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Is overfunding a 529 plan enabling?

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  • The White Coat Investor
    replied
    I just ran the numbers again for investing for retirement in a 529. I assure you it still doesn't make sense. If you overfund a 529, plan to change the beneficiary to the grandkids.

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  • G
    replied


    So I even though we have almost enough saved on paper, I am wondering if I should over-fund the plans on purpose, for tax reasons, as personal investment and estate planning tool.
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    are we really doing her a service?
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    Does overfunding 529s make sense?  Or do the funds end up being “wasted”?
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    you actually asked several questions in the very first post. and many folks still don't know what you were getting at....

    listen, if you can afford to put 30-40k/mo into taxable, I would just superfund each kid again before the end of the calendar year.  hopefully you will have enough left over to let that simmer along and transfer if you have the joy of grandbabies.  I mean, if your net worth is growing by 6-7 figures per year, I would personally be solidly in the category of your kids having no debt.

    again, my bias is to overfund.

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  • Kamban
    replied


    Lastly, this suggestion does not seem to have gained traction but I do want to respond to it. The only thing worse than a wealthy parent insisting their child take out education loans is when the wealthy parent becomes the bank. Trust me, don’t go there. If it’s cultural, that’s a different story, but if it’s not, from personal experience I would say it’s impossible to avoid resentment / damaged relationships on one side or the other if not both.
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    I am not much into "skin in the game" though I see the point of view of others.

    As to wealthy parents and money for their child's education

    -If the parent did not get any financial help from his/her parents but pulled himself by his bootstraps and got an education and became well off, it is up to him on whether he should let his children do the same or avoid that by providing financial help for education so that they can have a early leg up.

    -If the parent had his education supported fully or to a significant extent by his parents and thus accumulated wealth by not having any loans to repay, it is morally the right thing that he should also do the same to his children. In that scenario he cannot hide behind the skirt of skin in the game and give nada. But payments can come with some caveats to make sure that the education is useful and reasonable in cost.

     

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  • mapplebum
    replied




    ZZZ,

    well, that’s kind of what I’m asking about.  I’ve exhausted all the tax advantaged options.  I put in $30-40K into a taxable account nearly every month.

    I’ve looked into Whole Life/UL/VUL and came away unimpressed.

    Does it make sense to divert some of those funds into 529 for exactly the reasons you’re talking about (especially since the penalties for unqualified withdrawals are not very severe)?
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    If you're putting that much into a taxable each month I sincerely don't understand why you wouldn't pay for your daughter's graduate school. I mean, is graduate school excessive? Are you open to her finishing college and say, cutting hair for a living? Managing the local grocery store? Not to say you should pony up for more private school if a public one is just as good. If I were you I would play hardball. Tell her she needs to go after funding: full ride + stipend. If she gets it, fantastic, that will give her a leg up applying for jobs. Any kind of experience will. Which leads me to my next suggestion. Does she have a job? Internship? There's nothing more pathetic than an empty section under "work experience." If she's not doing any of those things but is publishing and heavily involved in research, she should get a pass. Otherwise, she needs at least some kind of job. Insisting she gain real experience in her field as a student will help her in the future, even if she responds badly to that now. If she goes after funding and falls short I would average out the cost of a public, in state program and offer that.

    This is never suggested on this forum but here I go. Even without knowing specifics, adult children have a sense of their parent's financial health. If you're refusing to pay for her education on the principle that she needs to have "skin in the game" don't be surprised if it engenders resentment. If paying for another degree is a hardship for you, she should understand and hopefully tell you she doesn't want your help. Everyone knows the current cost of education is astronomical compared to what previous generations paid. This is not the fault of Millennials or Generation Z. And yet for many students the choice is borrow for an education or bag groceries for the rest of their life. If it's not a financial hardship, if your children are responsible, and not dealing with chronic issues like gambling or an opioid addiction, I just simply don't understand why you would willingly place the burden on them.

    Lastly, this suggestion does not seem to have gained traction but I do want to respond to it. The only thing worse than a wealthy parent insisting their child take out education loans is when the wealthy parent becomes the bank. Trust me, don't go there. If it's cultural, that's a different story, but if it's not, from personal experience I would say it's impossible to avoid resentment / damaged relationships on one side or the other if not both.

