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re: Savings Plan for Children - 529 vs. Other Options
Posted on 2/28/24 at 12:18 pm to Nu Iota Prophet
Posted on 2/28/24 at 12:18 pm to Nu Iota Prophet
quote:
Had a 529 for roughly 15 yrs. Got spooked when I learned that FASFA counts it against their calculation for tuition qualification amount. Proceeded to roll it into a Brokerage Account.
I’m not an expert on this aspect by any means, but as long as the parent is the owner of the 529 plan (with the student as beneficiary), isn’t this pretty much a wash compared to any other parent-owned asset in terms of financial aid calculation?
In fact, if you take those funds and put them into an asset owned by the child, that would be the real penalty toward the EFC calculation (again, per my limited understanding).
0
Posted on 2/28/24 at 2:43 pm to LSUBlake11
529 now that you can roll excess into an IRA. We do $100 per month each for both kids.
They make about 2-300 a year from their grandparents for holidays and birthdays. That money goes into their savings accounts.
They make about 2-300 a year from their grandparents for holidays and birthdays. That money goes into their savings accounts.
Posted on 2/28/24 at 7:28 pm to TheBoo
I’m in process of “maxing” 529 this year to create a nest egg to grow for the next decade+. 529 gives some tax advantages on growth and I could always remove the principle if I needed for some unforeseen reason.
I expect college to cost $200K+ so planning accordingly.
I expect college to cost $200K+ so planning accordingly.
Posted on 2/28/24 at 8:36 pm to slackster
quote:
Only up to $35k
This will go way up over time
quote:
It’s obviously state dependent, I’ll give you that, but there are so many ways to pay for college that the minimal tax savings and potential penalties offset the benefit for many people in my experience.
Again with the new IRA rule I dont really see why it scares anyone anymore, there's a clear alternative if no college. And its definitely not "minimal" tax savings when you're talking about huge growth money being taken out tax free to pay for educational expenses. Using my example, over $60k of the over $100k is growth. I can take that $60k growth out completely tax free to pay for school. If that money was sitting in a brokerage account even if it was ALL long term capital gains $60k taxed at 15% is $9k in federal tax. Thats a gigantic amount of tax savings. This doesnt even include the state tax I'm saving every year which after 18 years amounts to another $2,500 as well. Thats well in excess of 11 grand of tax money I dont have to pay with it in the 529 instead of just letting it ride in a taxable brokerage account.
And in the end if she doesnt go to college we just roll this money into a ROTH IRA year after year for her once shes 18/19 and she'll retire with a nice nestegg as a result just from that.
There's also a scholarship clause for 529s where the penalty is waved for cashing it out if the school is paid for via scholarship.
This post was edited on 2/28/24 at 8:42 pm
Posted on 2/29/24 at 4:12 pm to fareplay
quote:
I too am curious on this. I’m hearing from videos online not to use for education below college. Is it safe to use for private school?
Yup, thats exactly what I've been using my for.
Posted on 2/29/24 at 4:15 pm to Nu Iota Prophet
quote:
Had a 529 for roughly 15 yrs. Got spooked when I learned that FASFA counts it against their calculation for tuition qualification amount. Proceeded to roll it into a Brokerage Account.
I'm almost positive they count both essentially the same, so I'm not sure what this accomplished.
Posted on 2/29/24 at 5:20 pm to thunderbird1100
quote:
This will go way up over time
Maybe. It’s not indexed to inflation in the legislation though, so I wouldn’t bank on it.
quote:
And its definitely not "minimal" tax savings when you're talking about huge growth money being taken out tax free to pay for educational expenses. Using my example, over $60k of the over $100k is growth. I can take that $60k growth out completely tax free to pay for school. If that money was sitting in a brokerage account even if it was ALL long term capital gains $60k taxed at 15% is $9k in federal tax. Thats a gigantic amount of tax savings. This doesnt even include the state tax I'm saving every year which after 18 years amounts to another $2,500 as well. Thats well in excess of 11 grand of tax money I dont have to pay with it in the 529 instead of just letting it ride in a taxable brokerage account. And in the end if she doesnt go to college we just roll this money into a ROTH IRA year after year for her once shes 18/19 and she'll retire with a nice nestegg as a result just from that
If she doesn’t go to college and that cap doesn’t go up you’re also looking at 10% penalty and ordinary income taxes on up to $60k - if you’re paying 15% LTCGs you’re paying at least 32% in taxes and penalties on that money. Poof, there goes the tax savings by a factor of 1.5x.
quote:
There's also a scholarship clause for 529s where the penalty is waved for cashing it out if the school is paid for via scholarship.
