Hey guys,
I'm curious if you guys know if it's worthwhile to contribute to a 529 even if the intent to use the funds are not for education. I know that there is a 10% penalty on top of capital gains taxes on withdrawal, but is there perhaps a break even point where if the money stays in the account for long enough it's worthwhile to invest in it anyways due to the tax deferred nature of the 529 account?
I haven't seen it often discussed so I'm guessing it's not. But I wanted to see the math behind it to see why it is or isn't worthwhile.
Let's for example look at the 529 program offered by NY. It offers a vanguard portfolio with an expense ratio of .16% using a mix of VTSAX and VTIAX funds.
Some assumptions:
Incremental annual additions of $5000/yr for 30 years. Draw down is uniform annually over 10 years starting immediately after 30 years of investing.
Withdrawing from the account incurs a 10% penalty on gains within the account.
Withdrawals are made while in the 15% capital gains tax bracket.
Performance averages ~7% growth/year, 2% of the 7% will be from dividends (to make the math easy assume dividends are distributed once a year)
Contributions are made while in the 25% income tax bracket.
I imagine calculating how much money will be in the tax deferred account after 30 years is fairly straight forward. You could use use a compound interest calculator with P0=5000, i=.0684 (.07 - .0016 for management fees), t=30, and r=1.
Would calculating the compound interest of the same amount in a taxable account be almost as easy? I would guess everything would remain the same, except for i. Would i be .0634 (.07 - .0016 - .02 * .25) with the last bit tacked on for taxes on dividends?
The part I have trouble on is calculating the value of payments uniformly distributed from the account over ten years. In addition to the fees and taxes of making the withdrawal, you still have to incorporate the gains that could be growing while the money is still in the account. Does anyone know how to calculate the distribution amount?