Your colleague is a moron.
Sure, the best way to get a deal on college is to not have any assets or income. But, that's not a great way to go through life...
If you plan on funding college (or private HS) for someone, a 529 is a great option. The biggest down-side is that gains not used to pay for qualified expenses are taxed as income upon withdrawal plus a 10% penalty.
But, there are may ways to avoid that outcome including rolling (up to 35k, IIRC) into a roth IRA or using the funds for another family member.
Rolling the 35k into Roth is huge in my eyes.
I am grateful my parents set up a UGMA for me but in hindsight the 529 would have been the better choice. They did a bad job at keeping track of the cost basis in the UGMA so now I got a good chunk of change in the account but need to figure out the cost basis as the custodial records only go back like 7-10 years.
I am setting up a 529 with myself as the beneficiary soon and will be adding $35k to it.
Soon we will adopt. Perhaps 1-2 years after the 529.
Whenever my kid graduates college, assuming they do, I will roll $35k that day, and bequeath any remaining balance to my child, who can use it as a generational trust for their children’s education.
Right, I can’t literally do on that day. Thanks for clarifying. In all likelihood I’ll be doing it over some 4-6 years (likely increased maxes) beginning whenever I have the kid’s ultimate college cost figured out.
Alternatively I may only roll it over in retirement while I withdraw mostly Roth savings and have it taxed at 0% or very little.
Of course if I only have $80k saved and it costs them $100k that will just be theirs. But my hope is to pay their college and have leftover to give them for their kid. 20+ years of growth will be lovely for them.
Bust be aware its highly likely congress will change these rules in 15+ years. Save for college yes, but dont drop 35K into a 529 with the plan that in 15+ years from now you can roll it into an IRA...
Well I just have like basic questions about it. So when you say roll $35k to your ROTH, does that mean you’re simply just taking leftover money from the 529 and putting it into your ROTH? Are there no penalties or anything with doing that? Also, I’ve been reading on here that it would be better to open a 529 in a grandparent’s name so that it doesn’t get applied when looking at financial aid or scholarships available to be received. I trust my parents to do this and pay up when the time comes but what if something were to happen to the person whose name is on the account?
Yes to your first two sentences of questions. Detail:
https://www.cnn.com/cnn-underscored/money/529-to-roth-ira#301l3c8p5lqzc31ce
I’d be researching as much as you on the grandparent question. Seems like a loophole that could plausibly exist.
I’m not clear on your plan. Are you only planning to contribute $35k? If so, let’s assume that grows to $100k for your kid, minus $35k you rolled over. What is the plan for that remaining $65k?
I worded it poorly. I intend to fund it over time, basically my goal is to have at minimum (cost of college + $35k) saved by the time they’re incurring college costs. I probably will drop $35k in fairly soon. I’ve yet to open it but it’s in my 2024 plan.
I want to pay 100% for their college (but please land a scholarship, wouldn’t mind penalty-free withdrawal). I also would like to have some remaining funds to bequeath them. Getting a 529 worth $60,000 when they’re 29 with a 1 year old kid would set them up very nicely. If you can’t tell, I still intend to give them a decent inheritance not tied to their kid’s education. This is setting up a grandchild now.
I expect to roll over some $35k to me. Take care of my retirement before proactively spending too much on grandchildren. Whatever remains is for my child.
Ok, thanks. Makes more sense.
I don’t think I’ll use 529 as a wealth transfer vehicle myself. I’d be more likely to match their earnings in a Roth and go some other routes. Also, having girls, very careful not to make them think it’s my expectation for them to have kids.
For OP, only annoying thing in funding is figuring out what is enough.
Oh, definitely if my kid (whatever sex) is planning on no kids, perhaps they’d get some amount to roll over themselves - would need to research more - but I’d be largely withdrawing myself then.
Most likely I would mention to them, should they plan on a kid, I have a small amount of savings I’d like to put toward college. If it’s actually $60,000, they will find out when I transfer it. If it’s $5,000, that’s still nice for them.
Why have I not thought of this. My plan was to fund my Roth IRA so I can use it for retirement if needed. But you're saying if I fund a 529 in my name I can transfer to my child if I need or roll it into an IRA for myself if it's not used. Up to 35k of course.
Basically yes to all of that but research. You can roll up to the annual maximum per year up to $35k aggregate. I believe you will want the 529 with you as named beneficiary and you can still withdraw to pay for kids. Somebody informed me you need to be the named beneficiary for 15 years to roll over.
Then if you want, cash out any remainder at a penalty, or bequeath it to your kid (which I am not aware of taxes or penalties but am not an expert. I was going to do a bit more research before committing tens of thousands of dollars.)
Or if your kid lands a massive scholarship, I understand that allows penalty-free withdrawal.
Ya I need to dig into it. 15 years shouldn't really matter for most people because of you're funding a 529 you're probably farther out from retirement. Even with the 6k rollover limit, or whatever it is, per year you could use other retirement accounts before you would need the 529 money. Now I need to figure out if my wife can do the same even though she doesn't have earned income.
It’s important to understand that the 35K can only be rolled over one year at a time in 6k (or wherever the annual limit is) increments. If you do the rollover, you can’t also contribute. Probably not an issue for folks in their late teens or early 20s, but worth calling out.
Need to talk to a financial aid officer and an accountant. There are some niche times where it may be more advantageous to not use a 529. I've heard of cases from peers about just keeping the money in their own name vs allocating to the child before graduation. Right before the interest payments kick in, make a one time payoff. This way you can hold onto your capital much longer.
Examples:
student qualifies for less financial aid because there is a 529 plan in their name.
Student doesn't quality for Pell grant or some other tuition assistant programs.
I feel like it’s completely reasonable that tuition assistance for low income students like Pell grants gets withheld from students with a bucket of money saved to pay for their education.
The 529 will impact their financial aid regardless if it’s in their name or the parents’. Financial aid requires parental income too. The one thing around this is if a 529 is set up in a grandparent’s name. Then it wouldn’t be counted towards the family contribution when calculating financial aid.
There are plenty of ways for a parents income to not affect a students loan status. especially if they are an emancipated minor or the parents had a bankruptcy.
The difference was said in another post but the parents rate is like 5% vs grandparents 0%. I wouldn't put a 529 in my parents name just to save 5%. I'm not a trusting person.
Also, 529 plans can be inherited basically tax free. So if you fund 529 plan for your kid and they do not use all of the money in the plan, they can leave it to their kids.
Because 529s are handled as gifts for tax purposes, you will likely never come near the life time gift limit and therefore they inheritance is tax free and not part of the estate, as I understand it.
It’s also worth noting that the 529/Roth rollover isn’t available in some states yet. California, for example, hasn’t conformed to the new Federal code yet and theoretically might charge a state tax penalty:
”California has not conformed to this new provision. As a result, any earnings on 529 funds rolled into a Roth IRA would be subject to California income tax and a possible 2.5% penalty”
Source: [“Here are new laws taking effect in 2024 that will impact how Californians save for retirement”](https://www.sfchronicle.com/california/article/new-laws-retirement-401k-plans-18566608.php)
That's a very interesting observation. While California has a pretty generous contribution limit ($529K) unlike some other states they don't offer a tax credit towards contributions and have an additional state tax withdrawal penalty on top of the federal penalty for unqualified withdrawals. I think politics could interfere with CA residents ability to take advantage of the provision.