But income taxes still apply. 22%+ there too using your CG bracket.
To each their own, but it’s not the no brainer you may think it is for many people, at least not under current tax laws. If you’re saving enough in a 529 to completely pay for college, you’re either going to save a lot in taxes or get slapped with taxes and penalties. I don’t love the odds. If you’re keeping it under/around the $35k current rollover limit, I can get on board with that a little easier.
Additionally, part of my issue is the 15 year requirement for the Roth means your kid is basically at least 15 years from a college or no college decision, and who knows what college will even look like at that time.
More often than not, I’d rather see someone maxing 401k and Roth accounts, at a minimum, before I even get into 529 plans.
Posted on 3/1/24 at 5:43 am to Eric Nies Grind Time
quote:
I personally just like the 529 because it's easy for the grandparents. They can throw money in when they want. Plus they like knowing it's going towards education.
THIS
I would also add that if you started a custodial account, when they turn 18 they can cash out and spend it on hookers and blow. The 529 does not allow that.
Another thing of note....you are adamant about education and want to give your child the opportunity to go to college. You put it in a separate savings account under your name. Then you die unexpectedly and your wife is so sad being alone and vulnerable, that she chooses average Joe to re-marry. Joe loves fishing. He finds out that there is a huge chunk of change in said account. He cashes is out and buys a fishing camp and a boat.
With the 529, that cannot happen.
Same thing with a divorce. The money you intended it for is used for something else.
It gives you peace of mind for your kids education.
Posted on 3/1/24 at 6:55 am to hottub
quote:
Is the K-12 number capped per year per child or per family?
I have 4 kids and paid all their tuition. Not sure there is a cap
Posted on 3/1/24 at 7:44 am to slackster
quote:
Additionally, part of my issue is the 15 year requirement for the Roth means your kid is basically at least 15 years from a college or no college decision, and who knows what college will even look like at that time.
Personally, my kids are going to college. They will be raised where it won’t even be considered an option not to continue into upper education. I know there are families that absolutely disagree but they can parent their own way.
Posted on 3/1/24 at 7:46 am to slackster
quote:
More often than not, I’d rather see someone maxing 401k and Roth accounts, at a minimum, before I even get into 529 plans.
Already max those and HSA. I do 529 contributions in addition to meaningful weekly brokerage contributions.
Posted on 3/1/24 at 8:34 am to slackster
quote:
Maybe. It’s not indexed to inflation in the legislation though, so I wouldn’t bank on it.
Plenty of things arent indexed to inflation and constantly rise over time, not worried at all there. I'm 100% sure it wont be $35k 17 years from now
quote:
If she doesn’t go to college and that cap doesn’t go up you’re also looking at 10% penalty and ordinary income taxes on up to $60k - if you’re paying 15% LTCGs you’re paying at least 32% in taxes and penalties on that money. Poof, there goes the tax savings by a factor of 1.5x.
Keep in mind its not just 4 year colleges you can use this money for, so its not if she does or doesnt go to a 4-year institution, but plenty of other options there as well. Personally there seems like extremely few scenarios she wont do some type of post high school education. Just the way we're going to raise her and how both my wife and I were raised. There are some extreme things that could happen where it doesnt happen, but banking on it happening is just fine by me all things considered. Also, again, the cap will most definitely be going up over time so not worried there.
quote:
But income taxes still apply. 22%+ there too using your CG bracket.
They also apply in a taxable brokerage account, except in the taxable brokerage account I have zero tax saving options if she goes to any type of education after high school. This is why to me it's pretty much a no brainer to go the 529 route, there's enough outs where the huge amount of tax savings that is likely is worth it.
