Author Topic: Are there any cons 2 a second brokerage account to put away money for kid vs 529  (Read 1228 times)

lilybluerose

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Hi! I have a 6 and a 2 year old. Right now I put away money into their 529s. Since opening those though I have always had a nagging feeling that I just am not happy with the restrictions on those. I was thinking of other ways to save money for them. I was wondering if there are any cons to me opening a separate vanguard brokerage account, and just throwing money in it to vtsax, and letting it sit in there until they need it? Im thinking of this as their money. For future cars, moving, school, whatever. Is this a bad idea if I plan on some of that money being pulled in around 9+ years?

Would you put it into something other than vtsax?  That is what my brokerage is in. ( ira and 401 k is in target retirement funds)

Also, are there drawbacks to making multiple withdrawals from a brokerage account, outside of losing potential growth, when the time comes? I have never taken anything out of my brokerage account yet. Thanks!!

I net around $120-150k a  year, and fully fund my ira and 401k . This would be extra money and gift money to put away.

secondcor521

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You might look up the investment order post/thread here and see if it suggests something different for your situation.

In general I think it's a reasonable plan.  But since you asked for cons, here are the ones I can think of:

1.  You'll have an extra account to keep track of, with all the attendant hassle of opening it, funding it, dealing with monthly statements, etc.

2.  You'll have to keep track of and pay taxes on any dividends, capital gains distributions.

3.  If VTSAX is low or down in 9 years when you want or need the money, that's something to consider.  Some might suggest a more balanced fund, but that's your call.

4.  If you end up using the taxable for 529-eligible expenses (presumably because the 529 balances are already used up and you still have 529-eligible expenses), then you'll have lost some tax efficiency.  From your post it sounds like you're OK with this con.

5.  The investment order might suggest something else as a higher priority.  The only thing I can think of offhand is an HSA (which I'm not even sure I agree with 100% but I understand the recommendation), but there could be others.

Nothing wrong with making multiple withdrawals from a brokerage account.  You hopefully know that in order to make a withdrawal, you'd probably have to sell some of the VTSAX (or whatever), and selling shares of VTSAX (or whatever) would result in a capital gain or loss being realized, which would be a taxable event and you might owe capital gains taxes at that point.

Simpli-Fi

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https://www.biggerpockets.com/blog/fund-college-tuition-real-estate-investments

Option 4 interests me.

Not really the question you asked but on topic, as I donít like the restrictions of my 529ís.

lilybluerose

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Ohh yes I definitely plan on doing the roth when they are a little older!

".  If VTSAX is low or down in 9 years when you want or need the money, that's something to consider.  Some might suggest a more balanced fund, but that's your call." Do you have any balanced funds to look into? I only really know about VTSAX and target retirement funds. Maybe I could do one of those, close to that time? Thanks!

secondcor521

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Ohh yes I definitely plan on doing the roth when they are a little older!

".  If VTSAX is low or down in 9 years when you want or need the money, that's something to consider.  Some might suggest a more balanced fund, but that's your call." Do you have any balanced funds to look into? I only really know about VTSAX and target retirement funds. Maybe I could do one of those, close to that time? Thanks!

Sorry, that's too close to investment advice, which I don't do.  If you like Vanguard, they have a fund selector tool you can find on their website.

Dicey

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Remember you won't need all the money at once. Typically, you'll disburse it over four years, which should help smooth any bumps.

JJ-

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Do you get a tax credit in your state for 529s? This may tip the scales one way or the other.

Do you know how much you want to pay for their education? If it's like us and we are aiming for 4 years in state but oh well if we don't get there (which relies on some growth over 15 years with a predetermined monthly amount), we are doing a mix of both. Remember there is the American Opportunity Tax Credit to offset some of your taxes if that tips it the other way.

brandon1827

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Wife and I had a similar dilemma, but ultimately decided that putting money into brokerage versus a 529 made more sense for us, because our son may decide that he doesn't want to go to college. The money we're saving for him now is what we call a "launch fund" (I completely stole that from someone on this site) and can be used for college if he decides, technical/trade school if he prefers that, or a down payment on a home should life take him another direction. If I understand a 529 correctly, it's strictly for college. If you know without a shadow of a doubt that your kids will attend university, then 529 isn't a bad way to go. If it's uncertain, it may make more sense to put your money in something that provides for other alternatives

reeshau

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The money we're saving for him now is what we call a "launch fund" (I completely stole that from someone on this site) and can be used for college if he decides, technical/trade school if he prefers that, or a down payment on a home should life take him another direction. If I understand a 529 correctly, it's strictly for college.

A 529 can be used for a trade school, too.  For that matter, it could be used for a private K-12 school, if there was some special situation you needed.

https://www.savingforcollege.com/article/can-you-use-a-529-plan-to-pay-for-trade-school

Of course, a down payment on a house would not be a qualified expense.

reeshau

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@lilybluerose ,
Will you still be working when your kids are in college?  If so, the capital gains on the withdrawals you make could be taxed, given your nice income.  And the amount could spike if your kids have an overlap year your are withdrawing for them both.

Morning Glory

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I like 529's, but I'm in a state with high income tax and there's a deduction for contributing. My state also taxes capital gains the same as regular income, so the Roth property of the 529 makes it advantageous.
If your kid has a disability, you can roll over 15k per year from a 529 to an able account without penalty. It's also super easy to transfer to another beneficiary, so if you have multiple kids only one needs to be in college. If you have leftover funds you could transfer to a grandchild, niece, nephew, or even use them to take some classes yourself. If you're enrolled at least half time you can use the 529 for living expenses too.

529s act like a Roth when used for education, so no capital gains taxes on the withdrawals . If you withdraw without a qualified reason the gains will be taxed as income, plus there's a 10% penalty. Some states have clawbacks on their tax deductions too. So get creative with those leftover funds. 
« Last Edit: August 17, 2021, 06:43:46 PM by Morning Glory »