529 questions and saving account for LO.

LoveLee2014

I'm hoping some the mommies and daddies on here can help me out with a few questions about saving for LO. 

1st. The 529 college saving plan: what if they don't go to college, but pick the armed services, or get a free ride to a 4 year university? What happens to the money? Do they just get it? Do we have to pay a penalty if it isn't used on tuition? Can we the use it toward our retirement if they get a full ride, or tuition assistance? Or, most likely, if my parents volunteer to pay for LO college when the time comes? 

2nd. Savings account with parent access: this would be for them to educate them on how to save for a rainy day. Or, how to save up for a car at age 16 years old. For example: every dollar they save and keep in the bank by 16 year old, we match it to put toward a car. Would this be the way to go? 

3rd. What is the main difference from a trust fund and a long term savings account? The fact that they can't have open access until a specific age or year? Is the earned interest rate higher in a trust fund? 

Any other ideas I'm missing? I have all his money in a giant jar right now(I know not the best), but that's why I'm trying to figure it all out! I seem to just get confused when I'm looking up online. Thank you!!!!

hlb8179

We have set up a 529 for LO. If she doesn't go to college or doesn't need the money for college, you get the money back but it is taxed. The main benefit to the 529 is being able to save all that money for college and use it tax free. 

dmbfan46835

We are not doing a 529. It has to be claimed as income on a FASFA so if your child requests financial aid, they may not qualify until those funds are extinguished. We have chosen an investment life policy for the majority of our college savings.  It accrues cash value and doesn't have to be claimed and won't be taxed as the money has already been taxed when contributed. Our policy is for about $500k in our sons name. It will be paid in full so he will have a policy for life, no premium payments necessary and it is projected to accrue close to $100k by the time he goes off to college, or not if he chooses. He can use it for a downpayment on a house, his wedding, leave it it in there for retirement, he isn't limited by any rules. I'm in Indiana and while the 529 offers some tax advantage up to a certain dollar amount, if your child doesn't go to college, it pretty much rolls into an IRA unless you want crazy tax penalties.  

sweetpeasmom315

All our girls have 529 accounts but they are set up in my parents name so it will not count towards their fasfa. We did a lot of research on this and if the account is set up in a grandparents, aunts, uncles etc. name it oesn't count towards the child's fasfa so they would still be eligible for tuition help. Like pp said if they don't use it for college it is taxed and pretty heavily so you lose a good chunk of whatever you have saved. 

LoveLee2014

I thought for sure I would get a lot more comments on this. Thank you for the few of you who did share with me your thoughts! I didn't know about having to claim it on a FASFA... I might skip the 529 all together and just do savings. 

dmbfan46835

LoveLee2014 said:

I thought for sure I would get a lot more comments on this. Thank you for the few of you who did share with me your thoughts! I didn't know about having to claim it on a FASFA... I might skip the 529 all together and just do savings. 

I thought you would too!! I'd maybe find something other than savings. Until the fed raises rates, you won't get any return on your money. Maybe a mutual fund round be best. Check this out 

https://www.cnbc.com/id/100769936

Kelliek327

529s can always be transferred tax free to another child, or even a grandchild if the original beneficiary doesn't use it.  There is no expiration date on how soon the funds must be used.  It can also be used to pay for things like room and board, off campus housing, textbooks, Higher education such as a masters, or vocational schools.  I found this website helpful: 

https://www.savingforcollege.com/articles/20100122-5-ways-to-spend-leftover-529-plan-money

There is also a link to a video on the last page of the article about what is considered a "qualifying expense."  Hope this helps!

Kayciejoe56

My tax guy suggested staying away from the 529, just because of the restrictions.   While we all hope our kids will go to school,  it may not be in everyone's plan.  He also mentioned the point of trying to keep something in our name vs lo name due to the Fafsa issue. 

We have decided on a separate Roth Ira for lo (but in our names).  We will use this account for money we want to dedicate to lo's future.  However,  we are also going to set up a regular savings account at our local bank in a few years.   We want an account with easy access that we can teach lo about saving for something he wants and banking in general. 

LoveLee2014

@Kayciejoe56 Is your ROTH Ira for college or their retirement? I think I read this wrong but it says it gets taxed a lot on the way out, not on the way into the ROTH Ira. Do you know the terms as far as taking money out? Why is this crap so confusing?! 

LoveLee2014

Also, Internet searching for this stuff isn't very clear. Lol. I also got about three minutes of sleep last night thanks to a fussy, fidgeting and crabby baby. 

Kayciejoe56

@LoveLee2014 it will be in our name, but will be used for his college or first home if needed.   If you take money out before 60 years old (us,  not him), you can take out all that you have put in, tax free.   The only penalty that occurs is when you take out the interest made, and I believe that is taxed at 10%.  However there are also exclusions, aND home buying is one of them. You pay no penalties if you use it for a home.

Our thought is we are going to help him pay for college without the account if we can,  because we would love for him to have it to buy his first house.   But if we need it,  we can take out some of the principal to supplement the college bills 

Natabear

Everything that I've read said that the 529 affecting fafsa was a myth.  

