529 musings

[Matt]

So with the distinct possibility that 529s will become more useful (to me) by allowing them to be spent on private K-12 education (this is in both Senate and House versions), I've been thinking about how best to utilize them.  My current thought is to use them essentially as a "education HSA", but without the federal deduction on contributions.

The benefit here is that in my state (Louisiana), contributions up to $4800/couple are deductible on state taxes (so ~$300 tax savings per child).  In addition, the state has a "earnings enhancement", which is basically a income based match on your contributions.  In my case, it would add 2% on top of my annual contribution (no cap).  Theoretically this would add about another ~$600 per year per child if I ran the full tuition amount through the 529.

In addition, I'm considering asking my parents to open accounts with my children as the beneficiaries.  They would get the same benefits (tax break + earnings enhancement).  Big question:  Would it be ok for me to "gift" the money back to them that they contribute?  Obviously if they want to actually contribute to my child's education they're free to, but assuming just legally utilizing these accounts to maximize tax benefits, this part would be optional.

Somebody smarter than me please poke holes in my logic.  Obviously the best possible use of these would be to way overfund them and get the tax free earnings growth, but I don't have the means for that currently.

[ENT Doc]

If you already have an account open for your children your parents can each contribute $15,000 a year per child (staring 2018, $14,000 now) without it affecting the estate exemption and just apply their payments to the account already opened.  They can also lump sum it for 5 years - again, per person, per child.  That ends up being a lot of money.  They can also do a direct tuition payment of whatever amount without creating gift tax issues.

[Matt]

Right, I get that they could just pay the tuition.  I'm trying to get them their tax/match benefit without them actually losing any money.  So they put money into 529, I pay tuition out of it.  I pay their exact deposit amount back to them.  Net benefit of ~$500 per child.

[ENT Doc]

That's interesting.  But when you set up a 529 I don't know if you can name a grandchild as the beneficiary.  What may be possible is for them to set up a 529 for themselves as owner/beneficiary, contribute, get the deduction, gift the contribution to the grandchild, you pay them the gifted amount.  I have NO idea how to set all that up, or even it's it legal.  Would be interested in getting someone's take on this.

[Matt]

You can name anyone as beneficiary.  Only family members can take the tax deduction (at least in Louisiana).

http://www.startsaving.la.gov/savings/pdf/STARTFAQs.pdf

 

[q-school]

ENT Doc wrote:

That’s interesting.  But when you set up a 529 I don’t know if you can name a grandchild as the beneficiary.  What may be possible is for them to set up a 529 for themselves as owner/beneficiary, contribute, get the deduction, gift the contribution to the grandchild, you pay them the gifted amount.  I have NO idea how to set all that up, or even it’s it legal.  Would be interested in getting someone’s take on this.

Click to expand...

anyone can.  i understand some people have been utilizing loopholes that allow uncles to own the 529 and somehow that is not reported on fafsa.  grandparents absolutely can and get the tax benefit.

Matt- you can gift anyone 14k a year with no tax consequences.  if married, can both give.  if receiving party is married, both can give to both.  so you and wife could give mom and dad 56k to pay them back.

i think people used to do this with coverdell before the 529 existed.

 

 

[The White Coat Investor]

q-school wrote:

ENT Doc wrote:

That’s interesting.  But when you set up a 529 I don’t know if you can name a grandchild as the beneficiary.  What may be possible is for them to set up a 529 for themselves as owner/beneficiary, contribute, get the deduction, gift the contribution to the grandchild, you pay them the gifted amount.  I have NO idea how to set all that up, or even it’s it legal.  Would be interested in getting someone’s take on this.

Click to expand…

anyone can.  i understand some people have been utilizing loopholes that allow uncles to own the 529 and somehow that is not reported on fafsa.  grandparents absolutely can and get the tax benefit.

Matt- you can gift anyone 14k a year with no tax consequences.  if married, can both give.  if receiving party is married, both can give to both.  so you and wife could give mom and dad 56k to pay them back.

i think people used to do this with coverdell before the 529 existed.

 

 

Click to expand...

For sure. We're using the Uncle loophole for all our nieces and nephews

 

[ENT Doc]

The White Coat Investor wrote:

q-school wrote:

ENT Doc wrote:

That’s interesting.  But when you set up a 529 I don’t know if you can name a grandchild as the beneficiary.  What may be possible is for them to set up a 529 for themselves as owner/beneficiary, contribute, get the deduction, gift the contribution to the grandchild, you pay them the gifted amount.  I have NO idea how to set all that up, or even it’s it legal.  Would be interested in getting someone’s take on this.

