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  • 529 vs taxable account

    I am in the process of firing my NML financial advisor thanks to the WCI course.  When I surrender the whole life policies, I will have a chunk of money to invest.  I have 1 child finishing undergrad this year, 1 child starting college in 2020, and my youngest will start in 2021.  Since my eldest has been in college I have been putting 10K into a NE 529, then using most of the funds for her college, just to get the tax advantage.  With this chunk of money from the whole life policies am I better off investing a large amount in 529's now (I think I can put 15K per spouse per kid or 90K in this year), or just put enough in to get the tax advantage (10K), and put the rest into a taxable account, knowing that I will for sure need to pull funds from it in 2021 for college expenses?  Or is the best option somewhere in between?  Meaning, try to invest at least 10K per year into a 529 to get the tax advantage, but put the bulk of the funds in a taxable acct?  Any help would be greatly appreciated!

  • #2
    Before I comment, would you please confirm that the tax benefits you referred to are for your state income tax?
    Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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    • #3
      Wow what state gives you that kind of a tax benefit?

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      • #4




        Wow what state gives you that kind of a tax benefit?
        Click to expand...


        Actually, there are several. MD offers even more than that. Note that the OP is not saving that amount of taxes but getting a deduction or credit based up a contribution of $10k.
        Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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        • #5
          You don't have much time before you have to use the money for school for your second and third kids.  Therefore, I would assume that you would invest it very conservatively (bonds or cash)--unless you plan to cash flow tuition or use another source--so it probably doesn't matter if it goes into taxable or 529 in terms of investment returns.  If it were me, I'd contribute enough to get the tax deduction and put the rest into taxable at Vanguard, probably 1-2 years' worth of tuition in money market and the rest in VWALX or VBTLX.  That way you don't oversave in your 529.  If you happen to be so unlucky....

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          • #6
            I also would probably contribute $10k per year to 529 and withdraw the $10k in year to pay for education and invest the rest in taxable. You don’t have enough time to make the tax savings on the expected gains in the 529 to be that meaningful and you give up tax loss harvesting any downturns in the next few years.

            Surrender may not be your best option on the whole life policy though. I would post specifics on that if I were you to make sure you don’t make a mistake.

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            • #7
              Correct, I am referring to state income tax benefit.  If I put 10K into Nebraska's 529, it saves me about $700 on my state income tax bill.  I have had the whole life policies for close to 15 years.  The cash value is at about 292K.  The gain is 31K.  I understand the gain will be taxed as ordinary income.  If I am in the 24% bracket, that will cost me $7440.  I don't think it will take me to long to recoup that once I have control of it.  Of course, if the market goes south...

               

              I appreciate any input.  I am definitely a novice investor.  I know I have made some mistakes in the past, and I am trying not to make to many in the future.

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              • #8




                Correct, I am referring to state income tax benefit.  If I put 10K into Nebraska’s 529, it saves me about $700 on my state income tax bill.  I have had the whole life policies for close to 15 years.  The cash value is at about 292K.  The gain is 31K.  I understand the gain will be taxed as ordinary income.  If I am in the 24% bracket, that will cost me $7440.  I don’t think it will take me to long to recoup that once I have control of it.  Of course, if the market goes south…

                 

                I appreciate any input.  I am definitely a novice investor.  I know I have made some mistakes in the past, and I am trying not to make to many in the future.
                Click to expand...


                What are your premiums, dividends, and face value of that policy?  It may be worth keeping if you have already had it 15 years.

                Welcome to the club.  Everybody here has made financial mistakes.

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                • #9


                  Correct, I am referring to state income tax benefit.  If I put 10K into Nebraska’s 529, it saves me about $700 on my state income tax bill.  I have had the whole life policies for close to 15 years.  The cash value is at about 292K.  The gain is 31K.  I understand the gain will be taxed as ordinary income.  If I am in the 24% bracket, that will cost me $7440.  I don’t think it will take me to long to recoup that once I have control of it.  Of course, if the market goes south…
                  Click to expand...



                  1. Life insurance - were you my client, I would likely recommend you go ahead and cash them in. I cannot give a definitive answer because my advice would depend upon other details of your financial situation and goals. Take that as general advice.

                  2. 529 - given the ages of your children, I would (again likely) recommend funding only $10k/yr to take advantage of the state tax deduction. This answer is even less definitive than the last because of the number of variables. For example, we typically recommend a 75%/25% split between education savings accounts (529s and Coverdell ESAs) and taxable accounts. That varies based upon the number and ages of the children, college plans and projected costs, how much of college the parent wants to fund, possible K-12 private school, savings for grad school, etc. etc. Also, you should not count on the stock market to grow for contributions in the near future unless you can fund college with cash in the event the market is down when you need to pay tuition and leave the investments alone.


                  A lot going on, I realize, but I hope that helps.
                  Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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