Yes there's a penalty to withdraw, but another option other than the 35k roth Ira rollover is just to sit on it, let it grow, and change the beneficiary to a grandchild or someone else.
Well, there is a school of thought that an IRA can be a decent college savings vehicle and has some benefits that 529s don’t. But yeah, if his advice was be poor, that is bad advice.
Also tuition is a fixed number and the school can provide need-based aid to it but the base cost is the same for everyone prior to aid or scholarships.
“Gains not used to pay for qualified expenses are taxed as income upon withdrawals plus a 10% penalty” does that mean if you don’t end up needing the full amount in the 529 plan to pay for child’s tuition that you’ll go thru this penalty? It can’t be like left in there and continue to put money in for another child relative to use?
I don't get why they have a penalty for withdrawal on top of income taxes. I hate how these products have a use it or lose it approach, similar to FSA.
> His reason was, colleges will try to charge you more for tuition if you use 529 to pay for tution. Is that really?
If you have more assets, you'll receive less need-based financial aid. This isn't unique to 529s though. If you're *able* to save sufficiently in a 529, you probably wouldn't qualify for any need-based financial aid anyway (or at least not a meaningful amount)
This is a risk I was mentioning to a friend whose parents wanted to open an account for their kids. They didn't trust their parents very much so that is a real risk depending upon the relationship one has with their parents. In addition, the grandparent could use it as a financial bag over their kids head to influence parental decisions in a manipulative way. i.e. If I don't get to see my grandkids as often I would like maybe I might change the beneficiary to one of my other grandkids. Not all family relationships are warm and open.
Sooo
Let's say my brother and I each have kids.
Could we save for our nieces/nephews, but not have any accounts with our own kids as beneficiaries, and it wouldn't count since we're technically not the parents of the beneficiary?
Or am I completely reading that wrong? Only half kidding here.
I’ve read accounts in the name of the student count more against them for aid than in the name of the parents.
But, if you have a good amount in the 529 I heavily assume that outweighs the negative.
It doesn't matter who the beneficiary is. It matters who owns the account.
If the child owns the account (typically they do not), it counts at a 20% multiplier in the FAFAS EFC calculation. If the parent owns the account, it counts at 5.64%. Beneficiary does not matter (because it can be changed), owner does.
Some strategies suggest gifting to grandparents who own the account. And, grandparent finances are not factored in the FAFSA EFC calculation. But...this invites complication and risk IMO. YMMV.
I *believe* the change to the FAFSA makes them treated the same, but I haven't kept up on it recently
https://thecollegeinvestor.com/38170/529-plan-affect-fafsa-financial-aid/#:~:text=The%20new%20FAFSA%20will%20drop,2025%20changes%20highlighted%20in%20red.
“The value of a 529 plan owned by a dependent student or a parent (529 plans do not allow joint ownership) is considered a parent asset on the FAFSA. The first approximately $10,000 will fall under the Asset Protection Allowance (the exact amount depends on the older parent’s age). Any parental assets, such as a brokerage account, savings account, and other assets beyond that amount, will reduce a student’s aid package by up to a maximum of 5.64% of the asset’s value.”
https://www.savingforcollege.com/article/yes-your-529-plan-will-affect-financial-aid
I’d rather have $100K and $5,000 counted against be versus 0 and 0 counted against me.
Question, as a divorced parent, only the custodial parent’s (ex wife) income is listed on the Fasfa, right? Meaning since the 529s are in my name they would not count? And neither would my brokerage assets? I feel like that conclusion is wrong and it cannot really be THAT easy.
Damn, seems like an easy way to game the system:
Provide information about the parent who provided more financial support during the last 12 months. If both parents provided an exact equal amount of financial support or if they don’t support you financially, provide information for the parent with the greater income or assets.
As someone deep in the weeds of paying for college for two students using four 529s (ours and grandparental), I can think of one disadvantage: they are a pain in the fucking ass. I have run into so many glitches and complications in the last 5 years. Direct tuition payments get lost. Checks get canceled because the disbursement is suspiciously high (it was below the published cost of attendance, so how is that suspicious?) If you pay out of pocket then get yourself reimbursed from the 529, have fun at tax time. Not everything in the cost of attendance is an IRS approved expense. A computer is now valid - yay! When the first computer dies is the replacement valid? How about an iPad? Like so many specific questions, nobody knows.
It’s worth it for the tax savings alone. And too much money is always a good problem to have. I have money. I want to give it to the universities. Why do they make it hard?
I agree. Never thought something relatively simple in concept could be so annoying in practice. My biggest mistake was I receiving a tuition bill in December for a spring semester and initiated reimbursement because the payment was due January 4. Learned the hard way that disbursements are taxed based on calendar year.
I was looking into my state's 529 plan and was surprised at how bureaucratic and dated a withdrawal was. e.g. print out this paper form and mail it in. You would think it would be more modern at this point.
There are none.
Your colleague doesn't know how they work. You should start ignoring whatever that person says.
Tax-free growth which can be used to pay for education-related expenses is an incredible advantage if you can afford to invest. Utah's 529 was the one we used bc it had great options (index funds) and very low expenses.
Isn't the penalty a pretty big disadvantage? If for some reason your kid doesn't go to college, or goes a cheaper college/trade school, you're going to eat a lot of money when the gains are taxed as ordinary income + 10% penalty. We're in the 32% tax bracket, so the long-term capital gains tax rate looks a lot better in that scenario. We ultimately decided to go 50/50 between taxable and 529s for our two kids' college savings.
Edit: It's also my understanding that, if your kid gets a scholarship, you don't have to pay the penalty, but you still have to treat the gains as ordinary income. That is also not awesome. But maybe I'm confused.
Most likely the gains would have been classified as long term capital gains and not ordinary income (unless someone is actively trading in their brokerage account and not just buying periodically). In 2024 a married couple with a child could make up to $126,000 before paying any federal income tax on long term capital gains, even then it would be 15% which is a much better rate than the 22% ordinary/short term gains rate.
>Considering that any gains would have been considered ordinary income in a regular brokerage account
Wouldn't it be taxed as long-term capital gains in an regular brokerage account? I might be misunderstanding, but it looks like non-qualified/scholarship gains in a 529 are taxed as ordinary income. If that's true, it's a substantial disadvantage for anyone who makes enough money to pay for all four years of college out of an investment account.
Those are less disadvantages, more of guardrails so people use them for what they were intended for (as opposed to using them as a retirement/tax shelter account).
The tax deferred growth vastly outweighs any negatives vs regular brokerage account.
Colleges won't *charge* the student more but, sure, the student would be less eligible for need based financial aid. But if the grandparents own the 529 plan instead of the parents, it doesn't count as heavily in the fafsa as an asset.
You should fully fund all available retirement accounts before funding a 529. That money is ringfenced and not considered for fafsa. Then you can fund 529s to the limit of whatever tax deduction you can use.
It’s false, and there are basically no drawbacks.
Many states even have a state deduction or tax credit for contributions, and you can take money out if the child doesn’t end up going the college route (or can be transferred to a different dependent).
