By Dr. James M. Dahle, WCI Founder
529 plans are a critical part of the four pillars of paying for college. They're named after a section of the tax code, just like 401(k)s. Stupid, I know, but that's the way these things work. What they should have been called was “The Tax Break for the Rich”, because that's what they are. Or at least, the tax break for the high-earners, which isn't necessarily the same thing as the tax break for the high-net-worthers. Why is it the tax break for the rich? We'll get to that, but first, 529 plan basics.
What Is a 529 Plan?
A 529 account is a state-sponsored way to help you save for your kid's college. Basically, you put after-tax money into it, then it grows tax-free, and if spent on legitimate college (or med school) expenses, it comes out of the account tax-free. An individual can put up to $17,000 in there in 2023, up from $16,000 in 2022 ($34,000 for married couples) and still stay below the annual gift tax exclusion.
In 2017, the Tax Cuts and Jobs Act expanded 529s allowing their use to pay up to $10K for private elementary or high school tuition.
Each state has its own plan (or two), and some are better than others. Sometimes you also get a break on your state income taxes if you use the one in your state. The expenses of the plans, like 401(k)s, vary quite a bit and change often.
You can move money from one 529 to another (including a 529 ABLE account) fairly easily, much like transferring an IRA from one custodian to another.
Which State Has the Best 529 Plan?
If your state doesn't have any income tax, or if it doesn't give a break for 529 contributions, or if its expenses are ridiculously high, you may want to look into the best 529s out there. Since the plans change often, so does this list, but I would consider looking into the plans from front-runners Michigan, Utah, Illinois, and New York (direct). Compare investment options, plan expenses, and expense ratios of the various funds.
Pre-Paid Tuition Plans
Some states offer a pre-paid tuition type plan. Basically, you pay tuition at today's price and the state takes the risk of tuition inflation. Given the past rate of inflation, that might be a pretty good investment, but be aware that the deal may be different for in-state schools versus out-of-state schools, unlike the more standard “defined contribution” 529s.
529 Plans and Financial Aid
529 plans do count against a kid if they are trying to get financial aid. Thanks to a 2009 law, a 529 in either your name or your child's name has an expected family contribution of 5.64%. (Consider having the grandparent own the account if this is an issue, but honestly, most readers aren't going to qualify for any sort of financial aid anyway.)
Who Maintains Control Over the 529 Plan and Whose Money Is It?
The 529, unlike a UGMA, isn't your kid's money. It's yours. So you can take it out and spend it on a boat if you like (but you'll have to pay a 10% penalty, plus your regular income taxes on the earnings). You can also roll it over from your daughter's 529 to your son's 529 to your grandson's 529 without any penalties, which gives you a lot of options when Junior decides to smoke dope and play disc golf professionally instead of going to Yale like you planned when he was three. Be aware that the “generation-skipping tax” only applies if the new beneficiary is two or more generations away from the old beneficiary and only applies if the transfer exceeds the gift tax exemption amount.
Why Is a 529 Plan a Tax Break for the Rich?
Several reasons:
#1 High Contribution Limit
An Educational Savings Account/Coverdell/Education IRA works just fine for those who don't make much. All these plans can offer lower expenses and more investment choices than a 529. You don't get a state tax break, but the working class doesn't pay all that much in income taxes anyway. The problem with an ESA is that you can only put $2,000 a year into it. That just isn't enough to pay cash at Harvard. This isn't an issue for the working class. It's hard enough to put $2,000 into that account for each of their kids. But for a high-earner, it's nice to have the higher contribution limit ($17,000 per year for an individual) of the 529.
#2 State Tax Breaks
My state allows both me and my wife to put $2,040 EACH (2021) into a 529 for EACH of our children and get a credit for it on our state taxes. Tax break going in, tax break while growing, tax break coming out. Can't beat that.
