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Strategies for Using 529 Funds

jazzymomof7jazzymomof7 Registered User Posts: 238 Junior Member
We have enough in the 529 to pay about 1/4 of ds’ total college expenses and plan to pay the remainder from current income.

I was thinking we should save the 529 funds to use during ds’ senior year when our 2nd child should be entering college. My husband was thinking we’d use 1/4 of it each year.

Any thoughts/ideas/best practices?

(Use of the 529 will not affect ds’ financial aid. He won’t qualify for need based aid at any of the schools on his list whether we have the 529 funds or not.)

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Replies to: Strategies for Using 529 Funds

  • marinebioslomarinebioslo Registered User Posts: 34 Junior Member
    @jazzymomof7 I live in Colorado and we get a state tax benefit from 529 contributions. If you live in a state like this you should deposit the current income funds in the 529 and withdraw college costs from the fund. I have been doing this and recently confirmed that it is a good strategy by a CPA.
  • RW1RW1 Registered User Posts: 117 Junior Member
    Make sure you pay the school directly out of the account without receiving the money in transition as you could get hit with some taxes. Usually works best to never touch the payout. I would use it all now as safe investment of 529 is most likely not earning very much at this stage.
  • Eeyore123Eeyore123 Registered User Posts: 1,058 Senior Member
    If you can handle the cash flow, pay all of DS out of current income. Change the beneficiary to the next child and continue to let it grow tax deferred. Also do post #1 if it helps.
  • BKSquaredBKSquared Registered User Posts: 1,090 Senior Member
    edited March 7
    We are doing the 1/4 each year for both kids to level out the cash pay outs from current income/savings. I think though the smarter financial decision is to front load the payments from the 529's. Most of them are set up to go mostly to a stabler but lower returning allocation as the child gets to college age. The tax advantage of sheltering gains then diminishes and you have virtually no control over the funds in 529's. If you get a deduction/benefit from state income taxes for 529 contributions then #1 may be a good way to go if you are not confident in the returns you might achieve from money over which you have discretion and your state has a high marginal tax rate.
  • momofsenior1momofsenior1 Registered User Posts: 4,585 Senior Member
    So many factors play into that decision. We are opting to up front use our 529 money because our other investment accounts get better returns.
  • 3puppies3puppies Registered User Posts: 1,674 Senior Member
    Kudos on being able to afford the college costs through various combinations of 529, other assets, and current income. The vast majority of students are unable to do this.

    Lots of other factors may apply - you mentioned you have a second child. During your older child's senior year, when you are paying for 2 in school at the same time, is there any expectation for financial aid for either child that year?

    What you do in the first couple of years for your older child, and depending on what other assets you have and/or are using, could result in different FA implications for your younger child. For example, if you sell investments to pay for college expenses, resulting in higher income that year, it may spike your income and make it harder to qualify for aid.
  • jazzymomof7jazzymomof7 Registered User Posts: 238 Junior Member
    @3puppies There won’t be any financial aid even with both kids in at the same time. We have a really high efc.
  • colfac92colfac92 Registered User Posts: 335 Member
    We did (are doing) the 1/8th per semester approach....
  • ItisatruthItisatruth Registered User Posts: 199 Junior Member
    YMMV but we had exactly the same set up and opted to use the whole amount to cover the first year for the first kid. We kept the account open, and have been moving each subsequent semester's tuition through the account to get the state tax deduction mentioned by @marinebioslo in #1 above. I do feel a bit guilty as this is more within the letter than the spirit of the ltax aw for 529 contributions but it is indeed legal and a good state tax savings move.
  • KnowsstuffKnowsstuff Registered User Posts: 2,467 Senior Member
    I have a junior and sophomore in college. We paid off all expenses including loans for the Junior but just started to tap into the 529 for the sophomore . We wanted to see how long we could go since one or both might have a 5th year like an bs /ms program or going for PhD down the road. I will have to look into the rules above but we are just taking what we need at the moment. We didn't take for books /computers we just paid directly for that. The kids work and contribute a bit like books. Next year we will most likely need to tap into it more frequently. It's a strange feeling for us for some reason but we are really fortunate we started this while they were young. We didn't get close to "all 4 years" for each and always planned on using our income with the 529 to pay for college. This way we were able to put money away for retirement (which is ours not theirs... Lol).
  • appalachymomappalachymom Registered User Posts: 167 Junior Member
    @RW1 You mentioned the possibility of being hit with taxes by just taking possession of 529 funds before paying school. Have you had this happen?

    We requested payout to me (account owner) of the total balance of an an ESA and a partial payout from a 529 for kid's current freshman year, and immediately paid the school the exact amount disbursed. That was the only way this transaction could be done electronically and efficiently, and I thought transparently. Is there really a risk of owing tax?
  • ItisatruthItisatruth Registered User Posts: 199 Junior Member
    @appalachymom Should be fine, of course you can check with your accountant. The key is to just keep transaction records of the disbursement from the accounts and payment of the tuition bill. As long as you can demonstrate paying actual tuition bills with the same amount of disbursement you should be fine.
  • ordinarylivesordinarylives Registered User Posts: 3,158 Senior Member
    We paid 1/4 per year for oldest. Rest came out of current income. The money by that time was in a very conservative investment and not earning much. Who wants volatility when you need to use it in the next years? My state is one that gives a deduction for 529 contributions, so we ran the current income contribution through the 529 just to get the tax benefit. All fine and good until the next child....

    She got some substantial scholarships, and we took some of her 529 money out and didn't use them for QEE. Well, no federal penalty because of the scholarship rule, but my state income taxes that year were not pretty because now the state wants their deduction back!
  • RW1RW1 Registered User Posts: 117 Junior Member
    Yes, unfortunately we had trouble transferring tuition in D1s first year and that added some stress for D. So 2nd yr we moved money into our account and then paid it to school which alleviated the stress( at least that worked), but when it was all said and done listing that as income and then listing college expenses ended up costing approx 400 in extra taxes.Not a large amount when your talking about full tuition and room and board but enough to pinch. I don't think it would hit if overall income was lower.
  • RW1RW1 Registered User Posts: 117 Junior Member
    It does not matter if paid amount is equal to expenses. In fact for D expenses were a couple grand higher than what we paid out the account ( Taxes discount some of your living expenses)
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