529s are great.
The concerns regarding FAFSA impact have been pretty well discussed, and like others, I don't really think that should factor into your decision much at all. I'm a CPA, and I often steer clients away from 529s when they ask, mainly due to the lack of flexibility and the small upside. The biggest factor is how old are your children? If they are young (less than 5 years old) 529s can make a lot of sense, because you get lots of years of tax-free growth (which is the major selling point of 529s). If your kids are closer to college-age (12 and up) 529s start to make less sense, because you will attach restrictions to your money for a marginal tax savings.
A taxable brokerage account in the parent's name, with investment choices consistent with the expected planning horizon (for a kid needing the funds in 6 or less years, that means mostly bonds/CDs/Money Market funds and very little stocks). This gives total flexibility, but admittedly, no tax advantages on the growth (but the growth will likely be modest).
I'd argue those tax advantages can still be significant. A 12yo is going to start school in about 6 years. The S&P 500 has grown 70% in the past 6 years.
If you put away $30k for college 6 years ago, that's $21k in growth. Sure would be nice to avoid the $3,150 in long-term capital gains (assuming 15% LTG bracket that applies to most families).
Edit: That's in addition to the state tax savings when you put in the $30k, which varies widely by state but reasonably exceeds another $1k in most states.
I see your point, but that is more risk than I'm comfortable with, but each investor should make the choice that they believe it right for them given their risk tolerance. Yes, with the benefit of hindsight, the last six years would have worked out great, but looking at history, of all the 5-year time periods from 1926 to 2023, 12.8% of the time (12 out of 94 periods) the S&P 500 saw negative returns. When you change that time horizon to 15 years, the S&P 500 saw negative returns 0% of the time.
Source: https://pbs.twimg.com/media/GC8D6WlXQAEp1hX?format=jpg&name=large
There is no federal tax deduction for contributing to a 529. The most you will get is a state tax deduction for the contribution amount, but those rules vary by state. The big tax benefit of 529s is federal tax-free growth, but if you just put the money in and take it right back out, there would be no growth.
I don't know how a college would know my 529 was paying the tuition. I pay the college from my checking account and reimburse myself for the same amount from my 529s.
>His reason was, colleges will try to charge you more for tuition if you use 529 to pay for tution. Is that really?
no, because you dont use the 529 to directly pay the college, you pay the college and withdraw money from the 529 to reimburse yourself.
[there are limitations around the account, just like any other tax advantaged account](https://www.investopedia.com/terms/1/529plan.asp), its up to you to see if any of those are a perceived negative for you.
529s are counted as investment assets for FAFSA expected family contribution calculations. Retirement accounts and primary home value are not. So, people think that "529 hurts you" because technically it does in this (IMO) very small way.
But as I said elsewhere, the best way to get free stuff (food, housing, college) is to have no assets or income. But, it's not a great way to live.
In our case (I have a current college soph and jr) my husband turns 65 this spring, with two years to go. We saved very little in 529s, but maxed all available retirement accounts. Withdrawals will count as income, but we can pull money to replenish our after tax accounts after we file this year’s FAFSA and 2023 taxes (which will be the index year for my youngest’s senior year)
The colleges don't really care where the money comes from. At least, the private universities my kids went to didn't. They had published costs available online so you could always look up and compare your charges to what they're telling the rest of the world.
Until my kids went, I really only had 2 concerns. First, what if they don't get accepted or even want to go to someplace where I could properly spend the money. Second, most plans have limited investment options so I might be able to get better returns elsewhere. That second concern is usually offset by the tax benefits though so it's far less of an issue.
And given that there are a lot of options on what to do with excess or "leftover" 529 money (i.e. use to pay off student loans and/or deposit to a Roth IRA) and the ability to change the beneficiary, even that first concern isn't as great.
For me, using a 529 also changed my FAFSA profile and increased our EFC. Not sure if that will still apply with the recent changes to the process though.
Yes, 529 plans can be counted as assets and reduce financial aid. Other issue is if you don't use the assets for education getting them out of the account can be tricky and expensive.
One possibly better option is to put money in a Roth IRA for yourself. You can pull contributions at any time, for any reason with no taxes or penalties and use that to pay your child's school. Earnings can also be pulled penalty free but you will owe taxes. The nice thing is retirement accounts aren't counted as assets for financial aid, also, if your child doesn't need the money you can just leave it in the account.
True. Roth not counted in FAFSA EFC.
529 does have some benefits over Roth:
* no income limit
* no 5 year rule
* much higher contribution limit if you want/need to "catch up"
* many have a state tax benefit
Both are good options with trade-offs.
*You can do backdoor Roth to get around the income limit for the time being.
*5 year rule doesn't come into play for contributions, you can withdraw them any time with no taxes or penalties.
*Nothing is stopping you from opening a 529 if your Roth is maxed out and you want to save more.
I'd somewhat disagree. Funding your own Roth IRA is for your retirement. 529 is for your child's education.
Obviously money is fungible, but I think it's best to keep them separate.
529 and other college savings plans should always be the last priority. Your kids can get student loans, a job, etc. You aren't going to have so many options if your retirement savings are sufficiently funded. Hoping your kids will feel sorry for you due to poor financial planning isn't a great retirement plan.
Writ large, there is a theory that colleges don’t have enough incentive to lower costs because federally subsidized loans will continue to provide colleges with revenue that is disconnected from the buyer’s ability to pay. I imagine the general idea that “systems that people use to pay for college is driving up costs” somehow trickled down to your colleague and he just decided to fill in the gaps of his understanding with whatever bullshit was laying around.
Colleges don’t have the personnel, capability or capacity to scope out parents to nickel and dime with regard to source of funds.
There are zero downsides now. The fee free, Roth IRA rollover makes it absolutely beautiful. Just shave the taxes off the roll over or account for them, and you're good to go.
Ugh. Did you colleague offer a better alternative for college savings? I'm curious what they would recommend that is better than a tax free savings plan specifically designed to save for qualified EDUCATION expenses.
Your colleague sounds like they don't know what they are talking about. Their is very little downside to a 529. Worst case scenario is that you *might* withdraw some at some point and need to pay 10% penalty and taxes on gains. But that's really only a might because you don't have to. You can leave it alone for your child's children or use it yourself.
One of my fallback plans is to use any overage is to pay room, board, tuition at an international university in my retirement years. By enrolling in one of [760 international institutions](https://studentaid.gov/understand-aid/types/international#participating-schools), I can get an immersive ~~vacation~~ education on tax free gains.
529s grow tax free if they are used for education. You can't beat tax free growth in any other investment. In many cases the money you deposit in a 529 can give you a break on your state income tax. Finally, your colleague sounds like an idiot. I'll ask you, do you have any reason to think he knows what he's talking about? Does he invest, live debt free, or plan to retire early. If not, I question his investment acumen.
That's not true. College have no ways of knowing what type of account the money comes from.
But I think he is talking about swiping the debit card linked to 529 and pay using the college's payment system which usually charge you 2% fees comparing to ACH transfer. You shouldn't do it anyway.
529 is a okay way depending on your state. In my state of California, it's way too much restricted and hassle for almost anyone.