Future 529 plan recipients
#3 You Can Front-Load a 529 Plan
Would you like to shelter MORE than $17,000 per child, per parent, per year? You can. You're allowed to front-load up to five years worth of contributions at one time, up to $85,000 per child. Eventually, there's a limit on contributions. But imagine putting in $85,000 when your child is born, $85,000 when your child turns 5, $85,000 when your child turns 10, and another $51,000 when your child turns 15. By the time they turn 18, assuming 8% returns, you'll have well over $1 million for college. I don't care what tuition inflation is, that's going to cover it. Obviously the poor can't do this, but the rich can.
#4 College Savings
The working class pays for college by working their way through it and taking loans. They're doing well to put away $17,000 for retirement, much less for their kid's college. They simply don't have a need for a 529 plan. As a general rule, only high-earners have a little extra to put away for the next generation.
Should the High Earner Overcontribute to a 529?
Now, for the advanced reader, a discussion of whether you should purposely overcontribute to a 529. Let's say you've maxed out your IRAs, 401(k)s, etc. You've got more money to save, but are already saving plenty for college. Should you put even more into 529s planning to take it out later and spend it during retirement? Let's analyze how you'll end up.
First, some assumptions:
- Let's assume you get a 5% tax break on your contributions.
- Your investments earn 8%/year.
- You pull the money out 30 years after you put it in.
- Let's further assume that your state DOESN'T recapture the state tax breaks you got years earlier when you contributed it. (Some do recapture these.)
- We'll also assume you invest in a relatively tax-efficient investment such as a stock index fund, and that the 529 expenses are 0.3% higher than they would be in a taxable account, and that your total marginal tax rate when you withdraw the money is 30% and your total capital gains tax rate is 15%.
Investing in a 529 vs Taxable Account
Let's compare investing in a 529 plan with a taxable account.
$10,000 into a 529
Instant 5% return = $500
After 30 years, $10,500 invested at 7.7% (reduced for 529 expenses) grows to $97,199. 30% taxes plus 10% penalty reduces this to $58,319.
$10,000 into a Taxable Account
After 30 years, $10,500 invested at 7.7% (reduced for capital gains/dividends of 2%/year taxed at 15% rate) grows to $97,199. You now sell it at 15% capital gains rates with no penalty, leaving you with a total of $82,619.
Now, you might have to pay a little more in taxes in the taxable account if you churn your account, but you also might have opportunities for tax-loss harvesting, charitable donations, etc. to reduce your tax burden. (See my article on Taxable Accounts for more details.)
It's pretty clear that investing in a 529 for reasons other than education isn't very bright. If you do mistakenly over-contribute, you can always roll it over to another family member's 529, but you certainly shouldn't be trying to game the system by purposely over-contributing for your retirement. Over-contributing to start a college fund for a grandkid is another matter, of course, as is over-contributing in order to roll it into an ABLE account for your disabled child.
In summary, a 529 is a great way to save money on your taxes and help Junior avoid the loan burden you probably had to deal with. As tuition continues to skyrocket, even state school undergraduate degrees may soon be out of reach of those who can't pay at least part of the bill using savings.
Are you funding your children's education with 529? Why or why not? Comment below!
WCI,
I am a physician in Utah and have just opened 529 accounts for all my kids thanks to you. My kids are 12, 10, 8, 6, and 2. I am a little confused about which investment option to choose for them. The Utah 529 has many investment options as you are aware:
Age based aggressive global
Age based aggressive domestic
Age based moderate
Age based conservative
Equity – 100% domestic
Equity – 30% international
Equity – 10% international
70% Equity30% Fixed income
20% Equity/80% Fixed income
Fixed income
Public Treasurers’ Investment Fund
FDIC-Insured
Customized Static
Customized Age-Based
Which option would you recommend?
Also, as you know, you get a 5% Utah state income tax credit for contributions up to 3,840 per kid per year. I learned in your post here that you can front load up to 5 years worth of contributions in the 529s, but I’m assuming the income tax credit only applies to the first 3,840 per year, correct? You don’t get more tax credit for front loading more, right? Thanks in advance! Your site, newsletter, book, and podcast are INVALUABLE!
Not enough info. Do you like any of the offered asset allocations? Do you prefer a very safe investment? A very risky one? Do you prefer one you can pick once and never mess with again? Do you want it to become less risky as you approach enrollment age?
