Hello former FWers and fragile dealers need your suggestion on saving for my newborn. Just wanted to start early
I have been looking at how to save money for my NB and looks like currently 529 is the only option i could find so far…
Is there any other ways to save…ill open a roth when he gets his first W2 but until then i would like to invest in something for him.
Also im looking at making an investment of 5k on my nephews name whos currently 4 yrs…which ill probably give it to him when hes 16.he already has a 529 plan his parents are contributing…where would be a good place to put this for 12 years with good returns.
Tax efficient index funds and ETFs can be held in a brokerage account. Assuming long term gain rates don’t increase significantly, this could be an excellent option.
Many people jump on the 529 idea early on, when there is no guarantee that the child will want to go to college or be especially suited for college. The penalties for not using 529 funds for education were severe when I checked into them many years ago.
Agree with @BostonOne. In addition, individual bonds/CDs can make a good choice, if the idea is to save for a certain number of years before the money is touched.
I’m years out of this, so this might be dated information. In the past, parent’s 529 money counted against the kid’s eligibility for financial aid. A trick around the system was to put the 529 in someone else’s name (Granny?). Then, after the FI was worked out, change the beneficiary.
I’m not recommending this – just discussing it. It has some ethical concerns. But then I don’t know as I see too much about the financial aid situation that IS particularly ethical…
Also, think about saving for yourself instead. IRA (Roth or trad), 401k, taxable account, etc. Then, when kiddo is 18 or whatever, you can choose THEN what to do with the money. After doing a bit of this for my kids, if I had it to do over, I would have saved / invested more for me and less for them. That said, the 529 worked out ok for us. Not great, just ok.
It’s a 10% penalty on the gains. I wouldn’t call it “severe,” I think it’s the same as for unqualified 401k withdrawals and probably all other similar vehicles. Also, since 1/1/18 you can take out $10K tax-free for K-12 tuition (though if the child “isn’t suited” for college, they may not be suited for private K-12 either).
This is still the case, but it is not necessary to change the beneficiary (it only matters that parents aren’t the owners of the account – read me).
Re: 401k. Wait until the get a job, any job, and open a Roth IRA for them. Fund the Roth with a gift of either their total take home pay for the year or the yearly max for an IRA, whichever is lower.
I agree that the penalties are not that severe when you look at the options. One concern is what if your kid gets scholarships. Penalty is waived for taking cash out of the 529 plan up to the amount they receive in scholarships.
Also beneficiary can be changed to anyone in your extended family. It can be a first cousin, niece or nephew, uncle/aunts, spouses, inlaws. If your initial beneficiary (your child) isn’t college material after all, agree with a family member to pay for their kids’ college education in exchange for a corresponding annual “gift” (say up to the annual exemption limit $15k per donor per beneficiary). Or you can just sit on the account and change beneficiary to your kid’s children.
If all fails, consider your luck. Paying 10% penalty on gains in exchange for not having to pay anything for your kids’ education. Besides, if the money was in taxable account, you’d likely pay annually more than 10% on gains anyway.
Now that’s assuming you’ve already maxxed out your other means of tax-deferred investments. IRA and 401k can be tapped out penalty-free for paying for higher education expenses. So I’d invest in those first before putting money in 529 plan. Especially since nobody is gonna let you borrow money for retirement where as borrowing for college is very common.
You’ll still have to pay income tax on the gains in addition to the 10% penalty, so this is not a valid comparison.
Not quite. The 401k withdrawals may be penalty-free only if you don’t have any other funds and can qualify for a hardship withdrawal. And for either 401k or IRA you’d still have to pay income taxes on any withdrawals.
Was coming from the angle of someone with Roth IRAs and Roth 401k which in this case would be tax- and penalty-free withdrawals. Yes you need to qualify for hardship withdrawal but it’s not like you’d want to touch those funds if you could avoid it.
As far as the lifetime vs annual gift exclusion, with inflation those estate exemptions could come into play for many people here. Plus there is no guarantee that the limits will remain the same in the future, especially considering the current debt/annual budget deficits that may well force changes in fiscal policy in the intermediate to long term. And why reduce your estate tax exemption (whatever it may be in the future) if you can avoid it by using the annual gift tax exemption to maximum effect? For most college funding purposes, the annual gift exemption should be about the right size to cover expenses without decreasing your estate tax exemption.
From paying for college for my own kids. $60k/yr tuition+board cover costs at most institutions.
By the way, for someone so up to date with this, why do you keep talking about $5.6M estate tax exemption per person? Might want to update your numbers…
Anyway, back one topic, the bottom line is the rules for changing beneficiaries for 529 plans may allow you to avoid paying penalty even if your kids don’t go to college.
As Shandril said, the exemption could be reduced in the future. Technically, it’s setup to revert back to pre-TCJA numbers.
You pointed out above “then the argument is to use the exemption NOW.” Which seems like a good idea. However, I’m not sure why you think the annual gift exclusion and the estate tax exclusion are mutually exclusive. Why not use them both? To add to this, there may be non-tax reasons why a taxpayer may not want to use up all of their exemption now. One example is if they want to save some of the exemption for heirs that are not currently alive, but there are many other possible examples of why one may want to save some of the exemption.
Why is a 15k annual exclusion not relevant? If the estate tax rate is 50%, the ability to use the annual gift tax exclusion saves a couple $15k per year ($15k contribution from each spouse). I haven’t met anyone willing to just throw $15k away every year in taxes.
If you surpass the annual exclusion amount (and possibly if you don’t in some circumstances - I seem to remember hearing that, but don’t recall the details), you’ll have to file a return. This increases financial complexity and return preparer costs/a taxpayer’s time.
Also, regarding educational costs, IIRC there are special exclusions.
Besides, if the money was in taxable account, you’d likely pay annually more than 10% on gains anyway.