Coverdell, 529 Plan, Custodial Account, which college savings plan?

[Tuckerman]

This is all so confusing. Can I roll over money from a retirement plan I have at work into one of these plans? I have two retirement plans and I think that I should switch one to a College saving plan for my child so that she does not have the huge debt that I now have. Or could I use my plan for educational purposes when the time comes? I want to be able to put an unlimited amount per year if thats possible. Any suggestions or has anyone used any of these plans?

[stupendous man]

Um, heh heh, is this about skiing?



(try fatwallet)

[Tuckerman]

Um, heh heh, is this about skiing?



(try fatwallet)

Um, no thats why its in the padded room. If I wanted to talk skiing I would be in the "Ski / Snowboard" area. If I wanted to talk swell action at Coast Guard beach I would be in the "Surf" area. There is a lot of knowledge here that is easy to get at and free. Like what I just dropped on you.

[Brock Landers]

Um, heh heh, is this about skiing?



(try fatwallet)

you stupid shit, thats why we are in the padded room.


anyway...
i believe you can put money from a retirement account into a 529. im not sure on details or anything, but im sure someone here knows. i know- not much help, but im fairly sure you can do it so scope it out.

[shmoesmith]

It depends on the retirement plan. Certain retirement plans can only be rolled into 'like' plans (with the same tax code designations etc).

I'm not 100% positive because I've never had a client want to do this, however I think you cannot do it without it being considered a distribution. While some retirement plans allow you to take a distribution for educations costs, it is only for qualified education costs and it counts towards your annual income for the year(you just get the early withdrawl penalty waived). A Roth IRA would be an example of a plan that allows distributions for education.

What type of retirement plan do you have at work? The most common ones are 401K, 457, 403B, Pension, Simple, SEP, Annuity.

Edit: When doing education funding be very careful about how you plan this. You roll that money into an account for your child that is an 'educational' account and it will count against them in obtaining financial aid in the future. Additionaly, if they are the next Einstein and get a scholarship, you wont be able to withdraw that money for yourself(should you need it and they dont)without getting penalized(just like early withdrawls on a retirement plan)

[Tuckerman]

What type of retirement plan do you have at work? The most common ones are 401K, 457, 403B, Pension, Simple, SEP, Annuity.

I have an 457 plan as well as a state retirement plan that is not optional. So I would stop sending money to the 457 plan and put it into a college savings plan I think. My employer a Local Government only contributes to the state retirement plan.

[shmoesmith]

you have a PM with more detailed info.

[goofygrin]

OK you're probably not going to be able to roll your retirement accounts to one of these plans without getting hit with major taxes.

That said, the 529 won't impact the kids FAFSA (that's the whole idea) and you can get the money back if they don't go to college.

A custodial account on the other hand is their money. You can't get it back and it impacts their FAFSA/student aid. They aren't forced to use it on education either.

Personally, I think that the 529 plans all kind of suck. High fees and poor returns. I put my kids money into a custodial trading account (tradeking.com) and have his money in the stock market. Much lower overhead than the 529 plans, and honestly, when he's going to college, we're not going to get financial aid anyway, so I'm not concerned with that.

[shmoesmith]

OK you're probably not going to be able to roll your retirement accounts to one of these plans without getting hit with major taxes.

That said, the 529 won't impact the kids FAFSA (that's the whole idea) and you can get the money back if they don't go to college.

Yes it can impact the FAFSA, just at a lower level than other types of accounts. If you try and get your money out of it (if they dont go to college) it gets counted as part of your income for the year and has a 10% penalty for a nonqualified distribution.

Under the federal methodology, state savings plans are classified as an asset of the parent if the parent is the account owner. So, if you're the parent and the account owner of a state savings plan, you must list the value of the state savings plan account as an asset on the federal financial aid application, called the FAFSA. Under the federal methodology, a parent's assets are assessed (or counted) at a rate of no more than 5.6 percent. This means that every year, the federal government says that 5.6 percent of a parent's assets must be applied to college costs before any financial aid will be forthcoming. (By contrast, student assets are assessed at a rate of 35 percent, though this figure will be reduced to 20 percent beginning July 1, 2007.)

