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cporro

Posted: Mon Jul 27, 2009 11:22 pm

Guest

a while ago i opened an iowa state 529 for a niece. from what i recall
all 529s are not at all equal and iowa was a good choice. what i
didn't know was that it would be counted as college aid. not so great
since her family is broke.

not to mention it's kind of inflexible. has to be used for a certain
(but wide i'm told) list of schools.

the big thing it has going for it is tax deferred growth (if used for
education).

now for my other niece i'm considering just setting up an account.
more flexible in terms of investment also can be used for anything
without penalty.

i was told by the vanguard rep i could do a 529, or custodial, or just
open another account in my name but for her.

he didn't know too much about how a custodial account would differ in
terms of taxes.

he told me the custodial would tax the minor at a lower rate up until
$1,800 in profits. after that her parents would get taxed and at
higher rate. in reality this account will never make that much since
we are just planning to start with $250.

her parent are in a lower bracket for sure then me.

guess i'm just looking for general advice on my options.

much thanks.

Gene E. Utterback, EA, RF

Posted: Tue Jul 28, 2009 9:57 pm

Guest

"cporro" <cporro@gmail.com> wrote in message
news:65ea2397-d3f0-448d-907f-f31097a6670a@y10g2000prg.googlegroups.com...

Quote:

You're doing the right thing by getting better information now. Be careful
about what anyone tells you, even me, even here. This is an unpaid forum
and while most of us here try our best to give good counsel you must keep in
mind that the particulars of the individual situation will ultimately drive
what works best for you.

First, the 529 account for your niece shouldn't be a problem for her as far
as aid goes. 520s are consider owned by the person who set them up - this
should be YOU! Unless you named someone else as custodian or trustee. So
when she applies for financial aid they shouldn't even KNOW about this
account or count it against her. Remember, this is YOUR money until you
actually dole it out to her - you could elect to change the beneficiary at
any time at which point the money wouldn't be available to her anymore.

Second - be very, very careful in setting up a regular custodial account for
her or any other minor. These are generally referred to as UGMA or UTMA
accounts - Uniform Gift/Trust for Minor Accounts. All the money put into
these belong to the child, not you - you can't take it back and you cannot
control what is done with it once the child reaches the age of majority.
That age varies a bit from state to state but is generally between 18 and
21. So once your niece hits 18 all the money in that account belongs to her
and she do with it whatever she wants - we sometimes refer to this and the
Harvard vs. Harley dilemma.

The big advantage to the 529 accounts is that the money put into them grows
tax deferred AND if taken out and used for qualifying expenses the growth is
ultimately free of income tax.

The big disadvantage to the 529 accounts is that if the money is taken out
later and NOT used for qualifying expenses then you get hit with not only
taxes on the earnings, but you get to pay a penalty as well.

So you have to weight the benefits of tax deferred, and possibly tax free,
growth with the possibility of taxes and penalties if the money is not used
as originally intended. Keep in mind that you can change beneficiaries
later. This helps is your first niece turns out to not need or deserve the
money but another family member does.

Most of the time, for non-direct family members who want to help with
educational expenses I suggest they consider a simple retail account. This
is funded with after tax money - just like the 529s are. BUT it is YOUR
money - you can name the niece as beneficiary if you die, so she'll get it
if something terrible happens to you. Otherwise it is YOUR money and you
can dole it out as you please.

In fact, when it is time for her to go to school you COULD actually gift her
some of the investments. The gift value would be at your cost basis so that
when she sells them to pay for school the gains would be taxed to her. If
her bracket is low enough she could may even be exempt from capital gains
tax (assuming we don't get any major changes in those laws between now and
then).

Good luck,
Gene E. Utterback, EA, RFC, ABA

chris porro

Posted: Wed Jul 29, 2009 2:48 am

Guest

Quote:

You're doing the right thing by getting better information now.

right. 18+ years of growth somewhere...or if done poorly 18+ years of
oops.

