Grandsons saved money VS 529

[old medic]

We have a savings account for our 9 year old Grandson and put in some every month, along with his gift moneys and he actually earns some working around here. We didn't go with a 529 initially, and still not sure about it.
I would like to see his money grow more than what the savings account gives, But dont want him to lose 10% if he doesn't use it for school. The amount we add is not enough to help us with tax, unless rolling his lump savings applies.

 

[EastWest Gal]

A 529 plan can also be used for trade and vocational schools. It grows tax free. If not used for education, there is a 10% penalty and the capital gains are taxed. More importantly, you retain control. You own it, and can change the beneficiary at any time.

Think HVAC, electrician, plumbing, welding, wind turbine technician, elevator repair, physical therapy, X-ray tech, these are just a few where there is some education involved. Some of these trades pay quite well. My nephew was never college material, and his 529 plan was used to learn welding.

You could also open a custodial investment account, but once he reaches the age of majority, he can do what he pleases with the money, which could be dangerous at age 18!

Last, there is no tax benefit to gifting money except to a charity. If you gift too much, you have to pay gift tax.

 

[old medic]

The kid is almost to smart... he's had some issues at school and @ 8 was IQ tested...
They said that they couldn't complete the test, but was scored at 126.
Hes also a hands on outdoors type kid

 

[LOL!]

Generally, children have such low incomes that they pay no income taxes. A 529 plan is a way for wealthy parents not to pay income taxes on investment gains when their children go to college.

If you are not wealthy and you do not pay taxes on your investments, then there is almost no advantage to a 529 plan. For such people perhaps the only advantage is any state income tax breaks that you might get for contributions.

If you are wealthy and pay taxes on your investments because you are not investing tax efficiently, then perhaps a UTMA/UGMA account is better for your grandson. If such an account is invested tax-efficiently, then there should be no taxes on it and the gains will be as good as it gets because of the added risk of using long-term index funds investments if you choose to go that route. If the gains are high enough, a tax return for the child may have to be filed showing they do not owe any income taxes. Check with his parents about that.

 

[teetee]

If you are planning to give him less than 15K a year (max. gift before getting taxed) for the future then nothing needs to be done here: You don't get taxed withdrawing money from a savings account, neither you or he have to pay tax:
https://www.irs.gov/businesses/smal...oyed/frequently-asked-questions-on-gift-taxes


529 is for education expenses only so based on the above assumption on the gift amount, it doesn't seem to have any advantage over gift from your savings account, unless you wish to use the next 8 years to invest the money and tax-free growth is desired.

 

[old medic]

The money is already his, In a savings account in his name, I'm just listed as the custodian of it. His mother supposedly has a 529 that some of his dads disability check goes into... but have my doubts.
We consider ourselves rich.... But dont have the money to be wealthy. LOL

 

[phil1ben]

Past performance is no guarantee of future returns.........however, I opened my kids 529 plans when they were 6 and 9. They are now 23 and 27 and through graduate school. The appreciation alone in the 529 plans (utilizing a conservative allocation which automatically shifted percentages from equity to fixed income as the kids approached college) ultimately ended up paying for 30% of their college expenses including room and board.

 

[RobotMom]

OK. I need to clear something up - you do not pay a flat 10% penalty if you withdraw money from your 529. You pay the 10% penalty and federal income taxes on the GAINS only. So if you invest $50k and earn $15k in gains, the 10% is assessed at the $15k in gains. The same gains that have been growing tax free and, if you live in a state that offers it, have written that amount off on your state taxes. So it is not nearly as bad as one would think. Plus, as others have pointed out, your grandson will probably need some sort of specialized training even if he doesn't go to college and 529s can be used for that, too.

I did 529s for my two daughters and definitely recommend that you consider it. Savingforcollege is a great website with useful information. I see LOTS of misinformation on internet forums about 529s, please do your own research and get information from reputable sources. Once you do, you will see that a 529 is a great way to save money for children and grandchildren and that the benefits outweigh the drawbacks.

 

[Dash man]

OK. I need to clear something up - you do not pay a flat 10% penalty if you withdraw money from your 529. You pay the 10% penalty and federal income taxes on the GAINS only. So if you invest $50k and earn $15k in gains, the 10% is assessed at the $15k in gains. The same gains that have been growing tax free and, if you live in a state that offers it, have written that amount off on your state taxes. So it is not nearly as bad as one would think. Plus, as others have pointed out, your grandson will probably need some sort of specialized training even if he doesn't go to college and 529s can be used for that, too.