Coverdell education savings accounts, mutual funds, and U.S. savings bonds (e.g., Series EE and Series I) owned by a parent are considered parental assets and counted at a rate of 5.6 percent. However, UGMA/UTMA custodial accounts and trusts are considered student assets and assessed at a rate of 35 percent (this figure will be reduced to 20 percent beginning July 1, 2007).


If your adjusted gross income is less than $50,000 and you meet a few additional requirements, the federal government doesn't count any of your assets in determining your family's EFC. So, your state savings plan account would not be listed.

Personally, I think that the 529 plans all kind of suck. High fees and poor returns. When he's going to college, we're not going to get financial aid anyway, so I'm not concerned with that.

I think most of the 529's that I have seen suck as well for the exact same reason.

As far as not being eligible for aid,some families with incomes of $100,000 or more may qualify for financial aid, while those with lesser incomes may not.

Your current income is the main factor that determines whether your child will qualify for aid, but it's not the only factor. Other important considerations include your assets, the number of children you have in college at the same time, and how many years you have until retirement. The federal financial aid formula specifically excludes four types of assets from consideration: retirement assets, home equity (in your primary residence only), cash value life insurance, and annuities. But colleges may include one or more of these assets in their determination. The rule is when in doubt, apply. The federal application is free, so all you stand to lose is a few hours of your time. I have associates that specialize in nothing but getting high income family's assets positioned so that their children are eligible for financial aid. There is no reason to pay for the expense if you can inteligently position your assets so you dont have to.

[Obstruction]

Onorthodox but practical advice:

Maximize your residential RE holdings and retirement and borrow against them when the fateful day comes. These assets are the only assets that fall outside of FAFSA. Two added benefits are that 1)these assets remain entirely within your control (as opposed to some investments which will fall under the control of the child upon majority, giving rise to the dreaded "red corvette syndrome.") 2) Home equity borrowing has substantial tax advantage.

[shmoesmith]

Onorthodox but practical advice:

Maximize your residential RE holdings and retirement and borrow against them when the fateful day comes. These assets are the only assets that fall outside of FAFSA. Two added benefits are that 1)these assets remain entirely within your control (as opposed to some investments which will fall under the control of the child upon majority, giving rise to the dreaded "red corvette syndrome.") 2) Home equity borrowing has substantial tax advantage.

Not all retirement plans allow you to borrow against them. Additionaly, things like 401(k)s are not all structured the same and may or may not allow you to borrow against it. If you do, you will be charged intrest(probably higher than a student loan)than is not tax deductible(student loans are). Additionaly, you will have a shorter payoff period for paying back your loans against your retirement account(usually 5 years). It is an option though.

Taking out the money out of real estate equity is certainly one way of doing it. That way you are getting tax savings on any intrest that you have to pay. That said, it is not the 'substantial' tax savings that people make it out to be.

Example: You make 100K/yr. This is the 28%tax bracket(if single). You are not actually paying 28% on your taxes. The only portion that is taxed at 28% is the ammount over $74,200.
So lets say you get a home equity loan for 25K to pay for your kids education. Home equity loans are 7.25% (depending on type of loan). So your first year paying on the loan (for simplicity sake, we wont consider intrest compounded monthly)you pay $1812.50 in intrest. This comes as a deduction, NOT A CREDIT to your taxes, effectivly dropping your taxable income by $1812.
This will therefore drop it off the top of your tax bracket. So, your actual tax savings would be 28% of $1812, or about $507 on your taxes(which is something, but not alot considering how much you will pay when you make 100k/yr)

Now if you just got a student loan, you would get the same type of tax benefit as the intrest paid on your home, but you would get a lower rate, it wouldnt need to be paid off until after they are done with college and they normally have a longer pay off period. Additionaly, you would not have had to leverage one of your most valuable assets to fund the goal.

