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College funds and offspring who have "stopped out"
Old 12-09-2023, 07:53 PM   #1
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College funds and offspring who have "stopped out"

Hi all.

I am interested in wisdom and insight from those of you who have navigated through a period of time where you have college funds set aside and the offspring in question has stopped out of college for a period of time.

I am in that situation now. I 100% love and support my offspring whether they choose to make the stoppage permanent and pursue their current alternate path (entrepreneur / sole proprietor), or if they choose to return at some point (they think they might someday), or if they choose some other path than those two (military, SAHP, whatever).

We did use a small portion (a few $K) of their 529 funds to help start their business. Their business is going really well for their first year, and they like it. I still have funds set aside in 529s for the rest of their college if that happens.

I have two other offspring, one of whom has finished college, and the other one is on track to graduate in six months or so, and funds are there for that.

My plan was always to distribute any excess to the kids after they were all graduated. That plan is on hold for now, because how much to distribute to each offspring depends on how much is left over and how much each spent, which can't yet be known as long as one hasn't finished - an unexpected and unconsidered weakness in the plan.

I don't have any specific questions really. I am sort of wondering how long to wait before deciding to change any plans vis a vis the 529s, I guess. The other two offspring are doing fine and don't really need their TBD portions of the leftover 529 funds. But it is something I've mentioned to them several times as my plan.

I also wonder how other folks navigated something like this. Did they change their plans in response to something like this? How long did they wait? How did it turn out?

There would be the possibility at some point of using even more of the 529 to invest in the business. It's been a year so far, and the business is growing on it's own pretty well and doesn't really need a capital injection. But it's an option to be considered. Does a large capital injection from the 529 into the business reasonably let me off the hook for paying for the rest of a degree later? I can see both sides of that argument.

Any thoughts and opinions welcome.
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Old 12-09-2023, 09:19 PM   #2
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I am not you. Only you can figure out what is "right" and "fair".

That said, I would not beat myself up trying to achieve the above.

I am guessing funding the business would create a taxable event, for someone? (I don't know anything about 529's).

I guess I look at your situation and say "Good job. 2 kids thru college, and 2 entrepreneurs. You should be damn proud."
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Old 12-09-2023, 09:35 PM   #3
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I am not you. Only you can figure out what is "right" and "fair".

That said, I would not beat myself up trying to achieve the above.

I am guessing funding the business would create a taxable event, for someone? (I don't know anything about 529's).

I guess I look at your situation and say "Good job. 2 kids thru college, and 2 entrepreneurs. You should be damn proud."
Not beating myself up. More just pensively wondering good ways to proceed.

Yes, there would be taxes on the 529 withdrawal for business. The agreement we have is that the entrepreneur pays the (relatively low) taxes in return for access to that capital. They're also required to have lifetime business revenues that equal the capital draw - this is to encourage them to invest mindfully in their business. They seem to think this is reasonable.

And yes, very proud, thank you.
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Old 12-10-2023, 03:04 AM   #4
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It's not huge, but you can do a transfer from the entrepreneur's 529 into a Roth IRA. I don't know all of the details, which definitely merit research... But if future college is iffy, why not get a headstart on retirement investing? I understand that the cap is $35k per individual, as a lifetime limit. That's what I'd be looking to do. If entrepreneur eventually goes back to college, great. Having the Roth IRA started won't hurt them, even if the 529 doesn't fully cover that return to college.

Last point, on returning to school after stopping partway ... Be sure the entrepreneur understands the university's policy for credit durability. At some point, their past credits will effectively "expire" and will no longer count for credit toward graduation. I don't know if this is the same for all schools, but my wife ran into this issue, with the university requiring her to re-accomplish some courses that were older than 7 years.
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Old 12-10-2023, 06:37 AM   #5
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I would talk to the kids about it. The ones with the business could decide if current access to funds was more important than the potential future use for a return to college. If you think one is likely to blow it now and regret not having the funds for college later, you could tell him that holding on for a while is what you are inclined to do.