Personally, I’m VERY aggressive in my kids’ 529s. They’re 1/2 TISM, 1/2 VG SV, and 1/2 DFA SV. But if you don’t feel about 529s the same way I do, you might not want to do that. More info here:
https://www.whitecoatinvestor.com/3-reasons-why-you-can-take-more-risk-with-a-529/
No, there is no more tax credit for frontloading. If you want to maximize the tax credit be sure to put in the maximum creditable amount each year (currently about $4K per kid for a married couple.)
I had a question, that I hope folks can shed some light on.
What would you say is a good amount to contribute each year per child if you wanted to not only pay for college but 4 additional years of graduate school. I had the amazing blessing of having my medical school paid for, however with the expectation that I do the same for my children.
I realized that the 529 not only can pay for tuition but also for housing, books etc. So I’m unsure how much I should save into this account. I want to put a decent amount in, but as described earlier I’m not looking to use the 529 as a tax shelter where I could potential place the money in a taxable account to grow.
I also realize that it greatly depends on whether my children go to a instate public vs private college. But lets assume my kids go to a public college not one that cost 50k/year. I’m leaning to 5-6K per year per kiddo. What would the community recommend.
Thank you for any insight that you may provide.
There’s no right answer. For years I have put in the maximum amount I received a state tax credit on ($4K). This year is the first time I’ve ever maxed them out ($15K.)
There are a lot of factors that decide how much to put in- how much you make, how much of their school you’ll pay for, where you think they’ll go, whether there is medical/dental/law school in the cards etc. Anywhere from $0 to maxing them out could be appropriate for your situation.
I realize that there is a lot to take into account. I plan to pay for 100% of their schooling. As far as where they will go that will be hard to predict. I want to save for graduate school whether medical, law, dental etc. I’ve just opened a 529 for my kid (only two right now) and I’ve put 4K each year as to receive the max state tax credit. However, I’m concerned that this may not be enough. If I needed to pay out of pocket for additional expense I would be able to do so at the time. However it would be nice it could come from a tax free vehicle that’s been marinating for the last 18 years – 22 years. Lets assume public instate college and graduate school that costs 40k/year for 4 years. What would you recommend to save now. Again, I realize that there’s no perfect answer, but I really do appreciate your insight.
If you have lots of money and plan to pay for all of it, I’d try to front load 5 years worth of contributions. Between you and your spouse, you could put in $15K * 2 spouses * 5 years all at once this year. That’s $150K. Then do it again in 5 years. Then maybe once more. I mean, 8 years of schooling at $40K = $320K, and I suppose the most prudent thing to do is assume that your investment return will only equal the inflation rate on schooling over the next 20 years.
If you’re like most docs, you can’t actually afford to do that, so you’ll either have to pay some from cash flow, you’ll have to choose cheaper school options, or they’ll have to figure out a way to pay some of it themselves.
Two questions about 529s:
1 – I have two kids, each are a beneficiary on a separate 529 (2 separate 529s). We live in WI where there is a state tax deduction for each 529 account contribution. Could I start 4 different accounts (1 for each child, 1 under my spouse’s name, 1 under mine) to get 4 state tax deductions and just change the beneficiary name later if my spouse and I don’t use the funds?
2 – Has anyone tried to have a 529 for themselves and then use the 529 funds if they take CME at a “qualified higher education” institution such as the local medical school?
1. Probably, but read the WI rules about recapture of deductions. Also note that changing beneficiaries to another generation may involve gift tax considerations. https://www.edvest.com/documents/wi_disclosure.pdf
I looked through there briefly but didn’t see anything about recapture tax so I think you’re probably good.
2. Read the rules carefully. I don’t think CME qualifies because it isn’t “at least half time”. See below from Pub 970: https://www.irs.gov/pub/irs-pdf/p970.pdf
Qualified Higher Education Expenses
These are expenses related to enrollment or attendance at an eligible postsecondary school. As shown in the fol-lowing list, to be qualified, some of the expenses must be required by the school and some must be incurred by stu-dents who are enrolled at least half-time, defined later.
