College funds and offspring who have "stopped out"

[Flyfish1]

We had one child get a free ride to her Masters and the other 2 years out from graduation decided she wants an MBA. There is enough there for her to do that. My wife controls the 529's and when I asked her about how to split the extra, she had no hesitation it goes evenly to the two kids, despite the fact that the account balances are unequal at the moment. Technically it will go to their children if they have any and I suspect they will. If they never have kids they can get the money at some point.

I guess my point is - don't rush to a decision yet things can change or just give it to the next generation.

 

[marinauser]

Assuming the business minded child had continued to go to college, when would you have made any decisions about distributing left over funds. I suspect not until that last child finished school. So why not wait until that date to make a decision. If the child has not returned to school, then time is up and I would distribute the remaining funds such that each child received an equal amount in total with each being responsible for the taxes. I would let each child decide if they would like to leave the funds in the plan to rollover for any child they may have.

 

[cathy63]

...Finally, as and when grandkids show up, you could make them the beneficiaries...

If the amount in the plan exceeds the annual gift tax exclusion amount, you would be subject to generation-skipping transfer tax when changing the beneficiary from a child to a grandchild. Like the gift tax, you just file the return and then the amount is subtracted from your lifetime exclusion when you die, so there's almost certainly no actual tax due. You just have to be aware of it and file the paperwork with the IRS.

 

[copyright1997reloaded]

We came up with basic rule set ..an experiment in progress.

We first estimated the "cost" of state college 4 yr program -this number is different for each kid unless they start in the same year. This way we have a rough idea of expected spend.

1) We cover the costs of college.

2) If you fail a class-you pay for the class.

3) Anything kid contributes toward the cost of college be it scholarships, pitching in $ from part time jobs etc..will come back to them upon graduation.

4) Kid reports any expenses along the way ...books, incidentals, etc. They send a pic of the receipt and we fund their bank account.

5) We have a meeting with them each year to review their "spend" against the estimated costs and discuss how to do better.

-arguably with a really motivated kid-#3 could be substantial but its money we have already set aside and can grow instead of being spent immediately-

Our first is wobbling along in college..not clear if he will get thru but if he doesn't that's fine. If this happens, the leftover money we had will not go to him. That can stay in our retirement If he decides to go back to school for another try- it will come from the leftover funds.

Of course-we have the overhead of having to keep track of all this...but lets be honest- we all love the spreadsheets right ?


Due to the variable nature of what each kid is gonna cost, it think easiest is just to split equally. The appearance of favoring one over the other (real or imagined) can lead to annoying arguments.

Take this for what it's worth (JSGOTI). I am a tenured faculty (college) in a STEM subject (Computer Science) and come from industry where I had multiple patents. I can tell you that there are students going there who are going there simply because mom and dad want them to go. In most (but not all) cases it is a waste of money and doesn't contribute to their success.

After seeing this play out in front of me over and over, and seeing him pushed to go by his mom (my ex) as "the only way to get ahead" only to see him struggle and be miserable, I changed my approach and have decided that my kid can determine what the right track is for them. College - OK. Trade - OK. Want to use that 529 money for your Roth - OK. Whatever makes you happy, just be aware of the ramifications of your decision.

Now my financial help is to get his Roth and 401K Roth funded as much as possible by reimbursing (subject to annual gift tax limits) salary which goes to the Roth(s).

 

[SecondCor521]

Assuming the business minded child had continued to go to college, when would you have made any decisions about distributing left over funds. I suspect not until that last child finished school. So why not wait until that date to make a decision. If the child has not returned to school, then time is up and I would distribute the remaining funds such that each child received an equal amount in total with each being responsible for the taxes. I would let each child decide if they would like to leave the funds in the plan to rollover for any child they may have.

In my situation, I would wait at least that long. (In fact, I arguably have.)

I guess I never spelled it out in concrete terms on this thread, but the entrepreneur is 23 now, and I'm wondering what to do if he elects to go back to school at age 29 or something. A few years, OK. Six more years? Hmm. A decade? That's a long time.

Anyway, as mentioned earlier, I've realized I can make the decision as it comes; I don't have to decide now.

