529s for children and grandchildren

Discussion in 'Financial Planning' started by Beliavsky, Jul 21, 2011.

  1. Beliavsky

    Beliavsky Guest

    My wife and I have three children. With our current jobs, we would be
    able to pay their college expenses out of our salaries. We have 529
    plans for them, whose earnings will be tax free when used for
    education. When parents can pay for college with tapping 529s, does it
    make sense to keep the money in the plans? Two later uses could be to
    pay for professional school for the children or even to wait until
    there are grandchildren and to make them the beneficiaries. Would
    there be tax consequences for doing the latter?
     
    Beliavsky, Jul 21, 2011
    #1
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  2. Beliavsky <> writes:

    > My wife and I have three children. With our current jobs, we would be
    > able to pay their college expenses out of our salaries. We have 529
    > plans for them, whose earnings will be tax free when used for
    > education. When parents can pay for college with tapping 529s, does it
    > make sense to keep the money in the plans?


    It depends on what your alternative options are. For example,
    if you still have room to add to a Roth, I'd probably consider
    adding to the Roth while using 529 money for the schools, since
    the Roth money will be far more flexible down the line.
    (Noting that there are some estate impacts here - money in
    the 529 is out of the estate - if you've got estate-tax kind of
    wealth, this may be an important consideration)

    > Two later uses could be to
    > pay for professional school for the children or even to wait until
    > there are grandchildren and to make them the beneficiaries. Would
    > there be tax consequences for doing the latter?


    You may change beneficiary with no tax consequences so long as
    the new beneficiary is a "member of the family" of the original
    beneficiary (and the new beneficiary is of the same generation
    for GST purposes, though that may not be a big deal given the
    recent very high limits and the ongoing mucking about with the
    related estate tax).

    Member of the family is defined quite specifically:
    son, daughter, brother, sister (or step- of each)
    father, mother (do you want to take some classes?)
    1st cousin, nephew, niece, aunt or uncle, various
    immediate in-laws, or the spouse of any of the above.

    Use of 529s also may have impact on available financial aid,
    and the impact is different if the 529 is owned by the parent
    versus owned by someone else like a grandparent.

    In general, especially if folks expect to be able to pay
    tuition and such out of then-current income, I urge folks
    to max out retirement savings first. (There are certainly
    exceptions, of course).


    [posting sofware is preventing me from including this disclaimer in the
    signature. I doubt the disclaimer is actually of any value, anyway,
    but can it really hurt?]
    disclaimer: discussions in misc.invest.financial-plan are for educational
    purposes only and should not be construed as financial advice. For
    personal financial advice, please consult directly with aprofessional.

    --
    David S. Meyers, CFP(R)
    http://www.MeyersMoney.com
     
    David S. Meyers CFP, Jul 21, 2011
    #2
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  3. Beliavsky

    Tad Borek Guest

    On 7/21/2011 11:59 AM, Beliavsky wrote:
    > When parents can pay for college with tapping 529s, does it
    > make sense to keep the money in the plans?


    That's an interesting question. You'd risk giving up a known tax benefit
    for a possible one. If it turns out there's no grad school and no
    grandchildren, there will be tax+penalty on earnings at the eventual
    distribution from the plan, with no way go go back and recapture that
    benefit (you paid for the costs directly with non-529 funds). You'd also
    need to check the specific plan's rules for how long the money can sit
    there if the original beneficiary has graduated from college, it varies
    for each (not necessarily an issue).

    So given the intended purpose you'd be giving up a chunk of
    tax-free-ness for your overall assets. Unlike basis step-up or a Roth,
    this one can only be realized when you have offsetting education
    expenses. Years with those costs are years to flush out 529 plans and
    get that benefit.

    To preserve the assets for future uses, an alternative strategy to look
    into would be using the 529s up during college while simultaneously
    making equivalent deposits to new 529 plan accounts through a different
    state. That will in effect "reset your basis" of your overall 529
    assets, to the extent of those deposits. But it has to be through a
    different state given the earnings-aggregation reporting rules for Form
    1099-Q.

