• filter:

College Savings / 529

  • Text Only
  • Search this Topic »
Voting History
rated:
What are some recommendations on saving for child's college?

529 (if so, which plan is recommended?) 
I'm in New Jersey. Are there any benefits if I choose a plan outside of NJ?

What is an alternative to 529? (Roth IRA)? (401k)?

Please let's hear some recommendations.

Thanks
 

Member Summary
Most Recent Posts
Most states that have tax advantages, also have some form of recapture clause for those deductions/credits if you take n... (more)

Shandril (Aug. 14, 2017 @ 1:01p) |

I figured it didn't exist for the exact reason you said, it seems like a no-brainer to contribute on December 31, take t... (more)

meade18 (Aug. 14, 2017 @ 1:05p) |

I am pretty sure that it isn't in the spirit of the law and that the state would try to claw things back, if you are sti... (more)

Dus10 (Aug. 14, 2017 @ 1:32p) |

Staff Summary
Thanks for visiting FatWallet.com. Join for free to remove this ad.

rated:
I'm no expert, but I did a cursory look into this last week because my parents said they wanted to contribute to my son's college fund. I told them to open a 529 in their state with my son as the beneficiary so they can deduct their contributions on their state taxes. They live in a different state than I do. If I decide I want to contribute into a 529 for my son, I would open one in my state to deduct the contributions on my state taxes.

If I was wrong, hopefully someone here can set me straight.

rated:
NJ does not have deductions for 529 contributions.

rated:
If there's no tax benefit in your state (and there's not per svap). Max your Roth IRA before 529.
most 529s have limited investment options, IRA is essentially the same thing (can be used for education) but more flexible.

rated:
Except you can donate significantly more to a 529 than an IRA
I looked a number of years back but at the time (I am in NJ), either Utah (Fidelity) or NH (Vanguard) were the best choices

rated:
wakeuprich said:   What are some recommendations on saving for child's college?

529 (if so, which plan is recommended?) 
I'm in New Jersey. Are there any benefits if I choose a plan outside of NJ?

What is an alternative to 529? (Roth IRA)? (401k)?

Please let's hear some recommendations.

Thanks

  
As other suggested, there are no benefits for choosing in or out of state plan for NJ residents. 
Your best bet is to select "direct" plan with low expenses (Vanguard/Fidelity have some). 
Make sure you contribute fully to your all retirements accounts first prior to contributing to education plans. You can't finance retirements.
Some private colleges do ask 529 plan balances (may get counted against getting financial aid) even though it supposed to be part of parent's asset. 
Have a reasonable expectations on return and set up monthly plan accordingly.
Also, look into rental/commercial real estate generating similar returns (outside 529). That may work better if you know what you are investing in. 
Also, look at https://www.kitces.com/blog/grandparent-owned-529-plans-gifting-... for avoiding traps related with grandparent financed 529 plans.
You may want do research at http://www.savingforcollege.com/ for 529 plans. 

 

rated:
ellory said:   Except you can donate significantly more to a 529 than an IRA
I looked a number of years back but at the time (I am in NJ), either Utah (Fidelity) or NH (Vanguard) were the best choices

  and I'd still MAX IRA before starting to contribute to 529.

rated:
So from the responses, a ROTH IRA seems like a better choice.
Any suggestions on where to open ROTH IRA?

rated:
I would plan to max all of my retirement accounts before contributing to a 529. While tax advantageous, also note that a 529 counts against your expected family contribution, if there were any potential for state or federal grant assistance for the child's benefit.

rated:
Sorry, very new to investing.
So there are fees with ROTH IRA also?

rated:
No fees to create a Roth. You can invest in anything like you could invest in a regular brokerage account. Some have fees. Some dont.

rated:
any recommendations on where to start with ROTH? I've seen TDAmeritrade, Fidelity. Do I open ROTH IRA then find where to invest that money? What about robo-advisers? I don't want to manage too much myself.

rated:
it works like a brokerage account.
pick a company, open an account, deposit $$, decide how you want to invest your money.
if you don't want to manage your money, just pick a whole market index mutual fund like VTSAX.
you can choose whatever company you want. TDA or Fidelity work. You could choose Vanguard. IF you have a brokerage account, you can choose the company where you have a brokerage account.
I have mine at USAA.

rated:
ellory said:   Except you can donate significantly more to a 529 than an IRA
I looked a number of years back but at the time (I am in NJ), either Utah (Fidelity) or NH (Vanguard) were the best choices

  
PA is also Vanguard.

rated:
wakeuprich said:   any recommendations on where to start with ROTH? I've seen TDAmeritrade, Fidelity. Do I open ROTH IRA then find where to invest that money? What about robo-advisers? I don't want to manage too much myself.
  Vanguard. If its for a college fund, pick a Target retirement date fund close to the date that your kid will be going to college.

rated:
Thanks this was helpful.

