Excess 529 Funds

[srblanco7]

Our daughter earned her BS in December and stayed in school this semester to take additional MBA classes. She'll leave school at the end of this semester needing 4 classes to complete her MBA, will start working and complete the final classes with employer tuition reimbursement.

Our "deal" with our kids is that we pay in full for state university tuition/room & board. As DD went to a private school which was a bit more expensive than a state school, she'll graduate with approximately $17500 in federal student loans. Her 529 still has approximately $15k in funds. I believe our options are -

1. Roll the funds to her brother's 529 (though I think we have him covered).
2. Leave the funds and let them grow - perhaps for a grandchild
3. One time disbursement of up to $10k for student loan payment
4. Allow her to roll the funds to a Roth IRA

My initial thinking is perhaps a $5k - $7.5k graduation gift to kick start the loan repayment (noting that I want her to have some "skin in the game" related to loan repayment as it's an outcome from the decision she made). Then perhaps just let things sit for a couple years(?). What say you SA members?

[Jluke]

I would go with option 4 if no penalty and she is eligible to contribute to Roth

or 3

whats the plan if there is excess money in your sons 529?

hard to know but you probably want to be fair and equal in what happens with excess.

good place to be

[srblanco7]

I would go with option 4 if no penalty and she is eligible to contribute to Roth

or 3

whats the plan if there is excess money in your sons 529?

hard to know but you probably want to be fair and equal in what happens with excess.

good place to be

As I read it - you can roll up to a lifetime limit of $35k from a 529 to a Roth IRA (subject to annual Roth contribution limits) without penalty. As with all things with the kids - will make sure it's fair. If our son has excess, options 2 and 4 would potentially apply (he'll have no loans and he's our last one to get thru college).

[disneysteve]

If you feel strongly about her repaying her student loans, which is fine, use the 529 money to pay them as much as you're allowed and then have her make payments to you. Then you can transfer any left over to your son. When he's in school, do your best to use the 529 money to avoid the same problem when he graduates.

[kork13]

I think your plan sounds fine. You have the excess, so I would pay off loans up to the $10k max, then use the rest to fund her Roth IRA. She'd still have $7.5k in loans to deal with, which will give her the "skin" you're after, but will be very manageable & set her up with a good start to retirement savings. At this point, she's an adult & just needs you to set a good example for her. In part, that includes priorities with money -- clearing debt & saving for the future. Ensure this is all a conversation with her, and I think you'll do her alot of good.

[kork13]

One additional thought ... Has your daughter received any scholarship money? I don't know all of the rules for it offhand, but in general terms, if she received any scholarships, you can withdraw an equal amount as unencumbered cash with no penalty. Just another potential option to consider.

[srblanco7]

One additional thought ... Has your daughter received any scholarship money? I don't know all of the rules for it offhand, but in general terms, if she received any scholarships, you can withdraw an equal amount as unencumbered cash with no penalty. Just another potential option to consider.

Thanks Kork and DisneySteve for the feedback. Kork - good reminder on the scholarships. Based on a quick look 529 scholarship withdrawals are taxable (no penalty, pay tax on the earnings). A decent option. A personal decision of course, but think I'd still lean toward the loan repayment & fund the Roth combo given that both are "tax free" events.

The mild conundrum would be how to even it out for our son. Perhaps funds to her for loan repayment and (rollover) funds to him for funding his Roth IRA.

[Like2Plan]

Did you contribute equally to each child's 529?

I'd say she has done a remarkable job of marshaling her resources If she went through a private college, earned her BS and most of her MBA and only owed $17500 at the end. Did she graduate with her BS a semester early? Then, she is going to have her employer cover the rest of the cost to finish her MBA. It seems like she gets it.

I like 3 and 4 the best. The nice thing about #4 is that she can kick start her Roth savings at a time when it might not seem easy to do. On the other hand, #3 would allow her to have her debt paid off sooner.

But, you are in a great place and you really can't go wrong with whichever decision you make.

[srblanco7]

Did you contribute equally to each child's 529?

I'd say she has done a remarkable job of marshaling her resources If she went through a private college, earned her BS and most of her MBA and only owed $17500 at the end. Did she graduate with her BS a semester early? Then, she is going to have her employer cover the rest of the cost to finish her MBA. It seems like she gets it.

I like 3 and 4 the best. The nice thing about #4 is that she can kick start her Roth savings at a time when it might not seem easy to do. On the other hand, #4 would allow her to have her debt paid off sooner.

But, you are in a great place and your really can't go wrong with whichever decision you make.

Generally speaking we did equivalent contributions to each child's 529. She did graduate a semester early (based on transferring credits for college classes taken in high school) - think her brother is on a similar path. She generally gets it - though I wonder at times if our kids realize how privileged they are.

Likely I was too conservative with her 529 withdrawals - meaning we paid some of her early tuition bills with a combination of cash flow and 529 funds. Lesson learned - will focus on maximizing use of our son's 529.

What I did not realize, until I looked this morning, was that her federal loans are accruing interest. For some reason I thought interest didn't start accruing until after graduation. That crystallized my thinking and I initiated a $10k withdrawal which we'll use to pay down the loan balance on her behalf.

Am thinking we'll move the remaining funds to our son's 529 account (recognizing that we have an IOU to him to keep things in balance).

[LivingAlmostLarge]

Roth rollover. Let her pay the loans unless you pay them as a graduation gift. I deliberately decided to up contributions to the 529 for the roth rollover.

[srblanco7]

Roth rollover. Let her pay the loans unless you pay them as a graduation gift. I deliberately decided to up contributions to the 529 for the roth rollover.

Thanks LAL. What do you see as the advantages of overfunding the 529 to facilitate Roth conversions vs direct Roth contributions?

[LivingAlmostLarge]

Thanks LAL. What do you see as the advantages of overfunding the 529 to facilitate Roth conversions vs direct Roth contributions?

I just felt more comfortable over contributing to the 529 because the growth is tax free so in theory you could save less and then move the $35k of earnings maybe? So it never is taxed depending on when you contributed.

Our kids are 14 and 11 so there is potentially 8 and 11 years of growth still. We could have a lot of growth.

[srblanco7]

I just felt more comfortable over contributing to the 529 because the growth is tax free so in theory you could save less and then move the $35k of earnings maybe? So it never is taxed depending on when you contributed.

Our kids are 14 and 11 so there is potentially 8 and 11 years of growth still. We could have a lot of growth.

I'd offer that both 529 and Roth contributions are made with post-tax funds (though some states offer a tax break for 529 contributions) and the growth is (in general) tax free. It might make sense to me to overfund a 529 if you want to stash money to later be moved to a Roth if your kids do not have the earned income during their younger years to justify a direct Roth contribution.

[LivingAlmostLarge]

I'm thinking that the earnings will be $35k and I am also thinking maybe they won't have much earned income, but it's really hard to so. I'd roll it to a roth at 18 if given the opportunity.