529 or taxable account?

[Eastfolk]

Just going to throw out a thought for people who have a taxable account and are not trying to keep income down for ACA...


Why not sell gains each year that would be zero tax so you can keep your total untaxed gains down a bit?


I would be doing this if not for the ACA credits.. resets the cost basis... and you do not have to wait to buy it back as it is not a wash as it it not a loss...

I’m guessing the reason for not doing this is, as you put it, it reduces your ACA credits so one would have to weight the benefits of resetting cost basis against the higher premiums on insurance. Guessing most folks that CAN sell gains at zero tax are also those that have FIREd and are relying on ACA credits though.

 

[FlaGator]

Thanks FlaGator for sharing your experience. But I'm not quite following your comment regarding risk mitigation. Wouldn't I be addressing this risk regardless of whether I'm contributing to a 529 or a taxable brokerage account if the intent of those funds is to pay for education expenses (e.g. college)? My question isn't necessarily whether I should fund my kids education expenses but rather which mechanism should I fund it through (529 vs taxable brokerage). The way I'm thinking about this (perhaps over-simplisticly) is would I rather have say $200k in a taxable brokerage or a 529 when my kids are college-age, knowing that I can withdraw from either one tax-free (maybe nearly tax-free in the case of the taxable brokerage). Seems to me like taxable brokerage is the slightly better option given there's no limitations as to what you can use it on if, using your own experience as an example, my kids get full scholarships to school. If you don't mind me asking, what do you plan on doing with the excess funds in the 529s? Assuming you'll convert $35k to each kid's ROTH IRAs? What about the remaining?

Either approach can work. This decision doesn't have to be either/or - you could split the intended funds between 529/Taxable in any proportion you're comfortable with.

Having the 529s allowed me to manage those investments discreetly for growth while ensuring adequate funds at specific dates. Managing my Taxable Brokerage Account has been complicated enough, having to balance variable annual spending needs, occasionally high medical bills, taxes, and ACA limits. I'm glad I didn't have to add college expenses to that equation.

In addition, my experience over the past 20 years is that growth in the Taxable Brokerage Account was not tax-free, nor close to it. Perhaps if you put the money earmarked for college in munis, it would be tax free. Retrospectively, if I had instead invested the college money in a Taxable Account for reasonable growth, the CG alone after 15+ years would have pushed me into a higher taxable bracket and blown through the ACA limits. Taking the gains when they happen along the way (as suggested above) would mitigate that somewhat, while adding another complication to managing the Taxable Account. There are no solutions, only trade-offs.

As for the remaining balances, the money was set aside for their benefit and I never considered it be part of my portfolio. I'm very, very happy everything worked as well as it did to now have the "problem". Yes, we'll take advantage of the Roth conversion option. Will also sit on those accounts for a few years to see if they pursue additional education, get married to a spouse with student loan debt, or have kids. After that, not sure. The money is there for me in the unlikely event I need it. But will probably liquidate the accounts, pay the taxes and split the money 50/50 between them for house down payments or other life-changing expenses. If I'm gone by that time, I instructed my kids to do just that.

 

[livingalmostlarge]

Right now, our HHI is about $330-$350k, so 24% marginal bracket. I should have been more explicit in my original post, but to clarify, my wife and I are planning on retiring in our early to mid 40s (both currently 36) so I don’t plan on having income for about 20 years until SS kicks in aside from interest and dividends from my taxable investments. We may want to perform some Roth conversions during this time though so that may factor in but directionally speaking, it sounds like there should be a sizeable opportunity to sell taxable investments at the 0% LTCG bracket. I do recognize that there will be some leakage in this process and on a standalone basis, the 529 will be more tax advantageous than a brokerage account. My question/concern is does that advantage outweigh the risk that I don’t end up utilizing the 529 (ie my kids don’t go to college) and have to pay 10% penalty to release the funds.

So i read these threads in FB and bogelheads. I saved a lot in 529/esa/umga. Here's the deal it doesn't matter if you have $0 income in FIRE, if you have large assets you don't get help.

I had someone say they had no idea and 20% help at HYSM type school and in inquired how it worked. Turns out that they had $200k taxable account and paid off home and $0. But then I did the college calculate. Funny thing, even with $0 in 529, pretty much anything above $500k in taxable and you were paying full freight.

7 figure taxable and 7 figure retirement I put in for us and DH will quit soon enough still full freight. I'm glad we did the 529.

 

[SecondCor521]

So i read these threads in FB and bogelheads. I saved a lot in 529/esa/umga. Here's the deal it doesn't matter if you have $0 income in FIRE, if you have large assets you don't get help.