Fifty years ago, my parents (who were not wealthy) had finished paying for my older brother's and my college tuition. My younger brother had dropped out freshman year and was working for Ma Bell as a PBX tech and had no intention of going to college (ironically, he was the brightest of us). My parents were "even Steven" advocates so my dad suggested that my brother might consider buying a house and he would contribute $10K or something to balance things out. He bought a place in Chicago for $20K. It is now worth about $1 to $1.5M as a teardown.
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Old 12-10-2023, 06:53 AM   #6
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I'd have a discussion with each one, independently, and ask what they thought was fair. Not equal, but fair. I say this because just looking at tuition, room, and board (TRB) inflation would say equal dollar amounts was not going to happen.
Keep in mind you already told them they would be getting their portion of the left over 529 funds.
But I need more info. Was college 100% covered by 529, or was 529 capped and they also took loans? Did one, two or all three use their own funds to supplement college? Was this amount equal amongst the 3?



Kids can be funny about fair, equal and money. What you do now can have ramifications for the rest of their lives. After you discuss with each independently, hopefully you have a clear path forward. If so, sit with the three of them and let them know the path so there is no second guessing. Tread very carefully.
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Old 12-10-2023, 07:29 AM   #7
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Kids can be funny about fair, equal and money. What you do now can have ramifications for the rest of their lives. After you discuss with each independently, hopefully you have a clear path forward. If so, sit with the three of them and let them know the path so there is no second guessing. Tread very carefully.
+1 I haven't had issues in this regard with my kids (that I know of), but I am sensitive to the problem. I have extended family members who felt that undeserving siblings got far too much support from their parents. Others who felt it was unfair to discount them because they did well. I embraced my parents "even Steven" approach but what seems even to me may not to you.
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Old 12-10-2023, 09:44 AM   #8
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I will probably have a mini-version of the this as I suspect DD2 will never use the money available for graduate school.

DD1 landed merit scholarships and stretched what we had saved for her pretty much through her PhD.

DD2 landed even bigger scholarships which allowed her to set aside money for grad school. But i think its less than 50/50 she will go to graduate school and greater than 50/50 she will want to start a business.

My current viewpoint is to let it ride in the 529 for a long time before I re-purpose it in case she changes her mind. If, in the end, she really isn't going to grad school I will encourage her to roll it into retirement accounts in some way or other.

Hard choices though. Good luck!
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Old 12-10-2023, 09:55 AM   #9
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Perhaps move "leftovers" into a Roth for each child? I do not know the tax implications or anything for that, may need to move "x" amount per year.
After 5 years, if the business person needed more capital, would he be able to withdraw from his Roth? And other kids could with draw for house down payment, or leave in for retirement.

Wonderful you were able to save enough for all your kids college, and have leftovers!
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Old 12-10-2023, 10:34 AM   #10
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Roths are certainly a good option. The other thing you could do is make your kids successor/contingent owners on their own plans. I believe some states also allow transfer of ownership, but you may not wish to hand over the accounts just yet. Finally, as and when grandkids show up, you could make them the beneficiaries.
If your child uses the 529 money to finance their business, are you off the hook for subsequent education expenses? I'd say yes.
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Old 12-10-2023, 11:32 AM   #11
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I've got two sons, both in college. The older son had a rough start to college, but is back on track. We worried about this issue a bit when it looked like he was going to blow off college.

The 529's were roughly the same size when they started college.

Older son had the failed crash and burn year - which ate a chunk of the money. He has subsequently worked part time and gone to school... eventually shifting the hours more towards school than for work till he was full time school and 2/3s time work. He is now a straight A student transferring to the UC system in the fall. That makes him currently a sophomore because the UC system requires transfer students to attend 2 years before graduation. Although he has enough units to almost graduate right now the community college doesn't offer a bachelors, despite offering high level courses.. He's got his gen-ed done, and even much of his upper division math courses (he's a math major). He's on track to graduate spring 2026 with a huge excess of credits.

The other son, 2 years younger, went straight to university and has done well. He also took advantage of a semester abroad (he returns this Friday) which cost a chunk of the 529 money. He's also got good grades, takes lots of units, and is on track to graduate with a business degree spring 2025. He also works part time since the published 'cost of attendance' does not match facts on the ground and he needs more money than we can withdraw as qualified expenses.

