529 Worthwhile For Graduate School?

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Topic Author
DelMar
Posts: 33
Joined: Wed Feb 17, 2021 2:29 pm

529 Worthwhile For Graduate School?

Post by DelMar »

Hi all. My daughter will be graduating next year and plans on proceeding to a Graduate School. I have paid for under-graduate school out of pocket but am considering starting fresh with a 529 to fund her next few years as she begins working toward her advanced degree.

As I understand it, the money I contribute is not deductible at either the State (California) or Federal level. It appears the only benefit to this would be that the asset would grow tax free and can be withdrawn tax-free if used for the permittable expenses. It's clear that enrolling will take time and effort and I'm wondering if it's really worth it given the short time horizon.

After running my business for 20 years and entering the "reward" chapter of my life my goal is to strip all unnecessary complexity from my life...even if it doesn't make sense from dollars & cents standpoint...within reason. I'm unfamiliar with 529s and just wondering if "the juice is worth squeeze" here.

Another factor to consider is that I've very recently sold said business and just happen to be sitting on a (very) large sum of money that I will be putting to work in the months ahead. Taxes have been paid so this chunk of change is after-tax. I'm wondering how much benefit I would gain by even getting involved with a 529 as opposed to simply putting aside, say 250K, in a low-risk/low-return tax-efficient bucket and funding her needs from that for the next few years.

Any insight from my fellow BHs would be greatly appreciated and, of course, if more info is required to weigh-in I'm at the ready to provide.

Thanks,
Rob
miamivice
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Re: 529 Worthwhile For Graduate School?

Post by miamivice »

You will not get much in the way of tax benefits. The growth will be tax free but that is it, and you won't see much in the way of growth in the next couple years that your daughter needs the money.
livesoft
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Re: 529 Worthwhile For Graduate School?

Post by livesoft »

Your daughter probably won't be paying taxes on capital gains, so if you gave her the principal to invest for capital gains herself, then when she sold no taxes on them. That leads to: Give her shares NOW that have unrealized long-term capital gains. Have her sell to realize the gains and pay no taxes on the gains. That is, she can do tax-gain harvesting.

Figure out what the exact taxes would be before you do this because you will not want her paying kiddie tax (the capital gains tax rate that you have).
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UpsetRaptor
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Re: 529 Worthwhile For Graduate School?

Post by UpsetRaptor »

I'm fairly pro-529, but that's a really short timeframe to try to squeeze out any tax free gains. With no state tax benefit, I probably wouldn't bother with the effort in your case. Funds needed within a couple years should theoretically be in lower risk, lower yielding investments anyways.
humblecoder
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Re: 529 Worthwhile For Graduate School?

Post by humblecoder »

Consider if you were to put $250K into a high yield savings account. At 1% you'd earn $2,500/year, but you'd have to pay some of that to the Federal and State Governments. Assuming you pay 30% in taxes, that would be $750/year. If that money were in a 529 in an equivalent safe investment, you'd pay $0/year. So the question is whether $750/year (the juice) is worth setting up a 529 account (the squeeze).

Feel free to plug in your own numbers, as I just made these up! Obviously, that amount would go down as you spend down the account to pay for grad school, but hopefully you get the idea for how you can do a similar calculation for yourself.

Setting up a 529 account is not brain bending work, so for me it would be worth it. But your tolerance for this additional complication might be less than mine, which is fine. That is a personal decision that you can make for yourself. Nobody on this message board is going to answer that question for you.
Topic Author
DelMar
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Joined: Wed Feb 17, 2021 2:29 pm

Re: 529 Worthwhile For Graduate School?

Post by DelMar »

Great answers so far, thanks everyone.

"livesoft"... I want to make sure I'm understanding your proposal. Do you suggest, and is it possible, to gift my daughter shares in VTSAX that I've held for several years in a non-qualified account (and which would obviously have LTCG tax due upon sale if I sold) worth about 250K which she could then sell as needed but not have taxes due since her income is minimal? Is that about right? Is that a "thing"...being able to gift shares to a child from non-qualified to non-qualified and have her not be on the hook for taxes due to her income level? No tax payable is triggered on the gifting?