I had someone say they had no idea and 20% help at HYSM type school and in inquired how it worked. Turns out that they had $200k taxable account and paid off home and $0. But then I did the college calculate. Funny thing, even with $0 in 529, pretty much anything above $500k in taxable and you were paying full freight.

7 figure taxable and 7 figure retirement I put in for us and DH will quit soon enough still full freight. I'm glad we did the 529.

The FAFSA rules are changing. Under the new FAFSA rules, there is a phrase "exempt from asset reporting". There was a similar phrase under the old rules "simplified needs test". The new rules provide avenues for people to entirely skip reporting of assets, including regular taxable accounts, even those of 7 figures.

If the kid is not going to a FAFSA school (ie, HYSM or CSS), then the previous paragraph only applies to federal aid, which is a small part of the pie in those cases.

 

[livingalmostlarge]

The FAFSA rules are changing. Under the new FAFSA rules, there is a phrase "exempt from asset reporting". There was a similar phrase under the old rules "simplified needs test". The new rules provide avenues for people to entirely skip reporting of assets, including regular taxable accounts, even those of 7 figures.

If the kid is not going to a FAFSA school (ie, HYSM or CSS), then the previous paragraph only applies to federal aid, which is a small part of the pie in those cases.

Where did you read that? I did the aid application on a lot of the schools the guy suggested and got nothing. But then again I don't know when the rules are changing. I did it this january.

https://www.bogleheads.org/forum/viewtopic.php?t=420961

controlling income for aid. Didn't seem to work for me but heck if i know.

 

[retire48in2018]

The key is just as diversification is good for growth of investments, having $ in various tax treated situations is good too.

Well, tax brokerage allows freedoms for retiring early - though there are methods, potentially for IRAs (72t) and 401k (Rule of 55).

We determined that we could cash flow college and never chose 529s, instead fully maxing Roths (back door), max 401k then paying off mortgage and finding brokerage account. We never had HSA options until retirement with ACA.

Our plan was retire at 48, using brokerage account. With no debts, income required was low, and - using capital gains from brokerage- made federal taxes near zero. We decided to wait 3 more years until 51 - but in last 3 years - we’ve been doing the plan.

But, its personal finance - that means- it’s your plan for your life. There are lots of options and strategies.

I recommend having flexibility in finding options, for early retirement. HSAs are not mentioned - but these are good long term funds as well for retirement - though annual funding amounts are limited.

Start with a desired retirement lifestyle wanted. Then build a plan around that (having debts?, traveling, etc) - to determine income needed. Then - that helps decide amount of investment needed and in what kind of tax shelter/situation

 

[SecondCor521]

Where did you read that? I did the aid application on a lot of the schools the guy suggested and got nothing. But then again I don't know when the rules are changing. I did it this january.

https://www.bogleheads.org/forum/viewtopic.php?t=420961

controlling income for aid. Didn't seem to work for me but heck if i know.

I read the text of the FAFSA Simplification Act when it was passed into law a few years ago (https://www.congress.gov/bill/116th-congress/house-bill/133/text). They've amended it somewhat since the original passage but not really in any significant way.

Here's a government document that alludes to some of it:

https://fsapartners.ed.gov/knowledg...lification-act-changes-implementation-2024-25

Search for the following text:

"Other applicants will have assets excluded from their SAI calculation based on income, tax filing status, and receipt of a benefit from a federal means-tested benefit program. This asset exclusion effectively replaces the SNT from the EFC formulas...."

One relatively easy way to be exempt is to get an Automatic Maximum Pell Grant, which can be awarded due to the family having under 175%/225% of FPL for their family size. The above document doesn't specifically mention this pathway, but you can probably google that and find that pretty easily. Here's one article in Money:

https://money.com/new-fafsa-pell-gr...ependent student,of the federal poverty level.

The rules are in the process of changing. The Department of Education rolled out the new FAFSA in the past few months with the changes for the 2024/2025 aid year. The rollout has been somewhat rocky from what I read.

These changes affect the FAFSA. Schools must use FAFSA for federal aid programs (Pell Grant is the main one; there are a few others), but they're free to do their own thing for institutional aid and scholarships.

Not sure what you did wrong. When my kids and I went through the old version (SNT), it would ask us the questions and when we got to that point, it would say "You don't have to report assets, do you want to anyway?" and we always said "No thank you." They don't make it super easy to find, but it's there if you read carefully and know precisely what to do.