Be careful

Quote:

about what anyone tells you, even me, even here. This is an unpaid forum
and while most of us here try our best to give good counsel you must keep in
mind that the particulars of the individual situation will ultimately drive
what works best for you.

true. i usually try and get info from varied sources.

Quote:

First, the 529 account for your niece shouldn't be a problem for her as far
as aid goes. 520s are consider owned by the person who set them up - this
should be YOU! Unless you named someone else as custodian or trustee.

i'm the custodian. here is something from vanguards site. since i'm
not her parent the 529 should not be considered when determining
financial aid. as you said. good.

* Student assets. Custodial accounts (under the Uniform Gifts to
Minors Act or Uniform Transfers to Minors Act—UGMAs/UTMAs) are
considered the student's assets. Assets transferred from an UGMA/UTMA
account to a 529 college savings plan remain the student's property.
In addition, a transfer from an UGMA/UTMA account involves selling the
assets, so any profits could be taxable.
* Parental assets. A 529 college savings plan or education savings
account funded by a parent is considered the parent's asset even if it
names the student as beneficiary. Parents' mutual funds are also
counted as parental assets. A parent's retirement assets—Roth or
traditional IRAs and employer-sponsored retirement plans—aren't
counted in financial aid calculations. However, distributions from a
Roth IRA are considered income in calculating the following year's
expected family contribution.
* Other assets. Grandparents, other relatives outside the
immediate family, and friends can hold 529 plan accounts. The assets
aren't counted in financial aid calculations because they aren't owned
by the student or the parents.

So

Quote:

when she applies for financial aid they shouldn't even KNOW about this
account or count it against her. Remember, this is YOUR money until you
actually dole it out to her - you could elect to change the beneficiary at
any time at which point the money wouldn't be available to her anymore.

i didn't know that. i thought i was stuck with her. and who knows what
she will be like in 16 years. now i wonder if we could split it
between her and her sister or another niece. we didn't expect anyone
else to have kids and they proved us wrong. so that first niece got a
bit much.

Quote:

Second - be very, very careful in setting up a regular custodial account for
her or any other minor. These are generally referred to as UGMA or UTMA
accounts - Uniform Gift/Trust for Minor Accounts. All the money put into
these belong to the child, not you - you can't take it back and you cannot
control what is done with it once the child reaches the age of majority.
That age varies a bit from state to state but is generally between 18 and
21. So once your niece hits 18 all the money in that account belongs to her
and she do with it whatever she wants - we sometimes refer to this and the
Harvard vs. Harley dilemma.

i saw that. irretractable. and 21 is too young imo. i was thinking 30.

Quote:

The big advantage to the 529 accounts is that the money put into them grows
tax deferred AND if taken out and used for qualifying expenses the growth is
ultimately free of income tax.

The big disadvantage to the 529 accounts is that if the money is taken out
later and NOT used for qualifying expenses then you get hit with not only
taxes on the earnings, but you get to pay a penalty as well.

yes. income tax at i assume my rate and a 10% i think. ouch

from vangard:

Earnings on nonqualified withdrawals may be subject to federal income
tax and a 10% federal penalty tax, as well as state and local income
taxes. The availability of tax or other benefits may be contingent on
meeting other requirements.

Quote:

So you have to weight the benefits of tax deferred, and possibly tax free,
growth with the possibility of taxes and penalties if the money is not used
as originally intended. Keep in mind that you can change beneficiaries
later. This helps is your first niece turns out to not need or deserve the
money but another family member does.

Most of the time, for non-direct family members who want to help with
educational expenses I suggest they consider a simple retail account. This
is funded with after tax money - just like the 529s are. BUT it is YOUR
money - you can name the niece as beneficiary if you die, so she'll get it
if something terrible happens to you. Otherwise it is YOUR money and you
can dole it out as you please.

retail account? what's that?