    -Tad
     
    Tad Borek, Jul 21, 2011
    #3
  4. "Beliavsky" <> wrote in message
    news:...
    > My wife and I have three children. With our current jobs, we would be
    > able to pay their college expenses out of our salaries. We have 529
    > plans for them, whose earnings will be tax free when used for
    > education. When parents can pay for college with tapping 529s, does it
    > make sense to keep the money in the plans? Two later uses could be to
    > pay for professional school for the children or even to wait until
    > there are grandchildren and to make them the beneficiaries. Would
    > there be tax consequences for doing the latter?
    >


    Interesting question - my question is have you maxed out ALL of your
    qualified retirement plan options already? In my opinion, that should be
    done first before funding 529s for the kids. Assuming you have maxed out
    ALL of your and your wife's qualified plan options, have you also maxed out
    your IRA options - traditional (deductible or nondeductible) or Roth? This
    should be done next, before funding 529s. Assuming you've done that already
    too - have you taken care of all the other suggested (required) set asides?
    Like 6 months to a year's living expenses and an emergency (liquid) cash
    reserve.

    The next item I suggest you visit is insurance, life for sure, but also
    consider disability. You said you make enough with your current jobs to pay
    for the kids college without (I am assuming your WITH was a typo) using the
    529 money. But what if you don't have those jobs when the time comes?
    Insurance is designed to shift some of the risk of future unknowns to
    someone else. Making sure you have enough life, and perhaps disability,
    insurance helps to make sure your plans continue into the future the way you
    think they will now. AND BE CAREFUL about relying on any insurance you have
    through work - if you leave the company will you be able to keep the company
    insurance? Even if you wanted to pay the full cost, it is often cheaper to
    buy and own some insurance on your own.

    Now assuming you've fully funded your own retirements and you have
    sufficient life insurance you need to address how to fund college for the
    kids.

    I always get a lot of flack here for what I'm about to say, so everyone
    DUCK - I am not a big fan of 529 plans for the reasons you mention and
    because too many people fund them instead of their own retirement. My
    suggestion would be to look at Variable Annuities for the following reasons:

    A - neither the money you put into a 529 nor a nonqualified VA is tax
    deductible. So you're working with the same starting amounts;

    B - take the money from a 529 for anything other than school and the
    earnings are taxable and subject to a penalty;

    C - take the money from a nonqualified VA for anything other than retirement
    and the earnings are taxable, and subject to a penalty if you're UNDER 59.5
    years old UNLESS you use the money for higher education, in which case you
    pay tax on the earnings and escape the penalty. And the VA can be inherited
    by a named beneficiary with essentially the same tax consequences as if they
    inherit a 529.

    D - I believe you get more control over how the VA money is invested and
    when and to whom its distributed. You can name anyone as a beneficiary of a
    VA but there are some restrictions on who the beneficiary of a 529 plan is.

    I do think 529s are great plans for grandparents to set up, I just don't
    like them for parents.

    Just my 2 cents,
    Gene E. Utterback, EA, RFC, ABA
     
    Gene E. Utterback, EA, RFC, ABA, Aug 2, 2011
    #4
  5. On Tue, 2 Aug 2011 12:20:36 CST, "Gene E. Utterback, EA, RFC, ABA"
    <> wrote:

    >D - I believe you get more control over how the VA money is invested and
    >when and to whom its distributed. You can name anyone as a beneficiary of a
    >VA but there are some restrictions on who the beneficiary of a 529 plan is.


    I agree with much of your post. But assuming the same asset
    allocation, why would you prefer a VA over a parent-owned regular
    investment account at Vanguard or Fidelity?
     
