529 investment over state tax break amount?

[Jenn]

We were funding these to a small degree- ESAs and 529s- and then older child gets scholarship covering tuition. We quickly changed course, drained both kids' 529s to pay her qualified college living expenses, and now just have youngest's ESA (nontransferable) to drain. Saving for the just in case costs in our own funds- mostly stock, and CD ladders as we get closer. However as we still have all husband's GI bill to use for this kid we can spend more money on ourselves if that's all she needs and we'll have a hard time draining her ESA! If she also gets similar scholarship it'll seem a waste to use GI bill just to pay her dorm fees- will investigate funding law school or whatever for someone- possibly me or husband! SHe can choose what she wants but might encourage her to aim for a college where the GI bill will be maxed out.

[jfoxcpacfp]

Jenn wrote:

and now just have youngest’s ESA (nontransferable) to drain.

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Just want to make sure that you realize an ESA is transferable to "qualified beneficiaries" in the same way the 529 would have been transferable. The same rules also apply for nonqualified withdrawals: tax on the growth and income and a 10% penalty. Your situation is the reason I have reservations about funding tax-qualified education accounts. There are just too many ways that the money can end up in a penalty-prone position. For example, I don't know of too many people with kids who feel the need to fund their nephew's education. Perhaps you can use it for yourself or your spouse to take a few college courses.

One bright spot is that, if your child gets a tax-free scholarship that results in your not using the ESA, the withdrawal is penalty-free (same for 529 accounts). Since you would have paid tax on the growth in a taxable account, you are fully restored.

[Jenn]

Thank you Johanna! Happy to learn I was wrong on that point- if only I'd known when the older was still in school! I hadn't considered your concern until I understood the cheapness of where she wanted to go and how good a scholarship she'd get. Luckily that put a brake on all our further investing in BOTH of their accounts. As you discuss we had no close relatives we'd want to transfer the 529 to, and I didn't want to have to manage the fund if unused until (if ever) I had grandchildren.

But with the youngest in high school still I keep asking "Don't you need a new computer [or other qualified ESA expense]?" I had thought her expenses at a public boarding school- minimal but there is an activities fee- were not qualified but I will investigate further!

[jfoxcpacfp]

Jenn wrote:

I had thought her expenses at a public boarding school- minimal but there is an activities fee- were not qualified but I will investigate further!

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I do not know why activities fees would not qualify.

[TheAbacus]

jfoxcpacfp wrote:

conniebird wrote:

Most MDs cannot do an ESA as there is an income limit

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Yes, i understand, but there is an easy workaround. Just gift the $ to the child, a grandparent, or friend (anyone who qualifies) and they make the contribution. Sorry, s/h included that in my original answer. Don’t recommend an UTMA or UGMA, kids at 18 tend to be highly unpredictable and that’s the age of majority in almost all states.

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Sorry to dig up this old post, but I have to ask.

Is this legal? Has it been done before? I found a few discussions on the Bogleheads forum arguing both for and against gifting money to the child, who then can open the ESA. Could you provide me a reliable reference to understand this better?

[jfoxcpacfp]

TheAbacus wrote:

jfoxcpacfp wrote:

conniebird wrote:

Most MDs cannot do an ESA as there is an income limit

Click to expand…

Yes, i understand, but there is an easy workaround. Just gift the $ to the child, a grandparent, or friend (anyone who qualifies) and they make the contribution. Sorry, s/h included that in my original answer. Don’t recommend an UTMA or UGMA, kids at 18 tend to be highly unpredictable and that’s the age of majority in almost all states.

Click to expand…

Sorry to dig up this old post, but I have to ask.

Is this legal? Has it been done before? I found a few discussions on the Bogleheads forum arguing both for and against gifting money to the child, who then can open the ESA. Could you provide me a reliable reference to understand this better?

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Done all the time. A relative (parent, brother, aunt, parent) could fill the same shoes if you wish. The only risk is the application of the step transaction doctrine, which we ignore all the time with back-door Roth conversions.

[deeppizza]

If I "give" $2K to my child so that they can then contribute to their own ESA, does that count against the annual federal gift tax limit of $14K?

[jfoxcpacfp]

Yes it does (along with Christmas and birthday gifts that nobody ever counts   ). If you are pursuing this strategy, better to give to another family member or trusted friend to contribute to ESA.