 

[RetMD21]

......I changed my approach and have decided that my kid can determine what the right track is for them. College - OK. Trade - OK. Want to use that 529 money for your Roth - OK. Whatever makes you happy, just be aware of the ramifications of your decision.....

I think it is wise to face the reality that your children are individuals and you have to give up control eventually. I have seen bright motivated kids on the fast track a degrees they don't want who only really find their way after graduating.

 

[KarenF]

If all kids are finished except for the one taking a break I would assume all that child's 529 was spent for them and calculate based on that. I had one kid that took a break and went back and the other one got scholarships and had money left over. The one that had money left over had the choice of what.ro do with it and he asked.me to transfer it to his wife. She is a teacher and can use it for continuing ed.

 

[KarenF]

In my situation, I would wait at least that long. (In fact, I arguably have.)

I guess I never spelled it out in concrete terms on this thread, but the entrepreneur is 23 now, and I'm wondering what to do if he elects to go back to school at age 29 or something. A few years, OK. Six more years? Hmm. A decade? That's a long time.

Anyway, as mentioned earlier, I've realized I can make the decision as it comes; I don't have to decide now.

haha My kid that took a break and went back just finished law school and he is 35. We paid for his undergraduate (where the break happened), his company paid for his Masters and we loaned him money at a favorable rate for law school. Some take longer than others.

 

[JBTX]

Contributed some very early on to 529s and ESAs but child one has had mental health and other issues and child 2 has mental disability. So stopped contributing fairly early on. Still I have some in there. Child one has tried college but failed but eventually wants to give it another go. Child 2 now has an ABLE account so I could move some 529 to ABLE, assuming the law renews. Otherwise down the road moving some to Roth could be an option. I have no plans to liquidate it any time soon.

 

[indiajust]

I am looking for the link, Michael Kitces had a summary of tax law changes this year for retirement plans.

A prominent one was making 529 rollovers to Roths part of the mix.

Might provide a different alternative than those already discussed.

For instance, having a good start on a Roth makes starting a small biz easier, since you don't have any pressure to make enough to contribute to retirement (that bucket is full).

I will see if I can find his summary page and get the reference.

 

[indiajust]

... found the link, relevant quote below...
https://www.kitces.com/blog/weekend-reading-for-financial-planners-december-23-24-2023/

Additionally, several key provisions of 2022's SECURE 2.0 Act are set to phase in for 2024, including:

Roth accounts in 401(k) plans will no longer be subject to RMDs (aligning the rules for Roth 401(k) plans with those for Roth IRAs)
The maximum eligible amount for a Qualified Charitable Distribution will now be linked to inflation each year, and will rise from $100,000 to $105,000
Assets in a 529 plan that will not be used for qualified education expenses will be eligible to be rolled over into a Roth IRA (up to the $7,000 IRA contribution limit, with a maximum lifetime rollover of $35,000)
Employers will be allowed to make matching retirement plan contributions for employees who are paying off student loans, regardless of whether the employee contributes to the plan themselves

 

[RetMD21]

.....
A prominent one was making 529 rollovers to Roths part of the mix.

Might provide a different alternative than those already discussed.

For instance, having a good start on a Roth makes starting a small biz easier, since you don't have any pressure to make enough to contribute to retirement (that bucket is full).

You can fill a bucket as long as it is 35k or less since that's the conversion limit

 

[SecondCor521]

... found the link, relevant quote below...
https://www.kitces.com/blog/weekend-reading-for-financial-planners-december-23-24-2023/

Additionally, several key provisions of 2022's SECURE 2.0 Act are set to phase in for 2024, including:

Assets in a 529 plan that will not be used for qualified education expenses will be eligible to be rolled over into a Roth IRA (up to the $7,000 IRA contribution limit, with a maximum lifetime rollover of $35,000)

[Edited for brevity.]

Yes, I'm very familiar with that law. Requoting myself, part of my "good plan" for "leftover funds" now includes the above 529->Roth rollover provision:

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.

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.

 

[livingalmostlarge]

Thank you for starting this thread. Gives me something to consider. I figured that if we have excess in hoping for grandkids and Roth IRA. I just dumped an extra $30k each kid couple days ago. That's to fund their Roth is my hope.