1.
The following expenses must be required for enroll-ment or attendance of a designated beneficiary at an eligible postsecondary school.
a.
Tuition and fees.
b.
Books, supplies, and equipment.
2.
Expenses for special needs services needed by a special needs beneficiary must be incurred in connec-tion with enrollment or attendance at an eligible post-secondary school.
3.
Expenses for room and board must be incurred by students who are enrolled at least half-time (defined below).
The expense for room and board qualifies only to the extent that it isn’t more than the greater of the fol-lowing two amounts.
a.
The allowance for room and board, as determined by the school, that was included in the cost of at-tendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student.
b.
The actual amount charged if the student is resid-ing in housing owned or operated by the school.You may need to contact the eligible educational insti-tution for qualified room and board costs.
4.
The purchase of computer or peripheral equipment, computer software, or Internet access and related services if it’s to be used primarily by the beneficiary during any of the years the beneficiary is enrolled at an eligible postsecondary school. (This doesn’t in-clude expenses for computer software for sports, games, or hobbies unless the software is predomi-nantly educational in nature.)
Half-time student. A student is enrolled “at least half-time” if he or she is enrolled for at least half the full-time academic work load for the course of study the student is pursuing, as determined under the standards of the school where the student is enrolled.
Qualified Elementary and Secondary Education Expenses
These are expenses for no more than $10,000 of tuition, incurred by a designated beneficiary during a tax year be-ginning after 2017, in connection with enrollment or at-tendance at an eligible elementary or secondary school.
Do you get a state tax deduction for each of the 5 years if you choose to superfund for 5 years?
Probably depends on the state, but I don’t think you get one in Utah. Just the $4K for year 1.
Hi, I live in Oregon and the Oregon College Savings 529 gives a state tax break for a certain amount. If I want to contribute more to 529 would it better to open a morningstar gold rated plan like Vanguard or put it in the Oregon 529.
Thank you.
You can use the Oregon one to keep it simple, or go to a better plan if it’s worth the additional complexity to you. The better plans are UT, NV, CA, NY and some others. They all have Vanguard funds. The “Vanguard plan” is NV.
Thank you.
Is there anything wrong with opening up two 529 accounts? My state (CT) gives me a tax break for 10K tax deduction for state taxes. The issue is that the CT plan isn’t rated as well as many other states plans. Would I benefit in putting 10K in CT and then opening up another state plan and maximizing my contribution, but not crossing the gift tax limitations?
No. Lots of people use that strategy. The usual culprits are UT, NV, NY, CA etc.
Is there any reason I couldn’t start 529s for me and my wife, max out contributions (they are state-tax deductible in my state up to $15K per year), and then effectively transfer to our kids’ 529s by changing beneficiaries when they are closer to college? When added to the kids’ 529s which we would also max out, could increase the state tax savings each year. . .
Thx in advance
I haven’t delved deeply into this question, but I don’t think there is any law against that. You might want to wait a few years in between so it doesn’t look like you intended to do that from the beginning. That could trigger the step transaction doctrine.
Practically speaking though, you can put so much in there just for the kid, why bother with tricks to do even more? I mean, who wants a $1.5M 529? If you start putting $45K a year in there….for 18 years…earning 8%…it will total $1.7M. And that’s without even frontloading it 5 years at a time.
I bet your state doesn’t give a deduction for a contribution to a 529 with an adult as a beneficiary does it? But you could do the same thing with a cousin or something.
Hi,
As a NY resident, I would like to enroll with NY 529.
1) Do you think NY is the best 529 for me?
2) I was under the impression as of 2017, the money can be used for private K-12 schools without incurring a penalty for a “non-qualified withdrawal.”
When I went on NY Saves 529 site, the asterisk states: ” In addition, withdrawals used to pay expenses for tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school are subject to recapture of any New York State tax benefits that accrued on contributions.”
What does that exactly mean?
Thank you again for your guidance!
Yes.
True.
