529: a worthwhile investment

Parents Forum
41

Right, but you also don’t pay a penalty if you give the same $6500 to them out of your income or out of savings in a taxable account.

Also correct, but as you point out you are going to be paying the tax anyway. So once you have paid the tax anyway, there is no additional tax consequence to giving the kid the money to use to put into a Roth.

So this is where it gets very tricky. If you leave it in a 529, that untaxed growth can continue on indefinitely. As long as someone eventually uses it for qualified earnings, it will also never be taxed.

Of course Roths also have this feature, but if you can fund them out of taxable instead, you are then converting something that doesn’t have this feature into something that does.

OK, so IF you have $6500 sitting in a 529 (and it is eligible, which is tricky), and $6500 sitting in a taxable account after you paid taxes you were going to pay anyway, is it better to convert that to no more 529 and $6500 in the Roth, or no more taxable, $6500 in the 529, and $6500 in the Roth?

Not a question with an obvious universal answer.

I note the main scenario in which you would typically consider doing the 529 to Roth conversion would be if you actually needed to spend the $6500 in taxable. Like, you should probably pay your rent and utility bills first, if you need it for that. So if you simply do not have the excess income or taxable savings needed to help with the Roth contribution, and if by using the 529 the kid can make a Roth contribution they couldn’t make themselves (or get closer to the limit), then maybe that will make sense.

So I am sure some people will do it in some circumstances. But I also think many people will end up deciding not to.

42

Hopefully you have $40K in each of two accounts, as it must have the recipient as beneficiary. You can’t gift to two children out of a single consolidated account. And if you used a single account and changed beneficiaries after the older kid graduated you are SOL.

One additional consideration not mentioned above is that states haven’t yet decided how to treat these Roth rollovers. Some like CA that treat use of 529 funds for K-12 tuition as an unqualified distribution may well do likewise with Roth rollovers.

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43

Another scenario is a kid that passes the income limit for making Roth contributions. You can then still do the 529 rollover because it isn’t subject to those limits.

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44

The rollover feature seems like it will most benefit non-habitual 529 contributors. I read somewhere that most 529 accounts have less than $4k in them. For lots of those accounts, I wonder if the student beneficiary will end up going to college.

The Roth rollover feature seems like it will most benefit families whose children choose not to attend college, and now the families don’t need to pay a 10% penalty plus ordinary tax on the gains but can rollover to a Roth, which their child most likely will qualify for.

45

Oh you can’t switch beneficiaries ?

My sons account has much more and he’s out of schoool. Like $80k left. And he’s earning so that was the plan.

My daughter will have some left but still has 3 more semesters and then has to get a job to meet the earnings part.

Worst case I do one and then match from my own money the other.

I ‘assumed’ I could do both from one, even if having to change beneficiary.

Sounds like a great new rule but they make things more complicated than a German car.

Why can’t anything tax related be easy ?

I will have to be really careful b4 doing any of this.

46

Did you already change beneficiaries…or did your kids never have separate 529 accounts?

47

Yeah, like if say the grandparents opened a 529 at or near birth in the kid’s name, put some money in, and then it just sat there until they turned college age, and now they are not going to college–“recovering” those funds my converting them to the kid’s Roth would seem like a pretty core purpose of the rules they set up.

But if we are talking about parents who have been steadily contributing but only over recent years, say once their incomes got high enough, and now are either looking at a kid who doesn’t go to college or doesn’t use up the whole amount for college . . . the rules seem almost intentionally less friendly to such parents.

Oh well.

48

I have two accounts but one always had less than the other.

One graduated with $80k left. And he’s earning.

The other will graduate in 17 months - knock on wood. And I hope she’ll be earning !! But who knows ? Hers will have - I have to look but 20 or 30k left.

The disparity is because the 2% credit card funded the one (older child), but not the other.

49

@Twoin18

So the key here is that those accounts should be kept…separate. Right?