    Leave a comment:


  • aelliscpacfa
    replied
    I have read a lot of great ideas on this post.  This 529 question has been on my mind.  I worry about enabling my children, and I also worry about over-funding their 529 accounts.  I don't have any great solutions or answers to the enabling question.

    I would like to think that my children won't go to more expensive colleges simply because we have enough money set aside.  I really don't know.  Our oldest is only 14.

    I tend to think over-funding is okay because the money could be used for grandchildren one day if my children don't use it.  We are big savers and will likely leave an inheritance to our children.  I think it is neat to consider some of that inheritance might be inside their 529 accounts right now.  That money could grow tax-free for a very long time.

    I guess I am "gambling" that is how it works out.  Putting money into a taxable account now is not a horrible idea.  I just like the idea of the money potentially growing tax free for 30 or 40 years or more.

     

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  • ZZZ
    replied
    @mollarroller

    Especially if your state offers a tax break, I think it makes sense.

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  • Lordosis
    replied
    You can never have too much money in taxable but if I had money coming out my ears I would direct some more to 529.

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  • childay
    replied




    ZZZ,

    well, that’s kind of what I’m asking about.  I’ve exhausted all the tax advantaged options.  I put in $30-40K into a taxable account nearly every month.

    I’ve looked into Whole Life/UL/VUL and came away unimpressed.

    Does it make sense to divert some of those funds into 529 for exactly the reasons you’re talking about (especially since the penalties for unqualified withdrawals are not very severe)?
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    Assuming you have a desire to fund future generations, then sure.  You would run the risk of never needing it if your kids don't have any offspring.

    Leave a comment:


  • molar roller
    replied
    ZZZ,

    well, that's kind of what I'm asking about.  I've exhausted all the tax advantaged options.  I put in $30-40K into a taxable account nearly every month.

    I've looked into Whole Life/UL/VUL and came away unimpressed.

    Does it make sense to divert some of those funds into 529 for exactly the reasons you're talking about (especially since the penalties for unqualified withdrawals are not very severe)?

    Leave a comment:


  • ZZZ
    replied
    Sure, that's a yes, but that's not what you've done, given theat by your own math you'll need continued growth and contributions to cover undergrad from your 529s.

    What Fireshrink is talking about is funding 529 far beyond what your kids would likely spend on education with intent of effectively creating a familial education trust such that long term tax free growth can pay for future generation's school tax free. For example, I have a preschooler with more in a 529 than both of your 529s combined.

    Sounds like you'll have grad school to pay for, so absolutely, keep getting the tax break if you can afford to without impacting your own retirement savings, which it sounds like you can easily do.


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  • molar roller
    replied




    Anyway, those of us oversaving in 529s have no intention of withdrawing the money for nonqualified expenses and paying any taxes or penalties on it. We intend to let the money grow for another generation for future grandchildren to use.
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    LOL, we've come full circle.  The question I asked in the very first post was

    "So I even though we have almost enough saved on paper, I am wondering if I should over-fund the plans on purpose, for tax reasons, as personal investment and estate planning tool."

     

    It seems that your answer is "yes".

    Leave a comment:


  • FIREshrink
    replied
    Anyway, those of us oversaving in 529s have no intention of withdrawing the money for nonqualified expenses and paying any taxes or penalties on it. We intend to let the money grow for another generation for future grandchildren to use.

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  • loeffy
    replied
    That's not an apples-to-apples comparison. You could always have a taxable account under your kid's name or gift them mutual funds.

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  • molar roller
    replied
    I don't think it's as mucn of a loophole as you make it out to be.
    Even at the lowest brackets the gains are subject to at least 10% federal income tax, plus 10% penalty, so same as 20% high bracket LTCG.
    And the state will recapture its taxes too.
    So at most, you 're breaking even on gains abd gaining a bit on tax deferral.
    But it's probably a way to escape losing more.

    That being said , I'm sure it's exceedingly rare to oversave so much in a 529 that it becomes a meaningful advantage.

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  • Lordosis
    replied
    Maybe the recipient can be the beneficiary but then the money belongs to them not the owner. That is like giving away money to pay less taxes.
    Good deal for the kid. Bad deal for you.

    Leave a comment:

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