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Is overfunding a 529 plan enabling?

Home Personal Finance and Budgeting Is overfunding a 529 plan enabling?

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

    #238679 Reply
    Avatar RI 
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    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…

    #238680 Reply
    Avatar molar roller 
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    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.

    #238690 Reply
    Avatar molar roller 
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    Splash Refinancing Bonus

    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…

    Click to expand…

    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.

    #238691 Reply
    Avatar molar roller 
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    Non qualified withdrawals are taxed at the owner’s rate, not the beneficiary’s rate.

    Click to expand…

    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.

    #238694 Reply
    Liked by ZZZ
    Avatar OldSoul 
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    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.

    #238698 Reply
    Avatar FIREshrink 
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    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.

    #238706 Reply
    Lordosis Lordosis 
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    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.

    “Never let your sense of morals prevent you from doing what is right.”

    #238712 Reply
    Avatar molar roller 
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    Status: Dentist
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    Joined: 05/31/2018

    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.

    #238773 Reply
    Avatar loeffy 
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    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.

    #238797 Reply
    Avatar FIREshrink 
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    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.

    #238833 Reply
    Liked by q-school, SLC OB, G, Kamban
    Avatar molar roller 
    Participant
    Status: Dentist
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    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.

    Click to expand…

    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”. 🙂

    #238839 Reply
    Liked by q-school
    Avatar ZZZ 
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    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.

    #238851 Reply
    Liked by FIREshrink
    Avatar molar roller 
    Participant
    Status: Dentist
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    Joined: 05/31/2018

    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)?

    #238865 Reply
    childay childay 
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    Joined: 01/09/2016

    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)?

    Click to expand…

    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.

    #238871 Reply

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