How to wisely use 529 for pre-college tuition?

[tink]

With the new tax law pertaining to 529 plans, and a child attending private elementary school, I’m wondering if there is a better way for me to manage my son’s private tuition payments and 529 plan.

My first grade son attends a private school with an annual tuition of $23,000. Presently, we save $2,000 per month in a designated savings account for his tuition and pay it when it is due in one lump sum. There are also payment options at his school and we could pay monthly or quarterly without any additional penalties or fees. Additionally, we save $500/month into his 529 account for college savings.

What is the best way to utilize the 529 plan for funds we will spend for pre-college tuition? It is our expectation that our child will continue at this school through high school. Do we need to have a large lump sum at this point to invest in the 529 in order for it to benefit us? Thank you!

[Gailete]

I would think that i something to figure out once the legal eagles get it figured out and publish articles on it in the various magazines like Money, Forbes, As well as trustworthy financial websites. This is still so new that there aren't going to be too many 'experts' out there yet.

[LivingAlmostLarge]

depends you can use it to avoid state income taxes if you live in a state that has that tax break. And you could put whatever you can in there to grow and keep pulling to pay for private school. Truthfully the break is really for rich people who when pregnant can probably put in $250k into a 529 and then start pulling at age 5. But really other than them who really has enough to put in to avoid paying taxes, and can even get the tax benefit?

[sblatner]

Since it grows tax free (I think as I never used one for our kids as 529s were too new), I would think the main benefit would be to make a large deposit and then use from that. If you are using it up about as fast as you are depositing it, there may not be much advantage. Also, if you are using it up soon, you need to make sure some of it is invested conservatively since you will be using it sooner rather than later.

[msomnipotent]

I'm assuming it is going to be just like using a Coverdell for private school fees, or using a 529 for college expenses. I haven't used ours yet, but I was told that you get the bill, you request the amount taken out of the 529, pay the bill, and keep the receipts for tax time. From what I have read, there is a $10,000 withdrawal limit per year for lower education, which I'm pretty sure is per child. I'm not sure if you can use both a Coverdell and 529 as I haven't read any concrete rules yet, but I don't see why not. I was told that you can contribute to both and use both for college, but not for the same expenses (so no double dipping). The only problem is that Coverdell contributions are limited to $2,000 per year, and have income limits. They might even just do away with Coverdells since the 529 now basically does the same thing but is better at it.

You will probably wind up doing what my sister is planning on doing, which is contribute as much monthly as you can, then pay the tuition in a lump sum when due. It will probably take a year before she will have enough to pay tuition for her kids and still have some left over for college savings, but at least that is something.

[msomnipotent]

depends you can use it to avoid state income taxes if you live in a state that has that tax break. And you could put whatever you can in there to grow and keep pulling to pay for private school. Truthfully the break is really for rich people who when pregnant can probably put in $250k into a 529 and then start pulling at age 5. But really other than them who really has enough to put in to avoid paying taxes, and can even get the tax benefit?

I would say this is intended more for people like my sister and her husband. They are a school teacher and cop, so no where near being rich. They also have to pay over $10,000 a year for private tuition for their kids because their public school system is total crap and run by a lottery. They have an excellent chance of being sent to the hood instead of the school 2 blocks away because enrollment is already filled there. Our state gives a tax break for contributions, which will hopefully give them extra spending money (which undoubtedly be spent on uniforms, sports, etc.). I'm even thinking of using it for my daughter's tuition if I can as it is getting out of hand for a public school, and I'm no where near rich either.

[MooseBucks]

1. Is it correct that it’s only 10k/yr for k-12 from a 529?
2. In PA there is a cap on contributions per year to prevent someone from putting in 250k in 1 yr.

[msomnipotent]

1. Is it correct that it’s only 10k/yr for k-12 from a 529?
2. In PA there is a cap on contributions per year to prevent someone from putting in 250k in 1 yr.

For now, it is. I read it in a few places and heard it on CNBC. Here is a Forbes link

https://www.forbes.com/sites/katiepf/2017/12/15/what-tax-reform-really-means-for-529-plans/#24e3f8b0729a

It is a withdrawal limit of $10,000, but you can put more in, of course. Our states limits 529 contributions as well, but it is some outrageous number that I would never hope to accomplish. No matter how much we contribute, the tax deduction is limited to up to $20,000 married filing jointly for our state, so that is something else to watch for.

[tink]

depends you can use it to avoid state income taxes if you live in a state that has that tax break. And you could put whatever you can in there to grow and keep pulling to pay for private school. Truthfully the break is really for rich people who when pregnant can probably put in $250k into a 529 and then start pulling at age 5. But really other than them who really has enough to put in to avoid paying taxes, and can even get the tax benefit?

Our state has a tax break for the first $5,000.

Yes, there is a limit of $10,000 that can be spent on private school expenses annually.

[LivingAlmostLarge]

I would say this is intended more for people like my sister and her husband. They are a school teacher and cop, so no where near being rich. They also have to pay over $10,000 a year for private tuition for their kids because their public school system is total crap and run by a lottery. They have an excellent chance of being sent to the hood instead of the school 2 blocks away because enrollment is already filled there. Our state gives a tax break for contributions, which will hopefully give them extra spending money (which undoubtedly be spent on uniforms, sports, etc.). I'm even thinking of using it for my daughter's tuition if I can as it is getting out of hand for a public school, and I'm no where near rich either.

Not really. To get the full benefit and not just state tax deduction you would put in upon birth say $250k. Then you could never pay taxes on it and use it it to pay for private school years k-12 then college and not worry.