I wonder if K-12 expenses are only federal tax free and not state tax free. Sounds like it to me. In some states, if you roll the money from their plan to another state’s plan, you have to pay back the state tax benefits you got. This sounds pretty similar! But at least you’re only paying state taxes on the contributions and not the entire withdrawal!
My husband and I file our taxes “married filing separately” for purposes of student loans. Do you know if we can contribute $150,000 in a the five year time frame if we are filing separately? Or is this only for folks filing jointly?
Meant to say without triggering the gift tax.
Yes. $75K into each of your 529s.
Thank you! One more follow up question: when we deposit the money into each of our 529s, does it matter who’s bank account the deposit comes from for tax purposes? I.e. would it be an issue to transfer 75K from a mix of my husband’s bank account as well as mine, or should 75K come solely from my bank account to my 529, and the other 75K come from my husband’s bank account to his 529? Asking because we’d need to transfer money between our bank accounts if the latter is the case.
Uhhh…..that is HIGHLY unlikely to be audited. And besides, you can gift your spouse an unlimited amount of money at any time. So don’t sweat it.
Why don’t you just combine your bank accounts? That’s what I would do. Way easier to manage money together than separately.
Hi,
I am a PGY-3 trying to find any tricks to pay off my medical loans, outside of just living like a resident and not buying extra “things,”
I was recently reading about 529s and saw that you could use a lifetime amount of $10,000 towards student loans. Does that mean that I could make a 529 account with my spouse as the account owner, fund it with $10k, then use that 10k to pay down my medical school loans?
In VA, with income tax of 5.75%, that would be a decent return, as long as it was that simple. I’m unaware of any or how many rules that would be breaking. Any input would be appreciated.
Mark
You really don’t need extra “tricks”. It really is as simple as carving out a big chunk of your income and sending it to your lender each month.
But yes, you can use a 529 to pay toward student loans and pocket the state tax deduction. You don’t need your spouse to own the account either, you can own it yourself. It’s a $4,000 per year tax deduction in Virginia.
Let’s talk distributions. Do you take them to yourself and then pay tuition? Do you pay distribution directly to college? Is there a tax efficient option here?
Either is fine and both are just as tax-efficient. Be sure you keep that receipt in case of audit though!
I’ve only taken one withdrawal. I Venmo’d money to my niece, then took money out of “her” 529 and put it in my checking account. She emailed me the receipt. I printed it out and put it in my tax folder.
Excellent article! My financial advisor agrees with you. However, he likes the idea of a 529 plan for asset protection and also as I am in the process of looking at a trust as a means of getting the money out of my name and into my children’s name. What are your thoughts on using at 529 plan for these purposes?
State dependent, but almost surely a little more protected than just your taxable account.
As a general rule, I like 529s for the next generation’s (and maybe the generation after that’s) college expenses, but not for much beyond that.
If your state does not allow you to write off any of the 529, is it still a valuable investment vehicle? Would a brokerage account not be superior at that point?
I was wondering this too before then learned that the point is that you don’t have to pay capital gains when the money is used for schooling. So still beneficial for people in states without state tax. But as stated in the article, you don’t want to put too much since anything extra you pull out not used for education gets the extra 10%.
Yes, because the money comes out federal and state tax free if you use it for education. All earnings are tax free, just like a Roth IRA
Slightly off topic, but I was looking at the linked article from January discussing the top rated 529 Plans. We live in Florida, so we have the benefit of shopping around. I started my kids out in the Nevada plan, as it was in the top 3 at the time. At what point (if ever) does it make sense to jump ship to a different state’s plan? Michigan’s expense ratio looks tempting.
529 choice is mainly a choice based on three main things: 1, tax break if any in your state; 2, fund offerings; 3, expense ratios. Depending on how closely you want to watch your nickels and dimes, you could switch from state to state if 1 and 2 were the same but 3 was different. However, then you’d have to keep up with the offerings of each state and fill out the paperwork each time you transfer assets. Seems like a cumbersome thing to switch for the difference in a few basis points. Note, I actually got an Alabama state tax break just for transferring my son’s 529 assets from GA to AL, so that was definitely worth my time even though the fund offerings were similar.
