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Old 02-27-2008, 10:52 AM   #61
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Another positive aspect of 529 is that you can withdraw an amount equaled to the total expenses (tuition, books, fee, room and board) even if they are covered by scholarship without any penalty.
You mean if a child gets a scholarship, you can use 529 earnings tax and penalty free in whatever way you please? That's new to me then.
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Old 02-27-2008, 09:36 PM   #62
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You mean if a child gets a scholarship, you can use 529 earnings tax and penalty free in whatever way you please? That's new to me then.
According to the IRS (Publication 970 (2007), Tax Benefits for Education), you are eligible to take a penalty-free withdrawal from the 529 account up to the amount of the award. You would, however, have to pay federal and state income tax on the earnings portion of the withdrawal.
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Old 03-03-2008, 04:42 PM   #63
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Wow, I feel fully educated now. I'm thinking of opening an ESA with Vanguard at the $2,000 max and then opening the 529. She attends private school now (in 5th grade), and we do plan to keep her there through high school. At "measly" $2,000/year maximum, I'm sure we'll be able to stop contributing in time in case we put her in public school earlier. Other info: I'm very sure she will not qualify for financial aid, so that's not really a concern. I'm a tiny bit concerned she won't attend college - it's something we talk about, but you never know when they suddenly decide to become a movie star or join a circus! I guess I would either take that trip to Italy as an exchange student or pay the 10% penalty. I do have questions:

Is there any reason to bypass the ESA and to do just the 529?

At her age, it's hard for me to see her potential in attending law school, being a doctor, or having the drive to obtain an MBA from Stanford, so I'm probably not going to put in $12K/year in the 529 - so far her only expressed ambition is to be an elementary school teacher . I'd "hate" to have too much money in there to find that she wants to go my alma mater, a state university, and then have $50K leftover... she's an only child, and all of her cousins are older than her and will probably be taken care of by the grandparents!

When choosing a 529, I read some language about it being tied to a "state," but I know she can attend any accredited school. I'm guessing we normally would just pick the state we live in, right?

Any other advice you can give? Or mistakes you've made that I can learn from? Thanks!
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Old 03-04-2008, 09:57 AM   #64
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I'm wondering if someone may know the answer to this question.
If I remember correctly, if the beneficiary of the 529 plan doesn't use it by age 35 it becomes taxable, so what if part of it is used and then passed on? Does the age requirement then stretch out to the next person? I know you have to actually name a beneficiary, but can you just keep changing the name if say your goal is to leave the money for your yet unborn grandchildren? Let's say you put a large chunk into this plan, and 40 years later are forced to take it out and pay taxes and penalties, what are the odds it was still a financial success? Or would I be better off going to art or golf school in my twilight years?
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Old 03-04-2008, 10:41 AM   #65
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I'm wondering if someone may know the answer to this question.
If I remember correctly, if the beneficiary of the 529 plan doesn't use it by age 35 it becomes taxable, so what if part of it is used and then passed on? Does the age requirement then stretch out to the next person? I know you have to actually name a beneficiary, but can you just keep changing the name if say your goal is to leave the money for your yet unborn grandchildren? Let's say you put a large chunk into this plan, and 40 years later are forced to take it out and pay taxes and penalties, what are the odds it was still a financial success? Or would I be better off going to art or golf school in my twilight years?
You are incorrect, there is NO age limit on a 529 plan. Current laws allow you to give money all the way down to grandchildren.. Plus, if one of your kids quits school and becomes a bum, you can change the beneficiary to yourself or someone else, even go "up" to you parents if they want to go back to school.........
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Old 03-04-2008, 10:47 AM   #66
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I'm thinking of starting a savings for my grandchild . Which is better tax wise the 529 or ESA ?
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Old 03-04-2008, 11:40 AM   #67
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I'm thinking of starting a savings for my grandchild . Which is better tax wise the 529 or ESA ?
Hard to say since tax laws can change. However, the ESA must be used by age 30m or you have to cash it out, the 529 has no time limit.

One BIG advantage of an ESA is it can be used for private prep schools and elementary schools, whereas the 529 cannot. One BIG disadvantage of the ESA is a limit of $2000 a year..........WAY TOO LOW......

In effect, the 529 is a gifting mechanism whereby you can get money out of your estate.......to me that's a pretty big benefit............
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Old 03-04-2008, 12:34 PM   #68
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Hard to say since tax laws can change. However, the ESA must be used by age 30m or you have to cash it out, the 529 has no time limit.
But you can transfer the ESA to another individual, like a 529b. Since you can use ESA money for almost any educational expense (grammar school, high school or prep school, trade school, college, grad school, random classes someone might want to take, tutoring, hardware like computers or widgets, etc.) and you can transfer it from one kid to another or one grandchild to another, it's hard for me to imagine having any trouble using the money for qualified reasons.
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One BIG advantage of an ESA is it can be used for private prep schools and elementary schools, whereas the 529 cannot.
To me, this is the main reason why I do ESA's for the grandkids and why doing ESA's is a good idea even if you also do 529b's. When the child is very young, it's hard to know positively that the money might not be needed for grammar school or high school or related expenses such as a computer to use in high school. You don't have to use ESA dollars for these short of things, but you can if needed. Otherwise, just use the ESA dollars like you would 529b dollars.
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One BIG disadvantage of the ESA is a limit of $2000 a year..........WAY TOO LOW......
Yep...... if you can afford more than $2k/yr, you'd also do a 529b. Well worth the effort to do both since the ESA is so much more flexible in both investing and spending options. Since the incremental effort of doing both is small compared to only doing one, I find it interesting that folks tend to argue for only one or the other.
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Old 03-04-2008, 12:38 PM   #69
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I'm thinking of starting a savings for my grandchild . Which is better tax wise the 529 or ESA ?
Hmmmmm.....not an accountant or cpa here, so buyer beware, but I think that since you're in Fla with no state income tax, it's a draw, no difference. Both non-deductible, both grow tax deferred, both have tax free withdrawals if used for qualified educational expenses.

Anyone see it differently?
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Old 03-04-2008, 01:10 PM   #70
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When choosing a 529, I read some language about it being tied to a "state," but I know she can attend any accredited school. I'm guessing we normally would just pick the state we live in, right?
Not necessarily. You probably want to pick the state that you work in. I guess for most people they are one in the same, but just thought I'd point that out.

The reason is because many states allow you to deduct contributions to their 529 plan from state income tax (sadly, the contributions are not dedictible for federal income tax).

In my case, I live in NJ but work in NY, and NY has a good 529 plan (with Vanguard) and allows for state income tax deductions of up to 10K/year into 529 plans.
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Old 03-04-2008, 01:24 PM   #71
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Of course if you're in a state that has no income tax, you can pick any of the 50 plans.
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