Quote:

In fact, when it is time for her to go to school you COULD actually gift her
some of the investments. The gift value would be at your cost basis so that
when she sells them to pay for school the gains would be taxed to her. If
her bracket is low enough she could may even be exempt from capital gains
tax (assuming we don't get any major changes in those laws between now and
then).

so she would be taxed on the value i initially payed and her tax
bracket?

Quote:

Good luck,
Gene E. Utterback, EA, RFC, ABA

thx, that was helpful.

also found vanguard has a nice summery of options for college savings.
https://personal.vanguard.com/us/planningeducation/college/PEdCollOptsWhatAreMyOptionsContent.jsp

btw, did you ever check out the vast difference from state to state on
the 529s?

Guest

Posted: Wed Jul 29, 2009 11:16 pm

"Gene E. Utterback, EA, RFC, ABA" <gene@alliancetax.com> writes:

Quote:

"cporro" <cporro@gmail.com> wrote in message
news:65ea2397-d3f0-448d-907f-f31097a6670a@y10g2000prg.googlegroups.com...

a while ago i opened an iowa state 529 for a niece. from what i recall
all 529s are not at all equal and iowa was a good choice. what i

If it's the Iowa UPromise 529 program, it is a good choice.

Quote:

didn't know was that it would be counted as college aid. not so great
since her family is broke.

529 assets are not generally considered an asset of the child,
but rather an asset of the owner (usually the parent, but it
could be the grandparent or uncle or whatever). Assets which
belong to the child are usually expected to be used to a much
greater extent than assets of the parent. Assets of someone
other than the parent are not necessarily considered at all.

That said, the "counts for college financial aid" discussions
usually center on what the federal government lists on their
standardized application, the FAFSA <http://www.fafsa.ed.gov/>
but that doesn't necessarily mean that private aid will follow
those guidelines. Even if FAFSA doesn't count something,
private aid might.

Quote:

not to mention it's kind of inflexible. has to be used for a certain
(but wide i'm told) list of schools.

529s can generally be used for any eligible postsecondary school
in the United States and many abroad, too.

There have been many "prepaid tuition" plans offered by states
which specifically guaranteed that the mone put in would pay
for tuition at state schools in particular, but if you wanted
to prepay for them and then the kid went to another school,
you'd get to transfer the value of the savings elsewhere, but
not necessarily have had that value grow as fast as you'd
have liked, nor necessarily as fast as the costs of education
elsewhere would go.

These days, though, most folks are going for regular 529s where
you invest the money, and it grows and you just watch it the
way you would watch an employer-provied 401k - it grows at
whatever rate the investments therein grow -- which doesn't
have anything necessarily to do with the rate at which tuitions
go up.

Quote:

the big thing it has going for it is tax deferred growth (if used for
education).

Tax *free* for education. That's huge. See the details that
Gene provided in his reply.

Quote:

he didn't know too much about how a custodial account would differ in
terms of taxes.

See Gene's warnings about custodial accounts. There aren't
many circumstances where I can see recommending them. Yours
certainly don't sound like they'd be appropriate.

[Gene's excellent-as-usual advice snipped]

Quote:

Most of the time, for non-direct family members who want to help
with educational expenses I suggest they consider a simple retail
account. This is funded with after tax money - just like the 529s
are. BUT it is YOUR money - you can name the niece as beneficiary
if you die, so she'll get it if something terrible happens to you.
Otherwise it is YOUR money and you can dole it out as you please.

You may want to consider having a trust be the TOD beneficiary
of that money in the event of your death. If it's intended for
the kid for college, the trust may specify that - and if the
kid doesn't use it for college, the trust may sit on the money
until the kid reaches some specific age, or it may pay out to
someone or something else (ie. charity, etc).

Quote:

In fact, when it is time for her to go to school you COULD actually
gift her some of the investments. The gift value would be at your
cost basis so that when she sells them to pay for school the gains
would be taxed to her. If her bracket is low enough she could may
even be exempt from capital gains tax (assuming we don't get any
major changes in those laws between now and then).

