Open a Virginia 529 Plan CollegeWealth Savings account at Union First Market Bank with 2.3% APY (2.00% APY for <$10k) or if you prefer BB&T 2.25% APY (2.00% APY for <$25k). Open to all 50 states.
When you take a distribution, the earnings are subject to a 10% penalty (assuming you're not using it to pay for qualified education expenses), so the 2.30% becomes 2.07%.
The only downsides I can think of are that I imagine that distributions may take a little longer than normal online savings (maybe a week vs a couple days) and about 10 minutes of extra work at tax time. Seems that many FWF savers are willing to jump through more hoops than that for 100 basis points.
Upside vs reward checking is $350k cap and no activity requirements.
The 529 saving plan really seems a too good to be true choice for pure saving purpose. You can name yourself as beneficiary. The rate of 2.25% (2.025% with 10% penalty) is compeptive against a lot of so call "reward checking account" these days. Plus the tax deferred benefit. I assume many FWFers can dump 200-300k into the plan for 2-3 years just to weather out the current zero interest rate environment. Then withdraw the funds for non-qualify purpose with 10% penalty and regular federal income tax (which we would pay each year anyway for regular saving/reward checking account). I also didn't find any tax implication that might adversely affect the earnings.
Silverthunder said: Are you guys fairly certain that the principal that you put in doesn't also get hit with the 10% penalty?
From the plan description page 10:
Non-qualified Distributions. Account Owners may request Non-qualified Distributions of Collected Funds from a CollegeWealth Account at any time. Non-qualified Distributions will be subject to federal income tax on the earnings and Virginia state income tax for Virginia taxpayers, as well as a 10% federal penalty tax on earnings, reported on the taxpayer’s federal tax return.
Watch the rate plummet when bankster-targeted sums get locked in. This is a government-sponsored scheme in a state where THE WEEK just reported the third-running candidate for US Senator 2012 was a cat. Really.
Ooh, I see little downside here. I live in VA, so 5.75% deduction for me too. I guess, if I cash out early, I'd pay back that 5.75%, and 10% of the interest, keeping principal intact. And if I use the 529 on behalf of some relative, then it's all qualified withdrawal, and the state income tax break stays put. Win-win situation? No downsides that anyone can think of, given that rate stays this high?
sloppy1 said: Not a fixed rate...subject to bank's whim.
Wouldn't red this guy. I've seen several "Money market" & "Personal Savings" accounts which seem to bait and switch from something like 2% APY to something way less. And with a 529 account your money is a lot less liquid than either of these.
If you've got a lot of money saved up now to move into the account it would probably make a lot of sense, but banks are notorious for bait and switch with variable interest rates. I would count on the promotional rate dropping after about 6 months.
futhey said: And with a 529 account your money is a lot less liquid than either of these.
How is a 529 "a lot less liquid"? This account is fully liquid. Granted it's subject to 10% penalty, but the current return is 2% AFTER factoring in the penalty. If the rate was to plummet, just pull it all out. How are you worse off in that scenario than having money sitting at lower rates at ING/Alliant/similar MM accounts?
On another note, looking at the fact sheet, I come across this:
Virginia law provides Account Owners and Beneficiaries protection from creditors. When Virginia law is applied, a CollegeWealth Account may not be attached, garnished, seized or appropriated by any creditor to pay any debt or liability of the Account Owner or Beneficiary. This protection generally may be preserved by a debtor in a bankruptcy case. Federal bankruptcy law, as amended by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), protects all Contributions made at least two years before a bankruptcy filing to a CollegeWealth Account for the children or grandchildren of the Account Owner or other individual contributing to a CollegeWealth Account.
Isn't this asset protection yet another benefit of putting large sums of money in this account (naming yourself as beneficiary) irrespective of whether you ever intend to use it for education?
Looking at a 2.5% cash account at at a Kasasa bank for Florida. Only downside is max $5,000. Luckily (or unluckily) that's all I have to spare anyway. What do you think? Better choice due to liquidity - no?
lorymills1 said: Looking at a 2.5% cash account at at a Kasasa bank for Florida. Only downside is max $5,000. Luckily (or unluckily) that's all I have to spare anyway. What do you think? Better choice due to liquidity - no?
Hypothetically speaking, could one build up a very large 529, marry a women with children going to college who is paying tuition out of pocket, withdraw from the 529 tax-free, and then divorce? Since money is fungible, it shouldn't matter that the money from the 529 didn't directly go to pay tuition.
Additionally, from my understanding, only the earnings have to go towards tuition dollars. Not the principal. So suppose you put $300k in here. You get $7k in earnings. Marry a women with kids that have $7k tuition. Withdraw the full $307k and apply the $7k to tuition. No tax penalty even though the $300k principal doesn't get applied to tuition, right?
ubermichaelthomas said: Hypothetically speaking, could one build up a very large 529, marry a women with children going to college who is paying tuition out of pocket, withdraw from the 529 tax-free, and then divorce? Practically speaking, a whole lot of risk (divorce), work (wedding), expense (prenup) and emotional drain for a measly <1% ROI (which is sure to drop like a rock)
ubermichaelthomas said: Hypothetically speaking, could one build up a very large 529, marry a women with children going to college who is paying tuition out of pocket, withdraw from the 529 tax-free, and then divorce? Since money is fungible, it shouldn't matter that the money from the 529 didn't directly go to pay tuition. Sure, don't forget to marry a chick with a big pile of capital losses to help out with your tasty Fiesta Group profits.
