We’re continuing our college series with an in-depth discussion of 529 plans.
529 plans are incredibly popular in all their permutations. (Many people who are currently participating in a 529 plan don’t actually realize it because they refer to it as a pre-paid tuition program.)
They’re also under attack. President Obama’s most recent budget proposal targeted them for change. (It also targeted Coverdell ESAs.)
Personally, I think 529 plans are often misused and mis-applied. The majority of the mass affluent who participate are simply not getting a huge benefit in exchange for giving up the freedom and flexibility of the money.
But, there are a number of things that can be done with these accounts that are really unique.
Enjoy part 1 of our class today and learn:
- What the differences are between various types of 529 plans.
- Who they’re a great fit for.
- How to use them to pay for travel and real estate tax-free.
- The history of the legislation affecting these accounts.
Enjoy!
Joshua
Links:
- A Comprehensive Guide to the Ultimate Education Account a.k.a. the Coverdell Educational Savings Account
- IRS Publication 970: Tax Benefits for Education
- International Schools which participate in Federal Student Aid Programs (spreadsheet)
Hi Joshua,
I really enjoy your show, and this one in particular got me thinking. I had never heard of 529 plans before, but I think they might be great for me. My wife is currently taking a break from work to go back to college, and we live in a state with fairly high state income taxes. Can I put money into a 529, then immediately take it back out again to pay for her tuition, and cut out state income tax that way? What about for her living expenses? Just how much money am I allowed to deduct this way?
Yes. Check your state’s rules, but yes. I’ll be covering this as part of the series, but here’s some info to get you started: http://www.finaid.org/savings/state529deductions.phtml#loophole
Hi Joshua, Thank you so much for doing your show. You make it easier for people to do (at least part of) their own financial planning. Regarding Obama’s budget proposal, I’ve just read on the savingforcollege website that, if the plan in approved, existing plans will not be affected. Does this mean that future contributions to plans that already exist will also not be affected? Hope you know or you can find out. I loved your idea of front loading and I will definitely look into this.
I also wanted to thank you for the link to international schools. I am Dutch myself, and I now know that the money in my children’s 529 plans can also be used when they want to attend a Dutch university (a great way to save on tuition).
I would say probably not. Usually changes are applied and old funds are grandfathered in. But I wouldn’t run the risk of thinking I could put future funds into the account simply because it was established.
Don’t worry too much about this yet. Just because the president proposes something doesn’t mean it’s going anywhere. Watch congress to see what they do.
My political analysis? Obama is caring more for his legacy than actually trying to do something. He’s a lame duck president and has little chance of passing any of his agenda items so he’s more concerned with being remembered as a consistent, ideological liberal than with actually effecting change.
I keep an eye on this stuff but I’m not too concerned yet about this one.
Hi Joshua, thanks for this podcast. I wanted to post some thoughts for your Canadian users.
I was intrigued by your comments that putting a lot of money away into a 529 plan does not give you the best returns because you will naturally be more conservative with your asset allocation to preserve funds close to your beneficiary’s start date for secondary education. You mentioned it may be preferable to put that money to work in tax-free & taxable accounts up to your child’s graduation. At that time (or 1 year beforehand), stop and re-route your annual retirement contributions to pay for your child’s secondary education instead, and/or supplement as needed with the higher returns offered by long-term taxable accounts.
For Canadians, our closest equivalent to a 529 plan is a Registered Educational Savings Plan (RESP). We receive an annual incentive to contribute. The government matches 20% of contributions, up to $2500 worth of individual contribution (i.e. government will add up to $500 per year). Link: http://www.canlearn.ca/eng/savings/cesg.shtml . In addition, certain provinces also top up when your child reaches certain ages, such as Alberta and Saskatchewan.
So using your line of reasoning, a potential plan for the average Canadian would be to put in just enough into the plan to receive a guaranteed 20% return (while it lasts), then re-route savings as you recommended. This also lessens the blow to your financial plans should your child/beneficiary choose not to pursue secondary schooling, as more funds are held in a taxable account rather than locked in the RESP, which limits the money’s utility.
Thought this would be handy to some Canadian listeners. Thanks as always for the awesome content – I always find ideas I can translate to my own situation!
Just a follow-up to my last post. If a child/beneficiary does not use the RESP, we have more options on how to reallocate the money, compared to a 529 plan. This includes
(1) transferring all funds to a retirement (RRSP) account without penalty – including all government grant funds – if you have room, or
(2) closing the RESP account at a 20% fee & income tax, and you must return grant money to the government.
#2 is obviously a high penalty to pay, but you are able to do it.
More details: http://www.canlearn.ca/eng/savings/using_resp.shtml#q5
Hey Justin, Thanks for the ideas! That’s a super helpful resource for our Canadian contingent.
Feel free to continue developing some of these ideas and if you can put together a list of ideas like this, maybe we can do a useful segment (doesn’t have to be an entire show) to help the Canadians figure out creative ways to accomplish their goals.
I’m learning a bit about the Canadian structure as I do these interviews, but I’m still woefully ignorant on the specific rules. Email me if you want to help me create a useful little segment.
Joshua