Help me to understand this...

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If you use a 529, but only choose to pay for good grades, what will happen if your child is a C student or drop out?

JimOhio,

I am sure you are not familiar with an expression all doctors use while in school:

"D is for doctor."

[disneysteve]

JimOhio,

I am sure you are not familiar with an expression all doctors use while in school:

"D is for doctor."

Or...

Q: What do you call the guy who graduates last in his med school class?

A: Doctor

[noppenbd]

I'm under the impression that a 529 not used for education, becomes an Traditional IRA. I'm not sure of this.

I'm pretty sure that is not true. 529 monies have to be used for qualified higher education expenses, or else they are subject to a 10% penalty on gains. The beneficiary can be changed pretty freely (owner, child, grandchild, niece, etc) so there is flexibility there.

[disneysteve]

I'm pretty sure that is not true. 529 monies have to be used for qualified higher education expenses, or else they are subject to a 10% penalty on gains. The beneficiary can be changed pretty freely (owner, child, grandchild, niece, etc) so there is flexibility there.

True. I'm trying not to put too much in the 529 for just that reason. We don't have anyone to transfer it too if there ended up being more in there than our daughter needed.

[maat55]

I'm pretty sure that is not true. 529 monies have to be used for qualified higher education expenses, or else they are subject to a 10% penalty on gains. The beneficiary can be changed pretty freely (owner, child, grandchild, niece, etc) so there is flexibility there.

I didn't know for sure, but I thought that they may have an out just like HSA's.

What if the child you are saving for dies? God forbid. HSA's allow you to take the money out at 59.5 just like with an traditional IRA. I never read up on the 529, I'm going to do that today.

[maat55]

OK, I found that 529's that are not used for qualified education have a 10% penalty.

HSA's, that are not used for qualified medical expenses can only be used if you are disabled or over 65.

[Snave]

We are putting a significant amount aside in a 529. I guess I am playing the odds that our children will go to college and once in, not flunk out. I feel the advantages to the 529 outweigh the probability that my children will flunk out or not even attend. The way I see it, if I put it in a 529 and they flunk out or drop out then I lose money having had it in a 529. If I invest it in taxable accounts and they finish with a degree, then I lose out on the tax benefits of the 529. I will play the odds that they will finish with a degree, therefore putting my money in the 529. Also, with more than 1 child, it can be transferred. So I guess I need to have more kids to better my odds.

[jIM_Ohio]

My whole take on education expenses is that education is best paid for with cash flow than investments.

18 years from now my kids will probably be off to college. The plan is to have the mortgage paid off and use a portion of the old mortgage payment to fund the education.

No need for tax breaks.
I could probably charge the tuition on a cc and get a rebate which is not taxable and the "value" of the rebate is probably better than the 529 tax break as well.

[disneysteve]

My whole take on education expenses is that education is best paid for with cash flow than investments.

18 years from now my kids will probably be off to college. The plan is to have the mortgage paid off and use a portion of the old mortgage payment to fund the education.

That isn't a bad plan at all if things work out that way. Personally, the timeline and numbers don't work for us. Our daughter will start college in 6 years. We are probably 15 years from paying off the mortgage. Plus, even if the mortgage was paid off, our current payment wouldn't be nearly enough to cover college costs 6-10 years from now (or now for that matter).

[Like2Plan]

OK, I found that 529's that are not used for qualified education have a 10% penalty. .

maat55,
Just a clarification, it is a 10% penalty on the gains (and the gains are also taxable) if not used for qualified education.