"You can lose a lot of things, but no one can take away the knowledge you gained."
- Dr. B. Roberds
My parents told me that if nothing else, they did what they could to provide a good education to me. For that I am grateful. I also think about the quote above, which came from one of my former bosses. Along that vein, I'd like to provide the opportunity for knowledge to my kid. To me, this means college and beyond.
Brief primer on 529 plans: they are a nice way to save money for college. After-tax money can be invested and can grow tax-free, plus the money won't be taxed if used for a qualifying expense such as college, or more recently, even lower grade schools (K-12.) There is also no limit to the length of time a 529 plan can be held. For compounding, this is huge, and this doesn't even take into account "529 super-funding" that rich people can take advantage of!
Here's the game, how can you maximize the benefits?
Let's assume you have a kid and open a 529 account, and you do what you can to contribute the yearly maximum to it, which for some is already a stretch. Here's one reason example of why it might be worth the trouble.
Example:
- Maximum contributions are made at the beginning of each year and the market grows, the rate I chose is 6%.
- Caveat 1: 529 plans have limits to contributions once an account reaches a certain limit. I think that limit is $300k currently (plan-dependent) which is still quite a lot. Presumably, once the beneficiary goes to college and starts to spend it down, contributions could begin again.
- Caveat 2: the table below uses the tuition of a public university, in this case UCLA, semi-randomly picked as a desirable place to attend, with strong academics, but not the cheapest public university.
- Kid goes to college at year 19. For simplicity in this example, goes to graduate school right after.
- The assumption here is that the graduate program is not a business or medical school, which could result in much higher costs and additional school time like med school.
- Consider the following, assuming one could make the maximum contribution and the market returns at 6% and college tuition inflation rate as 4%. Click here for larger version.
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| After graduation, there's money left over. |
- It's possible that the kid doesn't spend it all!
Firstly, here is where there is a problem. A parent who designated a child as the beneficiary can designate another beneficiary as long as it's the equivalent generation as the child, like a sibling, or a first cousin.
You can't re-designate yourself (as a beneficiary) to a grandchild without triggering something called the generation-skipping gift tax.
- If kid never has grandkid, unless you have another "member of the family" beneficiary to designate to, then you're boned, the tax penalty is waiting.
But! This is where the game gets interesting.
What's unclear to me is, and my own research has not borne an answer to my satisfaction:
What's unclear to me is, and my own research has not borne an answer to my satisfaction:
- If the child is the beneficiary, graduates, then lets the account continue to grow, can said child (or account owner) designate the grandchild as a new beneficiary without the generation skipping gift tax?
The consequences are:
- If not, it becomes important not to overfund a 529 plan, otherwise withdrawal comes with tax penalties.
- If yes, then overfunding a 529 plan might be really advantageous, such as continuing contributions for said child after graduation but prior to grandchild, thus funding multiple generations worth of college expenses through the power of compounding.
- Based on this, it might be possible! Which means, I need to do more research.
I took the following snippet from the link above and it applies to this whole post:
This information does not constitute tax advice and is provided for informational purposes only. Please consult your tax advisor, financial advisor, local taxing authority, and/or plan provider or sponsor for more information.