Older son has significantly more remaining in his 529 because he's been attending community college (MUCH cheaper) and is extremely frugal. Younger son has enough to finish... but perhaps not much extra.

I've told them since day 1 that whatever is left could be applied towards graduate school or held, then rolled over, for future grandkids. Older son is thrilled that he might have enough to cover a graduate degree. With a math major, he'll probably want one. Younger son is planning on hitting the ground running with his business degree and doesn't plan on a graduate degree. So it's all working out. But when they graduate with their BS's they will get ownership of their accounts and face any tax consequences themselves.

But - back to the OPs question. If the kids all started with similar 529 amounts... it's pretty even/fair to keep them segregated. If you think the entrepreneur is unlikely to pursue college in the future, go ahead and fund the balance into the business (assuming it's a good business model.) For the remainders of the other kids - transfer ownership of their balances to them... and let them decide whether to roll it to a Roth, save it for grandkids.

Nothing says you have to keep ownership of the account - just transfer it to the beneficiary.
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Old 12-10-2023, 12:07 PM   #12
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I don't think there is a right or wrong answer.

We told our 3 kids we'd pay for college 100% if they chose to go. Having money in a 529 plan didn't really have anything to do with it. We never told them we would make things equal or give them leftover money - only we'd pay for college. Two of the three went the conventional route and went away for college and graduated on time. The middle child went a different route, working and going to college part time. She eventually dropped out after getting her Associates degree. It was her choice and since we never promised her anything concerning leftover 529 funds, well she didn't really know or care.

We've helped our kids out in other ways financially and I do like to keep things equal when it comes to non-college gifts.
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Old 12-10-2023, 02:48 PM   #13
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That makes him currently a sophomore because the UC system requires transfer students to attend 2 years before graduation. Although he has enough units to almost graduate right now the community college doesn't offer a bachelors, despite offering high level courses.. He's got his gen-ed done, and even much of his upper division math courses (he's a math major). He's on track to graduate spring 2026 with a huge excess of credits.
...
Older son is thrilled that he might have enough to cover a graduate degree.
rodi... here's something to consider/check into...

When I was an undergrad, I was in a similar situation having an excess of credits. I was doing my engineering degree at a school with a co-op program. Since I had free tuition (my dad was a prof), I would take some of my elective humanity/social science elective classes in evening school while working on co-op since my job happened to be in the same city - all at no financial cost to me. That allowed me to take more engineering elective courses than required during my academic terms, which increased my exposure to various topics. When I got near the finish line, I could have graduated early, but since my job was lined up I wouldn't have anything to do until the standard graduation time. My school allowed up to 15 hours to be taken for graduate credit while still an undergrad. I did this and had a head start on my MS, which I did in the evening while working after graduation from undergrad (work paid for that, the free tuition benefit as a family member of an employee didn't extend to grad school). This assumed you made the election prior to taking the course and didn't need the course to count towards your undergrad degree.

Obviously this was decades ago and at a different institution, but might be worth a look to see if it's a possibility.

edited to add: minor detail, but this applied to the dual level courses... ie could be either upper level undergrad or entry grad, we called them 600 level due to the numbering scheme... so an undergrad was allowed to take... it wouldn't have been possible for an undergrad to take higher level grad courses...
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Old 12-10-2023, 05:01 PM   #14
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Thanks for all the perspectives.

More so than usual, I was not very clear about the thrust of my concern.

I am *not* concerned with how to use up the leftover funds. I have a good plan for that.

I am *not* concerned with fairness about how to balance college fund usage among the three. I have a good plan for that. My plan also happens to account for inflation as it turns out, because there is a 5 year age gap between DS28 and DS23 (also have DD21.99).

What I'm mostly wondering about is how to deal with the aspect that one of my kids is on a hiatus / sabbatical from college that could last a year or a lifetime.