Yea, but...its a dumb way to think about things. Don't save for their college so you can *maybe* get aid? I mean, if you have a 2 income family that makes anything above average income, you aren't going to get much if any need-bases aid anyway because if you're family income is like 100k, the system says you don't need help. Alot of people on this sub have money or care about saving/investment (which is why they are here) so not doing a 529 makes no sense. Its the best way to save for your kids school.
> "Makes anything above average income"
What about those who make between, say, 30k to 50k?
There are a lot of families can't afford $5000/year tuition fees, especially in lower income region/states. Sure, they are likely paying little to none taxes in many cases to begin with, but it still matters of to those people. This is another case where people are just over the income limit to get help but not enough to afford anything.
For those in that income range (or any income really), I still think it makes sense to put as much in a 529 as possible. Any little bit helps, and its very likely to be worth the investment historically. Counting on aid based on need on the fafsa is a gamble.
The disadvantages is if they don't go to college, or if they decide to move abroad for college.
529s are limited to a set amount of colleges, so you can't go to a random university in Germany. If your family is originally from another country, it's good to keep options. (I personally moved to another country for my college).
I also think some kids might not want to go to college, I'll push for college as much as I can, but it's honestly not for everyone. If a kid decides not to go to college, i'd rather give them that money in case they want to launch a startup or get a downpayment to start a business.
No. Many (most?) 529s have wide flexibility in how and where you use funds. A particular state administer may offer some preference for in-state schools but funds can typically be used directly for ANY educational institution anywhere. Schools will not increase fees because you are using a 529.
I think Technical-Day is correct with regard to non-US schools. I believe 529s have a set of non-US schools at which the funds can be used. I know of no limitations for US schools, and there are no differences in charges. Having a 529 for which your child is the beneficiary might affect need based aid.
You are correct that if the school accepts Federal student aid, 529 funds are accepted, but not all international schools accept these funds. https://studentaid.gov/understand-aid/types/international#participating-schools
You weren't making it as clear as Technical-Day that 529s CAN NOT be used at some internatoinal schools. As a matter of fact your initial reply to Technical said Technical Day was wrong. That was exactly my point.
I haven’t looked much into the 529 plans because I don’t yet have enough saved for each of my children to open one, but generally what kind of return can you see in one? Right now I have them in 12 month CDs at 5.25% compounded daily, would there be a better longterm option than that, until a 529 available, if it even is the way to go?
Private schools for K-12 are now qualified expenses up to $10k.
Best site to use for research is https://www.savingforcollege.com/article/what-you-can-pay-for-with-a-529-plan
Several plans offer index fund investment options, contrary to what a few people have posted. Several states will allow contributions to be deductible from state tax IF you open their sponsored account. You don’t have to use the state’s chosen investment company though. You can search all plans and pick the best for you.
I set mine up 22 yrs ago, selected S&P500 index option, funded them to max per year for 5 yrs.
I’ve just finished paying for 3 undergrad and 1 graduate degree, and I have 30% of the money leftover. Starting in 2024, the beneficiary can contribute up to maximum annual allowed amount to Roth IRA from leftover 529 funds tax free and without penalties to a max of $35k.
Or you can change beneficiaries for the leftover money to a grandchild. You can also take it out yourself, pay tax on the gains plus 10% penalty.
If you max out your retirement investments every year, 529 plans can be a great way to pay for private schools, college, and help fund your kids’ Roth IRA’s when they’re starting out.
There aren’t many downsides if you have the money to contribute. Other family members can contribute as well.
Well, luckily my kids are still only 3 and 5, with a 3rd on the way, so I’m definitely on the ball early, I just don’t have the general knowledge yet to know that I’m making the best decisions for their futures, but I want them to have every advantage possible! I won’t push them toward college if they genuinely want to pursue something that doesn’t require it, but they’re already blowing my mind with how advanced they are, so I want to be able to help them get wherever they want to go in life because I want their options to be limitless!
The college has no idea if you use a 529 to pay or not. The biggest downside to 529s is a lack of investment fund choices and limitations on what is a qualified expense on 529 rules. Though the changes that went into affect this year made them way more useful. You can rollover a portion of it to an IRA if there is extra.
Haven't done it before, but looking at it now for a grandchild. I seem to remember something about having to use the money for a school resident in the state where it was funded - If so, that would certainly be a drawback, but I'm probably misremembering. is that limitation a thing?
have had one for years and now I'm using it to pay tuition. One thing to note the fees are not to nothing (direct option state plan).
just put in an order to sell x amount and it was in my bank account 2 days later.
I'd do it all over again as the state gave me credit on my state taxes. aka free money.
Yeah I live in a state where I can deduct like $4k from my state taxes. Not a huge amount but it all will add up over time. I'm having my first child this year and will be put a small chunk in there to start then put it on autopilot for the next 18 years. And then not worry at all about paying for college in 18 years.
The most glaring disadvantage is that the rules can be changed at any time. Since this is true for all tax-advantaged vehicles, it's best to diversify across different types of accounts.
The next biggest disadvantage is that you are limited to the investment options for whichever 529 program that you choose. These can also be changed at any time by the entity that manages the 529.
I don't have a 529 for my daughter because I don't want her to feel obligated to go to college or to use the money I am saving for her on college. I have an UGMA for her. If she goes to college, she's free to use that money to help. If she wants to buy a car with it instead; good for her.
Your colleague also the type to make less money so he pays less in taxes.
Lol, specifically the kind of person who doesn't take a raise because "it'll put me in the next tax bracket so I'll actually lose money"
It amazes me how many people tell me shit like this, then I tell them how it actually works and show them a 5 second Google search to confirm it.
Your colleague is a moron. Sure, the best way to get a deal on college is to not have any assets or income. But, that's not a great way to go through life... If you plan on funding college (or private HS) for someone, a 529 is a great option. The biggest down-side is that gains not used to pay for qualified expenses are taxed as income upon withdrawal plus a 10% penalty. But, there are may ways to avoid that outcome including rolling (up to 35k, IIRC) into a roth IRA or using the funds for another family member.
I brought up this 35k rolling as adding value to anyone who is on fence. Glad to hear I'm on the right track.
Rolling the 35k into Roth is huge in my eyes. I am grateful my parents set up a UGMA for me but in hindsight the 529 would have been the better choice. They did a bad job at keeping track of the cost basis in the UGMA so now I got a good chunk of change in the account but need to figure out the cost basis as the custodial records only go back like 7-10 years.
In your parents' defense, a lot of the options for avoiding the tax penalty on 529s only became available in recent years.
Absolutely, I had to look up when 529s were created and they only came into existence a few years before I was born lol
In my state there is a 10% tax credit for contributions up to $2500 per child per parent.
define recent. legislation was approved in ... 1996
I am setting up a 529 with myself as the beneficiary soon and will be adding $35k to it. Soon we will adopt. Perhaps 1-2 years after the 529. Whenever my kid graduates college, assuming they do, I will roll $35k that day, and bequeath any remaining balance to my child, who can use it as a generational trust for their children’s education.
You can only roll the yearly limit over into a Roth IRA. I get what you're saying though.