    HW \Skip\ Weldon, Aug 3, 2011
    #5
  6. Beliavsky

    JoeTaxpayer Guest

    VA use - WAS Re: 529s for children and grandchildren

    On 8/3/11 1:35 PM, HW "Skip" Weldon wrote:
    > On Tue, 2 Aug 2011 12:20:36 CST, "Gene E. Utterback, EA, RFC, ABA"
    > <> wrote:
    >
    >> D - I believe you get more control over how the VA money is invested and
    >> when and to whom its distributed. You can name anyone as a beneficiary of a
    >> VA but there are some restrictions on who the beneficiary of a 529 plan is.

    >
    > I agree with much of your post. But assuming the same asset
    > allocation, why would you prefer a VA over a parent-owned regular
    > investment account at Vanguard or Fidelity?


    I still struggle with the whole VA idea. I hear the value of tax
    deferral, but then see that VAs turn long term cap gains into ordinary
    income (as do 401(k)s and pre Tax IRAs, of course). Given the popularity
    of the Roth conversion and claims that taxes are 'going up' it would
    seem that those who have already maximized their pre-tax savings are not
    going to benefit by adding even more.
    For sake of sticking to the point, I'm not going down the cost path
    here. The VA discussion always seems to have the pro vs the anti, but I
    have yet to see a compelling Pro case.
    (I'm not completely closed minded. I can contrive a case where a low
    asset, late in life very high earner suddenly has the desire to take
    advantage of deferral. I'm asking about the general case, not the very
    niche ones.)
     
    JoeTaxpayer, Aug 4, 2011
    #6
  7. "HW "Skip" Weldon" <> wrote in message
    news:...
    > On Tue, 2 Aug 2011 12:20:36 CST, "Gene E. Utterback, EA, RFC, ABA"
    > <> wrote:
    >
    >>D - I believe you get more control over how the VA money is invested and
    >>when and to whom its distributed. You can name anyone as a beneficiary of
    >>a
    >>VA but there are some restrictions on who the beneficiary of a 529 plan
    >>is.

    >
    > I agree with much of your post. But assuming the same asset
    > allocation, why would you prefer a VA over a parent-owned regular
    > investment account at Vanguard or Fidelity?


    I'm not sure what you mean by a "regular investment account", regardless of
    where its held. If you'd clarify a bit, I'll try to answer.

    Gene E. Utterback, EA, RFC, ABA
     
    Gene E. Utterback, EA, RFC, ABA, Aug 9, 2011
    #7
  8. Re: VA use - WAS Re: 529s for children and grandchildren

    "JoeTaxpayer" <> wrote in message
    news:j1eang$p6d$...
    > On 8/3/11 1:35 PM, HW "Skip" Weldon wrote:
    >> On Tue, 2 Aug 2011 12:20:36 CST, "Gene E. Utterback, EA, RFC, ABA"
    >> <> wrote:


    SNIPPED

    > I still struggle with the whole VA idea. I hear the value of tax deferral,
    > but then see that VAs turn long term cap gains into ordinary income (as do
    > 401(k)s and pre Tax IRAs, of course).


    There are more issues other than just taxes. VAs get preferential creditor
    treatment in many jurisdictions.

    AND many people, especially in retirement, wind up the 15% tax bracket
    anyway. If your taxable income puts you in the 15% tax bracket do you still
    benefit from the special 15% capital gains tax rate?

    AND VAs allow you put "benefit riders" on the investments to protect either
    your income stream, principal contributions OR the death benefit for the
    ultimate beneficiary. I had a client last year who's mother passed - the
    contract value of her VAs was just about $500K BUT the enhanced death
    benefit payout was $1.3M. You can't do that with any other investment (so
    what if it costs an extra 1% or 2%).

    > Given the popularity of the Roth conversion and claims that taxes are
    > 'going up' it would seem that those who have already maximized their
    > pre-tax savings are not going to benefit by adding even more.
    > For sake of sticking to the point, I'm not going down the cost path here.
    > The VA discussion always seems to have the pro vs the anti, but I have yet
    > to see a compelling Pro case.


    There are always going to be differences of opinion among informed people
    and I won't try to change your mind, you are entitled to your opinion -
    especially if its an educated one. I would like to note that a LOT of the
    anti's positions are gounded in cost. Cost should not be the only, or even
    the primary, focus - rather consider where you'll be on the back end and
    whether you'll be better off then.