- Sign up with Fidelity or Vanguard, or another.
- Deposit money
- Invest that money into Vanguard fund
- Let it grow

rated:
Maybe another dumb question -

I am using the ROTH IRA for college savings. When i withdraw this money for college, I will have to pay income tax on the withdrawal amount.
Would i also have to pay income tax should I be saving into 529 plan? I am just wondering where I will have the least tax penalty or amount to pay at withdrawal.

rated:
There is No Tax due on a 529 account as long as the beneficiary uses the proceeds for college

rated:
if used for an eligible expense (and educational expenses for a dependent are eligible), you pay no taxes when you withdraw.
same as with a 529.

rated:
Another big reason to contribute to the IRA (and 401k) before a 529 is that you should save for retirement prior to saving for your kids college. This is because you can borrow for college but not for retirement.

OP - You say you are new to the idea of investing. It's great that you're getting started. I suggest you take a look at the Bogleheads Getting Started Wiki entry. Then, post questions at the Bogleheads forum. FatWallet Finance is okay, but you'll get more consistently good advice at Bogleheads. Finally, here is a list of Recommended Books for those interested in learning about investing. Good luck!

rated:
Am I mis-reading something -

Normally, if you withdraw money from a traditional or Roth IRA before you reach age 59-1/2, you would pay a 10% early distribution penalty on the distribution, in addition to any regular income tax due. There is, however, an exception for distributions used to pay qualified higher education expenses. The portion of the distribution used for qualified higher education expenses is exempt from the 10% early distribution penalty. You will still pay income tax on the portion of the distribution that would otherwise have been subject to income tax. All this exception does is avoid the 10% additional tax on early IRA distributions. The qualified higher education expenses must be for you, your spouse, your children or your grandchildren. Qualified higher education expenses include tuition, fees, books, supplies and equipment, as well as room and board if the student is enrolled at least half time in a degree program.


The statement in bold. Do I pay tax when I withdraw from ROTH IRA? It's going to be for college.

rated:
N̶o̶.̶ ̶Y̶o̶u̶ ̶p̶a̶y̶ ̶t̶h̶e̶ ̶t̶a̶x̶ ̶d̶u̶e̶,̶ ̶w̶h̶i̶c̶h̶ ̶o̶n̶ ̶a̶ ̶R̶o̶t̶h̶ ̶i̶s̶ ̶0̶%̶ ̶b̶e̶c̶a̶u̶s̶e̶ ̶y̶o̶u̶'̶v̶e̶ ̶p̶a̶i̶d̶ ̶i̶t̶ ̶p̶r̶i̶o̶r̶ ̶t̶o̶ ̶p̶u̶t̶t̶i̶n̶g̶ ̶t̶h̶e̶ ̶m̶o̶n̶e̶y̶ ̶i̶n̶t̶o̶ ̶t̶h̶e̶ ̶a̶c̶c̶o̶u̶n̶t̶.̶ ̶O̶n̶ ̶a̶ ̶t̶r̶a̶d̶i̶t̶i̶o̶n̶a̶l̶ ̶I̶R̶A̶ ̶y̶o̶u̶ ̶w̶o̶u̶l̶d̶ ̶b̶e̶ ̶S̶u̶b̶j̶.̶ ̶t̶o̶ ̶y̶o̶u̶r̶ ̶c̶u̶r̶r̶e̶n̶t̶ ̶i̶n̶c̶o̶m̶e̶ ̶t̶a̶x̶ ̶r̶a̶t̶e̶.̶ ̶T̶h̶e̶ ̶s̶t̶a̶t̶e̶m̶e̶n̶t̶ ̶y̶o̶u̶'̶r̶e̶ ̶r̶e̶a̶d̶i̶n̶g̶ ̶i̶s̶ ̶c̶o̶n̶f̶u̶s̶i̶n̶g̶ ̶b̶e̶c̶a̶u̶s̶e̶ ̶i̶t̶ ̶t̶a̶l̶k̶s̶ ̶a̶b̶o̶u̶t̶ ̶b̶o̶t̶h̶ ̶t̶r̶a̶d̶i̶t̶i̶o̶n̶a̶l̶ ̶a̶n̶d̶ ̶R̶o̶t̶h̶ ̶I̶R̶A̶s̶.̶ ̶
Edit: Read libralibra's response, not mine. 

rated:
A couple of posts from others are definitely wrong - on a Roth, you will pay taxes on the earnings for early withdrawals used for college. The college exemption is only on the 10% additional penalty (and only if the Roth is >5 years old). Note, however, that there are no taxes or penalties on the contribution amount under any circumstances (Federal, I don't know how every state works). Also there are no taxes on anything (earnings or contributions) if you are 59.5 by the time you start withdrawing (for college or whatever you want) - as long as the Roth is >5 years old that is.

