Raiding the (probably unneeded) college savings
January 29, 2010 10:10 PM Subscribe
Should I pull the money out of my daughter's 529? She is 19. She is taking time off and is eventually planning to do a certificate program at the community college. Meanwhile we had saved up enough for an expensive four year college. Right now there is a loss on the account. Since it is an age related investment, it is invested pretty conservatively. My understanding is that if I withdraw it now since there is a loss there will be no tax or penalty and I can reinvest in something more aggressive and more flexible, spendingwise. Does this make sense to give up the tax advantage to avoid the possibility of penalties later?
Seconding everything gjc said. You need a financial planner to determine your best course of action, and you need to look at your accumulated gain/loss, not a year-to-year gain/loss. It's a tax-deferred investment vehicle, and if you withdraw the money for non-education, any accumulated gain that you haven't paid tax on will be taxed. I don't know the details of the 529s available in your state, but can you change it to another 529 with riskier investments? I know you can usually do this in NYS. Also, if you took any state tax deductions for your contributions, they may be subject to recapture if you withdraw the money for a non-authorized use (i.e. they tax you on those previously-taken deductions).
posted by melissasaurus at 4:07 AM on January 30, 2010
posted by melissasaurus at 4:07 AM on January 30, 2010
Best answer: Also, your daughter may decide after going to community college to continue to an associates degree and then a 4-yr college and then maybe grad school. (It's actually quite common for this to happen.) You can always change the beneficiary too (yourself, your spouse, a niece/nephew, your future grandchildren, etc).
posted by melissasaurus at 4:11 AM on January 30, 2010 [3 favorites]
posted by melissasaurus at 4:11 AM on January 30, 2010 [3 favorites]
Yyou need professional advice on the tax question. Your accountant should be able to tell you whether you can withdraw it tax free.
You do have an option with keeping the 529, though, which is to change the investment policy. You don't like it now because it's age based and conservative. The 529s I've looked at (specifically Utah) have many options, including some aggressive equity-only funds. I believe you can switch between the investment options simply and with no tax consequences (check with the 529 administrator).
I sense your real question is you think you may have more money saved than your daughter will use for her education. If so, great! Too much money is never a problem. You may want to look up what all qualifies as a 529 expense, it's a much broader category than "four year college".
posted by Nelson at 8:16 AM on January 30, 2010
You do have an option with keeping the 529, though, which is to change the investment policy. You don't like it now because it's age based and conservative. The 529s I've looked at (specifically Utah) have many options, including some aggressive equity-only funds. I believe you can switch between the investment options simply and with no tax consequences (check with the 529 administrator).
I sense your real question is you think you may have more money saved than your daughter will use for her education. If so, great! Too much money is never a problem. You may want to look up what all qualifies as a 529 expense, it's a much broader category than "four year college".
posted by Nelson at 8:16 AM on January 30, 2010
Do you have other children? If so, think about keeping the money in the 529. Any remaining funds your daughter doesn't use can be passed without penalty to the next kid, or any immediate family member pursuing education.
posted by slow graffiti at 11:39 AM on January 30, 2010
posted by slow graffiti at 11:39 AM on January 30, 2010
I'd also suggest you at least consider keeping the money in the 529 but moving it to a more aggressive investment mix--at 19 I think it's rather early to make a definitive call about what your daughter's educational expenses (or those of other family members) might amount to in the long run.
posted by drlith at 12:01 PM on January 30, 2010
posted by drlith at 12:01 PM on January 30, 2010
Best answer: This is too complicated to solve without an accountant, but Ic an give you an overview of some of the issues you'll be looking at.
You mention that there is a "loss in the account." For the purposes of tax free investment vechicles like 529s, the "cost basis" for your investments is the amount of money you put into the fund compared tot he amount you take out. It doesn't count as a loss if you put in $100, the value of the account shoots up to $250, and then when you finally withdraw from the fund the investment is only worth $120. The stock market feel a lot over the past 1.5 years, but is not down much when looked at over a longer time period. You may have a loss in the account if a lot of the investment was put in recently, but if much of it has been in there over a longer period this is less likely.
The benefits also will depend on your current tax bracket. I've seen a research paper that found that the tax advantage of a 529 for a rich family that ends up not using it for education is (positive) and larger than the benefit a poor family receives if they use the 529 towards education. So it might be worth leaving the money in the account, even if it has a loss, even if you don't end up using it for education.
Your expected time horizon for the investment has changed. You thought you might need a lot of money right now, but now it looks like you might have a bit more time before you start spending this money towards education (I am not an expert on what does and doesn't qualify, but from above it sounds like there might be other things you'll end up being able to use this fund towards beside a 4 year college for you daughter). Your time horizon has changed, so your investment mix should change too. Unless an accountant thinks you are better off removing the money right now (my guess would be this won't be the case) you should should move to a slightly riskier asset mix.