Thanks,
Rob
helloeveryone
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Re: 529 Worthwhile For Graduate School?

Post by helloeveryone »

DelMar wrote: Wed May 05, 2021 3:19 pm Great answers so far, thanks everyone.

"livesoft"... I want to make sure I'm understanding your proposal. Do you suggest, and is it possible, to gift my daughter shares in VTSAX that I've held for several years in a non-qualified account (and which would obviously have LTCG tax due upon sale if I sold) worth about 250K which she could then sell as needed but not have taxes due since her income is minimal? Is that about right? Is that a "thing"...being able to gift shares to a child from non-qualified to non-qualified and have her not be on the hook for taxes due to her income level? No tax payable is triggered on the gifting?

Thanks,
Rob
This is a nice way to essentially avoid capital gains taxes. I saw this on another thread where they discussed the exact same scenario. In that thread they were talking about the kid(s) had taken out school loans for college, then the parent gifted them appreciated shares of stocks. Waited the right amount of time to avoid kiddie tax, then the kid would sell the appreciated funds and use that money to pay off the school loans (or pay them down)

In your case - gift $15,000 this year, let it sit in her name, then she sells and pays tuition or whatever expenses she has. You now avoid capital gains taxes on the appreciated amount.
HereToLearn
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Re: 529 Worthwhile For Graduate School?

Post by HereToLearn »

helloeveryone wrote: Wed May 05, 2021 3:50 pm
DelMar wrote: Wed May 05, 2021 3:19 pm Great answers so far, thanks everyone.

"livesoft"... I want to make sure I'm understanding your proposal. Do you suggest, and is it possible, to gift my daughter shares in VTSAX that I've held for several years in a non-qualified account (and which would obviously have LTCG tax due upon sale if I sold) worth about 250K which she could then sell as needed but not have taxes due since her income is minimal? Is that about right? Is that a "thing"...being able to gift shares to a child from non-qualified to non-qualified and have her not be on the hook for taxes due to her income level? No tax payable is triggered on the gifting?

Thanks,
Rob
This is a nice way to essentially avoid capital gains taxes. I saw this on another thread where they discussed the exact same scenario. In that thread they were talking about the kid(s) had taken out school loans for college, then the parent gifted them appreciated shares of stocks. Waited the right amount of time to avoid kiddie tax, then the kid would sell the appreciated funds and use that money to pay off the school loans (or pay them down)

In your case - gift $15,000 this year, let it sit in her name, then she sells and pays tuition or whatever expenses she has. You now avoid capital gains taxes on the appreciated amount.
Or gift $30K, if married.

Also, would it be possible to gift the full amount and just file Form 709 with the IRS?
momvesting
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Re: 529 Worthwhile For Graduate School?

Post by momvesting »

Is her graduate school in California as well? If not, research whether the state she will be going to school in has a state tax deduction. If she has income in that state and files a tax return, you could gift her the money and she can flush it through a 529 if the state allows it. Some states also have age requirements on the 529 for the tax deduction.
Topic Author
DelMar
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Joined: Wed Feb 17, 2021 2:29 pm

Re: 529 Worthwhile For Graduate School?

Post by DelMar »

"helloeveryone", thank-you. Kiddie tax has been mentioned a couple of times in this conversation. Quick explanation of that?

"HereToLearn", thank-you. Yes, I'm married so I guess I could gift the 30K in VTSAX shares per year. I assume that is 30K per year, right? Also, is that 30K valuation based on what the shares cost me when originally purchased or what they're worth the day of gifting? And... what is the cut-off date for 2020 gifting...05/15 due to the COVID extension? If so, then I suppose I can gift 60K now and then wait until 01/01/22 to gift my next 30K?

I need to look into what IRS Form 709 is, thanks for the reference.

