Thoughts on 529 plans - Tax breaks

[moneymaker]

Hi everyone:

I'm 31 married with 2 girls (4 and 1) and I have about $7k in wellesley right now for them. I state of residence is in Virginia and I think I've finally decided to put that money in a 529 plan to take advantage of the tax benefits.

The Virginia 529 plan offers both state and federal tax breaks where as the Vanguard 529 plan would only offer a federal tax break for me.

The big question for me is I'm active duty military (O3 soon to be O4) and will be moving in the next 2-3 years from Virginia, so is it worth it to me to have the money in a VA 529 when I don't plan to keep Virginia as my state of Residence - therefore, not be able to take advantage of the state income tax break. Would I be better off opening up a Vanguard 529 since I still get the federal tax benefit and the money is already with Vanguard?

Thanks so much!

 

[RE2Boys]

I would strongly suggest that you study the options and fees of various state 529 plans. Visit savingforcollege.com

You could invest in the VA 529 plan and upon moving, transfer the 529 plan to another state that may have more flexibility & lower fees. You are allowed ONE change per 529 plan each calendar year.

Technically, if the Wellesley funds are registered in a UGMA account, it is the kids money and if transferrred to a 529 plan you would have some limitations on control of the plan. If accounts not UGMA, then it would be your money.

 

[Al in Ohio]

I would if its similar to here in Ohio. In Oh the biggest tax break is realized in the tax year you make the deposit. A 539 plan deposit made in Ohio reduces your gross income by the deposit amount up to $2,000 per child. You only get that in the year its done, a one time incentive. Then earnings are exempt from state and federal tax each year thereafter.

 

[gindie]

I would if its similar to here in Ohio. In Oh the biggest tax break is realized in the tax year you make the deposit. A 539 plan deposit made in Ohio reduces your gross income by the deposit amount up to $2,000 per child. You only get that in the year its done, a one time incentive. Then earnings are exempt from state and federal tax each year thereafter.

Actually, not quite correct, Al. Below is a quote from the CollegeAdvantage.com website (emphasis mine):

"CollegeAdvantage is the only 529 college savings program that allows Ohio taxpayers to deduct their contributions from Ohio taxable income. Each contributor (or married couple) can deduct up to $2,000 per beneficiary, per calendar year, with unlimited carry forward in future years.

For example, if you contributed $2,000 to accounts for each of your three children, you could deduct $6,000 from your taxable income for Ohio income taxes. Or, if you contributed $6,000 for one child in one year, you could deduct $2,000 from your Ohio taxable income in each of the next three years."

 

[kaneohe]

You could invest in the VA 529 plan and upon moving, transfer the 529 plan to another state that may have more flexibility & lower fees. You are allowed ONE change per 529 plan each calendar year.

If you leave the VA plan later, what happens to the previous VA tax breaks that you have received. Don't know details, but in some states, I believe I've read that you have to repay them.

 

[LOL!]

As someone who has 529 plans, a kid in college, and a kid going to college soon, I must say that 529 plans should not be contributed to until AFTER one has contributed the maximum possible to their retirement plans: 401(k), 403(b), 457, IRAs, Roths, etc.

That means that one should only contribute to a 529 if they have money left over after contributing $17,500 to their 401(k), $5,500 to their Roth IRA, $17,500 to the spouse's 401(k), $5,500 to the spouse's Roth IRA, and anything else they can think of.

Money is retirement accounts is good for retirement and is shielded from financial aid formulas presently. If one is used to putting $46,000 a year into retirement accounts for 18-20 years, then when it comes time to pay for college, one can simply stop contributing and use that cash flow for college if needed.

In effect, 529 plans are for the wealthy who can afford to max out retirement plan contributions and still have money leftover to contribute to 529 plans. For less well-off folks, 529 plans are more of an emotional scam. For states which sponsor these plans, it is a way to increase college costs and reduce their own funding for state-supported educational institutions.

529 plans are also great for grandparents who are already retired and can afford to pay for their grandchildren's college educations.

(OK, I will admit some states give state income tax breaks to make it seem worthwhile. You should move out of those states that have a state income tax (vote with your pocketbook).)

 

[ProGolferWannabe]

We lived in a State that offered a State Sponsored 529 plan---contributions made could be deducted from income for the purpose of calculating state income tax. What was interesting, was that contributions only had to be held by the 529 custodian for one-day in order to qualify for the tax deduction. In our case that meant immediately before paying for our kids tuition, we would take the dollars that we set aside for tuition, write a check to the 529, and immediately withdraw those to pay for tuition. We got the benefit of the state tax deduction by doing this. We left the state last year (kids are still in college) and were not required to repay the allowed deduction.

 

[Al in Ohio]

Actually, not quite correct, Al. Below is a quote from the CollegeAdvantage.com website (emphasis mine):

"CollegeAdvantage is the only 529 college savings program that allows Ohio taxpayers to deduct their contributions from Ohio taxable income. Each contributor (or married couple) can deduct up to $2,000 per beneficiary, per calendar year, with unlimited carry forward in future years.

For example, if you contributed $2,000 to accounts for each of your three children, you could deduct $6,000 from your taxable income for Ohio income taxes. Or, if you contributed $6,000 for one child in one year, you could deduct $2,000 from your Ohio taxable income in each of the next three years."

I stand corrected. I do remember that twist now and actually made use of it to spread it out one year.

Even better benefit than I originally stated.

 

[RE2Boys]

As someone who has 529 plans, a kid in college, and a kid going to college soon, I must say that 529 plans should not be contributed to until AFTER one has contributed the maximum possible to their retirement plans: 401(k), 403(b), 457, IRAs, Roths, etc.

That means that one should only contribute to a 529 if they have money left over after contributing $17,500 to their 401(k), $5,500 to their Roth IRA, $17,500 to the spouse's 401(k), $5,500 to the spouse's Roth IRA, and anything else they can think of.

Money is retirement accounts is good for retirement and is shielded from financial aid formulas presently. If one is used to putting $46,000 a year into retirement accounts for 18-20 years, then when it comes time to pay for college, one can simply stop contributing and use that cash flow for college if needed.

)

Great point LOL! In addition, as long as the Roth has been open for five years, one can withdraw the principle contributed without penalty as another source of funds that can be used to cover college expenses if necessary. Fund retirement accounts first!

 

[gindie]

What was interesting, was that contributions only had to be held by the 529 custodian for one-day in order to qualify for the tax deduction. In our case that meant immediately before paying for our kids tuition, we would take the dollars that we set aside for tuition, write a check to the 529, and immediately withdraw those to pay for tuition. We got the benefit of the state tax deduction by doing this.

I just read a Morningstar article this week about this. I don't know if a subscription is needed, but it is at A Quick 529 Tax Tip That Could Save You Big Money

The gist is that most states do not have a minimum on the amount of time the contribution must sit in the 529 before taking the tax deduction.

 

[kaneohe]

We lived in a State that offered a State Sponsored 529 plan---contributions made could be deducted from income for the purpose of calculating state income tax. ............................. We left the state last year (kids are still in college) and were not required to repay the allowed deduction.

Did you stay in that state's 529 plan? I think the reapture talk I've seen is if you switch to another state's plan.