I wouldn’t leave the Nevada plan to save a handful of basis points. The Nevada plan is fine.
I was wondering this too before then learned that the point is that you don’t have to pay capital gains when the money is used for schooling. So still beneficial for people in states without state tax. But as stated in the article, you don’t want to put too much since anything extra you pull out not used for education gets the extra 10%.
May I suggest a few changes for your analysis? First, the “instant 5% return” should not be present in the taxable account numbers, because presumably this is the state tax deduction/credit offered for 529 contributions. Second, I would assume effectively zero fees in the 529. For example, the CA plan has options with as low as 0.06% fees, only a few basis points higher than the very best funds available. Third, I’d use a 0.4% tax drag (2% x 20%) on the taxable fund, because we’re talking about a state that levies income tax, so they will tax yield. Fourth, I’d assume a 24% federal tax rate (very wide bracket for MFJ filers), and 5% state So it would be something like this:
529 future balance before taxes: $10,500 x (1+8%)^30 = $105,658
529 future basis: $10,500
529 future balance after taxes: $105,658 – ($105,658 – $10,500) x (24%+5%+10%) = $68,546
Taxable future balance before taxes: $10,000 x (1+7.6%)^30 = $90,026
Taxable future basis*: $26,848
Taxable future balance after taxes: $90,026 – ($90,026 – $26,848) x (15%+5%) = $77,390
No surprise that the taxable account still came out ahead, but with a more realistic analysis the numbers are closer. I think the recommendation to not save for non-education expenses in a 529 should remain.
*formula from here: https://www.bogleheads.org/wiki/Taxable_account#Performance
Thanks for the suggestions. Keep in mind this article was first written before that Wiki article was and before 529 fees were quite so low.
I have four kids… is there any advantage to opening a 529 account for each child? or can I just keep all of the 529funds in my oldest child’s name and then transfer the funds to the next oldest when it’s her turn to go to college.
State dependent. In my state, there is an advantage to opening multiple accounts. I think it’s a better general practice too and not that much more hassle. Then they each get their statement each quarter that you can use to teach them investing principles.
Jim, what do you think of the strategy of using 529 plans to create a multi-generational educational endowment?
https://www.google.com/amp/s/www.barrons.com/amp/articles/how-to-use-529-plans-loophole-51622242163
https://www.financialsamurai.com/using-a-529-plan-for-generational-wealth-transfer-purposes/
Obvious “flaws” are the possibility the law changes or potential for a spendthrift heir who becomes the account owner and liquidates the account for other purposes. But even in the event of those “fails” you still have achieved significant income tax and, if applicable, estate tax avoidance. Of course, ensuring the fulfillment of the desired objective may be more important than maximizing tax avoidance. Other thoughts? Thanks for what you do!
Not a huge fan (and not just for the reasons you mention). As a general rule, I think 529s are a great place to save for college for your kids and your grandkids. Beyond that, I think you’re probably better off with a trust.
Dear WCI,
I’m currently a PGY – 3 in living in New York. I’m planning on moving to California permanently next year. My son is 1 month old. Would you recommend to start a 529 in New York State before we move or just to get the California 529?
I will appreciate your opinion. Thank you for what you do!
My recollection is NY will give you a deduction and CA will not. So I’d make my contribution this year for sure! You can always just transfer it into the CA one. No reason you have to use the CA one there of course. More info here:
https://www.whitecoatinvestor.com/best-529-plans-reviews-ratings-and-rankings/
Thank you very much for your help!!
Hi,
I want to start 529 for my children and a niece in IL. I have 3 children ages 6 months to 3 years. Niece is 7. My state gives 20k deduction overall. Just wondering how much to put in, the current limit is 30k per account I believe. I can put up to 20k combined to get the largest deduction.
This is a simple present value calculation. Decide how much you want and when, assume a reasonable return, work backwards, and you should be able to figure out how much to put in every year. If you want to put extra in, in case the kid goes to dental school or for grandkids, you can do that too.