To me utilizing your retirement plan loans, or home equity would be a poor choice for college funding. That said, they are options.

edit: to cover my butt legally
DISCLAIMER: I'm in no way trying to give advice or recommendations in this thread(there are many ways to accomplish this goal, the best of which, will depend on your familiy, resources and goals), just stating known facts that can be found on the internet on many websites. Always do your research and consult with a licensed professional before making a decision about what is best for you.

[RootSkier]

Um, heh heh, is this about skiing?

Yes, this is the exact reason I can no longer bear to read ttips.

Too many weak assed threads in the main forum. Also, too fucking much boring gear discussion and nowhere to put it but the main forum. Also, pseudo dorky dating on the main board. Lame.

Welcome to TGR. Maybe you can tell Mitch to take a lesson and add a Gear Swap and a Spray/Padded Room to make ttips readable again.

edit: sorry to disrupt what has become a very informative thread. Just had to JONG a little.

[shmoesmith]

just to give credit to the proper sources, alot of this info I pulled straight from ForeField Advisor, other info I pulled from some of my old textbooks. Forefield advisor is an awesome resource for pulling up financial information on alot of different subjects, but it doesn't come cheap at $400/yr for a subscription...it sure makes researching fast though! Good if you are a financial geek or financial advisor and need quick info or presentations in lemans terms for a client.

I'm not sure if you have to be in the financial indursty to get a subscription(my company pays for mine)but I thought I would just thought I would throw that out incase any of the mags need a really good accurate resource for doing their own research and would find it helpful.

[goofygrin]

shmoesmith, thanks for the info.

I knew the 529 impacted the fafsa, but not to the extent that the same amount in a UGMA account would.

Interesting that retirement accounts don't count toward the fafsa. Not that I need another reason to shift some funds around (again, in my tax bracket, we're not getting anything other than loans or merit based stuff), but that's a good one


The best plan that I know of is this:
Make your kid go to a JUCO that's near your house for the first two years. Why pay big college tuition for him to get the same base knowledge? Also, the JUCOs I went to had more approachable teachers and smaller classes for the base classes. (anyone remember taking a class with 400 people? You'll never see the prof and you are seriously intimidated, a JUCO class is more like a HS class and more comfortable for freshmen).

Then when you get your basics done, transfer to a bigger school, but seriously, why pay for a private school unless you're going to be a doctor, lawyer or accountant. State schools are WAY cheaper and IMHO, unless you're going to be leaving into a 6 figure position, you're way behind the 8 ball if you're immediately saddled with a $100,000 loan burden.

[mnflyfish]

Tucker,

I'm not sure if you can roll over your 401 into a 529. I would suggest though you investigate the Alaska plan. You mentioned your debt. I just set up plans for my daughters and went with the Alaska because I'm self employed. If I'm sued for some reason and end up filing BK, in any other state plan those funds are fair game, where in Alaska they are not subject to my financial problems. I would highly suggest you speak to a professional you can trust. I have a great guy do my stuff, and he's also the local Trout Unlimited chapter pres so at least a portion of my fees go to something I enjoy. Oh, and I make him drive when we go fishing. I would also suggest you avoid the large company advisors, though I'm sure there are some good folks, I've just been burned in the past with a very large advisor org so that's a personal thing.

Good Luck,
Jay

[shmoesmith]

Tucker,

I'm not sure if you can roll over your 401 into a 529.

Good Luck,
Jay

You can't roll over a 401(k) into the 529 without taking a 401(k) distribution(and thus triggering a tax penalty). You must liquidate the holdings before contributing to a 529. 529's need to be funded with cash contributions.

I would also suggest you avoid the large company advisors, though I'm sure there are some good folks, I've just been burned in the past with a very large advisor org so that's a personal thing.

Hey!!! I resemble that remark!!!
If you guys want to find a good advisor, get one that has a CFP designation ChFC designation, or ather recognized designation from the college for financial planning(they issue a good majority of the professional designations in the financial world)

[snow_slider]

Besides 529's some states also offer a paid up front plan. In virginia, you can pay like 30K into thisplan and then if your child goes to a VA school, the tuition is covered in full the entire time. If the child decides to go out of state, however, then the money is rolled into a savings account, but you don't get earned interest.

A great deal, if you're sure your child is gonna go in-state.