Additionally, from my understanding, only the earnings have to go towards tuition dollars. Not the principal. So suppose you put $300k in here. You get $7k in earnings. Marry a women with kids that have $7k tuition. Withdraw the full $307k and apply the $7k to tuition. No tax penalty even though the $300k principal doesn't get applied to tuition, right? Correct, but it's worth noting that if you need some of your money back sooner, withdrawals are pro-rata out of principle and earnings for 529's. It's not like Roth IRAs where the earnings come back last.
dsru said: $350k cap Per owner-beneficiary combination.
A word to the wise - don't expect this to last. One of the 529's offered very generous 5-7 year CD rates and they got hammered with new money. Unlike CDs, you can't lock in the good rate by being early for a Money Market account.
Just did some research. If you live in VA and thus the state income tax deduction factors into your decision: 1) Open the Union First bank CollegeWealth 529 today. Contribute 4k. 2) Contribute 6k in January. You will get a 4k deduction for 2012, 4k deduction for 2013, and the remaining 2k deduction carries over to 2014.
In the future, if rates drop, and you want to hold onto the state income tax deduction, you can transfer over to VEST once a year. That way, you can buy investments within the 529 at low cost (around 30bps, depending on fund).
If you don't live in VA, so you're not concerned with the deduction: 1) Open Union First Bank CollegeWealth 529. Contribute 10k now. In the future, if rates drop, you can roll over to any other qualified plan, like another state's 529 (as long as they accept rollovers).
Are contributions subject to the gift tax limits if I (the contributor) am the beneficiary as well? $13,000 annual gift limit per donor, per beneficiary or a special gifting provision of $65,000 one time across 5 years.
IOW, Can I do $65,000 or the FDIC max $250k to start out? Can't seem to locate an answer.
eqbert said: Are contributions subject to the gift tax limits if I (the contributor) am the beneficiary as well? . There's no gifting involved if you open an account with yourself as both owner and beneficiary. You can start it with $350k for yourself if you really want.
This is quite interesting. We know there is a 10% tax on federal income taxes for non-qualified withdrawals. For 529's where state's offer tax deductions, is the penalty for non-qualified withdrawals typically similar?
ubermichaelthomas said: Since money is fungible...
How many times are you going to use this word "fungible" in your posts? You sound pretentious and you don't really use the word well in context.
lovemydogtracy said: If you took a partial withdrawal, how would you determine the amount of the earnings for the 10% penalty? xerty said: it's worth noting that if you need some of your money back sooner, withdrawals are pro-rata out of principle and earnings for 529's. It's not like Roth IRAs where the earnings come back last.
Also, keep in mind there are other qualified exemptions. I remember someone asking an investment advisor what do I do with funds in a 529 if my kid decides not to attend college ? He said you can spend the money on yourself instead of the child, as many universities offer overseas educational travel. He gave the example of a geological dig at the Egyptian pyramids which was a qualified expenditure.
it's not exactly right to say the effective yield is just 90% of 2.3% since you have to account for taxes. If your tax rate is 0%, then the effective yield would be 2.07%. But if your tax rate is say 30%, then
2.3 * (1-.1-.3) = x * (1-.3) 2.3 * .6 = x * .7 x = 1.9714
libralibra said: it's not exactly right to say the effective yield is just 90% of 2.3% since you have to account for taxes. If your tax rate is 0%, then the effective yield would be 2.07%. But if your tax rate is say 30%, then
2.3 * (1-.1-.3) = x * (1-.3) 2.3 * .6 = x * .7 x = 1.9714
so this is like a 1.9714% savings account.
No. Because the person would also have to pay taxes with the 1.9714% savings account.
I am not familiar with this particular account. The downside to this would primarily be if there are any penalties that this account has (not IRS penalties) for removing money before a certain time period. I don't know if there are any.
sesat said: 529's are used in special-needs planning all the time, because of the penalty-free withdrawals for non-qualified expenses. As an estate planning tool, they allow the grantor/trustee to remain firmly in control, while qualifying for the annual transfer-tax exclusion. Furthermore, they can use stack 5 years of annual-exclusions in a single year. That's rocketfuel for an inter-vivos special needs trust.
A bit off topic, but I have a question for you on this. When we set up our wills to include a testamentary special needs trust for one of our kids, we were advised to transfer the beneficiary of the 529 plan from the child to the parent, so that the funds would be included in the estate and would pass into the testamentary trust. Leaving it in the child's name presented a risk that the funds in the plan would transfer directly to the child if both parent's died, bypassing the special needs trust. The risk of setting the beneficiary as the parent is the gift limit issues if things go better than expected and the child could use the money for school down the road, but we're not talking about huge amounts of money here - about $25k at this point (child is 7). What would be your recommendation in this situation?
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