529 Plans?

labro · February 2016

H and I were whining talking to his sister last night about taxes. Over the course the call she mentioned we may be able to deduct contributions to a 529 plan to help reduce our tax bill. I've been doing some research and it sounds like is Partially True. We can't take the deduction for our federal taxes, but our state does allow us to claim 529 contributions as a deduction, up to $2k each year. Anyway, this obviously won't change what we owe for federal taxes...but upping our state refund could at least help relieve some of the hurt. What does MM think? We don't have children, but it sounds like the rules on a 529 plan allow for children not even born, and also for nieces and nephews (which we do have at least).

ETA: After further research, Georgia allows us up to $2k PER beneficiary. So we aren't even limited to a max total of $2k. If we wanted to, we could do a max of $6k since we have our 2 nieces and 1 nephew that we'd open a plan for.

hoffse · February 2016

You're correct about how the deductions work.

I actually opened one for myself this past year because my LLM tuition qualifies as an education expense. I made contributions and withdrawals all year last year. Saved us $500 on our state taxes for 2015.

They aren't a great deal if you don't plan to use them for qualified education expenses. But if you plan to have kids (or want to help with the education for your nieces or nephews), then yes - they can be excellent. Contributions to 529's grow tax-free as long as they are used to pay for qualified education expenses. The definition of that was recently expanded, and most expenses that go toward earning a degree (including graduate/professional degrees) qualify. There are a few restrictions, but not too many. You can get that money back if your beneficiary gets a scholarship, etc. They're pretty great in general.

For you guys though, I don't know that I would make a 529 contribution this year. For most people, it ties up their money until they can spend it on a qualified education expense. Is your deduction $2,000? If so, the actual tax savings is likely to be pretty low since state income tax rates usually aren't that high. I would absolutely take advantage of 529's if you guys have kids or if you decide to help with education expenses for your niece/nephew (or even for yourself), but I don't think I would tie up my money in one of those accounts just to save a few hundred bucks in taxes. I would wait to use them when there's a real plan involved for how to spend the money in the future.

hoffse · February 2016

Is it a deduction or a credit against your actual taxes though?

If it's a deduction, you have to multiply $2,000 by GA's state income tax rate. If it's a credit, then it's $2,000 in tax savings outright.

EDIT: I just looked it up, and it says it's a deduction. GA's income tax rate is 6%. So you're actual tax savings would be $120 per beneficiary.

Again, they are awesome vehicles if you plan to use that money for college savings anyway, but the primary tax advantages are actually on the back end for most people since your investments grow tax-free.

labro · February 2016

@hoffse I guess I like the 529 Plan primarily because it would be a huge help to our nieces and nephew if and when they go to college. Obviously we take on a risk if none of the beneficiaries go to college. But the additional return amount (even if it only adds up to a few hundred dollars) is a perk. At this point, any small way to balance out our federal tax bill with a bigger state refund is a nice bonus.

What do you mean by real plan? For us, it seems advantageous to open one right now since our nieces and nephew are all very young so the account has plenty of time to grow. Plus the immediate and on-going (if we were to continue to make contributions) benefit of the boost to our state tax refund.

ETA: Good point re: deductions vs. credits. $120 x 3 = $360 that we'd see if we did the max. It isn't huge. This idea is growing on me though just from the pure excitement over doing something positive for our nieces' and nephew's future education.

hoffse · February 2016

labro said:

@hoffse I guess I like the 529 Plan primarily because it would be a huge help to our nieces and nephew if and when they go to college. Obviously we take on a risk if none of the beneficiaries go to college. But the additional return amount (even if it only adds up to a few hundred dollars) is a perk. At this point, any small way to balance out our federal tax bill with a bigger state refund is a nice bonus.

What do you mean by real plan? For us, it seems advantageous to open one right now since our nieces and nephew are all very young so the account has plenty of time to grow. Plus the immediate and on-going (if we were to continue to make contributions) benefit of the boost to our state tax refund.

***************SIB********************
Sorry I wasn't clear - by "real plan" I meant that you were planning on making that gift or saving that money anyway because you have a targeted spend date in mind. For most people that's when their kids are born and they know they need to start saving for college because they only have 18 years to do it. If you are going to save for college anyway, you might as well get the tax perks of a 529.

In the original post it sounded like you wanted to make the contribution primarily for the tax advantages. My point is you tie up a lot of money for a relatively small tax savings. Now if you were going to give that money to your nieces/nephews for their college fund anyway, then by all means do it through a 529.

jtmh2012 · February 2016

labro said:

ETA: After further research, Georgia allows us up to $2k PER beneficiary. So we aren't even limited to a max total of $2k. If we wanted to, we could do a max of $6k since we have our 2 nieces and 1 nephew that we'd open a plan for.