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But I need more info. Was college 100% covered by 529, or was 529 capped and they also took loans? Did one, two or all three use their own funds to supplement college? Was this amount equal amongst the 3?
No loans. College was covered by a variety of things - 529s, scholarships, financial aid, IB/AP credits. The kids were not expected to contribute to anything necessary (tuition/room/books/board/fees/transportation), but the were on their own for things like dates, cell phones, and entertainment.
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Old 12-10-2023, 05:06 PM   #15
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Perhaps move "leftovers" into a Roth for each child? I do not know the tax implications or anything for that, may need to move "x" amount per year.
After 5 years, if the business person needed more capital, would he be able to withdraw from his Roth? And other kids could with draw for house down payment, or leave in for retirement.

Wonderful you were able to save enough for all your kids college, and have leftovers!
Thanks, I'm very familiar with the new 529->Roth rollover stuff, and that is the general plan.

Entrepreneur could access Roth contributions for the business if he wanted to, but I would discourage that based on his personality, financial situation, and business situation.

I have a separate plan for house down payments, cars, weddings, etc. which I'd like to keep out of this discussion for now. My main focus is what to do about being in "limbo land".
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Old 12-10-2023, 05:20 PM   #16
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What I'm mostly wondering about is how to deal with the aspect that one of my kids is on a hiatus / sabbatical from college that could last a year or a lifetime.
I chose to help my children with their college education. I didn’t face your situation but 2 of our children did pause their college to work, one for 2 years and another for 1 year. We discussed options and I kept the funds in reserve. In both cases they eventually chose to go back to college and finish their degrees. They returned to college as much better (and focused) students after the time working.

Late teens is a tough age, there’s lots of pressure to make choice that have lasting consequences. I think having options and keeping them open is positive, the same for not heaping more pressure on them.

I also think your interest, concern and willingness to help is a good thing.
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Old 12-10-2023, 09:53 PM   #17
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Thanks for all the perspectives.

More so than usual, I was not very clear about the thrust of my concern.

I am *not* concerned with how to use up the leftover funds. I have a good plan for that.

I am *not* concerned with fairness about how to balance college fund usage among the three. I have a good plan for that. My plan also happens to account for inflation as it turns out, because there is a 5 year age gap between DS28 and DS23 (also have DD21.99).

What I'm mostly wondering about is how to deal with the aspect that one of my kids is on a hiatus / sabbatical from college that could last a year or a lifetime.



No loans. College was covered by a variety of things - 529s, scholarships, financial aid, IB/AP credits. The kids were not expected to contribute to anything necessary (tuition/room/books/board/fees/transportation), but the were on their own for things like dates, cell phones, and entertainment.
It sounds as if you have plenty of funds so money is not an issue. Whether the kiddo goes back to school or not - is out of your hands. He either will at some point, or he won't. Respect his decision. It is your decision whether you want to leave the funds in the account for a few years waiting for him, withdraw some or all of the funds, or change the beneficiary - and the timing of same. (Personally, under those circumstances, I wouldn't rush to make any decisions . . . )
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Old 12-11-2023, 12:35 AM   #18
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After reading your last post I would hold the funds for a possible return...


I was one who dropped out of college as I did not study and was not that interested in it... had a great GPA the first year but declined quickly...


It took me 1 1/2 to 2 years to figure out what I wanted to do... did go back and graduate with honors...


BUT, if it were me I would give the kid a time frame of when help will stop... IOW, say 5 years and if he does not go back do your plan for distribution... if he has not gone back in 5 years he will never go back...
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Old 12-16-2023, 05:24 PM   #19
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Thanks all for the perspectives and thoughts.

I think I was just getting ahead of myself - what if entrepreneur doesn't go back soon, and what if the other two resent me for my decisions about how I deal with that eventuality vis-a-vis distributions of the excess.

The entrepreneur may or may not go back, but I can play it by ear, year by year, rather than worry about it now.

If he goes back soon, my plan will work. If he doesn't go back soon, then I can revisit and revise the plan as I've already had to do several times already for other unexpected scenarios.

The other two likely won't resent me my decisions in any scenario; that's an unfounded fear and simply isn't who they are.

Just wanted to post a follow up to let everyone know I read what they wrote and that it all helped me think through it.
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Old 12-16-2023, 06:42 PM   #20
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Wow... I hope that my kids will not resent me for NOT giving them money...


It is not theirs and IMO should not be expecting it... even if you told them you would...
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