Ok, I see, yes you did say equal to the loans.
But, are you pulling out 529 money in 2015 that is equal to loans from 2014 and prior?
The 529 withdrawals need to be in the same year that the expenses were incurred to avoid tax/penalty.
That’s sad for my daughter, but happy for her future offspring!
Thanks, @intparent, for your comments, but I feel I’ve not been very clear. The idea is not for me to use any of the money. Ever. The idea is to get excess money out without paying tax on the gains (if possible), and without paying a penalty. This money would still be my daughter’s. It’s me working with the IRS rules to help my daughter keep as much of the 529 money as possible. Interest free loans are a pretty good deal, if you ask me, which is a reason why I suggested she take the whole financial aid package that was offered. Once the money is out, she might use it for anything (a car, down payment on a house, pay off loans, whatever…once it’s out, it can be used for anything). Too bad the previous year loan quantities are not a resource that can be tapped.
So… your daughter is dodging the gains?
Does your daughter have any merit scholarships? She can take out the equivalent without paying the penalty (but still paying taxes on the gains)
sorry, I just reread the thread, your daughter is already out of college, so you can’t do the above.
I’m a bit confused, but tell me if I got this right.
D1 started college in 2010 and you used all of the balance in her 529 because she went to private college.
She took out loans for 4 years, total of $12,000.
D2 started college in 2013 and since she goes to public college you think there will be extra money in her 529 when she is done. Did both daughters have the same amount in their 529? Tuition costs go up every year, so you might have less than you think. She has two more years of college, right? Also why couldn’t you have her not take out loans since she goes to the cheaper school and pay more out of the 529 funds?
Wow, OP, weren’t you complaining on CC when your daughters loan was switched from subsidized to unsubsidized?
You didn’t tell anyone you actually had 529 funds.
You might also want to change your screen name, not too hard to find your personal info.
Someone who works in IT should know that the internets are forever.
@mommdc, You are VERY good at picking up the essentials from my rather disjointed presentation!
$19,774 in loans, actually, for D1.
Both started with the same amount, yes.
As to why I suggested to D2 to accept the whole financial aid package (including loans) well, maybe I’m doing that wrong too, hehe! My thinking, which may be flawed, was that since the loans are interest-free until graduation, there’s no down-side. And by having that debt (student loans) and later paying it off, she will improve her credit score. She has a standard taxable account where she will stash the money pulled from the 529 (that have been pulled out without taxes on the gains). That stash will be available for any use (including paying off the loans) after graduation.
The whole purpose of the question here was supposed to be an “us against the IRS” (legally, of course), but it turned into my somehow stealing from my kids’ money. Money I freely gave them anyway! There are a lot of moving parts in my case, since I can change beneficiaries, and pull money, so essentially it’s one big pot of money from both accounts and, for the benefit of my kids, I’d like to help them get it out by paying the least taxes on it.
It’s actually much more simple than I thought. You get the budget number off of the financial aid statement, subtract $4,000, subtract what you paid the University through direct payments, then pull whatever the remainder is and stick it in the kids’ holding account until they graduate. I wish I would have know that before because then I wouldn’t have been saving all of those receipts.
I was complaining about that, as a matter of fact. But as far as I know, I’ve not described that I’ve done anything illegal, or even something not to be proud of. The 529 funds were listed as assets in the parents’ side of the FAFSA. Maybe you could explain more about what I should be cowering from? I really don’t care if the world knows the details of how I’ve tried to negotiate this paying for college jungle, along with my screwups. And if I did somehow break a law, it was without malice of forethought.
“Dodging” may have more of a negative connotation than I’m fully comfortable with. I am assisting my daughters in legally minimizing taxes. Seems like the prudent thing to do.
I don’t think there are accusations of you stealing your kid’s money. There are accusations of you trying to get a tax break for a college savings program and not actually spending the money on college expenses or loan payoff. Trying to game the system (“us vs the IRS”), you get burned sometimes. So sad.
I don’t know much about student loans, but isn’t there an origination fee? Also to build credit I thought getting a loan and then paying it off right away does not do much to establish good credit but paying your monthly payments on a timely basis over an extended period of time does. So if she has to make payments now to accomplish that, why not not do loans and save that money for a future downpayment?
Also correct me if I’m wrong, but don’t you have to use the 529 money for each term for qualifying expenses to be tax free? I didn’t know you could stash the money until graduation and then pay off loans.
And you can switch beneficiaries even after that person has finished college?
I guess I just don’t get the financial gymnastics. If I had money saved in a 529, I would pay the expenses for the four years and any shortage would be taken out as loans. Alternately if the other child had money leftover I would leave it for her to use for her children or if she really needs the money to deal with the tax consequences. How much gains would there be left at the end? And without loans the ending balance would be much lower.
