529 or Not?

[ER_Hopeful]

hope I'm not hijacking the thread, but what's likelihood that we'd be able to use the 529 to pay off student loan in the future? google search says such bill has been submitted in Congress.

[joel2125]

As Charlie Munger likes to say, basing long term investment decisions on tax considerations can result in large mistakes. The great thing about a 529 is you can't touch it or you will be penalized. You can set it up in whichever state you like. Mine has been in Kansas while I live in Ca. I started when my kids were born and it has been a blessing on my life as all three have been in college for the past four years. Put as much as you can based on your projected college expenses. The rate of college inflation has averaged over 6%. I am 58 and its hard to know just what tax bracket you will be in at the time the kids are in college. Set it up, automatic withdrawals, double up in bear markets, and let it ride!

[sengsational]

Quote:

Originally Posted by ER_Hopeful hope I'm not hijacking the thread, but what's likelihood that we'd be able to use the 529 to pay off student loan in the future? google search says such bill has been submitted in Congress.

The last time I checked the IRS 529 publication, it said "no" to using 529 funds to pay loans. It doesn't make a lot of sense, either. You are allowed to pull basis and gains out of a 529, tax and penalty free, in the amount paid for qualified education expenses. If you have a loan or not doesn't affect that total. So if two students were at the same university, encountered the same expenses, and pulled that amount from their respective 529 accounts, but Mr A paid all his education expenses without using a loan, and Ms B paid all her education expenses, but ended up with a student loan payment, then Ms B gets an advantage not available to Mr A.

[ER_Hopeful]

Quote:

Originally Posted by sengsational The last time I checked the IRS 529 publication, it said "no" to using 529 funds to pay loans. It doesn't make a lot of sense, either. You are allowed to pull basis and gains out of a 529, tax and penalty free, in the amount paid for qualified education expenses. If you have a loan or not doesn't affect that total. So if two students were at the same university, encountered the same expenses, and pulled that amount from their respective 529 accounts, but Mr A paid all his education expenses without using a loan, and Ms B paid all her education expenses, but ended up with a student loan payment, then Ms B gets an advantage not available to Mr A.

My logic is that if we were allowed to pay for students loans from 529, then the 529 stash could grown another 4 years.

[sengsational]

That's a good idea. But I'm pretty sure that the AQEE needs to be taken in the year it happens or it's "gone". Maybe not. I'm not sure the IRS weighed-in on that, formally. Something you'd need to research. If you do find a definitive source, I'd be curious about learning about it. Not because I need it anymore, both kids are out of college and the 529's don't have much left in them. My plans are to keep them for grandchildren, if those ever show up.

But I did something like what you're proposing. Both kids went full-on with financial aid, taking all the grants, scholarships and loans that were offered. Both schools vigorously manage their graduation student debt statistic, so the loans weren't too large of a percentage. Our EFC was low because most all of my assets were in retirement vehicles AND, I was retired most of the time (no income). Anyway, each year, I pulled an amount equal to the entire AQEE and put it in a separate account. I only needed to spend a small fraction of it on school at the time. Now, I'm paying the loans out of that account. I have the option of paying them all off and being done with it, but the interest rates are low, so I'm in no hurry.

[sengsational]

Quote:

Originally Posted by sengsational It doesn't make a lot of sense, either.

But I just thought of a way the law would make sense: if it was limited to the total AQEE actually incurred. In other words, say that only 50% of the total AQEE was utilized during the actual school years. It would be logical to allow the other 50% to be utilized against student loans.

[gatored]

Quote:

Originally Posted by Letsdoit Please make sure my thinking is correct... We have 2 kids, 4 and 6 years old. I am 31 and DH is 41. Our current plan is to leave full time work in 5 years to travel with the kiddos in a tiny house. Our investments should be at about 1.2 million at that time with about 300,000-400,000 in low volatility non tax advantaged funds and 800,000-900,000 in a mix of traditional and roth 401ks/IRAs.

Only work part-time starting in 2023 at 36 years old and DH at 46 with a 9 and 11 year old? $1.2MM, plus part time income is supposed to cover your living expenses (utilities, clothes, food, property taxes, home insurance for tiny house, cars, car insurance, medical insurance for 4, etc.) for the next 40-50 years, as well as pay for both kids college and the cost for 4 to travel, presumably extensive travel given the appearance of being main driver in work cut-back? By cutting back I'm assuming that will have an impact in your future SS benefits (many of the 35 years will either be 0 or smaller amount). Are there any pensions or inheritances expected that would help fortify the $1.2MM?

[GrayHare]

Let's say after 10 or 20 years one makes a non-qualified 529 withdrawal, I realize there is a 10% penalty, but how are the investment gains taxed? Are they all cap gains, or are the multiple years of dividends separated out and taxed as dividends during the tax year of withdrawal, or something else entirely?

[Fired Up]

Quote:

Originally Posted by GrayHare Let's say after 10 or 20 years one makes a non-qualified 529 withdrawal, I realize there is a 10% penalty, but how are the investment gains taxed? Are they all cap gains, or are the multiple years of dividends separated out and taxed as dividends during the tax year of withdrawal, or something else entirely?

The gains are taxed as ordinary income.