So tell me who has $250k or even $10k lying around upon birth or in utero? Not many people. It favors the rich. Tax break with state income taxes and tax free growth!

Cuts both ways. Wish I had that kind of money. That being said I might be able to dream of being able to provide for my grandchildren like that....

[msomnipotent]

Not really. To get the full benefit and not just state tax deduction you would put in upon birth say $250k. Then you could never pay taxes on it and use it it to pay for private school years k-12 then college and not worry.

So tell me who has $250k or even $10k lying around upon birth or in utero? Not many people. It favors the rich. Tax break with state income taxes and tax free growth!

Cuts both ways. Wish I had that kind of money. That being said I might be able to dream of being able to provide for my grandchildren like that....

Any tax break that doesn't specifically exclude "the rich" is going to help wealthier taxpayers more, simply because they pay more taxes. It really doesn't matter to my sister if she is getting the full benefit or if someone with more money than her is getting a larger deduction. She is getting a break on her taxes and it is helping her pay for much needed private tuition. If the cesspool that is Chicago would get their act together, she wouldn't even need to send her kids to private school.

[msomnipotent]

Our state has a tax break for the first $5,000.

Yes, there is a limit of $10,000 that can be spent on private school expenses annually.

It varies by state. My state allows up to $20,000 for married filing jointly, but the deduction phases out depending on your AGI. I don't remember the exact numbers, but I remembered thinking, "By the time you are able to afford $20,000 to put into it, your income excludes you from any tax benefit!".

I was thinking that maybe someone could theoretically deposit $10,000 into their 529, add $2,000 to a Coverdell to use for supplies and uniforms, and maybe gift $10,000 to a grandparent to deposit into another 529 to get the $20,000, but I can't find concrete proof that this is acceptable.

[LivingAlmostLarge]

msomni how much is your sister saving? $20k/year at 5%? So $1000. But they aren't necessarily growing it more and deferring the taxes on the gains if that. Right? If they are just using it to dump to avoid income taxes that only works in states that have that tax break.

No state I've lived in has that state tax break for the 529. So it's a moot point for many. 17 states have no break currently and I am guessing potentially more soon.

Now without a state tax break the only break you get from a 529 is not paying taxes on the gains.

How much gains are there really in cash on a year of money $20k being dumped in? 0.5%? $100 gains because if you need it asap you aren't investing it like a 529 was meant to. You are likely leaving it in cash. So you made $100/year and you are about to pay $35 in taxes.

See the minimal benefit for the average person? But you have grandparents who give each $75k upon birth to kiddo. Starting out with $150k. Then in 5 years assuming a conservative 4% return? $182k so $32k in 5 years and you start pulling lets assume $10k tax free. It's likely enough to fund private school and college.

It's not the same benefit for people contributing to pull out money in a turn around. But if you have time to compound and invest? Yes.

And the state tax deduction i think is limited to $5k for many states. So at most $250 in state income taxes on $5k @ 5%. So I guess it's a benefit for the "middle" class.

But maybe I'm just not seeing how it's not disproportionately helping those much wealthier. Not High Earnings Not Yet Rich (HENRY) people, but people who have inherited wealth or rich parents to gift?

FWIW I'll take advantage of this myself I hope but I just don't see it as a middle class break.

[msomnipotent]

In my state, the limit is up to $20,000 and the tax break for 529 contributions starts to phase out at around $100,000 for MFJ if I recall, and completely stops at $160,000. While $160,000 is a lot of money, Chicago and surrounding suburbs are HCOL areas. That is middle/upper middle class living for a family of four. So anyone above $160,000 gets nothing but the benefit of tax free withdrawals when they pay education expenses. That isn't a new tax benefit. People have been putting money in IRA's to pay for college tax free before there were 529's and they would still be doing it if 529's didn't exist. The only difference is that you can choose to use an IRA for retirement or college expenses.

My sister wasn't saving anything at all before the new rules. She was on a payment plan with interest. So now she will be getting a state tax deduction, not pay interest, and get the benefit of a bull market for however long it lasts. I'm not sure of the yearly performance because our state recently changed administrators and they haven't carried over the old information yet, but I recall it was about 12% in gains when I checked. Several people have asked me about opening 529's recently, and none were rich. Not even upper middle class. States deciding to disallow tax breaks for contributions would be a punch in the gut for the middle class. The wealthy would just shrug and keep doing what they do.

I'm just not understanding how someone who is middle class can get a tax break for deductions, stop paying interest, and get tax free earnings while someone over $160,000 gets nothing that they were not getting already can be considered a tax break for the wealthy.

[LivingAlmostLarge]

So how if she was on payment plan paying interest did she get the money to lump sum into a 529 and then pull it out? If you didn't have $10k to begin with where did it come from to put money in to pull out?

I broke down the numbers above. I guess but how much do you really make because most don't advocate investing in the stock market if you are pulling the money in the year.

I mean what you are writing doesn't make sense.

I would have to have $10k to put in before I need it say August 2018. But where did the money come from if I was only making payments for private school before?

Then in 8 months it's going to grow a lot? What about the payments for 2017-2018 I was making? Did I not make them?

If I had the $10k lump sum why was I paying interest? What your saying doesn't make sense unless something isn't panning out. Either you had the money and saved all year to pay in August 2018. And were a year ahead. Or you were making payment plan throughout 2017-2018 if so how are you avoiding interest by having a 529?

And why are you investing in a 529 into the stock market if you are pulling it out in less than 12 months?