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Is overfunding a 529 plan enabling?

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  • FIREshrink
    replied
    You are the recipient, and owner. The child is the beneficiary and does not control the funds. If money could be distributed to beneficiary at his lower tax rate everyone would exploit that loophole as it's big enough to drive a truck through.

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  • OldSoul
    replied
    In reply to MPMD's comments regarding gumption: I don't think having loans leads to gumption, but depending on the kid, it may make them more conscious of the overall cost of their education, potentially altering some of their spending habits. We committed to paying for undergrad for all 3 kids, and contributed about 120-140K to each of their 529 accounts. Our oldest graduated engineering school with about $3500 left in the 529. He's now entering grad school, and the prospect of student loans definitely influenced his spending habits, and decision on which school to attend. Michigan was charging about $50k/year for tuition alone. Instead, he went with the school that offered him in-state tuition ($17-18K). He also had a well-paying summer internship and managed to save 7K to help pay for grad school. If I had committed to paying for grad school as well, he might have made different choices. All that said, I likely will make significant contributions to help offset most of grad school as well.

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  • molar roller
    replied




    Non qualified withdrawals are taxed at the owner’s rate, not the beneficiary’s rate.
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    from NY 529 plan

    https://www.nysaves.org/home/faqs-managing-your-account.html

    Withdraw the money for other uses. A 10% federal penalty tax on earnings will apply if you withdraw money for any reason other than to pay qualified higher-education expenses.

    ...

    Additionally, any accumulated earnings that are withdrawn from your account must also be reported on the recipient's income tax return for the year in which they're distributed, and you may owe federal, state, and local income taxes.

    Leave a comment:


  • molar roller
    replied




    Be careful funding Roth’s for the kids unless they are working. It sounds like the OP has maybe a 19-year old and a 16- year old, who could certainly have jobs and income. But it also sounds like he is pretty gung-ho to use each and every tax advantages account to the maximum, and you need to make sure that the kids have legitimately earned income in excess of the the amount you are putting in their Roth IRAS…
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    I used my kids in a lot of my advertisements when they were younger.  Full blown photo shoots with professional photo/video, makeup, lighting, the whole 9.

    That was easily a couple of grand worth of work if I hired actual models, plus ongoing royalties.

     

    https://careertrend.com/how-much-money-does-a-kid-model-get-paid-13653389.html"

    Breakdown by Modeling Type


    According to Modeling for Kids website, child models make around $70 per hour in photo shoots for magazines, as of 2011, while Skolnik claims magazine editorials pay $25 to $75 per hour. Modeling for Kids places the rate for advertisements between $1,000 and $1,200 per day, while Skolnik says the catalog rate is $75 per hour. Skolnik also says that product package modeling pays kids around $125 per hour, while commercials can range anywhere from $475 to $100,000, depending on the scale on which the commercial airs and for how long.

     

    They were in my direct mail pieces, website, etc for years.  I started late (they were 10/12 at the time), should have done it earlier.

    Leave a comment:


  • molar roller
    replied
    When I went to school, my parents were very fresh off the boat, and paying for undergrad (mostly covered by fin aid and scholarships) or dental school was not even a discussion.

    10 years later, they paid for my sister's college in full.
    They also were of very little help when my kids were young, as they both worked... now they are retired and are the primary source of childcare for my nephews.

    I don't feel I was shortchanged in any way.

    And she probably calls them a lot more too, and my mother doesn't have to sit by the phone for days, not knowing if we know she's alive or dead.

    What I am saying is that even if you tried to divide everything down the middle, it doesn't really work out that way.

    I think if you've shown yourself a fair and equitable parent all your life, what and how much you pay for college for each kid isn't likely to cause resentment.

    Leave a comment:


  • RI
    replied
    Be careful funding Roth’s for the kids unless they are working. It sounds like the OP has maybe a 19-year old and a 16- year old, who could certainly have jobs and income. But it also sounds like he is pretty gung-ho to use each and every tax advantages account to the maximum, and you need to make sure that the kids have legitimately earned income in excess of the the amount you are putting in their Roth IRAS...

    Leave a comment:


  • FIREshrink
    replied
    Non qualified withdrawals are taxed at the owner's rate, not the beneficiary's rate.

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  • Kamban
    replied




    Or should I give equal amounts to both kids? For example they both get 150K and if that is not enough then they take out loans/work.
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    This would be the fairest way.

