Author Topic: 529 as personal early retirement account sanity check  (Read 772 times)

Kem

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529 as personal early retirement account sanity check
« on: December 16, 2021, 01:56:21 PM »
Like using an HSA as an early retirement vehicle, it seems like using the Indiana 529 plan is an awesome option.  As an Indiana resident the immediate 20% match is huge and greatly outweighs the 10% penalty on gains on withdraw.

The details:
As a married Indiana resident, I can invest in a CollegeChoice 529 Direct Savings plan. 

I believe this plan allows me to invest into the Schwab S&P 500 Index Fund (SWPPX) with a net expense ratio of 0.02% & 70BB in net assets.   I am a VTI fan – but SWPPX doesn’t appear too far off of VOO – and VOO really isn’t that far off of VTI.   In short, this looks like a great fund.

CollegeChoice 529 contributions offers a 20% Indiana tax credit up to $1,000.   
As such if we contribute $5,000 into the plan Indiana matches 20%.

I believe from what I’ve read so far (but could use confirmation on):
1 – I can name myself as the beneficiary.
2 – Like a ROTH IRA, contributions may be withdrawn at any time for any reason penalty free.
3 – Like a ROTH IRA, contributions are withdrawn before gains.
4 – Withdraws on earnings are subject to ordinary income tax plus 10% penalty if used for non-education expenses.   If yearly withdraws are kept below the standard deduction, this doesn’t look so bad.
5 – As the Tax Credit is not refundable, the maximum benefit will be the lesser of $5,000 or Total Indiana Gross tax liability for the year.
6 - As the match is a tax credit, it is not subjected to Federal or State taxes.




EvenSteven

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Re: 529 as personal early retirement account sanity check
« Reply #1 on: December 16, 2021, 02:39:23 PM »
Like using an HSA as an early retirement vehicle, it seems like using the Indiana 529 plan is an awesome option.  As an Indiana resident the immediate 20% match is huge and greatly outweighs the 10% penalty on gains on withdraw.

The details:
As a married Indiana resident, I can invest in a CollegeChoice 529 Direct Savings plan. 

I believe this plan allows me to invest into the Schwab S&P 500 Index Fund (SWPPX) with a net expense ratio of 0.02% & 70BB in net assets.   I am a VTI fan – but SWPPX doesn’t appear too far off of VOO – and VOO really isn’t that far off of VTI.   In short, this looks like a great fund.

CollegeChoice 529 contributions offers a 20% Indiana tax credit up to $1,000.   
As such if we contribute $5,000 into the plan Indiana matches 20%.

I believe from what I’ve read so far (but could use confirmation on):
1 – I can name myself as the beneficiary.
2 – Like a ROTH IRA, contributions may be withdrawn at any time for any reason penalty free.
3 – Like a ROTH IRA, contributions are withdrawn before gains.
4 – Withdraws on earnings are subject to ordinary income tax plus 10% penalty if used for non-education expenses.   If yearly withdraws are kept below the standard deduction, this doesn’t look so bad.
5 – As the Tax Credit is not refundable, the maximum benefit will be the lesser of $5,000 or Total Indiana Gross tax liability for the year.
6 - As the match is a tax credit, it is not subjected to Federal or State taxes.

Are you considering credit re-capture?

"An account owner of an Indiana CollegeChoice 529 Education Savings Plan who makes
a nonqualified withdrawal in a taxable year must repay all or part of the tax credit in the
year in which the nonqualified withdrawal is made from the account"

https://www.in.gov/dor/files/reference/ib98.pdf

seattlecyclone

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Re: 529 as personal early retirement account sanity check
« Reply #2 on: December 16, 2021, 02:56:27 PM »
2 – Like a ROTH IRA, contributions may be withdrawn at any time for any reason penalty free.
3 – Like a ROTH IRA, contributions are withdrawn before gains.

Withdrawals are prorated between contributions and earnings. Also note that this tax credit will be recaptured if you make a non-qualified withdrawal.

That all said, this could be a good deal if your time horizon is long enough and you don't expect to fill up your standard deduction during retirement otherwise.

Let's look at a comparison: you could invest $4,000 of after-tax money (worth $5,000 in a 529) into either your 529 or a taxable account. Suppose you hold the investment long enough for it to increase 5x in value.

529: initial value: $5,000. Final value: $25,000. Federal tax: 10% of $20,000 growth ($2,000). State tax: regular rate on the growth, plus $1,000 in recaptured credits. Amount left after tax: $22,000 minus any state tax on the growth.

Taxable account: initial value: $4,000. Final value: $20,000. Federal tax: 0% of $16,000 gain. State tax: maybe some capital gains? Amount left after tax: $20,000 minus any state taxes.

However if you have enough other retirement savings that you'll be exceeding the standard deduction anyway, you could add another $2,000 (minimum) to the federal tax bill, and the 529 doesn't look so great anymore by comparison.

How do you feel about taking a few classes during your retirement? If you sign up at a local community college at whatever level they consider to be a half-time student, whatever you pay for tuition plus reasonable food/housing costs now counts as a qualified distribution, putting the 529 ahead again.

Kem

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Re: 529 as personal early retirement account sanity check
« Reply #3 on: December 17, 2021, 07:53:59 AM »
Thanks @EvenSteven & @seattlecyclone.

I misunderstood the re-capture as an item that was only impacted for same year contribution/ withdrawals.  Instead, it is effectively a forgivable loan on which gains may accrue. 

Between the re-capture and pro-rated withdrawals (on top of the 10% penalty) use as an alternative investment shelter is not as sweet.

YttriumNitrate

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Re: 529 as personal early retirement account sanity check
« Reply #4 on: December 17, 2021, 08:14:47 AM »
I believe from what I’ve read so far (but could use confirmation on):
1 – I can name myself as the beneficiary.
2 – Like a ROTH IRA, contributions may be withdrawn at any time for any reason penalty free.
3 – Like a ROTH IRA, contributions are withdrawn before gains.
4 – Withdraws on earnings are subject to ordinary income tax plus 10% penalty if used for non-education expenses.   If yearly withdraws are kept below the standard deduction, this doesn’t look so bad.
5 – As the Tax Credit is not refundable, the maximum benefit will be the lesser of $5,000 or Total Indiana Gross tax liability for the year.
6 - As the match is a tax credit, it is not subjected to Federal or State taxes.

Hello fellow Hoosier. For #1, yes you can name yourself as a beneficiary, and can also change the beneficiary to another family member without penalty. For #5, I believe you meant to say "the lesser of $1,000 or ..." also I'm not sure if it works against county income taxes. For #6, you are correct that the tax credit is not subject to state or federal taxes.

I believe there's a 0.14% management fee that gets tacked onto the expense ratios of the underlying funds.

Kem

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Re: 529 as personal early retirement account sanity check
« Reply #5 on: December 17, 2021, 08:38:56 AM »
Howdy @YttriumNitrate

For #5 I meant to say that the maximum benefit will be based on contributions of the lesser of

Thanks for the heads up to look out for the Management fee.