"momvesting" she's graduating from Chapman University in Orange and has another term left in the fall before graduating. She is researching graduate schools and has yet to make a decision but thank-you for the food for thought.

This BH community is amazing! I look forward to contributing and giving back in the areas I'm knowledgable about going forward. Been a Bogle disciple for a couple decades but just joined this site a couple months back.

Rob
helloeveryone
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Re: 529 Worthwhile For Graduate School?

Post by helloeveryone »

DelMar wrote: Wed May 05, 2021 4:27 pm "helloeveryone", thank-you. Kiddie tax has been mentioned a couple of times in this conversation. Quick explanation of that?

"HereToLearn", thank-you. Yes, I'm married so I guess I could gift the 30K in VTSAX shares per year. I assume that is 30K per year, right? Also, is that 30K valuation based on what the shares cost me when originally purchased or what they're worth the day of gifting? And... what is the cut-off date for 2020 gifting...05/15 due to the COVID extension? If so, then I suppose I can gift 60K now and then wait until 01/01/22 to gift my next 30K?

I need to look into what IRS Form 709 is, thanks for the reference.

"momvesting" she's graduating from Chapman University in Orange and has another term left in the fall before graduating. She is researching graduate schools and has yet to make a decision but thank-you for the food for thought.

This BH community is amazing! I look forward to contributing and giving back in the areas I'm knowledgable about going forward. Been a Bogle disciple for a couple decades but just joined this site a couple months back.

Rob
Re: kiddie tax - I actually don’t fully understand it even after reading the irs section on it.

https://www.irs.gov/taxtopics/tc553

Will have to defer to BH’ers who actually did this or understand it.
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RickBoglehead
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Re: 529 Worthwhile For Graduate School?

Post by RickBoglehead »

DelMar wrote: Wed May 05, 2021 4:27 pm "helloeveryone", thank-you. Kiddie tax has been mentioned a couple of times in this conversation. Quick explanation of that?

"HereToLearn", thank-you. Yes, I'm married so I guess I could gift the 30K in VTSAX shares per year. I assume that is 30K per year, right? Also, is that 30K valuation based on what the shares cost me when originally purchased or what they're worth the day of gifting? And... what is the cut-off date for 2020 gifting...05/15 due to the COVID extension? If so, then I suppose I can gift 60K now and then wait until 01/01/22 to gift my next 30K?

I need to look into what IRS Form 709 is, thanks for the reference.

"momvesting" she's graduating from Chapman University in Orange and has another term left in the fall before graduating. She is researching graduate schools and has yet to make a decision but thank-you for the food for thought.

This BH community is amazing! I look forward to contributing and giving back in the areas I'm knowledgable about going forward. Been a Bogle disciple for a couple decades but just joined this site a couple months back.

Rob
2020 ended on 12/31 for gifting.

Value of shares when gifted, not cost basis.

30k per year.

Most people would jump at chance to grow money tax free for a year or two.
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setancre
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Re: 529 Worthwhile For Graduate School?

Post by setancre »

Just wanted to add that with a short timeline the 529 can also be more risky because if there is a market downturn and losses in the account, the losses are not tax deductible in the same way they would be for a regular taxable account. 529 losses are only deductible if you liquidate the account as a miscellaneous itemized deduction on Schedule A (over 2% of gross income), but currently those write-offs are also suspended through (at least) 2025.

So you'd get minimal tax upside on growth, but definite downside if there are losses in the account. With a short timeframe, I wouldn't bother.
RetiredCSProf
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Re: 529 Worthwhile For Graduate School?

Post by RetiredCSProf »

You can "superfund" a 529 account by gifting five years in one year. That is, you can gift $75K ($15K times five) in 2021, but any additional gifts to the same individual over the next four years would require filing IRS 709 form.

Or, you can pay your daughter's tuition directly without it counting as a gift. That is, you can pay educational expenses and health care expenses in addition to a $15K annual gift, without having to file a 709 form.
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