I wish I were your nieces and nephew....:)

hoffse · February 2016

ETA: Good point re: deductions vs. credits. $120 x 3 = $360 that we'd see if we did the max. It isn't huge. This idea is growing on me though just from the pure excitement over doing something positive for our nieces' and nephew's future education.

Yeah, if you guys want to make those gifts anyway, then a 529 is a great vehicle for it.

A piece of non-legal/non-tax advice though... you will need your nieces/nephews SSN's to make them the beneficiaries. Presumably you will have to ask their parents, and that will lead them to knowing that these accounts exist. You can actually change beneficiaries on 529's later. If you decide to change the beneficiaries in the future (like to your own hypothetical children if you plan to have them), you might have to explain that to the parents who think that money is going to be coming in the door years from now.

In my family, that kind of thing would go over without a hitch. In H's family it would start WWIII.

labro · February 2016

@hoffse I won't lie, it was firstly a "Omg, we can reduce our tax burden!", but we've always wanted to do something for them in regards to college....we've just never come up with a formal plan. It'll take some more research and discussion I think, but this is something I think I really want to do first and foremost for them.

jtmh2012 said:

labro said:

ETA: After further research, Georgia allows us up to $2k PER beneficiary. So we aren't even limited to a max total of $2k. If we wanted to, we could do a max of $6k since we have our 2 nieces and 1 nephew that we'd open a plan for.

I wish I were your nieces and nephew....:)

I mean....I'm pretty awesome. Look at this super cool onesie I got for my niece.

labro · February 2016

@hoffsee LOL at WWIII! Thankfully, my H's immediate family and mine mostly stay out of the drama. We're totally comfortable with getting their SSNs. If we ever have our own children, we'd just open another account for them.

smerka · February 2016

This link is from Clark Howard. He researched different states plan and only recommends certain ones. You don't have to invest in the plan for your state but that is the only way to get the tax refund. http://www.clarkhoward.com/clarks-529-plan-guide

smerka · February 2016

HSAs are currently my favorite tax avoidance vehicle.

hoffse · February 2016

smerka said:

HSAs are currently my favorite tax avoidance vehicle.

Truth. You get a 3-fer with those:

1) Current deduction in your contribution year

2) Grows tax-free

3) The time frame to take your withdrawals is really flexible, which can result in an effective boost for your retirement plan

But you have to have a HDHP for it to work.

smerka · February 2016

And you actually have to move money within it to the investment side so you don't just get a piddly amount of interest. And another bonus, you pay for medical expenses with tax free money because deducting medical expenses is nearly impossible now.

lbonga1 · February 2016

Another option is to max your retirement contributions if you have not already done so. Contributions to an IRA can still be made to count for last year, and it would reduce your taxable income depending on your adjusted gross income. You can put up to $18k in a 401k/403b/457 and $5500 in an IRA.

labro · February 2016

@lbonga1 We're already maxing our contributions for our 401ks and my Roth IRA for 2016.

I just checked the IRS Withholding Calculator now that we know what H's bonus and raise will be too and we'll actually be good for the year, we'll even get a refund (not my ideal, but at least we won't owe).

@smerka I love Clark Howard so much! I found that article yesterday and I was so glad to see Georgia's 529 Plan is on his "Dean's List"! H used to have an HSA but it seemed like when we had it, it caused us nothing but problems and we ended up closing the account. It's something to think about again....my H's company offers some really really excellent health insurance plans and the one with the HSA is kind of meh to us.

hoffse · February 2016

@labro, my favorite thing Clark Howard does is track airline deals out of the Atlanta airport on his website. H and I usually fly out of ATL for international trips since there are lots of direct flights, and it's just a 2-hour drive for us (and H's dad has a consular parking pass which he lets us use). I check that part of Clark's website almost every day.

Not sure if you guys are in/near Atlanta or if you guys travel, but his website is a goldmine of info for Atlanta-specific deals. He posts domestic deals too.

http://www.clarkhoward.com/clarks-atlanta-travel-deals

I also really like his travel philosophy. He says that if you see a smoking deal on a flight you should buy it and then figure out why you want to go there! That's because it's much harder to get deals on flights than hotels.

I also like that he takes his staff on a big trip each year, using his travel philosophy. They've been to Hawaii, Montana, Amsterdam... it just depends on which deals he can snag for the office, lol.

labro · February 2016

@hoffse Yes! We're in northern metro Atlanta. I usually read his column but I never knew he shared Atlanta flight deals on his website. I love his travel philosophy, although i think it must work for people who get more vacation time than I do!

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