Please help me compare the current college savings options.
1. Does purchasing a 529 in one state have implications if we move to another?
2. Which option has the least amount of penalties in case our kid receives significant scholarships?
3. Do either provide better incentives for grandparents to make contributions?
thanks
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www.savingforcollege.com
A good resource to compare each state's 529 plans, learn about plans in general.
1. no
2. can't think of a situation where they are not the same
3. only thing I can think of is if you use one for the state the grandparents are in that also offers a state income tax deduction for contributions
JazzyfromCO said:Please help me compare the current college savings options.
1. Does purchasing a 529 in one state have implications if we move to another?
2. Which option has the least amount of penalties in case our kid receives significant scholarships?
3. Do either provide better incentives for grandparents to make contributions?
thanks
All answers are dependent on the state where the 529 plan is located, and if that state offers additional deductions.
1. In virginia, for instance, if you move out of state, your virginia 529 contributions obviously would no longer be deductible on your virginia state tax return, unless you continued to be required to file in VA. The earnings would continue to be tax-free for federal purposes.
2. In virginia, for instance, if a beneficiary of a 529 plan receives a scholarship, the original investment and earnings are returned to the 529 account owner, penalty-free. Earnings would be subject to Federal income tax, no virginia income tax.
3. In virginia, it is my understanding that only the account owner may take a state tax deduction for contributions, up to 2k/year (4k/year beg 2009). If the account owner is over 70 y/o, no limitation on contribution deductions. For estate tax purposes, amounts contributed over $12k/year gift tax exclusion are eligible for 5 year averaging.
Finally, in VA, each beneficiary may accumulate up to $250k in 529 plans(both prepaid and savings based).
An out of the box approach that can work if all rules stay the same from now until you need to utilize savings for a college expenses:
use a roth IRA + roth 401k instead of a college savings plan. Assuming you do not plan to max out the two for retirement purposes, pool the college savings in with the roth retirement accounts.
Currently contributions can be removed without penalty or taxes, and ordering rules mean you will withdraw only contributions first until you have withdrew all of them.
Over the years, you should accumulate a large contribution basis, along with earnings in the roth ira. When it comes to college time, you withdraw the contribution portion for college expenses, and leave the earnings portion in it.
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When it comes to qualified distributions from a roth for retirement at age 59 1/2, there is little difference if the amounts in the account are earnings or contribution. Therefore it could be utilized for the above strategy.
The above method allows more flexibility than using a 529 or a coverdell if there is a need to draw on the assets for emergencies (60 day rollover period), and you can draw against the contributions without penalty or taxes in a roth if you don't intend to replace it.
If one doesn't qualify for a roth IRA, you could always maximize the pre-tax retirement plans (SEP IRA, SIMPLE IRA, Traditional IRA) and convert to a roth when available (currently there's that strategy talked about doing it in 2010 when the income restriction is lifted for a year).
and btw I think I've read in some places currently retirement assets aren't counted against financial aid as strongly as other kinds of college savings. someone shed some light on this?
I was talking to some one who wanted to put the money in his IRA (small amount) into a savings account for his grandkids. After telling him about the tax issues (he's like 55) and telling him to wait I told him to put the money into a 529 once it matured. Now my question is can he move the money now into a 529 and not have the early withdraw penalties from his IRA, or should he just wait until 59.5 then transfer it (either way basically never paying tax on it).
Another question, which I can't get a very straight answer on is how many options are there for financial vehicles within the 529? I see a lot of stuff that seems like you're limited to one or two mutual funds.
obviously it's ideal to use the funds for your retirement...but.. would it be good to put money into a self directed IRA, maximize the growth, then roll it into a 529 sans tax penalties (if possible)?
-Matt (this is my first post so be nice 
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