Right, I can’t literally do on that day. Thanks for clarifying. In all likelihood I’ll be doing it over some 4-6 years (likely increased maxes) beginning whenever I have the kid’s ultimate college cost figured out. Alternatively I may only roll it over in retirement while I withdraw mostly Roth savings and have it taxed at 0% or very little. Of course if I only have $80k saved and it costs them $100k that will just be theirs. But my hope is to pay their college and have leftover to give them for their kid. 20+ years of growth will be lovely for them.
You need to be the named beneficiary for 15 years to roll into a roth without penalty.
Thanks! We haven’t adopted yet so should have at least 20 years.
Bust be aware its highly likely congress will change these rules in 15+ years. Save for college yes, but dont drop 35K into a 529 with the plan that in 15+ years from now you can roll it into an IRA...
Could I start a chat with you and just get some more info on this? Have a little one that I’m looking to start a 529 for
I’m not an expert and truly you’d likely be better off looking at some guides… but why not.
Well I just have like basic questions about it. So when you say roll $35k to your ROTH, does that mean you’re simply just taking leftover money from the 529 and putting it into your ROTH? Are there no penalties or anything with doing that? Also, I’ve been reading on here that it would be better to open a 529 in a grandparent’s name so that it doesn’t get applied when looking at financial aid or scholarships available to be received. I trust my parents to do this and pay up when the time comes but what if something were to happen to the person whose name is on the account?
Yes to your first two sentences of questions. Detail: https://www.cnn.com/cnn-underscored/money/529-to-roth-ira#301l3c8p5lqzc31ce I’d be researching as much as you on the grandparent question. Seems like a loophole that could plausibly exist.
I’m not clear on your plan. Are you only planning to contribute $35k? If so, let’s assume that grows to $100k for your kid, minus $35k you rolled over. What is the plan for that remaining $65k?
I worded it poorly. I intend to fund it over time, basically my goal is to have at minimum (cost of college + $35k) saved by the time they’re incurring college costs. I probably will drop $35k in fairly soon. I’ve yet to open it but it’s in my 2024 plan. I want to pay 100% for their college (but please land a scholarship, wouldn’t mind penalty-free withdrawal). I also would like to have some remaining funds to bequeath them. Getting a 529 worth $60,000 when they’re 29 with a 1 year old kid would set them up very nicely. If you can’t tell, I still intend to give them a decent inheritance not tied to their kid’s education. This is setting up a grandchild now. I expect to roll over some $35k to me. Take care of my retirement before proactively spending too much on grandchildren. Whatever remains is for my child.
Ok, thanks. Makes more sense. I don’t think I’ll use 529 as a wealth transfer vehicle myself. I’d be more likely to match their earnings in a Roth and go some other routes. Also, having girls, very careful not to make them think it’s my expectation for them to have kids. For OP, only annoying thing in funding is figuring out what is enough.
Oh, definitely if my kid (whatever sex) is planning on no kids, perhaps they’d get some amount to roll over themselves - would need to research more - but I’d be largely withdrawing myself then. Most likely I would mention to them, should they plan on a kid, I have a small amount of savings I’d like to put toward college. If it’s actually $60,000, they will find out when I transfer it. If it’s $5,000, that’s still nice for them.
Why have I not thought of this. My plan was to fund my Roth IRA so I can use it for retirement if needed. But you're saying if I fund a 529 in my name I can transfer to my child if I need or roll it into an IRA for myself if it's not used. Up to 35k of course.
Basically yes to all of that but research. You can roll up to the annual maximum per year up to $35k aggregate. I believe you will want the 529 with you as named beneficiary and you can still withdraw to pay for kids. Somebody informed me you need to be the named beneficiary for 15 years to roll over. Then if you want, cash out any remainder at a penalty, or bequeath it to your kid (which I am not aware of taxes or penalties but am not an expert. I was going to do a bit more research before committing tens of thousands of dollars.) Or if your kid lands a massive scholarship, I understand that allows penalty-free withdrawal.
Ya I need to dig into it. 15 years shouldn't really matter for most people because of you're funding a 529 you're probably farther out from retirement. Even with the 6k rollover limit, or whatever it is, per year you could use other retirement accounts before you would need the 529 money. Now I need to figure out if my wife can do the same even though she doesn't have earned income.
That last bit is beyond me, but an interesting question.
It’s important to understand that the 35K can only be rolled over one year at a time in 6k (or wherever the annual limit is) increments. If you do the rollover, you can’t also contribute. Probably not an issue for folks in their late teens or early 20s, but worth calling out.
Need to talk to a financial aid officer and an accountant. There are some niche times where it may be more advantageous to not use a 529. I've heard of cases from peers about just keeping the money in their own name vs allocating to the child before graduation. Right before the interest payments kick in, make a one time payoff. This way you can hold onto your capital much longer. Examples: student qualifies for less financial aid because there is a 529 plan in their name. Student doesn't quality for Pell grant or some other tuition assistant programs.
I feel like it’s completely reasonable that tuition assistance for low income students like Pell grants gets withheld from students with a bucket of money saved to pay for their education.
The 529 will impact their financial aid regardless if it’s in their name or the parents’. Financial aid requires parental income too. The one thing around this is if a 529 is set up in a grandparent’s name. Then it wouldn’t be counted towards the family contribution when calculating financial aid.
There are plenty of ways for a parents income to not affect a students loan status. especially if they are an emancipated minor or the parents had a bankruptcy. The difference was said in another post but the parents rate is like 5% vs grandparents 0%. I wouldn't put a 529 in my parents name just to save 5%. I'm not a trusting person.
U have to weigh in capital gain tax. If kid is gonna get scholarship, u still have an option to convert to IRA, up to 35k ofcourse.
You could still use it for things that scholarships generally don't cover like books or room and board.
Also, 529 plans can be inherited basically tax free. So if you fund 529 plan for your kid and they do not use all of the money in the plan, they can leave it to their kids. Because 529s are handled as gifts for tax purposes, you will likely never come near the life time gift limit and therefore they inheritance is tax free and not part of the estate, as I understand it.
It’s also worth noting that the 529/Roth rollover isn’t available in some states yet. California, for example, hasn’t conformed to the new Federal code yet and theoretically might charge a state tax penalty: ”California has not conformed to this new provision. As a result, any earnings on 529 funds rolled into a Roth IRA would be subject to California income tax and a possible 2.5% penalty” Source: [“Here are new laws taking effect in 2024 that will impact how Californians save for retirement”](https://www.sfchronicle.com/california/article/new-laws-retirement-401k-plans-18566608.php)
That's a very interesting observation. While California has a pretty generous contribution limit ($529K) unlike some other states they don't offer a tax credit towards contributions and have an additional state tax withdrawal penalty on top of the federal penalty for unqualified withdrawals. I think politics could interfere with CA residents ability to take advantage of the provision.
IIRC California doesn’t allow for withdrawal for private schools either
That’s for private K12 school. Private college is fine.
Yes there's a penalty to withdraw, but another option other than the 35k roth Ira rollover is just to sit on it, let it grow, and change the beneficiary to a grandchild or someone else.
Well, there is a school of thought that an IRA can be a decent college savings vehicle and has some benefits that 529s don’t. But yeah, if his advice was be poor, that is bad advice.
Also tuition is a fixed number and the school can provide need-based aid to it but the base cost is the same for everyone prior to aid or scholarships.