A 529 account has tax saving benefits if used for qualified education expenses, that’s what it’s for, to help people save for college and if you live in a state where you get a deduction from income for money contributed, even better.
It’s similar to a retirement account because the tax savings is for a specific purpose and if you withdraw it early or for nonqualified purposes you pay tax and/or penalties (with some exceptions).
The origination fees are small, although they went up a bit this year. I think last year it was something like $30 if you took the full subsidized loan amount. Also, the loan is on the books for a few years until the kid graduates, even though someone else is paying the interest. So I think it still could help the kid’s credit rating.
You can switch beneficiaries whenever you want to. You can name yourself even if you want to go back to school. It doesn’t matter if the original kid graduates.
You actually hit on a good point about leaving any money in there for her to use for her kids. There is a movement afoot in Washington to do away with the 529 tax benefits, although contributions already made would be exempt. Assuming these would be exempt, it might be one of the best ways around to give your kids a head start on their college education expenses for their kids to leave the 529 in place with the money remaining in it and growing. They might not have the same opportunity to invest in 529s that we have today. One concern would be that 529 programs might shut down if there weren’t many new investors (no tax break, why invest there?). Not sure what they would do about that.
Here is an article in the NYT earlier this week:
Your credit score is not benefited from the ‘payments’ made by the government during the deferral period, nor is it benefited from the unsubsidized part of the loan when the interest is just accruing. Your credit score is helped when you make a payment. If you make one large payment, you may be helped by a factor of ‘one’; if you make monthly payments for 24 months, then you’ll be helped by a factor of 24. The credit score considers student loans an installment debt, just like a car loan. If you pay it on time, as agree, it is to your benefit. If you pay it off early, it’s not as beneficial on the payment side of the score, but of course you’ve reduced your debt load so it is more beneficial on that side of the scoring formula.
Honestly, you are better off with a car loan. Shorter term, secured debt, often a lower interest rate.
Not really all that sad because of this:
and also I figure I’m ahead of where I would have been in the “do nothing” scenario. What my original question was about was optimizing. I screwed-up optimizing, but I got (and will get) the overwelming fraction of the money out, with tax free gains. According to the 1099-Q forms, 47% of the money I’m spending are gains. Yipee! I love that by starting early and taking advantage of the program defined by elected officials, I didn’t have to pay income taxes on about half of the money used to fund my kids’ education.
As to the NYT 529 article, when they talk about people that would have saved for college anyway, they’re talking about me. IMHO, if you take away the tax-free gains, you might as well just kill the program completely (especially if the goal is to make taxes simpler).
@intparent, thanks for clarifying about the origination fee and changing beneficiaries, that is good to know.
And that is an important consideration with possible changes for 529 as far as new contributions.
@sengsational, we live and learn.
They ARE talking about you, and people like you are one of the reasons they are talking about taking this benefit away from everyone else. Thanks a lot…
intparent, no, the OP asked a question about using 529 funds for past expenses and has excepted they can’t do that. The OP didn’t [try]try** to do anything illegal. He didn’t try anything, he asked. I’m not sure what your problem is.
You don’t have to use 529 money each term, just within the tax year. You could pay expenses all year(spring, summer and fall semester) and reimburse yourself in December. And what everyone is telling the OP is that you can’t use 529 funds based on loans that paid expenses in prior years. Yes, you can switch beneficiaries after the original beneficiary has finished college.
Very interesting thread. Has nothing to do with me as we never set up 529 accounts. But recent news about proposed changes had me curious so this thread caught my attention, too.
I don’t really see any gaming the system going on in here. The 529 was funded with after-tax money, so the government already got its money. 529s are not deductible. Taxes are only paid on earnings when withdrawn (like other savings accounts) but only if the money withdrawn is used for non-qualified expenses. I am sure the IRS is more than thrilled that this parent did not utilize those 529 funds as he/she could have. So it sounds like a lot of money, perhaps, is tied up in a restricted account and so there is always the possibility that the account owner may need to cash out those funds for non-qualified expenses (an unexpected emergency, for example.) And when that happens, 10% penalty on the withdrawal, plus increased income taxes as those funds increase taxable income makes Uncle Sam very very happy.
Of course, the beneficiary can be changed to anyone in the family and will retain the benefits as long as the funds are spent on education expenses. This parent could even go back to college and use those funds - and why not? The funds came from the parent’s income to begin with.
What I have decided, though, is that I will never open a 529 account (well, no point really as one just started college and the others head there in two years.) But even still, I don’t really see the advantages, especially when I live in a no-state-income-tax state. Why not just go with Roth IRAs, using similar type after-tax funds, withdrawing funds tax free for higher education expenses (including room and board) or various other reasons.
He wants to take money out of the 529, but does not intend to apply them to the loans he is hoping to take them out under the guise of paying. Those are his kid’s “skin in the game”. I’d say that is trying to do something wrong…