I did 529s for my two daughters and definitely recommend that you consider it. Savingforcollege is a great website with useful information. I see LOTS of misinformation on internet forums about 529s, please do your own research and get information from reputable sources. Once you do, you will see that a 529 is a great way to save money for children and grandchildren and that the benefits outweigh the drawbacks.

+1000
I opened 529 plans for each of my three grandchildren when they were born. My plan is to fully fund four years at Penn State. If they go somewhere more expensive, it’s on them. If they go somewhere less expensive, the can use it for grad school or for their kids.
I don’t see a downside. We save on state income taxes, their parents can save for their retirement instead of college, and the kids will know who helped them get a debt free start in life.

 

[Rocky mtn high]

Encouraged parents to start a monthly 529 contribution after the child was born, as that is what we did for them with EE bonds back in the day. After they opened the 529 plan we are matching the monthly contributions of the parents to the plan as grandparents. Just like retirement, the sooner you start the better it will be.

 

[SecondCor521]

OK. I need to clear something up - you do not pay a flat 10% penalty if you withdraw money from your 529. You pay the 10% penalty and federal income taxes on the GAINS only. So if you invest $50k and earn $15k in gains, the 10% is assessed at the $15k in gains. The same gains that have been growing tax free and, if you live in a state that offers it, have written that amount off on your state taxes. So it is not nearly as bad as one would think. Plus, as others have pointed out, your grandson will probably need some sort of specialized training even if he doesn't go to college and 529s can be used for that, too.

I did 529s for my two daughters and definitely recommend that you consider it. Savingforcollege is a great website with useful information. I see LOTS of misinformation on internet forums about 529s, please do your own research and get information from reputable sources. Once you do, you will see that a 529 is a great way to save money for children and grandchildren and that the benefits outweigh the drawbacks.

I generally agree.

Nitpick: Most states do not allow "write offs" of the nonqualified gains, but many do allow write offs of contributions, which is definitely a nice perk.

I'll add that between the scholarships my eldest received as a freshman and his standard deduction, we paid $0 in taxes on the remainder of his 529. He graduated in December, and that month I made a non-qualified withdrawal of the remainder of his 529. First we had to calculate the earnings portion of the withdrawal, which was not the entire withdrawal - some was return of principal. Second, we were able to excuse the 10% penalty because he had scholarships his freshman year that exceeded the earnings portion. Finally, the earnings portion was low enough that it was below his standard deduction in 2020 because he was a zero income college student that year. This year he has a full time job and would have probably paid 22% in taxes on the withdrawal.

 

[athena53]

I have 3 grandchildren and have set up 529s for them. One advantage that I think hasn't been mentioned is that savings in 529s opened by a grandparent don't count when determining need for financial aid. I'm also happy to have $100K generating investment income free of tax.

The OP mentioned only one grandchild but ownership can be transferred to another family member if the grandson doesn't need it. From the Merrill Edge site: "Qualified family includes the beneficiary's siblings, parents, children, first cousins, nieces and nephews, among others.)"

529s can also be used for K-12 tuition at private schools.

Finally, on tax impact of withdrawals for non-educational purposes: I agree there should be no Federal taxes on the amounts originally deposited since they weren't a deduction to Federal taxable income when they went in. In my case it would be a bit messier for the state. I do get a break on state taxes for the first $8,000 but I contributed more than that and the excess was still taxed by the state. So, maybe I need to keep track of the contributions already taxed by the state.

 

[sengsational]

Money held in the child's name might have the advantage of being taxed at the child's lower tax rate, but subject to the "kiddie tax", so might not be a benefit. Also, money held in the child's name gets hit hard by the "expected family contribution" need-based financial aid formulas (gets hit like 5 times as hard as if held by the parent). If you start a 529 early, by the time the kid needs the money, it's probably double what you started with...all tax-free if used for school. It was a joy pulling money for school when my kids were in college, knowing it grew tax-free.

 

[old medic]

I'm telling you... this kids a little ****.... we talked to him about it...
He wants to buy stocks like Warren Buffet..... Because he dont pay taxes.