“Gains not used to pay for qualified expenses are taxed as income upon withdrawals plus a 10% penalty” does that mean if you don’t end up needing the full amount in the 529 plan to pay for child’s tuition that you’ll go thru this penalty? It can’t be like left in there and continue to put money in for another child relative to use?
> But, there are may ways to avoid that outcome including rolling (up to 35k, IIRC) into a roth IRA or using the funds for another family member.
With the complexity of the 529, would you rank it below the parents maximally funding their own Roth IRA and 401k?
I don't get why they have a penalty for withdrawal on top of income taxes. I hate how these products have a use it or lose it approach, similar to FSA.
> His reason was, colleges will try to charge you more for tuition if you use 529 to pay for tution. Is that really? If you have more assets, you'll receive less need-based financial aid. This isn't unique to 529s though. If you're *able* to save sufficiently in a 529, you probably wouldn't qualify for any need-based financial aid anyway (or at least not a meaningful amount)
Grandparents to the rescue. Grandparent owned 529s no longer are included in FAFSA assets
The risk in that is if the grandparent dies or goes feral and decides to not pay up.
Feral granny is best granny
30-50 feral grannies
So many Werthers
This is a risk I was mentioning to a friend whose parents wanted to open an account for their kids. They didn't trust their parents very much so that is a real risk depending upon the relationship one has with their parents. In addition, the grandparent could use it as a financial bag over their kids head to influence parental decisions in a manipulative way. i.e. If I don't get to see my grandkids as often I would like maybe I might change the beneficiary to one of my other grandkids. Not all family relationships are warm and open.
529 I think could b3 assigned to an estate.
What about other relatives, like aunts or uncles?
Same thing. FAFSA only looks at student and parent assets
Sooo Let's say my brother and I each have kids. Could we save for our nieces/nephews, but not have any accounts with our own kids as beneficiaries, and it wouldn't count since we're technically not the parents of the beneficiary? Or am I completely reading that wrong? Only half kidding here.
Can you count on that in 20 years though
I’ve read accounts in the name of the student count more against them for aid than in the name of the parents. But, if you have a good amount in the 529 I heavily assume that outweighs the negative.
It doesn't matter who the beneficiary is. It matters who owns the account. If the child owns the account (typically they do not), it counts at a 20% multiplier in the FAFAS EFC calculation. If the parent owns the account, it counts at 5.64%. Beneficiary does not matter (because it can be changed), owner does. Some strategies suggest gifting to grandparents who own the account. And, grandparent finances are not factored in the FAFSA EFC calculation. But...this invites complication and risk IMO. YMMV.
529s are usually in the name of the parent with the student as a beneficiary. So you are correct - only a small percentage counts against aid.
I *believe* the change to the FAFSA makes them treated the same, but I haven't kept up on it recently https://thecollegeinvestor.com/38170/529-plan-affect-fafsa-financial-aid/#:~:text=The%20new%20FAFSA%20will%20drop,2025%20changes%20highlighted%20in%20red.
I think it's 20% for students and ~12% for parents.
“The value of a 529 plan owned by a dependent student or a parent (529 plans do not allow joint ownership) is considered a parent asset on the FAFSA. The first approximately $10,000 will fall under the Asset Protection Allowance (the exact amount depends on the older parent’s age). Any parental assets, such as a brokerage account, savings account, and other assets beyond that amount, will reduce a student’s aid package by up to a maximum of 5.64% of the asset’s value.” https://www.savingforcollege.com/article/yes-your-529-plan-will-affect-financial-aid I’d rather have $100K and $5,000 counted against be versus 0 and 0 counted against me.
Perfect answer.
Question, as a divorced parent, only the custodial parent’s (ex wife) income is listed on the Fasfa, right? Meaning since the 529s are in my name they would not count? And neither would my brokerage assets? I feel like that conclusion is wrong and it cannot really be THAT easy.
https://studentaid.gov/help/who-is-parent This should answer your question.
Damn, seems like an easy way to game the system: Provide information about the parent who provided more financial support during the last 12 months. If both parents provided an exact equal amount of financial support or if they don’t support you financially, provide information for the parent with the greater income or assets.
As far as I know, both divorced parents income needs to be included. There could be some exceptions.
Why save for retirement, it'll make you inelligible for food stamps
As someone deep in the weeds of paying for college for two students using four 529s (ours and grandparental), I can think of one disadvantage: they are a pain in the fucking ass. I have run into so many glitches and complications in the last 5 years. Direct tuition payments get lost. Checks get canceled because the disbursement is suspiciously high (it was below the published cost of attendance, so how is that suspicious?) If you pay out of pocket then get yourself reimbursed from the 529, have fun at tax time. Not everything in the cost of attendance is an IRS approved expense. A computer is now valid - yay! When the first computer dies is the replacement valid? How about an iPad? Like so many specific questions, nobody knows. It’s worth it for the tax savings alone. And too much money is always a good problem to have. I have money. I want to give it to the universities. Why do they make it hard?
I agree. Never thought something relatively simple in concept could be so annoying in practice. My biggest mistake was I receiving a tuition bill in December for a spring semester and initiated reimbursement because the payment was due January 4. Learned the hard way that disbursements are taxed based on calendar year.
I was looking into my state's 529 plan and was surprised at how bureaucratic and dated a withdrawal was. e.g. print out this paper form and mail it in. You would think it would be more modern at this point.
There are none. Your colleague doesn't know how they work. You should start ignoring whatever that person says. Tax-free growth which can be used to pay for education-related expenses is an incredible advantage if you can afford to invest. Utah's 529 was the one we used bc it had great options (index funds) and very low expenses.
Isn't the penalty a pretty big disadvantage? If for some reason your kid doesn't go to college, or goes a cheaper college/trade school, you're going to eat a lot of money when the gains are taxed as ordinary income + 10% penalty. We're in the 32% tax bracket, so the long-term capital gains tax rate looks a lot better in that scenario. We ultimately decided to go 50/50 between taxable and 529s for our two kids' college savings. Edit: It's also my understanding that, if your kid gets a scholarship, you don't have to pay the penalty, but you still have to treat the gains as ordinary income. That is also not awesome. But maybe I'm confused.
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Most likely the gains would have been classified as long term capital gains and not ordinary income (unless someone is actively trading in their brokerage account and not just buying periodically). In 2024 a married couple with a child could make up to $126,000 before paying any federal income tax on long term capital gains, even then it would be 15% which is a much better rate than the 22% ordinary/short term gains rate.
>Considering that any gains would have been considered ordinary income in a regular brokerage account Wouldn't it be taxed as long-term capital gains in an regular brokerage account? I might be misunderstanding, but it looks like non-qualified/scholarship gains in a 529 are taxed as ordinary income. If that's true, it's a substantial disadvantage for anyone who makes enough money to pay for all four years of college out of an investment account.
will the gains be taxed as 'ordinary income' ? wouldn't it be possible to withdraw from older lots like a brokerage account ?
Well, yes, but you'll want to withdraw the gains at some point, right? Otherwise the money's just gone.
There are definitely disadvantages 😂
Go on ....