    One big advantage to VAs, and one that I see touted in the media now more
    than ever before, is the VA's ability to provide a stable stream of income
    once you start to draw. If a person has $1M invested and is taking a 4%
    draw against that and the value of the portfolio drops by 40% they now have
    just $600K. They now have to decide whether to cut back on their lifestyle
    OR invade the corpus. A VA, at least for the essential portion of their
    portfolio, can help to relieve this - and again, does it really matter what
    it costs if it provides what you need/want.

    > (I'm not completely closed minded. I can contrive a case where a low
    > asset, late in life very high earner suddenly has the desire to take
    > advantage of deferral. I'm asking about the general case, not the very
    > niche ones.)


    Understood, and its a good question. VAs can provide certain protections
    that you can't get with other investments. Typically these include -

    1 - your investment money is held in a an account separate from the
    insurance company's funds;
    2 - you can put living benefit riders on many VA contracts so that "when"
    the value of the contract itself declines your income stream won't;
    3 - you can put an enhanced death benefit on many VA contracts so that when
    you die if the market is down and your contract value is less than what you
    contributed, adjusted for withdrawals, your beneficiary is made whole - they
    get your original contributions less your withdrawals. These death benefit
    riders can also provide a beneficiary payout that exceeds your original
    contributions if the enhancement selected is greater than the withdrawal
    rate.

    For example, I have a 67year old client who's fully retired. She's got a
    full pension (to which she never contributed a dime) coming from the company
    she worked for. She also had about $350K in an old 401k - she doesn't need
    this money and wants to leave it to her daughter. By putting $300K into a
    VA with both an enhanced death benefit (growth at 5%) and an a living
    benefit (a 5% annual guaranteed withdrawal rate) she gets $15K annually to
    do with what she pleases AND her daughter will get the full $300K when she
    dies.

    It is important to note that VAs are NOT for everyone and they are LONG TERM
    investments. If you have or want an actively managed portfolio and/or you
    have short term goals for the money a VA may not be right for you. And the
    BIG caveat always applies - if you don't understand it you probably should
    not buy it.

    As an aside, JoeTaxpayer posts here regularly. I don't know him and have
    never met him and while I frequently disagree with some of his positions, he
    does bring a perspective to the forum that should be seriously considered.

    Gene E. Utterback, EA, RFC, ABA
     
    Gene E. Utterback, EA, RFC, ABA, Aug 9, 2011
    #8
  9. Beliavsky

    Tad Borek Guest

    Re: VA use - WAS Re: 529s for children and grandchildren

    On 8/9/2011 12:35 PM, Gene E. Utterback, EA, RFC, ABA wrote:
    > AND many people, especially in retirement, wind up the 15% tax bracket
    > anyway. If your taxable income puts you in the 15% tax bracket do you still
    > benefit from the special 15% capital gains tax rate?


    Yes, the rate on capital gains (and qualified dividends) becomes 0%.

    -Tad
     
    Tad Borek, Aug 9, 2011
    #9
  10. Beliavsky

    JoeTaxpayer Guest

    Re: VA use - WAS Re: 529s for children and grandchildren

    On 8/9/11 3:35 PM, Gene E. Utterback, EA, RFC, ABA wrote:
    > As an aside, JoeTaxpayer posts here regularly. I don't know him and have
    > never met him and while I frequently disagree with some of his positions, he
    > does bring a perspective to the forum that should be seriously considered.
    >
    > Gene E. Utterback, EA, RFC, ABA


    Your kind words are much appreciated, Gene. It's an honor for me to
    engage in intelligent discussions with you and the regulars here.
    My well-wishes to you and yours.
     
    JoeTaxpayer, Aug 11, 2011
    #10
  11. Beliavsky

    megneton

    Joined:
    Aug 25, 2011
    Messages:
    9
    this, voting +1 adding to your rep
     
    megneton, Aug 25, 2011
    #11
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