One word of warning on this, though - if it's a substantial
capital gain, and a substantial bit of money - you need to
be careful if the assets are sold during a year which you
will be reporting income for aid calculations. Those capital
gains are income - and if the investment are gifted to and then
sold by the niece, that income is reported on the *niece's*
taxes -- and financial aid applications.

One more thing to think about - especially if you keep the
money in your own name rather than gift to a 529 or directly
to the niece. You are allowed to make cash gifts of up to
$13,000 per recipient per year before you have to start paying
gift taxes. If, however, you pay the tuition directly to
the school in question, the gift is not taxable at all. The
payment has to go directly to the school - you can't give
the niece the cash and tell her to pay the tuition, else
you are subject to the annual exclusion limit and potentially
additional gift taxes. But you can pay the school itself
directly and there are no gift taxes.

If you aren't already maxing out your Roth, you might consider
doing that - and if the time comes that you want to help the
kids out with school, you may take your Roth contributions
out tax and penalty free and make gift-tax-free payments directly
to the schools. (Taking out the growth of the Roth contributions
may be a little bit more problematic, depending on a variety
of factors, but worst case, you take out the contributions
and leave the growth to keep growing...)

Re: the gift tax issues, see IRS Pub 950:
<http://www.irs.gov/publications/p950/ar02.html>

The Direct-sold Iowa plan - Upromise and Vanguard:
<https://collegesavingsiowa.s.upromise.com/content/plandetails.html>
And, yes, it's a good one, with low expenses.

Be wary of the *advisor*-sold plans - Iowa's and everyone
else's. Even Iowa's advisor plan - which has excellent low
cost index funds and ETFs - hits you with either absurd
ongoing fees of an extra 1%/yr (C class) or with an up-front
"sales charge" of either 3.75% or 5.5% depending on the
investment selected. That charge goes in the broker's pocket.
If that broker is providing you a lot of valuable help
and advice, it may be worth paying him that money. But it's
optional and if you're talking about a substantial amount
of money - suppose you were putting in a few thousand/yr -
that adds up pretty damned fast. If you just need some
advice about setting this up in the first place, consider
paying a fee-only planner, perhaps even by the hour, a one
time payment for planning and advice - and then invest in
the more cost-effective direct-sold plan (which that fee-only
advisor is likely to recommend) and you may come out way
ahead.

(Seriously - they're charging 5.5% up front to put people
into Vanguard's total stock market ETF - and on top of
that, the ongoing annual expenses are 0.72% -- only 0.07
of which are the ETFs actual expense ratio. According to
the plan's documentation. As compared to the direct plan
where you pay no up-front loads, and the annual ongoing
asset-based fees are a flat 0.50%.)

--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! -- http://www.expita.com/nomime.html
Are you posting responses that are easy for others to follow?
http://www.greenend.org.uk/rjk/2000/06/14/quoting

Guest

Posted: Wed Jul 29, 2009 11:25 pm

chris porro <cporro@gmail.com> writes:

Quote:

* Student assets. Custodial accounts (under the Uniform Gifts to
Minors Act or Uniform Transfers to Minors ActÂ—UGMAs/UTMAs) are
considered the student's assets. Assets transferred from an UGMA/UTMA
account to a 529 college savings plan remain the student's property.

Another reason not to use custodial accounts. Some folks are
transferring custodial assets into 529s because they already
had those custodial accounts. They're looking for something
better to do with the money and they're not allowed to just
take it back and put it into a 529 of their own.

Quote:

counted in financial aid calculations. However, distributions from a
Roth IRA are considered income in calculating the following year's
expected family contribution.

If the Roth is the parent's or the kid's. If the Roth is
your's, no problem. See my other note re this.

Quote:

she will be like in 16 years. now i wonder if we could split it
between her and her sister or another niece. we didn't expect anyone
else to have kids and they proved us wrong. so that first niece got a
bit much.

