Move 529 money into brokerage account.

[Slicer]

I have a 529 (Utah Savings Plan) for my 10yr old son. Over the years my wife and I put in $20k. It grew to $31k .. dropped to $18k .. and is back at $20k. We're pretty much even right now.

I was considering closing the 529 (no taxes or fees since I'm currently at my basis) and putting the money into a brokerage account in my name. This account would be invested in the market for the next 8 (probably more) years. The primary purpose is for my son's education.

I realize the point of the 529 is to be able to pay for education expenses with tax-free money. The part I have a problem with is if: a) he doesn't go to college or b) has paid tuition from another source (scholarship, whatever). If the money isn't used, I'll end up paying taxes + 10% on the gains (totaling 35% right now). Also, he has no siblings so transferring the money to another child won't happen.

On the other hand, investing in a brokerage account I get a multitude of investment options (unlike the 529), I can use the money for anything we want and will be charged 15% on the long-term gains (under current tax laws).

The 529 is definitely the way to go IF he goes to college and uses all the money.

The brokerage is the way to go IF (for whatever reason) he doesn't need the money for college.

I love not paying taxes on the gains (when paying for education) but the flexibility of the brokerage account is REALLY attractive.

What are your thoughts? Am I overlooking something either way?

[disneysteve]

If you close out the 529, you're going to be hit with a penalty for non-qualified withdrawal. I think that is 10% but I'm not sure. Earnings would be taxed but if you are even, that isn't an issue. Going forward, the earnings would be taxed which reduces your upside.

If you leave the money in the 529 and your kid gets a scholarship, I believe there is a provision for that in the 529 so that you can get back that money.

A nice compromise might be to leave the money in the 529 but stop adding to it. Instead, put future contributions into the brokerage account. You don't want to sell the 529 assets now when they are near their lows. The market is already at a 9-month high and has seen nice gains so far this year. Hopefully, that will continue.

[snafu]

Kudos to you for taking action to facilitate your son's future education. What is your son's attitude, progress in school? Do you believe he has learning issues?

[Slicer]

<< If you leave the money in the 529 and your kid gets a scholarship, I believe there is a provision for that in the 529 so that you can get back that money. >>

I'll have to investigate that. That would make the 529 a little more tolerable.

<< A nice compromise might be to leave the money in the 529 but stop adding to it. Instead, put future contributions into the brokerage account >>

We stopped adding to the 529 about a year or so ago when it was above $30k. We were assuming another 10 years of growth would put it at $60k+ and thought that would be a good amount for the 529.

<< You don't want to sell the 529 assets now when they are near their lows. The market is already at a 9-month high and has seen nice gains so far this year. Hopefully, that will continue. >>

Moving it from the 529 to a brokerage will keep the money in the market. So it will continue to grow with the market.

<< Kudos to you for taking action to facilitate your son's future education. What is your son's attitude, progress in school? Do you believe he has learning issues? >>

No, he doesn't have learning issues. He does pretty well in school. Hopefully he will continue through doing well through middle and high school.

[disneysteve]

We stopped adding to the 529 about a year or so ago when it was above $30k. We were assuming another 10 years of growth would put it at $60k+ and thought that would be a good amount for the 529.

I guess I'm not sure what you expect to accomplish in a taxable account vs. within the 529. Your taxable investments will need to significantly outperform the 529 holdings to compensate for being taxable and to cover any investment costs like commissions. You do have far more options in a brokerage account, but a good index fund in the 529 (Utah's plan is run by Vanguard, isn't it?) should do just fine over the next 10 years.

If you are concerned that you won't need that money, that's different. But check into the penalty for early withdrawal.

[Taxplanr]

I have always felt that a 529 plan was really only good for grandparents wanting to help out with a grandchild's education.

[disneysteve]

I have always felt that a 529 plan was really only good for grandparents wanting to help out with a grandchild's education.

Why would it be good for grandparents but not for parents?