Also, be clear that people are saying that it's not either/or with Roth and 529. If you have money, open the 529 too. You can put 14k a year or a lump of 5x that for 5 years at once, which is much more than you can put in to a Roth. BTW, you need earned income to open a Roth, and be below certain income limits if you are covered by a retirement plan at work.

rated:
Roth IRA is better than 529 Plan for many reasons. They have lower fees, more investment options, can be rolled over more easily, can be used for retirement (duh!) in case kid does not go to college, can withdraw contributions without tax or penalty, are not limited in beneficiary designation, amount in Roth IRA typically does not count in FAFSA calculation, etc.

But if you already max out Roth IRA for retirement, then 529 Plan is not a bad option. More so in states with tax advantages (sadly not NJ). The maximum contribution to a 529 Plan is way higher (depends per state but around $235-425k max balance in account) compared to the $5.5k in Roth IRA. Also 10 states (not NJ) allow 529 Prepaid Plan based on purchase of future tuition credits. There are pros and cons to those but you obviously cannot buy those future tuition credits in a Roth IRA account.

rated:
libralibra said:   Also, be clear that people are saying that it's not either/or with Roth and 529. If you have money, open the 529 too. You can put 14k a year or a lump of 5x that for 5 years at once, which is much more than you can put in to a Roth. BTW, you need earned income to open a Roth, and be below certain income limits if you are covered by a retirement plan at work.
Actually the $14k per year or $70k per 5-yr limit is based on gift tax exemption rules. So, unless the specific plan you're looking at restricts it further (some do limit it to $14k), it will apply to contributing to 529 Plan for your grand-children say. But for yourself, your spouse, or your kids, there is effectively no annual contribution limit except for the max balance amount which is determined by each state ($235k to $500k depending on state, $305k in NJ). For deciding which is best when your state has no tax deduction or credit, I'd just look at what plans have good investment options with low expense ratios and good performance. Here is a good starting point. Between very good 3-yr, 5-yr, and 10-yr performance and low expense ratios, NY plan is not a bad benchmark.

rated:
Be careful, gift tax rules DO apply to your kids.

rated:
Can anyone speak to whether contributions are free to w/d anytime from a 529 w/o penalty & taxes?

rated:
withdrawals from a 529 come out pro rata, so you can't avoid taxes/penalties if you have some gains (with a non-qualified withdrawal). This is different than a Roth, where contributions come out before earnings.

rated:
When we finally jumped into the 529 pool, I insisted on using my state's plan. At the time, it didn't matter. Fast forward 5 years, and the state added a tax deduction for contributing to a 529.

rated:
micha8s said:   When we finally jumped into the 529 pool, I insisted on using my state's plan. At the time, it didn't matter. Fast forward 5 years, and the state added a tax deduction for contributing to a 529.
Good point. I wonder if you hadn't used your state plan when you opened, if you could have rolled over what you had into a new state plan once the tax deduction was passed. Obviously that's an extra step, but depending on the funds offered, it could be worth it for the OP.

rated:
I don't know.  I also don't know if my state's 529 deduction is specific to my state's plan or not.  But better safe than sorry.

The other reason I contributed to my state's plan was that they finally came out with a decent (Fidelity) plan.  Had it not been, I probably would've chosen the Vanguard Utah plan.

rated:
micha8s said:   When we finally jumped into the 529 pool, I insisted on using my state's plan. At the time, it didn't matter. Fast forward 5 years, and the state added a tax deduction for contributing to a 529.
Did the tax deduction apply retroactively?

If not could you have contributed to another plan then simply started contributing to your state plan's after they added the tax deduction? Nothing says you can only have one 529 plan plus you're also entitled to one rollover without penalty per 12 month period.  