If you are the owner of the 529 (and she's the beneficiary), YOU
control where it goes. If you want to open another 529 with
another niece - or your own kid, etc - as the beneficiary, you
may transfer some or all of the money from the existing 529
into the new one. The niece is not in control of that money -
you are.

Quote:

i saw that. irretractable. and 21 is too young imo. i was thinking 30.

See my other note re: trusts as beneficiaries if you keep
assets in your own name that you're planning on giving the kid.

Quote:

Most of the time, for non-direct family members who want to help
with educational expenses I suggest they consider a simple retail
account. This is funded with after tax money - just like the
529s are. BUT it is YOUR money - you can name the niece as
beneficiary if you die, so she'll get it if something terrible
happens to you. Otherwise it is YOUR money and you can dole it
out as you please.

retail account? what's that?

Regular taxable account in your own name. Same as you'd open
for yourself. You are allowed to open as many brokerage accounts
as you like. If you want to open one to keep assets separate
from other assets because they are for a specific purpose,
there's nothing stopping you. And each account may usually be
allowed to have its own set of designated beneficiaries who
get the assets when you die if you like, avoiding probate and
hassle. And you can transfer assets into and out of those
accounts to your heart's content.

Quote:

In fact, when it is time for her to go to school you COULD
actually gift her some of the investments. The gift value would be
at your cost basis so that when she sells them to pay for school
the gains would be taxed to her. If her bracket is low enough

so she would be taxed on the value i initially payed and her tax
bracket?

When you make a gift of appreciated assets to someone while
you are alive (as opposed to them getting those assets after
you die), the recipient of the gift keeps your costs basis.
If you paid, say, $1,000 for some stock and it went up in
value to $10,000, then you give the stock - as stock (rather
than selling it and giving cash) - the recipient now has
$10,000 worth of stock with *your* $1,000 basis. And if the
recipient then sells that stock, the $9000 in cap-gains are
income that the recipient owns and on which he or she may pay
cap-gains taxes.

Be careful if you're gifting a large amount of stock - if
you give above the annual gift-tax exclusion amount, you
may eat into your lifetime gift exclusion and/or eventually
have to pay gift taxes.

--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! -- http://www.expita.com/nomime.html
Are you posting responses that are easy for others to follow?
http://www.greenend.org.uk/rjk/2000/06/14/quoting

Gene E. Utterback, EA, RF

Posted: Wed Jul 29, 2009 11:43 pm

Guest

"chris porro" <cporro@gmail.com> wrote in message
news:5bae4c2e-abad-44f3-a3bb-ae61a9705f10@12g2000pri.googlegroups.com...

Quote:

SNIPPED

Quote:

Most of the time, for non-direct family members who want to help with
educational expenses I suggest they consider a simple retail account.
This
is funded with after tax money - just like the 529s are. BUT it is YOUR
money - you can name the niece as beneficiary if you die, so she'll get
it
if something terrible happens to you. Otherwise it is YOUR money and you
can dole it out as you please.

retail account? what's that?

Essentially there are two kinds of investment accounts - retirement and
retail. The advantage to a retirement account is the money can go in on a
tax advantaged basis and can grow tax deferred and may even come out tax
free. BUT money that goes in tax advantaged up front comes out as ordinary
income - essentially you defer the tax until later. For parents this may
not be a bad thing since they can get out of the premature distribution
penalty for monies spent on qualifying tuition. For other family member,
this exception does not apply.

A retail account is a nonretirement account. It is funded with after tax
dollars and earnins are taxed as they are earned and reported. The
advantage here is that gains usually get taxed at favorable long term rates.
This disadvantages include no tax break for putting money in AND having to
pay taxes on an "as you go" basis.

Quote:

In fact, when it is time for her to go to school you COULD actually gift
her
some of the investments. The gift value would be at your cost basis so
that
when she sells them to pay for school the gains would be taxed to her. If
her bracket is low enough she could may even be exempt from capital gains
tax (assuming we don't get any major changes in those laws between now
and
then).

so she would be taxed on the value i initially payed and her tax
bracket?

