Author Topic: Can I split a 529?  (Read 2629 times)

Mgmny

  • Pencil Stache
  • ****
  • Posts: 643
  • Age: 29
  • Location: Northwest 'Burbs of MSP
Can I split a 529?
« on: December 28, 2017, 09:03:19 AM »
Are you able to split a 529 plan?

Scenario: My wife and I have 0 kids, but plan to have 2-4 kids probably starting in 2018. So, we want to start a 529 (we are already maxing 401(k), Roth IRA, and will probably do a mega backdoor Roth this spring right before my contract is up). Ideally, we want to be "fair" to our children giving them each $X (probably somewhere between $50-100k - more research required). There are a few methods for this:

1. Upon birth/pregnancy, start a 529 for each child. Contribute X dollars per month to plan until 18. The problem is that this method won't be "fair" because each child will end up with different amounts based on the market.

2. Start a 529 now with the intent on using it for all of our children's college. This will be easier to be "fair" because we will have a large amount to pull from so it'd be easier to give them each the same amount of money. HOWEVER, there could be leftovers at the end, depending on the market and our children's higher education goals.  If we have 4 kids, and we want to split the leftovers between them for their children in 25+ years, is that possible, or do we need to hold onto it ourselves until we have grandchildren?

I've tried googling the ability to split up a 529, and have come back pretty dry. Any thoughts on best way to do this?


Mgmny

  • Pencil Stache
  • ****
  • Posts: 643
  • Age: 29
  • Location: Northwest 'Burbs of MSP
Re: Can I split a 529?
« Reply #1 on: December 28, 2017, 09:03:50 AM »
Also: If mods think this should go in "mini money mustaches" that's cool too. I wasn't sure.

bognish

  • Bristles
  • ***
  • Posts: 303
Re: Can I split a 529?
« Reply #2 on: December 28, 2017, 12:50:59 PM »
I am only familiar with the state 529 plan I participate in, but you need a SS# or TIN for the beneficiary of the 529. If that beneficiary does not use the funds you can have a non-taxed beneficiary change the any direct family member of the original beneficiary. I.e. you can set up an account for your spouse and change it to your kid, but it will be a taxable withdrawal if you change it to the neighbors kid.

Mgmny

  • Pencil Stache
  • ****
  • Posts: 643
  • Age: 29
  • Location: Northwest 'Burbs of MSP
Re: Can I split a 529?
« Reply #3 on: December 28, 2017, 02:42:33 PM »
I am only familiar with the state 529 plan I participate in, but you need a SS# or TIN for the beneficiary of the 529. If that beneficiary does not use the funds you can have a non-taxed beneficiary change the any direct family member of the original beneficiary. I.e. you can set up an account for your spouse and change it to your kid, but it will be a taxable withdrawal if you change it to the neighbors kid.

That's true. We are going to initially set it up under one of our own names. We are wondering how to plan it so at the end if there are leftover funds we don't get penalized and we act fairly to our children.

secondcor521

  • Handlebar Stache
  • *****
  • Posts: 2454
  • Age: 50
  • Location: Boise, Idaho
  • Big cattle, no hat.
    • Age of Eon - Overwatch player videos
Re: Can I split a 529?
« Reply #4 on: December 29, 2017, 08:59:28 AM »
In my state, at least, I can transfer any dollar amount between my three kids' 529's any time, with no tax consequences whatsoever.  Since 529's are a federally legislated account, I would guess that most states would allow this.  So my suggestion would be to just start saving, and as things evolve you can true it up later.

As to your question about leftovers, I haven't done it yet but my understanding is that you can change the ownership of the 529's containing the leftover money from yourself to your child.  Then it will be up to them to keep track of the money for their own kids (or withdrawing it and paying taxes).  So my suggestion there would be to wait until all of your kids have graduated, true things up the way you want to, and then change the ownership to your kids.

Mgmny

  • Pencil Stache
  • ****
  • Posts: 643
  • Age: 29
  • Location: Northwest 'Burbs of MSP
Re: Can I split a 529?
« Reply #5 on: December 30, 2017, 06:05:57 AM »
In my state, at least, I can transfer any dollar amount between my three kids' 529's any time, with no tax consequences whatsoever.  Since 529's are a federally legislated account, I would guess that most states would allow this.  So my suggestion would be to just start saving, and as things evolve you can true it up later.

As to your question about leftovers, I haven't done it yet but my understanding is that you can change the ownership of the 529's containing the leftover money from yourself to your child.  Then it will be up to them to keep track of the money for their own kids (or withdrawing it and paying taxes).  So my suggestion there would be to wait until all of your kids have graduated, true things up the way you want to, and then change the ownership to your kids.