Click to expand…

anyone can.  i understand some people have been utilizing loopholes that allow uncles to own the 529 and somehow that is not reported on fafsa.  grandparents absolutely can and get the tax benefit.

Matt- you can gift anyone 14k a year with no tax consequences.  if married, can both give.  if receiving party is married, both can give to both.  so you and wife could give mom and dad 56k to pay them back.

i think people used to do this with coverdell before the 529 existed.

 

 

Click to expand…

For sure. We’re using the Uncle loophole for all our nieces and nephews

 

Click to expand...

Is this specifically for your nieces and nephews' FAFSA benefit, or is it so you get additional tax breaks?  If the latter, do you get a tax deduction for EACH 529 you are the owner of, or is there a max per owner/filer deduction?  Also, is it your intention to gift the 529 to each of your nieces and nephews?  Curious about the logistics here.

[The White Coat Investor]

It's to help my nieces and nephews pay for college. Anything else is a secondary benefit. The tax break is tiny (this year we're putting in $31K and we get a $1550 credit). The fact that FAFSA doesn't look at a 529 I own is nice for them and their parents too.

There is no max per owner. It's a max per beneficiary.

I don't plan to "gift" the accounts. I plan to use it to pay some of their college expenses. I expect we'll blow through everything in there their first semester. They're not going to be that large of accounts most likely.

[bean1970]

We also have(had) a niece and nephew 529. Few points  1) When they are distributed, they count on the niece/nephew INCOME for that year. So what? If there is ANY slim chance the may need or actually receive aid, it affects this.  When my niece started school, my SIL died. She was getting aid. We dumped her 529 to the school, it was reported as income for her that year and her aid was decreased.  So we quickly learned the rule to distribute the 529 "backwards". So my nephew has 18 months of school left. we plan to dump what his in his 529 his last year/semester.   Just be aware grandparent/uncle etc 529s are non-parental assets and count as income when distributed (it looks like they made a killing working at a fast food joint!).   Another thing, we became the trustee for the 529s that my SIL had as well. The parental assets on her death became non-parental assets and made the income problem even worse.

[q-school]

I thought there were new fafsa rules that count income two years ago for establishing financial aid. So your strategy is not needed as much anymore.
In theory.

[bean1970]

8

[bean1970]

The White Coat Investor wrote:

It’s to help my nieces and nephews pay for college. Anything else is a secondary benefit. The tax break is tiny (this year we’re putting in $31K and we get a $1550 credit). The fact that FAFSA doesn’t look at a 529 I own is nice for them and their parents too.

There is no max per owner. It’s a max per beneficiary.

I don’t plan to “gift” the accounts. I plan to use it to pay some of their college expenses. I expect we’ll blow through everything in there their first semester. They’re not going to be that large of accounts most likely.

Click to expand...

you shouldn’t use it for their first semester. you should use it for the last semester (distribute backwards) On distribution/payment to the school counts as income for them which could affect any aid or need-based scholarship. if that matters to you to affect their income.

[The White Coat Investor]

bean1970 wrote:

The White Coat Investor wrote:

It’s to help my nieces and nephews pay for college. Anything else is a secondary benefit. The tax break is tiny (this year we’re putting in $31K and we get a $1550 credit). The fact that FAFSA doesn’t look at a 529 I own is nice for them and their parents too.

There is no max per owner. It’s a max per beneficiary.

I don’t plan to “gift” the accounts. I plan to use it to pay some of their college expenses. I expect we’ll blow through everything in there their first semester. They’re not going to be that large of accounts most likely.

Click to expand…

you shouldn’t use it for their first semester. you should use it for the last semester (distribute backwards) On distribution/payment to the school counts as income for them which could affect any aid or need-based scholarship. if that matters to you to affect their income.

Click to expand...

Excellent point. Probably won't make much of a difference though. We're probably talking about a four figure amount for each kid.

[HumbleInvestor]

The White Coat Investor wrote:

It’s to help my nieces and nephews pay for college. Anything else is a secondary benefit. The tax break is tiny (this year we’re putting in $31K and we get a $1550 credit). The fact that FAFSA doesn’t look at a 529 I own is nice for them and their parents too.

There is no max per owner. It’s a max per beneficiary.

I don’t plan to “gift” the accounts. I plan to use it to pay some of their college expenses. I expect we’ll blow through everything in there their first semester. They’re not going to be that large of accounts most likely.

Click to expand...

Is the break on your state income tax? I dont know much about 529 and my basic understanding is there is no federal tax deduction for 529 contributions and my state does not have income tax. My state also does not offer regular 529 at this point and they are planning to offer one in early 2018. At present they only offer pre-paid tuition credits. In this case, can I signup with other states or federal level 529 plans?

Thanks

HI.