Hi Jim,
I have two very young children with NY 529. I am putting 5-10k per year for each to achieve my NY State deduction. And I’m ok with that current deposit amount.
I have about $12k separately in each child’s saving account with Chase. It’s just sitting there accumulating minimal interest.
My question: Would it be worth opening a Vanguard taxable account for each child and periodically placing money in there. Any tax implications?
Sure. That’s called a UTMA/UGMA account depending on the state. Think of it as a custodial taxable account. The first $1,100 in income a year in that account is tax free. The second $1,100 is taxed at the child’s tax rate. Beyond that, it’s taxed at your rate (referred to as the kiddie tax).
Got it. Thanks.
Instead of An UTMA account, would I be able to open a Vanguard brokerage account either in their name or an additional one in my name for them (ie multiple accounts for the few kids?)
I understand with UTMA they would be in control at age 18/21. If I don’t want/need them to be in control, would the above (additional brokerage account) be worthy?
A brokerage account in their name IS an UTMA account.
You could open it in your name if you want and then gift it to them at some point. Keep in mind the gift tax laws of course. But that would allow you full control of the money until you give it to them. With a UTMA, you’ve already given them the money. You just get to control it until they reach 21.
I struggle with whether to fund a 529 for my 1 month old. I’m an early career physician (36) and my wife also works in healthcare. We do pretty well financially, have a post-tax savings rate of >50% and a NW over $2M now, 80% of which is in a 90/10 index fund portfolio in taxable and retirement accounts. We are planning to scale back work in our early 40s and likely retire in our late 40s if all keeps going well.
We live in a state with no state income tax, so the only benefit we would get from contributing to the 529 would be the tax free gains. I’m bothered by the risk of ending up over contributing to the 529 and needing to take the money out while paying the taxes and 10% penalty.
I also have no idea what college or work in general is going to look like in 20 years. I can certainly see a future where higher Ed is so disrupted by technology that tuition is driven far below the high sky high current costs. (Why can’t everyone with the aptitude have a Harvard quality undergrad education delivered virtually and at extremely low cost?) In any event, current tuition inflation rate can’t be sustained for another 20 years. A four year degree just cannot cost $1M+ in 2040. The value proposition just isn’t there. Also with accelerating technology/innovation/automation, work itself could look very different in 2040 – the whole idea of a 4 year degree could end up becoming an outdated concept.
I’m not against earmarking something now for our child’s college/graduate education, but I’m just not sold the 529 gives the flexibility needed versus just taking the money out of our taxable account later on if needed.
Why not just put a little money in then? Hedge your bets.
In doing more research about this I am a little unclear about withdrawals from the 529. Are they always tax-free for education expenses? I live in Delaware and their website states that growth and disbursements are tax free. If I instead contribute to a PA account, will those eligible withdrawals be tax free at both the federal and state levels?
If just tax free at the federal level, doesn’t it still make sense to contribute to my home state only?
Yes. Tax free from federal and state income tax in every state.
This article series suggests little reason to worry about overfunding a 529 vs taxable brokerage account for high income earners, which has prompted me to put the max in every year.
https://rpgplanner.com/529-plan-opportunity/
Apparently it’s because of avoiding the tax drag on growth and transactions. Does this seem right compared to the calculations here?
I suppose the more optimal choice is to put in just enough for education expenses while putting the rest in taxable. Having a hard time reliably estimating that number though. If overfunded, I figure I’ll fallback to calling them grandchildren education funds.
Barring medical or dental school, mine are all already overfunded so they’re almost surely going to become grandkid 529s eventually. No biggie.
I currently live in Pennsylvania which allows for a $32k per year contribution tax deduction.
Would I have to specifically invest in the PA 529 to reap the tax benefits of deducting up to $32k?
Or would I still be able to take advantage of this benefit while investing in a plan to Utah/Michigan/Illinois 529?
https://www.whitecoatinvestor.com/best-529-plans-reviews-ratings-and-rankings/
PA gives the same deduction no matter what 529 you use.