This is perfect! Thank you!!

CorpRaider

  • Bristles
  • ***
  • Posts: 435
    • The Corpraider Blog
Re: Can I split a 529?
« Reply #6 on: December 30, 2017, 08:19:10 AM »
If you're mostly just looking for more tax deferred space, and you have a substantial allocation to bonds in your tax advantaged accounts, you might consider buying some I Bonds (up to $30K per annum for a couple).  There was an education exception to the eventual taxation of the bond interest as well, last time I checked.  Although I could see preferring stocks for this long-term goal, if you have bonds in your other accounts, the money is basically fungible.  Not to promote, but I've got a little blurb on my blog about I Bonds and there is also more information in the forums here.

I personally don't prioritize the 529, just because you know you can borrow for college, not retirement (or living) and I am, regrettably, not straining against the limits of all my tax advantaged options.  I do use it to stash cash gifts to my son.  The account has become a little more attractive for me though, given that you can now make qualified distributions of up to $10K per year for private school tuition (just in case my son hates the local public school or something).
« Last Edit: December 30, 2017, 09:36:52 AM by CorpRaider »

ZMonet

  • Stubble
  • **
  • Posts: 202
Re: Can I split a 529?
« Reply #7 on: December 30, 2017, 04:58:33 PM »
My understanding, as others have said, is that you should be able to split without any problems.

Good point on the I bonds CorpRaider.  Anyone looking for the tax savings though needs to note the income limitations.

Tax Year 2016 Income Limits
For single taxpayers, the tax exclusion income limit is an adjusted gross income of $92,550 and above. For married taxpayers filing jointly, the tax exclusion income limit is an adjusted gross income of $146,300 and above. Married couples must file jointly to be eligible for the exclusion.

lhamo

  • Walrus Stache
  • *******
  • Posts: 9958
  • Location: Seattle
Re: Can I split a 529?
« Reply #8 on: December 30, 2017, 08:26:49 PM »
We started a 529 for our DS at birth, and then later split it in half and put half in a separate account for DD.

DS's account has more than enough to fund the rest of his undergraduate studies (he's currently a sophomore at a state school, and living at home).   Haven't decided yet if we will roll any remainder over to DD's account, or keep it in his name for graduate school use (or to pass on eventually if he has kids).  We have enough in DD's account to fund her at a state school if she lives at home, but if she goes further away or chooses a pricier school, it probably won't be enough.

Beach_Stache

  • Stubble
  • **
  • Posts: 132
    • This Frugal Father
Re: Can I split a 529?
« Reply #9 on: January 01, 2018, 07:48:33 AM »
We have 3 kids and did what money we could at the time.  We're a bit more financially stable now and our middle kid is a bit behind, so I've projected what I think college should cost and rate of inflation and will give our middle son a $1k/year raise for the next 7 years I think, then all should be "fair", however things always change, markets go up and down, and there is no way to make things exactly right.  I am in VA and when I started doing research for our state, you can get state refund credit of up to $4k/year per account, so we opened up 3 accounts (1 for each kid).  We couldn't open an account until our son's were born, as we needed their SSN I believe.  We do about $3k/year for each kid ($4k/year for the middle since he is behind) but that gives us a good state refund (which I calculated at like 4% tax advantage - I think I got the math right).  So with no gains in the market each year, just by putting it in it's 4% growth.  The 3 separate accounts let us get close to maxing out and we're keeping things as fair as possible, but based on your post I don't think you'll have to worry much about how fair it is at their college freshman year since it sounds like you guys will be in a very good spot.

My boys are 9, 7, 4 and I have done some research into how to try and get the best financial aid/grants/scholarships, and retirement accounts and home value (on primary house) don't count against you, but savings and post-tax accounts do, so my plan was to continue maxing out all retirement, try to have house paid off completely before 1st fills out FASFA forms and hope that we can get some grants/scholarships, maybe that'll be a good year for my DW to retire to show less money coming into the house.

Longer answer to your question, but even if you aren't going to max out, I would open a separate account for each kid, but you'll want to read into your state's law's, as for VA having a separate account for each kid makes sense.  I think you can even open up a separate account for each spouse for each kid, I can't remember.  But at 3-4k/year per kid that's about all we can handle and that should come close to providing a full scholarship for each kid assuming 8% growth and state school at around $25k/year at 3% increases/year.  I'm trying to keep things fair, but in all likelihood across a 5 year span between kids, the market will go up or down and honestly we'll probably make up the difference.

