Alternative to 529 Plan?

3,325 Views | 17 Replies | Last: 3 yr ago by cjsag94
DBill
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3:32p, 12/21/22
AG
Wife and I are looking into alternatives to a 529 plan for our 9 and 8 year old. Basically, we want the flexibility if they choose to not go to college, there will still be something there to help fund trade school, a business start up or another endeavor. We firmly believe and tell our kids they can choose to go, or not to go to college and if they don't, trade schools or opening your own business are very under rated and will be in much higher demand than they already are.

What do some of you recommend for an alternative to a 529 plan in this scenario for kids?
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techno-ag
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3:38p, 12/21/22
AG
It seems like a lot of trade is taught at the community college level, no? In which case Texas Tuition Promise Fund or whatever they call it these days would cover it. I know they also can release the unused funds with interest to the child after they reach a certain age.
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DBill
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3:43p, 12/21/22
AG
My fault, should have included we are out of state, no longer in Texas.
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southernboy1
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8:12p, 12/21/22
AG
The oldest daughter had a 529 we funded with stock show earnings. She decided to join the Army and proceeded to by a house. I took the money out for her closing cost and down payment. Really did not hit us too hard with penalties.
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GE
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In reply to DBill • 9:00p, 12/21/22
AG
Are you already both maxing IRAs?
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DBill
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In reply to southernboy1 • 9:40p, 12/21/22
AG
southernboy1 said:
The oldest daughter had a 529 we funded with stock show earnings. She decided to join the Army and proceeded to by a house. I took the money out for her closing cost and down payment. Really did not hit us too hard with penalties.


Good to know
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DBill
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In reply to GE • 9:42p, 12/21/22
AG
GE said:
Are you already both maxing IRAs?


Maxing both 401k and IRA, getting an HSA setup, work doesn't offer one so going offline for it and fund a HYSA monthly.
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JSKolache
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9:59p, 12/21/22
AG
Roth is the answer. You can withdraw your contributions penalty free. Only penalized if you withdraw earnings above the principal.
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Petrino1
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In reply to JSKolache • 10:33p, 12/21/22
JSKolache said:
Roth is the answer. You can withdraw your contributions penalty free. Only penalized if you withdraw earnings above the principal.


Isn't this the exact same for a 529?
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Harkrider 93
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In reply to Petrino1 • 8:26a, 12/22/22
AG
ea1060 said:
JSKolache said:
Roth is the answer. You can withdraw your contributions penalty free. Only penalized if you withdraw earnings above the principal.


Isn't this the exact same for a 529?
It is, but the Roth is much better if there is any money leftover.
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Harkrider 93
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In reply to DBill • 8:28a, 12/22/22
AG
DBill said:
southernboy1 said:
The oldest daughter had a 529 we funded with stock show earnings. She decided to join the Army and proceeded to by a house. I took the money out for her closing cost and down payment. Really did not hit us too hard with penalties.


Good to know
I can't guarantee this would work, but if you changed the ownership to your daughter, and then she took out the money for the house, it may have been less of a tax hit. This does depend on who is in a lower tax bracket.
As the waves roll, the eagle will fly to the setting sun.
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Troglodyte
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9:59a, 12/22/22
AG
I think 529 funds can be used for vocational/trades, community college, etc. It's not only college. Also, you can always change beneficiaries, so it one kid goes and the other doesn't, you can spend all on one. Or, you can move to grandkids. Just don't over fund. With the cost of college these days, over funding is tough to do.
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Baby Billy
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10:14a, 12/22/22
AG
UGMA is what you're looking for if you want more flexibility. The downside of those accounts is that once they turn 21 any money left in there has to be transferred into their name and you technically have no control over what they spend it on.
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Baby Billy
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In reply to JSKolache • 10:19a, 12/22/22
AG
JSKolache said:
Roth is the answer. You can withdraw your contributions penalty free. Only penalized if you withdraw earnings above the principal.
Not a fan of this strategy. You're so limited on how much you can put into those Roth IRA's to grow tax-free forever. That's $6,000 you'll never have the ability to put in there again so why waste the future tax-free growth of those dollars on college when there are other options you can use?
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jt5798
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10:29a, 12/22/22
Jerry beat me to it, but UGMA is what I opened for all 3 of my grandkids when they were born, through my Fidelity account. You can direct it, contribute on a scheduled basis into individual stocks or mutule funds and it is not tied to attending college, but could be used for that purpose if desired. It is not tax-free, but the child's SS number is tied to the account, so they technically are responsible for any taxes incurred during the year which are usually negligible.
Not sure if it's better, but it is another option to consider.
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Diggity
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12:45p, 12/22/22
AG
I know a lot of folks worry about overfunding their 529 (I am not one of them unfortunately) so this change in the tax laws should help alleviate some of those concerns.

In a nutshell, you'll be able to move up to $35K into your beneficiaries Roth without any penalty/tax hit.

Quote:
Section 126: 529 to Roth Accounts

SECURE Act 2.0 adds a new way to do a tax- and penalty-free rollover from a 529 account to a Roth IRA under certain conditions. Currently, money in a 529 that's distributed for non-education expenses can be subject to penalties and taxes.

But under the new provision, beneficiaries would be able to do a rollover of up to $35,000 aggregate in life from a 529 to a Roth IRA in their name. The rollovers would be subject to the Roth IRA annual contribution limits and the 529 would need to have been open for at least 15 years. Earnings and contributions would be treated like any other Roth account or rollover. However, the income limitation to be able to contribute to a Roth IRA is removed for the 529 to Roth IRA rollover, but the annual contribution limit remains.

My rating of this provision, which would go into effect in 2024, is positive. The main benefit here might be to remove the uncertainty that happens if you were to overfund a 529 or if your kids don't need it. Now, you likely can reposition that money back to yourself as a beneficiary to your Roth IRA or to your children's Roth IRA. For the vast population of Americans, overfunding college expenses by $35,000 in 529s is not a big risk, but it can happen. But this does give parents a lot of certainty that if they do overfund, their kid gets a scholarship, or doesn't go to school that the money can eventually be repositioned for this kid's retirement in a tax advantaged way inside of a Roth IRA.
https://www.forbes.com/sites/jamiehopkins/2022/12/22/the-secure-20-acts-impact-on-roth-iras/?sh=74329e244517
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DBill
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1:51p, 12/23/22
AG
Thanks for all the advice, I'll research these and see what fits best. I went ahead and setup a meeting with a financial advisor to get some more "planning" in the works.
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cjsag94
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In reply to Petrino1 • 5:44a, 1/6/23
AG
ea1060 said:
JSKolache said:
Roth is the answer. You can withdraw your contributions penalty free. Only penalized if you withdraw earnings above the principal.


Isn't this the exact same for a 529?


No, it isn't the same. Every 529 withdrawal is pro rata earnings and principal. Roth you essentially withdraw FIFO so tax free until you've taken out so the principal (then ordinary income +penalty of not associated with education or other exceptions). There are the new laws in place mentioned above to give some flexibility for excess 529 funds.

With that said, people with wealth, which I assume OP has or wouldn't be worried about the taxes on the earnings, are actually loading up retirement savings to actually fund retirement. So, if using Roth to save for college, you probably aren't saving properly for retirement (which is much more expensive than college). In short, I think using Roth for college savings is a low earner/low savings investor strategy, in which case the tax shelter benefit is negligible anyway.

0% cap gains and dividend taxes at 12% or lower tax bracket anyway.. no need to tax shelter for these people.
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