Not quite - she would pay tax on the gain which would be calculated on the
difference between what you paid for the investment and what she sold it
for.

Let's assume that you bought a block of stock in XYZ company for $1,000
today. In 15 years when she needs the money let's assume that its worth
$11,000. For the purpose of simplicity we'll ignore dividends and other
things like splits and such. Let's also assume that YOU are in the top tax
bracket - so you'll pay captal gains at 15% AND likely be subject to AMT,
while she is in the 10% bracket. Let's also assume that her parents are in
the 15% bracket.

There are two ways to get money in her pocket -

Option 1 - you sell the investment, realize a $10,000 gain, pay $2,600 iu
tax and give her the reamining $7,400. NOTE, I used 26% as the tax rate
because I believe that is the AMT rate.

Option 2 - you GIVE her the stock, she sells it and realizes the same
$10,000 gain. However, because she is in the lowest tax bracket she has a
long term capital gain rate of ZERO Percent so she pays no tax. Instead she
gets the full $10,000 to use on tuition.

There is a bit more to it that just this, but this gives you an idea of the
concept. You'll need to factor in your rate, her rate, perhaps her parent's
rate, let's not forget the kidde tax, and gaze into your crystal ball and
try to figure out what the tax rules will be some 16 years into the future.

Good luck,
Gene E. Utterback, EA, RFC, ABA

Don

Posted: Thu Jul 30, 2009 12:47 am

Guest

On 2009-07-29 12:16:03 -0700, BreadWithSpam@fractious.net said:

Quote:

(Seriously - they're charging 5.5% up front to put people
into Vanguard's total stock market ETF - and on top of
that, the ongoing annual expenses are 0.72% -- only 0.07
of which are the ETFs actual expense ratio. According to
the plan's documentation. As compared to the direct plan
where you pay no up-front loads, and the annual ongoing
asset-based fees are a flat 0.50%.)

I don't begin to understand the tax issues, but from what you say, it
seems that the type of product included in the plan and where it is
purchased is just as important if not more important than the choice of
type of plan and its tax implications. At the very least, the purchaser
would be well advised to run the fees and expenses numbers at the same
time as calculating the tax benefits.

Guest

Posted: Thu Jul 30, 2009 2:11 am

Don <dwzimm@telus.net> writes:

Quote:

On 2009-07-29 12:16:03 -0700, BreadWithSpam@fractious.net said:

(Seriously - they're charging 5.5% up front to put people
into Vanguard's total stock market ETF - and on top of
that, the ongoing annual expenses are 0.72% -- only 0.07
of which are the ETFs actual expense ratio. According to

I don't begin to understand the tax issues, but from what you say, it
seems that the type of product included in the plan and where it is
purchased is just as important if not more important than the choice
of type of plan and its tax implications. At the very least, the
purchaser would be well advised to run the fees and expenses numbers
at the same time as calculating the tax benefits.

The point here is that I was comparing the same state's 529
plan against itself - there are two ways to access that plan -
either you do it by going directly to the plan - or you go
through an "advisor" (which is what folks often call brokers
and salespeople). The tax issues are identical - in both
cases it's a 529 plan - growth tax deferred and if proceeds
used to pay for education, growth withdrawals are tax free.

Sorry if that was unclear.

I am curious which version of the plan the original poster
is in - I'm hoping it's the low-cost direct version because if
it's the very expensive "advisor" version, he's paying a lot
of money for advice he's not apparently getting.

--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! -- http://www.expita.com/nomime.html
Are you posting responses that are easy for others to follow?
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Don

Posted: Thu Jul 30, 2009 6:03 am

Guest

On 2009-07-29 15:11:45 -0700, BreadWithSpam@fractious.net said:

Quote:

Uninformed people might be inclined to focus on tax issues alone and be
unaware of the difference in cost between the direct version and the
"advisor" version, or even be unaware of the investment product that is
ncluded in the plan. The rule should be: Don't let the tax tail wag the
investment dog.

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