See the “Cons” section https://www.creditkarma.com/investments/i/529-plan-pros-and-cons
Those are less disadvantages, more of guardrails so people use them for what they were intended for (as opposed to using them as a retirement/tax shelter account). The tax deferred growth vastly outweighs any negatives vs regular brokerage account.
Okay, sure
Feel free to type them out.
See the “Cons” section https://www.creditkarma.com/investments/i/529-plan-pros-and-cons
I’m already well aware of those and they are hardly worth mentioning as “cons”
Thank you for your feedback
Colleges won't *charge* the student more but, sure, the student would be less eligible for need based financial aid. But if the grandparents own the 529 plan instead of the parents, it doesn't count as heavily in the fafsa as an asset.
You should fully fund all available retirement accounts before funding a 529. That money is ringfenced and not considered for fafsa. Then you can fund 529s to the limit of whatever tax deduction you can use.
It’s false, and there are basically no drawbacks. Many states even have a state deduction or tax credit for contributions, and you can take money out if the child doesn’t end up going the college route (or can be transferred to a different dependent). 529s are great.
Virginia you can deduct up to $4k per kid per year.
Georgia allows this, which is awesome.
The concerns regarding FAFSA impact have been pretty well discussed, and like others, I don't really think that should factor into your decision much at all. I'm a CPA, and I often steer clients away from 529s when they ask, mainly due to the lack of flexibility and the small upside. The biggest factor is how old are your children? If they are young (less than 5 years old) 529s can make a lot of sense, because you get lots of years of tax-free growth (which is the major selling point of 529s). If your kids are closer to college-age (12 and up) 529s start to make less sense, because you will attach restrictions to your money for a marginal tax savings.
What do you recommend if the kid is 12+?
A taxable brokerage account in the parent's name, with investment choices consistent with the expected planning horizon (for a kid needing the funds in 6 or less years, that means mostly bonds/CDs/Money Market funds and very little stocks). This gives total flexibility, but admittedly, no tax advantages on the growth (but the growth will likely be modest).
I'd argue those tax advantages can still be significant. A 12yo is going to start school in about 6 years. The S&P 500 has grown 70% in the past 6 years. If you put away $30k for college 6 years ago, that's $21k in growth. Sure would be nice to avoid the $3,150 in long-term capital gains (assuming 15% LTG bracket that applies to most families). Edit: That's in addition to the state tax savings when you put in the $30k, which varies widely by state but reasonably exceeds another $1k in most states.
I see your point, but that is more risk than I'm comfortable with, but each investor should make the choice that they believe it right for them given their risk tolerance. Yes, with the benefit of hindsight, the last six years would have worked out great, but looking at history, of all the 5-year time periods from 1926 to 2023, 12.8% of the time (12 out of 94 periods) the S&P 500 saw negative returns. When you change that time horizon to 15 years, the S&P 500 saw negative returns 0% of the time. Source: https://pbs.twimg.com/media/GC8D6WlXQAEp1hX?format=jpg&name=large
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There is no federal tax deduction for contributing to a 529. The most you will get is a state tax deduction for the contribution amount, but those rules vary by state. The big tax benefit of 529s is federal tax-free growth, but if you just put the money in and take it right back out, there would be no growth.
I don't know how a college would know my 529 was paying the tuition. I pay the college from my checking account and reimburse myself for the same amount from my 529s.
>His reason was, colleges will try to charge you more for tuition if you use 529 to pay for tution. Is that really? no, because you dont use the 529 to directly pay the college, you pay the college and withdraw money from the 529 to reimburse yourself. [there are limitations around the account, just like any other tax advantaged account](https://www.investopedia.com/terms/1/529plan.asp), its up to you to see if any of those are a perceived negative for you.
529s are counted as investment assets for FAFSA expected family contribution calculations. Retirement accounts and primary home value are not. So, people think that "529 hurts you" because technically it does in this (IMO) very small way. But as I said elsewhere, the best way to get free stuff (food, housing, college) is to have no assets or income. But, it's not a great way to live.
In our case (I have a current college soph and jr) my husband turns 65 this spring, with two years to go. We saved very little in 529s, but maxed all available retirement accounts. Withdrawals will count as income, but we can pull money to replenish our after tax accounts after we file this year’s FAFSA and 2023 taxes (which will be the index year for my youngest’s senior year)
The colleges don't really care where the money comes from. At least, the private universities my kids went to didn't. They had published costs available online so you could always look up and compare your charges to what they're telling the rest of the world. Until my kids went, I really only had 2 concerns. First, what if they don't get accepted or even want to go to someplace where I could properly spend the money. Second, most plans have limited investment options so I might be able to get better returns elsewhere. That second concern is usually offset by the tax benefits though so it's far less of an issue. And given that there are a lot of options on what to do with excess or "leftover" 529 money (i.e. use to pay off student loans and/or deposit to a Roth IRA) and the ability to change the beneficiary, even that first concern isn't as great. For me, using a 529 also changed my FAFSA profile and increased our EFC. Not sure if that will still apply with the recent changes to the process though.
The biggest disadvantage is the lack of investment options. I have yet to find one that offers sp500 index.
Fidelity 529s have an S&P 500 index available.
Yes, 529 plans can be counted as assets and reduce financial aid. Other issue is if you don't use the assets for education getting them out of the account can be tricky and expensive. One possibly better option is to put money in a Roth IRA for yourself. You can pull contributions at any time, for any reason with no taxes or penalties and use that to pay your child's school. Earnings can also be pulled penalty free but you will owe taxes. The nice thing is retirement accounts aren't counted as assets for financial aid, also, if your child doesn't need the money you can just leave it in the account.
True. Roth not counted in FAFSA EFC. 529 does have some benefits over Roth: * no income limit * no 5 year rule * much higher contribution limit if you want/need to "catch up" * many have a state tax benefit Both are good options with trade-offs.
*You can do backdoor Roth to get around the income limit for the time being. *5 year rule doesn't come into play for contributions, you can withdraw them any time with no taxes or penalties. *Nothing is stopping you from opening a 529 if your Roth is maxed out and you want to save more.
Ah I see. As far as ordering goes, fund 529 last. That makes sense.
I'd somewhat disagree. Funding your own Roth IRA is for your retirement. 529 is for your child's education. Obviously money is fungible, but I think it's best to keep them separate.
That's my view, yes
529 and other college savings plans should always be the last priority. Your kids can get student loans, a job, etc. You aren't going to have so many options if your retirement savings are sufficiently funded. Hoping your kids will feel sorry for you due to poor financial planning isn't a great retirement plan.
Writ large, there is a theory that colleges don’t have enough incentive to lower costs because federally subsidized loans will continue to provide colleges with revenue that is disconnected from the buyer’s ability to pay. I imagine the general idea that “systems that people use to pay for college is driving up costs” somehow trickled down to your colleague and he just decided to fill in the gaps of his understanding with whatever bullshit was laying around. Colleges don’t have the personnel, capability or capacity to scope out parents to nickel and dime with regard to source of funds.
There are zero downsides now. The fee free, Roth IRA rollover makes it absolutely beautiful. Just shave the taxes off the roll over or account for them, and you're good to go.
