529 instead of taxable account

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Topic Author
rootcanaldoc
Posts: 8
Joined: Sun Jul 15, 2018 10:26 am

529 instead of taxable account

Post by rootcanaldoc »

I have 4 kids in private school. Oldest is in 6th grade, youngest in nursery. Now that K-12 distributions up to $10k per year are allowed penalty free is there any reason not to fund 529 instead of taxable account after maxing out retirement accounts? I can theoretically withdraw up to $40k a yr (or whatever the total tuition actually is). Sounds like a no brainer to me. Am I missing something?
cmr79
Posts: 1309
Joined: Mon Dec 02, 2013 3:25 pm

Re: 529 instead of taxable account

Post by cmr79 »

I guess I'm missing why these things are necessarily related. Were you putting money earmarked for your kids' private tuition in a taxable account? If so, were you funding the account years in advance? If so, sure, doing it through a 529 probably makes more sense. If the money was put in the taxable account for a very short time, I'm not sure why you were bothering in the first place.

If you get a state tax deduction, funding the 529 and then using those funds a short while later for the tuition makes sense, at least up to the state tax deduction. Any amount that doesn't qualify for a deduction that would only be in a 529 short term probably doesn't give you much bang for the buck over just having it in a savings account. This is the scenario I was initially imagining, in which the kids' tuition money is separate from what you're currently putting into a taxable account.

If you are investing additional money above and beyond what you need for tuition for this/next year and are willing/able to take some risk with it, that is the only situation in which I think this might be a hard decision. There is little downside with several kids currently in private school to funneling some extra money into 529s to be used either for their K-12 tuition or college tuition down the road, but if your IPS states that your retirement savings goal is more/year than your tax-advantaged space, you shouldn't be sacrificing your own retirement plan to front-load savings for your kids' educations. Make sure your own bucket is filled first, then decide whether you want to lock the extra savings in for kids' educations in 529 vs have a larger bucket of general savings in a taxable account.
Topic Author
rootcanaldoc
Posts: 8
Joined: Sun Jul 15, 2018 10:26 am

Re: 529 instead of taxable account

Post by rootcanaldoc »

OK let me clarify. Let's assume I have no intention of saving a certain amount in 529s at this point. This is money that I would be putting in a taxable account for my own needs later (retirement, etc.) But instead of putting it in a taxable account now why not let it grow for several years tax free and withdrawing later.
kimura king
Posts: 264
Joined: Tue Dec 31, 2019 3:59 pm

Re: 529 instead of taxable account

Post by kimura king »

delete
Last edited by kimura king on Fri Oct 01, 2021 8:20 pm, edited 1 time in total.
babystep
Posts: 775
Joined: Tue Apr 09, 2019 9:44 am

Re: 529 instead of taxable account

Post by babystep »

You got it. You need to decide when to sell and get federal tax free gain. Your state's rule may vary.
Topic Author
rootcanaldoc
Posts: 8
Joined: Sun Jul 15, 2018 10:26 am

Re: 529 instead of taxable account

Post by rootcanaldoc »

When do I sell? Good question. So maybe I want to put in 80k (or more accurately less and let it grow to 80k) and start selling when my oldest kid is in 11th grade (10k per kid for 2 yrs). Or maybe I want to put in a higher amount hoping it will grow closer to $120k and begin withdrawing 3 years before he graduates high school. If I see my kids are interested in college and I don't need the money I can elect to keep it in there for college but the money is not tied up. I have options to distribute it for my own purposes. Essentially I'm using the 529 to fund the later years of high school which I am paying for anyway.
absolute zero
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Joined: Thu Dec 29, 2016 3:59 pm

Re: 529 instead of taxable account

Post by absolute zero »

rootcanaldoc wrote: Tue Aug 03, 2021 9:41 pm OK let me clarify. Let's assume I have no intention of saving a certain amount in 529s at this point. This is money that I would be putting in a taxable account for my own needs later (retirement, etc.) But instead of putting it in a taxable account now why not let it grow for several years tax free and withdrawing later.
You are effectively holding some of your retirement investments in a 529, but only temporarily. As long as you don’t overfund, this makes sense to me.
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