50

What you should do is start transferring from the older to the younger now, so the balance doesn’t run down. You can transfer amounts to the Roth that correspond to amounts from contributions that were in the 529 account 5 years previously. If you run the contributions down to zero then put more in, you will have to restart the 5 year clock (or at least hold off during the 5 year anniversary period of when the balance was lowest).

Yes you need accounts for each kid, set up 15 years earlier. If you have that but balances are uneven (eg one gets a large scholarship) then you need to actively manage this via transfers to avoid the problems I noted above.

And it is unclear whether you can actually move all the money out if you leave things too long since some of it is earnings and you might not have enough contributions depending on how the 5 year clock runs.

Example: you have $30K left in a 529 after graduation that is half contributions and half earnings. If 5 years earlier (while they were in college) there was $100K in the 529 that was then $60K contributions and $40K earnings, you’ve got no problem. But if you wait another few years and you have earned another $5K (now $15K contributions and $20K earnings) and the look back is to the $30K balance, as I understand it you’d only be able to transfer $15K to the Roth IRA. So waiting too long may not be a good idea.

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51

Ok.

52

Even though the older one has already graduated college?

53

If you want the younger one to take advantage of the full $35K then yes. You really want $35K of contributions (excluding earnings) in the younger one’s account for the relevant 5 year look back.

But this is really unclear until the final rules are written. In particular is it a rolling 5 year look back (so the fifth year of contributions towards your $35K total Roth rollover is based on a lower balance) or a single look back to when you graduate or to 5 years before you start rolling over.

54

So…he needs to transfer $5000 now…with the idea that the first $30,000 will be used first, and that the remaining $5000 will be in the account 5 years hence?

55

So if she had $20k left, I’d have 3 years.

Moving over $$ now would then backfill the final two etc …ie what you are saying…we’ll at $6500 a year it’d be 5 plus years.

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56

Yes, and more particularly, what is the balance of contributions excluding earnings in the relevant look back year, which is not really clear right now.

Yes, but depending on the mix of contributions and earnings, and how the rules are written, it might need to be more than this.

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57

I just want to say that 529s can be a worthwhile investment, no matter how much (or little) one has to invest, and whether or not it’s on a monthly or occasional basis. As many people in this thread have mentioned, the favorable stock market returns of the last 20 years have meant that there’s been incredible growth in the accounts, so that perhaps only 50% of the money in the accounts had actually been invested by them.

But even if the stock markets slow down, money saved earlier on can mean the difference between a kid having to work 25-30 hours a week in college vs. 10-12 hours a week (which can make a big impact on grades, especially important for students with pre-law or pre-med goals). It can make the difference in being able to buy or rent textbooks from the beginning vs. trying to borrow them from the library or sharing with a friend and worrying about getting the books on time or having the books recalled before the student is done with them. It can be the difference between renting an apartment in a dicey area of town further away from the college to being in one that’s more easily accessible to the campus and all of its resources.

Even if the sums totaled in the 529 aren’t enough to pay for four years of tuition, room & board, they can still make a meaningful difference in a student’s educational experience. It may sound trite, but it’s true: every little bit counts.

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58

It is a little hazy but I believe that one could fund five years worth or something like $50K upfront (or $50K for me and $50K for ShawWife). We and one grandmother joined to fund for both kids at that level. As a Canadian, she was not subject to tax on gifts and hence she could put in whatever she wanted. I don’t recall how much went in, but it was quite a bit. My income is variable so I would chip in whenever I had a good year. Whatever the amount, with accumulation, it paid for college and grad school for each kid. There is a little left, which should cover second masters (online, this time) for psychiatric mental health practitioner for ShawD (she’s already has an MSN but thinks that when she has kids, she wants to do mental health therapy from home).

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59

529 completely funded a BSCS and MSCS for our S at Stanford and will do the same for D at Hopkins

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Has anyone had issues paying tuition from the 529 account directly to the university? I’ve been told that sometimes it’s very slow and the university I spoke with said they recommend being very on top of one’s 529 plan as it has resulted in students not being able to register for classes.

Looking for best practices here…is it better to pay via your own checking account and reimburse yourself? Or doing an ACH transfer to the school? TIA!!