Posted on 3/1/24 at 12:56 pm to thunderbird1100
quote:
They also apply in a taxable brokerage account, except in the taxable brokerage account I have zero tax saving options if she goes to any type of education after high school. This is why to me it's pretty much a no brainer to go the 529 route, there's enough outs where the huge amount of tax savings that is likely is worth it
It may be with your specific situation. Look, 529s can work, and the Roth IRA change has certainly helped (the risk/reward was skewed heavily to the former previously IMO), but I’d still be wary of overfunding them aggressively.
Posted on 3/1/24 at 1:08 pm to Y.A. Tittle
"the FAFSA assesses 529 assets at a maximum of 5.64 percent of the value when calculating ..."
You would be correct. Admittedly I was not adequately educated on the matter as I am now. In hindsight, I should have left it alone.
You would be correct. Admittedly I was not adequately educated on the matter as I am now. In hindsight, I should have left it alone.
Posted on 3/1/24 at 1:21 pm to Nu Iota Prophet
quote:
You would be correct. Admittedly I was not adequately educated on the matter as I am now. In hindsight, I should have left it alone.
At least, you probably didn't frick up as big as I did by including your 401k holdings.
Posted on 3/1/24 at 3:45 pm to lynxcat
quote:
Personally, my kids are going to college. They will be raised where it won’t even be considered an option not to continue into upper education. I know there are families that absolutely disagree but they can parent their own way.
I was raised the same way. So glad I did not have a choice. Also, I was forbidden to pursue any degree that did not pay good money.
Posted on 3/1/24 at 6:24 pm to lynxcat
quote:
Personally, my kids are going to college. They will be raised where it won’t even be considered an option not to continue into upper education. I know there are families that absolutely disagree but they can parent their own way.
Yeah I get it, but 15 years from now college could be $80k/year or free. They feel equally likely right now.
Posted on 3/1/24 at 7:09 pm to slackster
quote:
It may be with your specific situation. Look, 529s can work, and the Roth IRA change has certainly helped (the risk/reward was skewed heavily to the former previously IMO), but I’d still be wary of overfunding them aggressively.
But why if followed appropriately in financial order of operations?
For someone that has already capitalized on all tax advantaged accounts, the available remaining avenues are either brokerage, 529, real estate, CDs, or HYSA (unless we start considering more exotic insurance packages, private equity…).
Posted on 3/1/24 at 7:39 pm to lynxcat
quote:
But why if followed appropriately in financial order of operations?
Because counting on that $35,000 to go up if unused is a bet I don’t think many should take.
The threshold for SS taxation was set at $25,000 in 1984 and has never been raised. Capital losses have been limited to $3,000 since 1977.
The potential ordinary income tax treatment and penalty for an aggressively funded 529 can grossly outweigh LTCGs on a passive ETF portfolio in a brokerage account.
Also, if you’re in a state like LA, you’re arguably not college material if you can’t at least get TOPS. That further limits the use of 529 tax free funds.
I realize this isn’t feasible for many, but my personal plan is to cash flow most college expenses. If/when we get more clarity on the Roth provisions (for example, will it be pro-rata between contributions and gains, just contributions, or just gains), I’ll use LA START for the small earnings enhancement and tax break up to the annual marriage limits. With 10-15 years of growth, I like where that will likely put me.
Lastly - people tend to be overly aggressive with investment choices in 529s. The timeline for a kid in high school, for example, is at best 4 years to start a 4-5 year drawdown. Having the entire balance in an equity index fund starts to make a lot less sense than it did when they were 2.
The same would be true for brokerage accounts though, to be fair.
Posted on 3/1/24 at 8:01 pm to slackster
quote:
Because counting on that $35,000 to go up if unused is a bet I don’t think many should take.
I guess I don’t see it as a bet on a conversion limit. Apply the probabilities of a child (or if multiple kids in the HH) go to college vs the chances they do not and calculate an expected value against it for any dollars above $35K. Without running it through a software program, I would expect any high probability scenario of attending college will have a better outcome than cash flowing or using brokerage dollars to fund university expenses. At some point as the probability of not attending goes up, the expected value will tilt in the other direction due to the penalties.
If you have multiple kids and believe there is a 95% chance at least one of them is going to higher education and will require funding…it’s a no brainer to use 529s.
In my case, I plan to super fund the 529 this year and it will have awhile to grow. I won’t need to contribute much in future years as it’s taken care of at a time where we have ample free cash flow to do so.
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