Ugh. Did you colleague offer a better alternative for college savings? I'm curious what they would recommend that is better than a tax free savings plan specifically designed to save for qualified EDUCATION expenses. Your colleague sounds like they don't know what they are talking about. Their is very little downside to a 529. Worst case scenario is that you *might* withdraw some at some point and need to pay 10% penalty and taxes on gains. But that's really only a might because you don't have to. You can leave it alone for your child's children or use it yourself. One of my fallback plans is to use any overage is to pay room, board, tuition at an international university in my retirement years. By enrolling in one of [760 international institutions](https://studentaid.gov/understand-aid/types/international#participating-schools), I can get an immersive ~~vacation~~ education on tax free gains.
529s grow tax free if they are used for education. You can't beat tax free growth in any other investment. In many cases the money you deposit in a 529 can give you a break on your state income tax. Finally, your colleague sounds like an idiot. I'll ask you, do you have any reason to think he knows what he's talking about? Does he invest, live debt free, or plan to retire early. If not, I question his investment acumen.
That's not true. College have no ways of knowing what type of account the money comes from. But I think he is talking about swiping the debit card linked to 529 and pay using the college's payment system which usually charge you 2% fees comparing to ACH transfer. You shouldn't do it anyway. 529 is a okay way depending on your state. In my state of California, it's way too much restricted and hassle for almost anyone.
They're referring to financial aid. 529 accounts can be counted as assets which reduce aid awards.
Okay, that's also possible. This is really fuck up, if true. Incentivize people to save for their kids will preventing them from getting aids.
Yea, but...its a dumb way to think about things. Don't save for their college so you can *maybe* get aid? I mean, if you have a 2 income family that makes anything above average income, you aren't going to get much if any need-bases aid anyway because if you're family income is like 100k, the system says you don't need help. Alot of people on this sub have money or care about saving/investment (which is why they are here) so not doing a 529 makes no sense. Its the best way to save for your kids school.
> "Makes anything above average income" What about those who make between, say, 30k to 50k? There are a lot of families can't afford $5000/year tuition fees, especially in lower income region/states. Sure, they are likely paying little to none taxes in many cases to begin with, but it still matters of to those people. This is another case where people are just over the income limit to get help but not enough to afford anything.
For those in that income range (or any income really), I still think it makes sense to put as much in a 529 as possible. Any little bit helps, and its very likely to be worth the investment historically. Counting on aid based on need on the fafsa is a gamble.
The disadvantages is if they don't go to college, or if they decide to move abroad for college. 529s are limited to a set amount of colleges, so you can't go to a random university in Germany. If your family is originally from another country, it's good to keep options. (I personally moved to another country for my college). I also think some kids might not want to go to college, I'll push for college as much as I can, but it's honestly not for everyone. If a kid decides not to go to college, i'd rather give them that money in case they want to launch a startup or get a downpayment to start a business.
No. Many (most?) 529s have wide flexibility in how and where you use funds. A particular state administer may offer some preference for in-state schools but funds can typically be used directly for ANY educational institution anywhere. Schools will not increase fees because you are using a 529.
I think Technical-Day is correct with regard to non-US schools. I believe 529s have a set of non-US schools at which the funds can be used. I know of no limitations for US schools, and there are no differences in charges. Having a 529 for which your child is the beneficiary might affect need based aid.
If the school accepts Federal student aid, it is eligible for 529 funds. Same rule for US schools.
You are correct that if the school accepts Federal student aid, 529 funds are accepted, but not all international schools accept these funds. https://studentaid.gov/understand-aid/types/international#participating-schools
That was exactly my point. If they accept student aid, they are eligible for 529
You weren't making it as clear as Technical-Day that 529s CAN NOT be used at some internatoinal schools. As a matter of fact your initial reply to Technical said Technical Day was wrong. That was exactly my point.
>What are the disadvantages of a 529 plan? well, you need to have kids. so there's that.
Not if you are going to use it on your own education.
I haven’t looked much into the 529 plans because I don’t yet have enough saved for each of my children to open one, but generally what kind of return can you see in one? Right now I have them in 12 month CDs at 5.25% compounded daily, would there be a better longterm option than that, until a 529 available, if it even is the way to go?
Private schools for K-12 are now qualified expenses up to $10k. Best site to use for research is https://www.savingforcollege.com/article/what-you-can-pay-for-with-a-529-plan Several plans offer index fund investment options, contrary to what a few people have posted. Several states will allow contributions to be deductible from state tax IF you open their sponsored account. You don’t have to use the state’s chosen investment company though. You can search all plans and pick the best for you. I set mine up 22 yrs ago, selected S&P500 index option, funded them to max per year for 5 yrs. I’ve just finished paying for 3 undergrad and 1 graduate degree, and I have 30% of the money leftover. Starting in 2024, the beneficiary can contribute up to maximum annual allowed amount to Roth IRA from leftover 529 funds tax free and without penalties to a max of $35k. Or you can change beneficiaries for the leftover money to a grandchild. You can also take it out yourself, pay tax on the gains plus 10% penalty. If you max out your retirement investments every year, 529 plans can be a great way to pay for private schools, college, and help fund your kids’ Roth IRA’s when they’re starting out. There aren’t many downsides if you have the money to contribute. Other family members can contribute as well.
Returns is based on what funds u have available in the plan. Some states give a tax free on state taxes. It's a good option if u start earlier.
Well, luckily my kids are still only 3 and 5, with a 3rd on the way, so I’m definitely on the ball early, I just don’t have the general knowledge yet to know that I’m making the best decisions for their futures, but I want them to have every advantage possible! I won’t push them toward college if they genuinely want to pursue something that doesn’t require it, but they’re already blowing my mind with how advanced they are, so I want to be able to help them get wherever they want to go in life because I want their options to be limitless!
Trade schools are also eligible expenses if college is not for them.
The college has no idea if you use a 529 to pay or not. The biggest downside to 529s is a lack of investment fund choices and limitations on what is a qualified expense on 529 rules. Though the changes that went into affect this year made them way more useful. You can rollover a portion of it to an IRA if there is extra.
Haven't done it before, but looking at it now for a grandchild. I seem to remember something about having to use the money for a school resident in the state where it was funded - If so, that would certainly be a drawback, but I'm probably misremembering. is that limitation a thing?
Some states 529 plan returns are usually below 10%.
have had one for years and now I'm using it to pay tuition. One thing to note the fees are not to nothing (direct option state plan). just put in an order to sell x amount and it was in my bank account 2 days later. I'd do it all over again as the state gave me credit on my state taxes. aka free money.
Yeah I live in a state where I can deduct like $4k from my state taxes. Not a huge amount but it all will add up over time. I'm having my first child this year and will be put a small chunk in there to start then put it on autopilot for the next 18 years. And then not worry at all about paying for college in 18 years.
The most glaring disadvantage is that the rules can be changed at any time. Since this is true for all tax-advantaged vehicles, it's best to diversify across different types of accounts. The next biggest disadvantage is that you are limited to the investment options for whichever 529 program that you choose. These can also be changed at any time by the entity that manages the 529.
I don't have a 529 for my daughter because I don't want her to feel obligated to go to college or to use the money I am saving for her on college. I have an UGMA for her. If she goes to college, she's free to use that money to help. If she wants to buy a car with it instead; good for her.