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  • #16
    Originally posted by jfoxcpacfp View Post

    .

    I d/n know what you mean by, “Holding multiple accounts per beneficiary, in different states, with different investments in each, makes it easy to minimize the pro rata problem.”
    .

    Imagine I have $300k in a 529 of which $164k is gains and $136k is principal (54% of total are gains). I withdraw $200k for qualified expenses leaving $100k. If the remaining $100k is withdrawn for nonqualified expenses, 54% or $54k will be taxable and penalized at 10%.

    In contrast say I have four 529s per child. Example (made up numbers):

    First in state 1 has 100k, all in stocks, 80% gains.

    Second in state 2 has 80k, all in stocks, 60% gains.

    Third in state 3 has 60k, all in stocks, 40% gains.

    Fourth in state 4 has 60k, all in bonds, 20% gains.

    College costs $200k. I withdraw all of the funds from plans 1 and 2, and $20k from plan 3. That leaves:

    Plan 3 $40k, 40% gains Plan 4 $60k, 20% gains.

    Now I withdraw 100% for unqualified expenses. A total of $28k is gains and subject to tax and penalty, which is about half if I had kept all investments in one account/state.



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    • #17
      Originally posted by FIREshrink View Post
      .

      Imagine I have $300k in a 529 of which $164k is gains and $136k is principal (54% of total are gains). I withdraw $200k for qualified expenses leaving $100k. If the remaining $100k is withdrawn for nonqualified expenses, 54% or $54k will be taxable and penalized at 10%.

      In contrast say I have four 529s per child. Example (made up numbers):

      First in state 1 has 100k, all in stocks, 80% gains.

      Second in state 2 has 80k, all in stocks, 60% gains.

      Third in state 3 has 60k, all in stocks, 40% gains.

      Fourth in state 4 has 60k, all in bonds, 20% gains.

      College costs $200k. I withdraw all of the funds from plans 1 and 2, and $20k from plan 3. That leaves:

      Plan 3 $40k, 40% gains Plan 4 $60k, 20% gains.

      Now I withdraw 100% for unqualified expenses. A total of $28k is gains and subject to tax and penalty, which is about half if I had kept all investments in one account/state.
      I see. I thought you were referring to gifting. I have not run into any folks who want a plan to minimize penalties as they prefer to avoid them in the first place. That is where the plan to gift comes in. Of course, Plan 4 could have held the $100k and generated only $20k subject to tax and penalty. But I also don’t run into any folks who invest to minimize their growth solely to pay less taxes. Cart before the horse and all that.
      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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      • #18
        Originally posted by jfoxcpacfp View Post
        I see. I thought you were referring to gifting. I have not run into any folks who want a plan to minimize penalties as they prefer to avoid them in the first place. That is where the plan to gift comes in. Of course, Plan 4 could have held the $100k and generated only $20k subject to tax and penalty. But I also don’t run into any folks who invest to minimize their growth solely to pay less taxes. Cart before the horse and all that.
        the plans aren’t invested differently to minimize taxes. However gains accrue over time. New boluses of money are each invested in different plans and in general older plans will have more gains and should be used first for qualified expenses to draw down he most gains. Newer plans with smaller gains are saved for last in case of unqualified withdrawals.

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        • #19
          Originally posted by FIREshrink View Post
          .

          Imagine I have $300k in a 529 of which $164k is gains and $136k is principal (54% of total are gains). I withdraw $200k for qualified expenses leaving $100k. If the remaining $100k is withdrawn for nonqualified expenses, 54% or $54k will be taxable and penalized at 10%.

          In contrast say I have four 529s per child. Example (made up numbers):

          First in state 1 has 100k, all in stocks, 80% gains.

          Second in state 2 has 80k, all in stocks, 60% gains.

          Third in state 3 has 60k, all in stocks, 40% gains.

          Fourth in state 4 has 60k, all in bonds, 20% gains.

          College costs $200k. I withdraw all of the funds from plans 1 and 2, and $20k from plan 3. That leaves:

          Plan 3 $40k, 40% gains Plan 4 $60k, 20% gains.

          Now I withdraw 100% for unqualified expenses. A total of $28k is gains and subject to tax and penalty, which is about half if I had kept all investments in one account/state.



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          Just when I think that I'm really nerdy about personal finance....



          I guess I assumed that one would use a FIFO accounting basis, but I actually have no idea how it will work when it comes time for brass tacks. Good thing I intend for it to be spent on education...perhaps I should have another kid just to make sure. Increase the odds of grandkids....

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          • #20
            it’s all pro rated within one beneficiary’s accounts with one state.

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            • #21
              Originally posted by G View Post

              Just when I think that I'm really nerdy about personal finance....



              I guess I assumed that one would use a FIFO accounting basis, but I actually have no idea how it will work when it comes time for brass tacks. Good thing I intend for it to be spent on education...perhaps I should have another kid just to make sure. Increase the odds of grandkids....
              Yeah I like to be tax efficient as much as as possible; but wow. That's a lot of accounting math and juggling to save, what -- 40k in taxable taxes?

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              • #22
                Originally posted by StarTrekDoc View Post

                Yeah I like to be tax efficient as much as as possible; but wow. That's a lot of accounting math and juggling to save, what -- 40k in taxable taxes?
                One reason one might just use a taxable. Geezzz. Hope they don't change the laws and tax the gains.

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                • #23
                  Originally posted by StarTrekDoc View Post

                  Yeah I like to be tax efficient as much as as possible; but wow. That's a lot of accounting math and juggling to save, what -- 40k in taxable taxes?
                  It's hardly any extra work to have 4 529s than 1. They take no management and i never change the investments.

                  Also, that's just one child, and our gains are larger than that.

                  Realize it's not for everyone, and our intent is to use for qualified expenses, but it's nice to know the out clause is pretty cheap.

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                  • #24
                    Originally posted by jfoxcpacfp View Post

                    As long as the donee (recipient) is a “qualified family member”, no tax and penalties would apply. However, gift tax returns would have to be filed for transfers to a family mbr of a younger generation, same as gift tax returns are required for parent-child donations > $15k/donor/donee/yr. And if the donee is not a qualified family member, taxes on growth + penalties would apply. Helpful Kitces article.

                    In response to another comment, 529 distributions on account of the beneficiary receiving a scholarship are penalty-free, but not tax-free on the growth.

                    Fwiw, you cannot w/d the basis before the growth. It is always prorated.
                    I was looking up qualified family member and it seems like grandchildren do not count as a qualified family member. In that scenario, what do you do with 529 funds you want to transfer to your grandkids?

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                    • #25
                      In essence we are legacy gifting as we’ve set up both UTMA accounts and a 529 account for grandkids. The idea is to gift the max $10K / yr to get the state tax benefit for the 529 and use the UTMA for unqualified expenses. Any left over is gravy to get them started on their lives post college.

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                      • #26
                        Originally posted by Darkroominvestor View Post

                        I was looking up qualified family member and it seems like grandchildren do not count as a qualified family member. In that scenario, what do you do with 529 funds you want to transfer to your grandkids?
                        It is based on relation to the current beneficiary not the owner

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