Same advice I give everyone. Invest in a mix of no-load low-fee mutual funds. Maybe choose one or two Equities funds, and a bond fund. You could also get a REIT (real estate investing in fund form). And you should also keep some of it in cash or cash-like assets. I wouldn't stress too much over picking the right ones, just stay away from anything with high fees (>0.5%). The key is choosing the right percentages of each of these asset classes. The more risk you are willing to take the more should go into the riskier asset classes, and vice-versa. Here is a over view of the ranking of the risk spectra .
Out of nowhere I might suggest 25% large cap US equities, 25% mid or small cap or international equities (slightly riskier, but higher returns than large cap), 25% bonds (of large companies or municipalities) (these are slightly lower risk than large cap equities), 25% Cash-like assets. But it all depends on when you think you might need the money, and how much of it you might need.
You really need to speak to an account about the tax-related issues of withdraw vs don't withdraw, but don't get suckered into getting investments that have high fees regardless of whether in or out of the 529. (In short research shows that despite taking high fees many mutual funds do worse than a passive investments like the S&P500, and that the previous good returns of a fund manager don't predict future good returns. So there is no way to tell if the extra fees of your investment manager are getting you a better investment, but on average they definitely aren't)
posted by vegetableagony at 3:42 PM on January 30, 2010
You mention that there is a "loss in the account." For the purposes of tax free investment vechicles like 529s, the "cost basis" for your investments is the amount of money you put into the fund compared tot he amount you take out. It doesn't count as a loss if you put in $100, the value of the account shoots up to $250, and then when you finally withdraw from the fund the investment is only worth $120. The stock market feel a lot over the past 1.5 years, but is not down much when looked at over a longer time period. You may have a loss in the account if a lot of the investment was put in recently, but if much of it has been in there over a longer period this is less likely.
The benefits also will depend on your current tax bracket. I've seen a research paper that found that the tax advantage of a 529 for a rich family that ends up not using it for education is (positive) and larger than the benefit a poor family receives if they use the 529 towards education. So it might be worth leaving the money in the account, even if it has a loss, even if you don't end up using it for education.
Your expected time horizon for the investment has changed. You thought you might need a lot of money right now, but now it looks like you might have a bit more time before you start spending this money towards education (I am not an expert on what does and doesn't qualify, but from above it sounds like there might be other things you'll end up being able to use this fund towards beside a 4 year college for you daughter). Your time horizon has changed, so your investment mix should change too. Unless an accountant thinks you are better off removing the money right now (my guess would be this won't be the case) you should should move to a slightly riskier asset mix.
Same advice I give everyone. Invest in a mix of no-load low-fee mutual funds. Maybe choose one or two Equities funds, and a bond fund. You could also get a REIT (real estate investing in fund form). And you should also keep some of it in cash or cash-like assets. I wouldn't stress too much over picking the right ones, just stay away from anything with high fees (>0.5%). The key is choosing the right percentages of each of these asset classes. The more risk you are willing to take the more should go into the riskier asset classes, and vice-versa. Here is a over view of the ranking of the risk spectra .
Out of nowhere I might suggest 25% large cap US equities, 25% mid or small cap or international equities (slightly riskier, but higher returns than large cap), 25% bonds (of large companies or municipalities) (these are slightly lower risk than large cap equities), 25% Cash-like assets. But it all depends on when you think you might need the money, and how much of it you might need.
You really need to speak to an account about the tax-related issues of withdraw vs don't withdraw, but don't get suckered into getting investments that have high fees regardless of whether in or out of the 529. (In short research shows that despite taking high fees many mutual funds do worse than a passive investments like the S&P500, and that the previous good returns of a fund manager don't predict future good returns. So there is no way to tell if the extra fees of your investment manager are getting you a better investment, but on average they definitely aren't)
posted by vegetableagony at 3:42 PM on January 30, 2010
Response by poster: Reading your responses, I realized that I had assumed the difference between "life of plan total contribution" and current value represented an overall loss. However, we took out $25k in 2008 to pay for her freshman year of college so we have a gain of $23k rather than a loss of $3k. Since we have a taxable gain, I think we are better off leaving the money in the account but changing to a more aggressive investment mix (as several people suggested). Eventually she will either use the money or it can be passed to future grandchildren or, as vegetableagony noted, the benefit of deferring taxes all those years may compensate for the 10% penalty.
posted by metahawk at 4:31 PM on January 30, 2010
posted by metahawk at 4:31 PM on January 30, 2010
This thread is closed to new comments.
posted by gjc at 1:33 AM on January 30, 2010