I have thought more now though about whether it would be better to not fund so much and let them take out student loans for some of the amount in the event that they got a job after college with an employer that paid off some of their student loans or something?  You never know what the market will be like in 20 years and what companies will be offering, if all of your kids will go to school, etc.  I figure if one of my kids didn't go to school or got a scholarship then I'd happily pay the fines for taking the money out, or shift the money to one of the siblings or for graduate school, or even seeing about transferring those accounts onto their kids if that's possible.  Lots of ways things can go for your kids and planning out different scenario's can only help you be more financially prepared.

Paul der Krake

  • Magnum Stache
  • ******
  • Posts: 4663
  • Age: 11
  • Location: USA
Re: Can I split a 529?
« Reply #10 on: January 01, 2018, 12:53:05 PM »
If you're mostly just looking for more tax deferred space, and you have a substantial allocation to bonds in your tax advantaged accounts, you might consider buying some I Bonds (up to $30K per annum for a couple).  There was an education exception to the eventual taxation of the bond interest as well, last time I checked.  Although I could see preferring stocks for this long-term goal, if you have bonds in your other accounts, the money is basically fungible.  Not to promote, but I've got a little blurb on my blog about I Bonds and there is also more information in the forums here.
This exemption was removed in the tax bill signed into law a couple days ago.

secondcor521

  • Handlebar Stache
  • *****
  • Posts: 2454
  • Age: 50
  • Location: Boise, Idaho
  • Big cattle, no hat.
    • Age of Eon - Overwatch player videos
Re: Can I split a 529?
« Reply #11 on: January 01, 2018, 01:16:34 PM »
If you're mostly just looking for more tax deferred space, and you have a substantial allocation to bonds in your tax advantaged accounts, you might consider buying some I Bonds (up to $30K per annum for a couple).  There was an education exception to the eventual taxation of the bond interest as well, last time I checked.  Although I could see preferring stocks for this long-term goal, if you have bonds in your other accounts, the money is basically fungible.  Not to promote, but I've got a little blurb on my blog about I Bonds and there is also more information in the forums here.
This exemption was removed in the tax bill signed into law a couple days ago.

This is incorrect.  The House proposed removing the exemption, the Senate did not.  The conference committee version followed the Senate, so the exemption remains in law.

By the way, this is true of many provisions that the House proposed:  many did not make it into the final bill even though they were discussed in the press as the bill was being developed.

The cite below is the conference committee report, which is very close to but not quite exactly the final bill.

Cite:  item 15, page 597 of the PDF here:  http://docs.house.gov/billsthisweek/20171218/CRPT-115HRPT-466.pdf

cchrissyy

  • Pencil Stache
  • ****
  • Posts: 755
  • Location: SF Bay Area
Re: Can I split a 529?
« Reply #12 on: January 01, 2018, 01:18:57 PM »
I have one 529 plan for 3 kids, because there is no cost or hassle to change the beneficiary as time goes on, and I preferred the simplicity of using just one account.

Paul der Krake

  • Magnum Stache
  • ******
  • Posts: 4663
  • Age: 11
  • Location: USA
Re: Can I split a 529?
« Reply #13 on: January 01, 2018, 01:30:42 PM »
If you're mostly just looking for more tax deferred space, and you have a substantial allocation to bonds in your tax advantaged accounts, you might consider buying some I Bonds (up to $30K per annum for a couple).  There was an education exception to the eventual taxation of the bond interest as well, last time I checked.  Although I could see preferring stocks for this long-term goal, if you have bonds in your other accounts, the money is basically fungible.  Not to promote, but I've got a little blurb on my blog about I Bonds and there is also more information in the forums here.
This exemption was removed in the tax bill signed into law a couple days ago.

This is incorrect.  The House proposed removing the exemption, the Senate did not.  The conference committee version followed the Senate, so the exemption remains in law.

By the way, this is true of many provisions that the House proposed:  many did not make it into the final bill even though they were discussed in the press as the bill was being developed.

The cite below is the conference committee report, which is very close to but not quite exactly the final bill.

Cite:  item 15, page 597 of the PDF here:  http://docs.house.gov/billsthisweek/20171218/CRPT-115HRPT-466.pdf
Nice!

Mgmny

  • Pencil Stache
  • ****
  • Posts: 643
  • Age: 29
  • Location: Northwest 'Burbs of MSP
Re: Can I split a 529?
« Reply #14 on: January 02, 2018, 09:38:06 AM »
Thanks everyone for the great replies! It looks like splitting shouldn't be an issue which is perfect!

I'll look into the state's rules that I use to open the 529 (I believe you can use any state, not just of residence?) to see if there are additional tax advantages to multiple accounts instead of just 1 account that eventually gets split.

I think that considering the fact our kids aren't even conceived yet, the I-Bonds probably aren't our best bet - at least not until the kids are older and need a more reliable college fund. But, for the next 13-16 years, stocks/high risk should be fine.