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Old 02-20-2013, 08:27 AM   #21
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Originally Posted by 45th Birthday View Post
If anyone is a resident of Illinois, currently has kid(s) in college, and will pay up to $20K total for their 529 allowable expenses (not otherwise covered by scholarships or 529 withdrawals), you should contribute to the Bright Start program, put the money in the money market fund, then withdraw it immediately and use it to pay the allowable expenses. Doing so will net you 5% off your Illinois income tax on whatever you contribute. Do the whole $20K, and you drop $1,000 into your pocket with no risk. You can do this all online, and the money round-trips in about a week.
Yes this is the same conclusion we came to last night. I can save $1000 a year for the next 10 years by using the Bright Start program. I can put in and take out $20K a year from the 529 (saving $10K in state taxes during that time period) and still have at least $4000 in tuition costs out of regular accounts so I can also do the American Opportunity Credit on my federal taxes (saving $20K in federal taxes over the 7 years my kids are in college.) There is also the savings by not paying taxes on the earnings as it is tax exempt.

At first I thought that I could either get the American Opportunity Credit or use the 529 but it seems like you can do both as long as the $4000 of tuition expenses that you put on your federal taxes for the American Opp. Credit is not the same money that was distributed from the 529. (Tuition plus room and board is more than $24K total.) So with careful bookkeeping, it seems you can do both. If anyone believes otherwise, please let me know.

The Bright Start program had gotten a bad reputation over the years but it seems they straightened it out. The fees are quite low now and I can invest in Vanguard Index Funds in the program. We are doing some investigation but it definitely seems like the best approach. I will probably start to funnel $20/yr into the program this year.
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Old 02-20-2013, 08:33 AM   #22
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Originally Posted by sheehs1 View Post
Have you looked at the FAFSA form yet? It's been a few years since I filled one out.
Actually my DH filled one out a few years ago when his daughter was in college. We delayed our wedding until after her last FAFSA was submitted, so that my income would not be included. It seems very unfair that they include stepparents income, but that is what they do. I think my kids would only be eligible for loans anyway, even if it just included my income.

Thank you all for the helpful advice! DH and I were very excited to realize that we could save tens of thousands of dollars just by structuring the flow of the college money appropriately.

That's more for our retirement savings!
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Old 02-20-2013, 10:27 AM   #23
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At first I thought that I could either get the American Opportunity Credit or use the 529 but it seems like you can do both as long as the $4000 of tuition expenses that you put on your federal taxes for the American Opp. Credit is not the same money that was distributed from the 529. (Tuition plus room and board is more than $24K total.) So with careful bookkeeping, it seems you can do both. If anyone believes otherwise, please let me know.
You are correct that you can get both the American Opportunity Credit and tax free withdrawals from the 529 plan by making sure that $4,000 of college expenses are paid from non-529 sources, but the tax law is actually even more generous than that. Suppose you pay 100% of your child's allowed college expenses from your 529 plan. Then you are allowed to take the AO credit and the entire 529 withdrawal is penalty free. But the $4,000 portion of the withdrawal that was used for the AO credit is subject to regular income taxes. But only a portion of the $4,000 will be investment gains, and therefore taxable. Some of the $4,000 will be return of your contributions, and therefore not taxable. In the case of the clever suggestion of contributing money into the money market option in the 529 and then immediately turning around and withdrawing it for college expenses, 100% of the withdrawal will be return of your contributions, and therefore not taxable.

So if you stay alert to current tax law, you can potentially maximize the benefits of the 529 greatly to your advantage. Just make sure to think through all of the angles ahead of time. You also have the additional constraint of needing to set up the $50,000 account for each child, so that may restrict your use of the 529 plan.
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Old 02-20-2013, 10:57 AM   #24
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Here is one other suggestion that I haven't tried myself, but believe it's worth investigating. Look into establishing three 529 accounts - one for each child and one for yourself. That may possibly get you three state tax deductions each year instead of two. Then when the time comes, change the beneficiary of your 529 account to one of your children and using it for their college expenses.
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Old 02-20-2013, 10:59 AM   #25
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You also have the additional constraint of needing to set up the $50,000 account for each child, so that may restrict your use of the 529 plan.
I think I know a way to incorporate this. I have a master bank account that has all my current college savings (Account A). I can go ahead and setup the 529 and start contributing for the next few years (Account B) drawing from Account A. When my daughter starts college, I set up the $50K account in a dedicated regular bank account (Account C) as required. When it is time to pay bills, I pay them from Account C, and get reimbursed for a smaller amount ($4000 less) from the 529 (Account B) into the main bank account (Account A). I then continue to contribute to the 529 using money from Account A. I am the owner of all three accounts so I think there is not a problem doing this. I believe I can get the 529 to reimburse me directly and do not have to have them pay the school directly. When Account C is empty, I pay the rest of the college expenses from Account A, which continues to be partially reimbursed from the 529 (Account B).

I can set up 529 account for my son (Account D) and fill it with $20K to cover his first year (while daughter is in her last year of college) from the main Account A. When son starts, I set up Account E with $50K. I pay his expenses from this account and get 529 Account D to reimburse Account A for the partial amount ($4000 less). Account A then refills Account D. When Account E is empty, I pay the rest from Account A, which continues to be partially reimbursed from the 529. (Any amounts left in daughter's 529 Account B can be changed to have son as beneficiary when she is done.)

It seems complicated but I think it will work. We are making a spreadsheet to organize it all. What do you think?
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Old 02-20-2013, 11:00 AM   #26
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Here is one other suggestion that I haven't tried myself, but believe it's worth investigating. Look into establishing three 529 accounts - one for each child and one for yourself. That may possibly get you three state tax deductions each year instead of two. Then when the time comes, change the beneficiary of your 529 account to one of your children and using it for their college expenses.
I think it is $20000 total but I will check.
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Old 02-20-2013, 11:02 AM   #27
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Checked in tax form and the limit is $20K.
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Old 02-20-2013, 02:52 PM   #28
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I plan to retire from my job in 7 years but I will not have to withdraw retirement money until I am 70, 22 years from now. So I think I can be a little more aggressive with the money.

I will investigate 529s in more detail. I may want to put some money in there as Illinois does offer some nice state tax breaks. Something to seriously consider.
I would be very careful when looking at the 529 plan investment options. I had money in those for three kids when the market crashed in '08. Money was invested in age based plans relative to when they started college. I had thought they would be invested very conservatively but they were not. Plan values dropped 30% along with the market and just did get back above even last year.

Just call me stupid as that was a real learning experience for me. Carefully investigate how the 529 plans are invested so you don't take on more risk than you want.
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Old 02-20-2013, 03:19 PM   #29
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529 rules allow you to withdraw the money if it is all not used. You would have to pay taxes only on the gains, the principle is returned to you tax-free..........
You missed this part about taxes -
Of course, if you spend the money for purposes other than college, you must pay taxes on your earnings and an additional 10% federal tax.
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