LoveLee2014

Thank you for taking the time to explain that to me, @Kayciejoe56

LoveLee2014

For some reason, on my phone, when I tag someone I can't type after their name! Again, thank you for that!!! 

I would not use a 529 simply because of the FASFA thing. So, I'm curious where you read that @Natabear

Natabear

@LoveLee2014   Here are a few credible sources that at least say it doesn't make baby ineligible.

Under the "Related Questions" section of the 529 Plan offered by Charles Schwab -

Will a 529 plan affect my child’s ability to qualify for financial aid?

Guidance from the U.S. Department of Education says that a 529 plan is counted as an asset of the parent or other account owner in determining eligibility for federal financial aid. Only 5.6% of the value of the account is considered the parent's assets for financial aid calculations. There is no impact if the account is owned by another relative, such as a grandparent, aunt, or uncle. When assets are held in the child's name, such as with a custodial account, only 20% of the assets will be considered. Schwab recommends that you consult your tax advisor concerning your particular situation.

Under the "Common Financial Aid Questions" under T. Rowe Price's college planning section - 

Which College Savings Plans Should I Choose if I Want to Enhance My Eligibility for Financial Aid?

In general, assets in the parents’ name (such as 529 plan accounts or taxable accounts) may improve your chances of receiving aid, since a smaller percentage of their value is included in the EFC calculation. In contrast, a larger percentage of assets in a student’s name (such as UGMAs/UTMAs) are counted in the EFC calculation and as such could reduce your potential aid package.

However, parents need to weigh the impact on financial aid against other considerations, including the tax benefits of various choices and ownership issues.

Under the "Does a 529 Plan affect financial aid?" section on savingforcollege.com -

Are assets counted on the Free Application for Federal Student Aid (FAFSA)?

Yes, but assets in accounts owned by a dependent student or one of their parents are considered parental assets on the FAFSA. When a school calculates the student's Expected Family Contribution (EFC), only a maximum of 5.64% of parental assets are counted. This is quite favorable compared to other student assets, which are counted at 20%. Higher EFC means less financial aid.

As far as what happens to the money if baby doesn't use it for college, you can withdraw it but you'll have to pay taxes and a 10% penalty fee on the earnings.  Read this next part:

From T. Rowe Price's "Three Reasons You May Not Be Using a 529 Plan—and Why You Should Rethink Them" -

MISCONCEPTION #1: A 529 plan won’t allow me to access my money if I need it; and if I don’t use it, I’ll lose it. 

Our survey found that one in every four parents who is saving for college but not using a 529 account is concerned about having access to their money. In addition, almost half of parents think that if the money in the account is not used for college, it’s lost. Reality: A 529 plan offers significant flexibility, and you can access the money at any time, for any reason. The money is always yours and stays in the account until you withdraw it. You don’t ever “forfeit” it. If the beneficiary listed on the account doesn’t go to college or, for any reason, doesn’t use all the money, you can change the beneficiary on the account to another sibling, a cousin, a grandchild, or even yourself and use the money for them—without any penalty. For College Savings 529 Plans, the money can also be used for higher education expenses other than undergraduate tuition, such as graduate school tuition, room and board, books, and supplies. If you do need to withdraw funds for anything other than a qualified educational expense, you’ll need to pay income taxes on those earnings, as well as a 10% penalty on the earnings. But, what’s important to remember is your contribution portion is never taxed or penalized. For example, let’s say you contributed $5,000 to your child’s 529 plan and it earned $2,000, giving the account a balance of $7,000. If you withdraw all $7,000, only the $2,000 of earnings would be subject to taxation and the 10% penalty (remember: the earnings haven’t been taxed while they were in the account). If you are in the 25% tax bracket, this would mean paying 25% + 10% of the $2,000 in taxes and penalties, or $700—leaving you with $6,300 to spend. Considering you invested $5,000, in this hypothetical scenario, you’re still left with significantly more than you contributed to use for anything you want.

irenejean

We have a financial advisor and asked her about this subject.

The 529 is great because the growth is not taxed if it's used for educational purposes. If the child doesn't go to college only the growth, not the principle you put in, will be subject to tax/penalty.

There is another savings option that is invested, it's called a UTMA/UGMA account. You pay into the account post-tax, and the growth is taxed each year, thought there are some tax breaks with these accounts. The parents are "custodians" of the account, but the account belongs to the child, and when the child is 18, they own the account and can do whatever they wish with it. The biggest benefit is that there is no penalty if the money isn't used for college.

We also have a regular old bank savings account. Since LO won't access either a 529 or UTMA/UGMA until he's much older, we think a regular savings account will be good to teach him about money when he's young. But we won't use this savings account for major savings, since there's really no growth in these accounts.

We're still on the fence about what we're going to do, if LO goes to college, the 529 plan is the better option. I like the flexibility of the UTMA/UGMA account more. The growth of both those accounts is about the same.

Edited to add: The regular old savings account is in LO's name with us as the parents/custodians of the account so we can move the funds.

irenejean

Also, you can put all the money into a regular old savings account and move it if/when you choose an investment account. That'll be better than that jar!