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  • 529 excess

    In-laws have 150k in 529 for their daughter. They said if she got a full academic scholarship they would keep the money and pay taxes on gains if she didn’t seek graduate school. I brought up th option of keeping the 529 for grandkids as with 8% growth it would be 1.5-3million by time grandkids would be need it in 30-40 yrs. Heck could even start a nice scholarship for others. They looked at me like I was crazy to suggest such an option. Wondered what the hive would do with leftover 529 money.

  • #2
    1) School expenses above "full" scholarship
    2) Grandkids
    3) Community college classes/semester abroad/master's degree for me
    4) Cash out and pay the taxes

    As an aside...I've never looked into the details of reimbursing from a 529 for scholarships. I wonder, is this something like an HSA, that you can save the receipts and reimburse years later if it becomes clear that you won't have grandkids?

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    • #3
      Do they need the money? If not why take an unnecessary tax hit?

      If their daughter has kids they can transfer an amount just below the annual gift tax to avoid the generational tax on 529s. Money could also be gifted to other relatives attending eligible schools.

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      • #4
        We’ll likely have a substantial excess even after professional school.
        I’ve always viewed it as a last ditch resource if money is needed late in retirement, but otherwise as a pass down to future grandkids if any.
        Also considered language, cooking, etc. classes as an easy option in retirement.
        With kids in college it is conservative investments now, but would likely shift that to higher risk once they’re done.

        Should also add that one reason for our excess is scholarships, but I didn’t want to pull out money and pay the taxes now.

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        • #5
          Maybe they need the money? It doesn't matter how big it grows if they give it to their grandkid then they don't get any of it. However even if they pay the taxes and cash it out they'll get a good chunk of it back. So if they were not planning on funding their grandchildren's education already and they need the money then taking it out is the right option.
          It also depends on what tax rate would be. If they are in peak earning years it could be a bit of a hit especially if there's a lot of gains. But if there are minimal gains or they are retired in a lower tax bracket maybe it just makes sense to get that money out of there.

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          • #6
            I’m under the assumption that they do not need the money given I have a brief glimpse of their finances from conversations. Both with good jobs making well above 200k each. I think they would use the money for fun stuff (boat, vacation home, etc). I just think if you don’t need the money then why not let it grow and help out future generations.

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            • #7
              Originally posted by blephptosisbrow View Post
              I’m under the assumption that they do not need the money given I have a brief glimpse of their finances from conversations. Both with good jobs making well above 200k each. I think they would use the money for fun stuff (boat, vacation home, etc). I just think if you don’t need the money then why not let it grow and help out future generations.
              Hmm, it’s their money, and if there is leftover in the 529, and they would enjoy a boat, vacation home, travel, new car or something else that they otherwise might not be able to afford, I would suggest that they just spend the money on themselves. I am 100% committed to prioritizing my children’s education, but once that goal is met, there is nothing wrong with enjoying myself, especially at the potential expense of my unborn, hypothetical grandchildren. In my view, their education is the responsibility of their parents, not me, with the proviso that under certain conditions I may be willing to lend a hand.

              In fact, with that thinking, why would you ever spend anything on yourself when there is always some hypothetical person generationally downstream that could benefit from it?

              One last point, if you want to preserve good relations with the in-laws, I might suggest that you get out of the business of giving them self-serving, unsolicited financial advice. It sounds like I am closer to their stage in life than I am to yours (I currently have two kids in college), but if some future son/daughter-in-law proposed to me that I should forego things I want (since my needs were already met) to pay for their future kids’ college, about the nicest way I would respond would be to tell them to “bugger off”.
              Last edited by VagabondMD; 09-06-2021, 03:07 PM.

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              • #8
                Keeping the money tied up in the 529 for some hypothetical grandkid in 30 years seems odd to me too. Get access to the money while you can without penalty.

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                • #9
                  To me, the only rational reason to do what you suggest in that situation is for estate planning, i.e. they will eventually leave behind so much after 2nd-to-die that they need to divest themselves of wealth in order to avoid paying estate taxes starting at 40%. Otherwise, it was a generous choice to fund your wife’s college in the first place - not all parents do, as I’m sure you’re aware. Or maybe she has other siblings and they don’t want to start a traditional for all of the grands.
                  Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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                  • #10
                    Exactly. Not every family is interested beyond themselves let alone kids and grandkids

                    Op is right for the most tax efficient situation would be 529 to current generation expenses and then generational transfer of 15k yearly.


