). If you are pursuing this strategy, better to give to another family member or trusted friend to contribute to ESA.
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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.
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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?Leave a comment:
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Most MDs cannot do an ESA as there is an income limit
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.
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?
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.Leave a comment:
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Most MDs cannot do an ESA as there is an income limit
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.
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?Leave a comment:
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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!
I do not know why activities fees would not qualify.Leave a comment:
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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!Leave a comment:
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and now just have youngest’s ESA (nontransferable) to drain.
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.Leave a comment:
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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.Leave a comment:
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For the cost conscious out there and those without a state tax break, MA Fidelity Index 529 is now the lowest or among the lowest cost, with even target date 529 options weighing in as low as .11%, now that Fidelity has markedly cut index costs to match Vanguard. This puts it below the cost of Vanguard 529 plans NV (0.17%), NY (0.16%), and UT (prob around .22% at lowest depending on your portfolio). Now an extra .11% of Fidelity over Utah isn't going to break the bank, but given Fidelity's excellent customer service and reported ease of withdrawal to rival Utah, it is an excellent choice for those who want to stick to index funds and don't care particularly for DFA. Also, if most of one's other investments are with Vanguard, its also a nice hedge to park some at another institution.Leave a comment:
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One factor not yet mentioned is the asset protection benefits of 529 plans. In most states they are very strongly protected which is very attractive to some people. Given the cockamamie asset protection schemes some doctors are using, a fully funded 529 plan seems sensible. The 529 plan is also outside of your estate for estate tax purposes, which is very helpful in some states with low estate tax thresholds. You can do all this, and NO taxes or penalties are due on the basis of the 529 plan contributions, only the earnings.
I'm planning on using the entire account for the kids/grandkids college and grad school, but it's nice to know that even if they don't take advantage of it, the contributions and minor penalty will be probably worthwhile.
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Wouldn’t you lose the federal income tax deduction if you do this ‘backdoor ESA’ ? I live in an income tax free state with a lottery and free state U tuition and therefore there seems to be little to compensate for the illiquidity of the ESA and 529. I have been considering using a taxable account to keep the money as a 20’s fund like WCI talks about rather than locked in to pay specifically for tuition. I wonder if anyone else is in this situation.
What federal income tax deduction are you referring to?Leave a comment:
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Most MDs cannot do an ESA as there is an income limit
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.
Wouldn't you lose the federal income tax deduction if you do this 'backdoor ESA' ? I live in an income tax free state with a lottery and free state U tuition and therefore there seems to be little to compensate for the illiquidity of the ESA and 529. I have been considering using a taxable account to keep the money as a 20's fund like WCI talks about rather than locked in to pay specifically for tuition. I wonder if anyone else is in this situation.Leave a comment:
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I personally have put all of my kids' college savings in our 529 (no state tax deduction to speak of) and none in taxable accounts. I like having the money specifically earmarked for college so there is no temptation to spend it on something else. Having the earnings compound and grow tax free at that age is huge also. There is a risk they don't use it all and you will get hit with taxes and penalty but you can transfer from one to another.
A compromise would be to put enough in a 529 to cover 4 year in state undergrad costs (no idea what that projects at but wild guess is you would need $150 to $200k each in 14-17 years when they are 18), then on top of that fund a taxable college account to cover private colleges, grad school, etc. Check with a fee only planner to help with estimating college costs. Good luck!Leave a comment:
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You can change the beneficiary once a year but, if you do not have any more children, that might not be feasible unless you wait until your grandchildren go to college. In the meantime, your money is locked up in a 529. I’m definitely not one who thinks you should sock away lots of money in a 529, but you should contribute enough to get your state tax break.
I believe you can change to another qualifying beneficiary (ie younger sibling) as often as you want. It is the same beneficiary rollover (ie changing between different state 529 plans) that is limited to once year and the interplan change of investments (ie change from target date to static) that is now limited to twice a year.
I think saving 50% of one's total anticipated needs in a 529 (with the rest in a taxable account) is a smart move provided that one is willing to keep it heavily invested in equities, preferably can frontload it, and is in a high marginal income bracket. Otherwise the tax free growth benefit probably doesn't outweigh the risk and loss of flexibility vs a taxable account.Leave a comment:
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