Should I run this through a 529?

[tsdogs]

DD is starting college this fall and it looks like her college fund will be about 25-30K short. We can afford to just cover the extra expenses each semester, but I'm wondering if we shouldn't open another 529 for her to take advantage of any tax benefits? We live in Minnesota and would use the money in the next 1-3 years.

Expenses for her current account, ran by her grandparents out-of-state, look high. First though was just to use I-bonds, but now I'm wondering about 529s.

 

[HenryD]

I'm in MN too. For most of the accumulation phase, MN didn't offer a tax benefit. We used a combo of NY and UT, two highly-rated plans. We had the grandparents own and gifted them the NY contributions for their state tax break, which they gifted back into the plan.

Be aware that the tax treatment differs between parent and non-parent-owned plans when it comes to distribution. IIRC non-parent-owned distributions count as taxable income to the beneficiary, whereas parent-owned do not. For us it made sense to transfer ownership to my now ex in year 2. That way they got a couple years break on the FAFSA by not showing the 529 as a parent-owned asset, but the distributions are all from parent (ex) owned.

 

[sengsational]

I always thought the heavy lifting that a 529 could do was how gains came out without being taxed. So just flowing through a 529 without time to grow seems less beneficial.

 

[Philliefan33]

Does MN offer a pre-paid tuition plan? We had that option in PA when DD was in college. We would use credits from the fund to pay for the current year tuition and make a contribution to be used later. It basically was paying for next year’s tuition at this year’s rate, and it saved us some money since tuition increased each year.

 

[Dash man]

I always thought the heavy lifting that a 529 could do was how gains came out without being taxed. So just flowing through a 529 without time to grow seems less beneficial.

In PA, we can deduct 529 contributions from our state taxes. Distributions are also tax free. It doesn’t matter what state the 529 plan is from. We have five of them for our grandkids and a niece and nephew who lost their dad.

 

[The Cosmic Avenger]

In PA, we can deduct 529 contributions from our state taxes. Distributions are also tax free. It doesn’t matter what state the 529 plan is from. We have five of the for our grandkids and a niece and nephew who lost their dad.

And in Maryland we can carry forward up to 10 years of state 529 deductions, so we're going to run the last (we hope!) tuition payment through the 529 so it shows that 10x contribution, which will be paid out that same semester. We may not stay in MD that long, but hey, we might, so might as well put in the tiny bit of extra effort! So I'd check your state tax laws for something similar, just in case.

 

[Montecfo]

In Virginia there is a state tax deduction for 529 so we ran our final college expense money through the 529 even though there was little time for gains.

If no deduction then it only makes sense of you have meaningful gains for which to avoid taxation.

 

[levindb]

Make sure you understand the fees associated with the 529 plan. Some plans charge a fee on each deposit, and it make take a while before you break even.

Gifting stock in kind may allow the child to sell the stock when needed at a much lower (0%?) capital gains rate than you would have to deal with if you gave them cash.

 

[Phroig]

The state tax benefit seems to be a $3k deduction for joint filers. Expenses seem reasonable (0.15% for the basic equity option), and there are no other fees. You could do $3k for each of the next three years to pay for the Year 3 expenses. There should also be some gains over that period.

 

[tsdogs]

Thanks for all the advice! The grandparents transferred ownership to us this year. Looking closer, I think we will run 3-5K each year through the plan. Any gains will be tax-free and 3K is deductible.