                    ​​​​

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                    • #11
                      I have already mentally assumed that the money in a 529 is no longer mine. I don’t consider it at all when evaluating net worth or readiness for FI/RE. If my kids happen to not use all of that money, I’ll plan to let it grow for the next generation, so I don’t think it’s far fetched at all for OP to consider having in-laws pass it on to grandkids, but I also don’t know OP’s in law’s financial situation. Perhaps that money was contributed at great cost and sacrifice, or their financial situation changed from what they had anticipated and they need the money.

                      I think that education is extremely valuable, and I can’t think of a better way to express that to my children and eventual grandchildren than by allowing a way to cover some, if not all, of those educational expenses. I’m not certain that my kids will be in a financial position during their lives to make it happen for their future kids, so if I can do it with minimal sacrifice on my part, I’d be happy and blessed to do so. Perhaps I’m contributing to the meritocracy by doing this, but if I don’t then assuredly some other parent or grandparent will.

                      Our current 529 value is a little over $160k with 3 kids, the closest of whom is 4 years away from college, so still plenty of time to grow. But I don’t think we will be in a situation where we will be looking at millions in a generational education trust either. If we have any excess I’ll be pleasantly surprised.

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                      • #12
                        Originally posted by VagabondMD View Post

                        Hmm, it’s their money, and if there is leftover in the 529, and they would enjoy a boat, vacation home, travel, new car or something else that they otherwise might not be able to afford, I would suggest that they just spend the money on themselves. I am 100% committed to prioritizing my children’s education, but once that goal is met, there is nothing wrong with enjoying myself, especially at the potential expense of my unborn, hypothetical grandchildren. In my view, their education is the responsibility of their parents, not me, with the proviso that under certain conditions I may be willing to lend a hand.

                        In fact, with that thinking, why would you ever spend anything on yourself when there is always some hypothetical person generationally downstream that could benefit from it?

                        One last point, if you want to preserve good relations with the in-laws, I might suggest that you get out of the business of giving them self-serving, unsolicited financial advice. It sounds like I am closer to their stage in life than I am to yours (I currently have two kids in college), but if some future son/daughter-in-law proposed to me that I should forego things I want (since my needs were already met) to pay for their future kids’ college, about the nicest way I would respond would be to tell them to “bugger off”.
                        This post was not an attempt to gain ammunition against my in-laws. I did not make any attempt to persuade them to save the money in this completely hypothetical situation. As I mentioned in the initial post, they looked at me like I was crazy for suggesting that I personally wouldn't spend the money and save it for future generations. The point of the post was to see what YOU (financial mutants) would do with the money. I explained their financial situation and discussed that they are very well off and do not need the extra money. I personally would rather have millions to gift to grandkids and charity for higher education than to spend it on myself. I agree with maxpower that 529 to me is no longer "mine" and I do not factor it into my retirement or spending.

                        Note: My inlaws have always treated me like family. We can and have discussed finances (among just about everything) without damaging our relationship. The only person I would ever given any actual financial advise to are my own parents because they are terrible with their finances. I have personally saved them many thousands over the past 4 years but that is a completely different story.

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                        • #13
                          If there is any left over in the kids 529, I am debating changing the beneficiary to me and my husband so we could do stuff like ‘semester at sea’. I got that idea from one of the financial mutants here.

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                          • #14
                            Originally posted by G View Post
                            As an aside...I've never looked into the details of reimbursing from a 529 for scholarships. I wonder, is this something like an HSA, that you can save the receipts and reimburse years later if it becomes clear that you won't have grandkids?
                            HSA accounts are unique in this regard. 529 distributions taking advantage of the scholarship exception to the 10% penalty on earnings. Must be distributed in the same tax year as the scholarships. This covered with an example in Publication 970.

                            This is also true of any qualified education expenses. In order for the portion of distributions from earnings to be tax and penalty free. The distributions must take place in the same tax year as the qualified education expenses.

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                            • #15
                              Originally posted by Logan 6 View Post
                              Also considered language, cooking, etc. classes as an easy option in retirement.
                              Originally posted by ObgynMD View Post
                              If there is any left over in the kids 529, I am debating changing the beneficiary to me and my husband so we could do stuff like ‘semester at sea’. I got that idea from one of the financial mutants here.
                              Both of these are not likely possible.

                              The educational institution must be on the Department of Education's list of schools approved for financial aid.

                              This is also true to many plans to "study abroad" in desirable locations. Only a small fraction of foreign universities and colleges are approved for financial aid. Most of these are in England and Germany.

                              Not approved for financial aid, not eligible to be 529 qualified education expenses.

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