    Pick a number and they get the same amount. Whether they go to a private or public state Univ and get or not get scholarships is up to them. Teaches them financial management and fairness at an early age.

    Only exceptions are if one attended a private school for which you spent more than the other or one is disabled and needs extra financial help.

    Leave a comment:


  • Lordosis
    replied
    I do not know what is fair with paying for my kids college.

    Suppose kid #1 works his butt off and gets a scholarship and it cost less.

    Kid #2 does not and it cost more.

     

    Or

     

    Kid 1 goes to state school

    Kid 2 goes to private school

     

    Is it fair that I pay for them to get a degree no mater the cost?

    Or should I give equal amounts to both kids?  For example they both get 150K and if that is not enough then they take out loans/work.

    What if they miraculously get through school and have extra money?  Do you give it to them?

     

    I am sure everyone can have a different answer and no one is right.

    Leave a comment:


  • molar roller
    replied





    One, scholarships allow for a tax free withdrawal of that amount, which in my case is $20K for kid #1. 
    Click to expand…


    I think you get out of the 10% penalty but still need to pay the taxes on the gains.
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    yes, you're right

    "

    2. You can avoid the penalty if you get a college scholarship.


    There are a few special exceptions to the 10% penalty rule, including when the beneficiary becomes incapacitated, attends a U.S. Military Academy or gets a scholarship. In the case of a scholarship, non-qualified withdrawals up to the amount of the tax-free scholarship can be taken out penalty-free, but you'll have to pay income tax on the earnings. As Savingforcollege.com founder Joe Hurley likes to say, "the scholarships have turned your tax-free 529 investment into a tax-deferred 529 investment"."

    Leave a comment:


  • Lordosis
    replied


    One, scholarships allow for a tax free withdrawal of that amount, which in my case is $20K for kid #1.
    Click to expand...


    I think you get out of the 10% penalty but still need to pay the taxes on the gains.

    Leave a comment:


  • Kamban
    replied




    Our plan was for her to be a research scientist.
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    Be careful of all the grad students, PhD students and post docs working in labs waiting for the all important prize of tenured faculty position. And those old tenured professors refuse to retire or die.?




    One of her parents at 19 knew everything there was to know about everything, and didn’t feel the need to consult anyone much less his parents.
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    At least you knew at age 19. My daughter at age 15 thinks she knows her what her future map is and refuses to take any advice from us. She is set on the financial world and refused to take Honors / AP biology courses even though there is a teacher available to her at home.

    Leave a comment:


  • childay
    replied


    One, scholarships allow for a tax free withdrawal of that amount, which in my case is $20K for kid #1.
    Click to expand...


    Good to know!  Time to prep the little one for the PSAT..

    Leave a comment:


  • molar roller
    replied




    In general, money that won’t be spent on education shouldn’t go into 529s due to the penalty to get it out. You’re usually better off in taxable. But you can just change the beneficiary to the next generation.
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    that's the general wisdom, I know.

    But there are caveats to that.

    One, scholarships allow for a tax free withdrawal of that amount, which in my case is $20K for kid #1.

    Two, it is true that non-qualified withdrawals are subject to income tax, state recapture tax, and a penalty.  But is it as bad as it sounds?

    The withdrawals are taxed at the beneficiary's rate, not the contributor.  So taking out unused funds when the beneficiary's income is low can be actually mor advantageous than paying cap gains for the contributor, even with the penalty.  In fact, one can probably make himself the beneficiary, use the funds in retirement for non-qualified withdrawals, and still come out ahead.

    Obviously not what the plans were designed to do, but then again, HSAs weren't designed to be used as quasi-Roths either...

     







     

    That’s not quite what our plan was…. Our plan was for her to be a research scientist.
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    Does she care what your plan was? I know I didn’t care what plan my parents might have had for me and I doubt my kids care what my plan for them is.
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    sorry, I should have said "her plan".  She wanted to be a research scientist.  I would loved her to be  a dentist but that was not to be.

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  • The White Coat Investor
    replied




     

    That’s not quite what our plan was.... Our plan was for her to be a research scientist.
    Click to expand...


    Does she care what your plan was? I know I didn't care what plan my parents might have had for me and I doubt my kids care what my plan for them is.

    Leave a comment:

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