits from benefiting from such credits.39 Additionally, many states
provide state income tax deductions or exclusions for 529 Plan contributions and distributions."

Etc.

Of course it's difficult to prove the negative (that using 529 funds does not make one ineligible for the Lifetime Learning Credit), but is there a reference that specifically states that 529 funds used for tuition don't count toward LLC eligibility?

Gin1984

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Re: 529 college saving plans- yay or nay?
« Reply #46 on: November 20, 2014, 06:56:36 PM »
Coordination With American Opportunity and Lifetime Learning Credits

An American opportunity or lifetime learning credit (education credit) can be claimed in the same year the beneficiary takes a tax-free distribution from a QTP, as long as the same expenses are not used for both benefits. This means that after the beneficiary reduces qualified education expenses by tax-free educational assistance, he or she must further reduce them by the expenses taken into account in determining the credit.

MDM

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Re: 529 college saving plans- yay or nay?
« Reply #47 on: November 20, 2014, 07:03:35 PM »
Coordination With American Opportunity and Lifetime Learning Credits

An American opportunity or lifetime learning credit (education credit) can be claimed in the same year the beneficiary takes a tax-free distribution from a QTP, as long as the same expenses are not used for both benefits. This means that after the beneficiary reduces qualified education expenses by tax-free educational assistance, he or she must further reduce them by the expenses taken into account in determining the credit.
Thanks, that helped in finding the link below and (I think) I understand it now.

From https://us.axa.com/plan/education/529-plans/same-year-as-hope-credit-or-lifetime-learning-credit.html:
"From an income tax standpoint, it may be best for you to pay for college expenses with a combination of 529 plan withdrawals, tax credits, and other resources."  Appears one should fire up the ol' spreadsheet engine to figure this out on an individual basis....

johnny847

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Re: 529 college saving plans- yay or nay?
« Reply #48 on: November 20, 2014, 08:23:42 PM »
Recently deposited the amount we will withdraw the first week of January 2015.  That gives us the state tax deduction for this year.

Not sure what (if anything) we will do beyond that.

Always a great trick, I employ it every year as a grad student.
WHAAAAT?! Are you saying that if I'm in school myself (which I am) I can open one for myself for the tax deduction?

The most important part about using a 529 as a current student is what you specify you are using the QTP funds for if you are ever audited. If you are at least a half time student, NEVER claim that you are using 529 funds for tuition and fees, unless you can already maximize the federal tax credits for tuition and fees. Claim you are using it for room and board. A 529 can be used for room and board tax and penalty free. But room and board expenses cannot be claimed for any federal tax credits.
The amount you can use for room and board is not how much you actually spend, but how much your school puts out as the financial cost of attendance. From the IRS website http://www.irs.gov/publications/p970/ch08.html
Quote
Expenses for room and board must be incurred by students who are enrolled at least half-time. The expense for room and board qualifies only to the extent that it is not more than the greater of the following two amounts.

    The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student.

    The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution.
So for example, if you were to go to school at say, Vanderbuilt (not my school) http://www.vanderbilt.edu/financialaid/costs.php you could take 9392+4990 out of a 529 tax and penalty free. It's a little bit weird because that figure is for the academic year. So for 2014 calendar year you would take half of the 2013-2014 figures and add that to half of the 2014-2015 figures.


Then, only if you can still maximize the federal tax credits (which are always better than getting a state tax deduction), and you still have room left in the deduction limit for your state's 529, would it be wise to put more money into a 529.


There is one caveat - a few states only let you deduct your net contribution to a 529 in that year. Check your states rules first.