This is something to consider if your state has a tax deduction but lackluster investment options. You could always contribute to it up to the amount of the tax deduction, then any further amount to another state plan with better investment options. Then, probably around the time you'll want to use the money in the 529 plans, you could rollover the money from the out of state plan into your state plan if it allows rollovers to qualify for the tax deduction, and especially if it allows you to carry forward those tax deduction over several years.

rated:
Even if there is a tax credit/deduction, you can usually transfer your funds to another plan, after some period of time. My plan, once the funds clear, I could transfer them to another 529 or withdraw them (for education purposes) and still qualify for the credit.

rated:
Shandril - I don't believe so. My understanding of the wording was that I could only deduct on my 2012 taxes contributions I actually made in 2012.

rated:
Any fwfers have a 529 with no plans for kids or college?

Trying to think of creative uses to get the tax benefits.

What keeps me from putting enough into a 529 to get the tax deduction every year and then withdrawing it every other year?

rated:
jd2010, I was thinking the same. You get a 20% credit then withdraw the funds and get a 10% penalty. Sounds like a good deal. I think they should have provisions. However, what if you just save it up in the 529 and then move to another state...

rated:
Dus10 said:   jd2010, I was thinking the same. You get a 20% credit then withdraw the funds and get a 10% penalty. Sounds like a good deal. I think they should have provisions. However, what if you just save it up in the 529 and then move to another state...
  
Also only the earnings are penalized I believe, so just deposit Dec 31, withdraw Jan 1, for my state theres a 2k 100% match state deduction.

rated:
Is the discussion opening a 529 with the kid as a beneficiary or a Roth IRA under the kid's name? My Roth IRA is maxed each year for my own retirement. I have one 529 for my kids.

However, I've been advised to hold off on contributions to it as they have to be spent on education or face a penalty. Are we saying the penalty might be worth it if the state gives tax breaks? To deposit into the account, get the tax credit, and then withdraw and pay the penalty which is less than the tax break?

I was also thinking, as an adult I can basically become an expert at a lot of specialized things just by using the internet and for free. I would wonder if college will really be necessary or what the costs might be in 14 years when my son is looking at college.

rated:
thedonz said:   Is the discussion opening a 529 with the kid as a beneficiary or a Roth IRA under the kid's name? My Roth IRA is maxed each year for my own retirement. I have one 529 for my kids.

However, I've been advised to hold off on contributions to it as they have to be spent on education or face a penalty. Are we saying the penalty might be worth it if the state gives tax breaks? To deposit into the account, get the tax credit, and then withdraw and pay the penalty which is less than the tax break?

I was also thinking, as an adult I can basically become an expert at a lot of specialized things just by using the internet and for free. I would wonder if college will really be necessary or what the costs might be in 14 years when my son is looking at college.

  Discussion is on 529. To be able to make a Roth (or traditional) IRA contribution in your kid's name, she/he must have earned income.

College degree is not for everyone; there are a lot of trades that one can learn and make a good living without a college degree. However, for many traditional fields where a degree is required (e.g., specifically asked for in a job requirement), just learning from the internet is not going to cut it.

Skipping 8 Messages...
rated:
meade18 said:   
Dus10 said:   
meade18 said:   
Dus10 said:   jd2010, I was thinking the same. You get a 20% credit then withdraw the funds and get a 10% penalty. Sounds like a good deal. I think they should have provisions. However, what if you just save it up in the 529 and then move to another state...
  is there a state that gives a 20% credit, or are you just fantasizing?

  Uh, why else would I have said it?  My state does, with a cap of $1k worth of credit annually.  Here is the list of benefits per state: [L=http://www.savingforcollege.com/compare_529_plans/?plan_question... =437&page=compare_plan_questions=437&page=compare_plan_questions]http://www.savingforcollege.com/compare_529_plans/?plan_question...  (Broken, doesn't like square brackets in the query string)

Shortened URL because FW doesn't like the format (goo.gl/xXDRc6)

  
I figured it didn't exist for the exact reason you said, it seems like a no-brainer to contribute on December 31, take the credit, and cash out paying the 10% penalty.

  I am pretty sure that it isn't in the spirit of the law and that the state would try to claw things back, if you are still a resident of the state for the following tax year.

  • Quick Reply:  Have something quick to contribute? Just reply below and you're done! hide Quick Reply
     
    Click here for full-featured reply.


Disclaimer: By providing links to other sites, FatWallet.com does not guarantee, approve or endorse the information or products available at these sites, nor does a link indicate any association with or endorsement by the linked site to FatWallet.com.

Thanks for visiting FatWallet.com. Join for free to remove this ad.

While FatWallet makes every effort to post correct information, offers are subject to change without notice.
Some exclusions may apply based upon merchant policies.
© 1999-2017