If your kid doesn't spend their 529, what will you do with that money?

[Anonymous]

Anonymous wrote:

Anonymous wrote:Is it theirs to spend? With conditions or without?

Not really 529, but prepaid tuition for MD. Converting it into Roth for them. The reason is because they used merit scholarship for tuition. Which is their hard work. For us, the prepaid college tuition is a sunk cost. Our kids have come out of their college journey with a double major in STEM, no debt, wonderful paying internships each year, savings in the bank - etc, etc. No conditions on our kids. We have invested time, effort on their upbringing, and it is paying dividends. They are super smart, mentally healthy kids who hang out with others like them.

Prepaid is one of the programs for 529

[Anonymous]

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Anonymous wrote:I gave it to my kid and told them to save it for grad school but if they didn’t go to grad school they could use it for a downpayment or something (didn’t want to leave it in the 529 in case they didn’t go to grad school).

So you paid the withdrawal tax on it? Or, did you cheat on your taxes? Curious.

For reasons not worth explaining we ended up paying out of other funds so we neither paid the tax nor cheated on our taxes as there is no requirement that the exact dollars used for tuition be traceable to the 529.

Basically we felt that we didn’t need those funds for retirement or other siblings but also we weren’t sure we’d be able to contribute more to grad school so we decided it was better to give the funds now with the understanding that it was all they could expect to get to fund grad school.

What this person did is literally fraud. You can’t just take the money back out of a 529 and give it to the kid. Legally the money you have saved tax-free in a 529 account must go toward educational expenses. Otherwise you must pay a significant tax penalty. If this were allowed then lots of people would be using 529s as a way to get around paying taxes on capital gains.

If you have $25k in qualified educational expenses and you get a check for $25k from the 529 the IRS isn’t going to check if there were other deposits and withdrawals to your checking account between when you got the 529 check and paid the tuition bill.

Everyone (well apparently except you) understands that money is fungible and the limit on abusing 529s is having qualified educational expenses— not proving that the exact same dollar bills are traceable from the 529 to the college.

While I agree with you on this, it doesn't answer the question. The question is, if your kid's total qualified education expenses end up being significantly less than what's in their 529. If you had qualifying educational expenses that you used the 529 to pay for, even if you initially paid them another way, and then reimbursed yourself with the 529, that's a different thing.

I have told my kids that they need to work to provide their own spending money. If it looks like we won't use the 529 money, we can withdraw a reasonable amount for spending money, and give it to the kid. That would be legal, but it would only be a small portion of the 529.

How would you do that since spending money isn’t considered educational expense?

The rules for 529’s absolutely allow the funds to bused for living expenses, including rent, food, and reasonable amounts of spending money.

News to me but thanks. I was wondering from tax filing purposes how you would characterize that in your filing.

I would characterize it as less than the costs listed on the colleges published cost of attendance.

https://financialaid.umd.edu/resources-policies/cost-attendance

[Anonymous]

Anonymous wrote:

Anonymous wrote:I’m pretty confident that my DC will go to college, and we won’t qualify for aid. Given that, we are funding enough to cover 90-100% of in-state tuition and we will come out of pocket for anything other than that. I’m not at all worried about wasting these dollars.

OP here,

I've got enough put away for about 6 years of in-state tuition and room and board for each kids. I've told my oldest that he has a budget of $X total, and he's found some schools, a couple safeties and a couple matches where the NPCs say he could get the degrees he currently wants debt free. The ones he likes best would come in at the top of budget, and would probably require him to get a job and earn his own spending money, but that's fine. That is what this money is intended for.

But now, as he's getting ready to apply, he's realizing that there are programs where his stats will give him huge amounts of automatic merit, and where he would be able graduate with significant savings. These schools aren't as good a fit in other ways, but they aren't bad schools, just not exactly what he has been saying he wants in terms of size, location, extracurriculars, other subjects he wants to study on the side etc . . . So, he's asking "What happens to that money if I don't use it?" It's a good question so I'm trying to sort out how to answer it.

if it were me, I'd say you don't have to pay for grad school. BUt I would be very tempted to say that you had been making sacrifices all along and if he likes the schools well enough, he should go there, because it would make YOUR lives easier if you can use it for retirement (I think that is allowed?)

[Anonymous]

Anonymous wrote:

Anonymous wrote:I’m pretty confident that my DC will go to college, and we won’t qualify for aid. Given that, we are funding enough to cover 90-100% of in-state tuition and we will come out of pocket for anything other than that. I’m not at all worried about wasting these dollars.

OP here,

I've got enough put away for about 6 years of in-state tuition and room and board for each kids. I've told my oldest that he has a budget of $X total, and he's found some schools, a couple safeties and a couple matches where the NPCs say he could get the degrees he currently wants debt free. The ones he likes best would come in at the top of budget, and would probably require him to get a job and earn his own spending money, but that's fine. That is what this money is intended for.

But now, as he's getting ready to apply, he's realizing that there are programs where his stats will give him huge amounts of automatic merit, and where he would be able graduate with significant savings. These schools aren't as good a fit in other ways, but they aren't bad schools, just not exactly what he has been saying he wants in terms of size, location, extracurriculars, other subjects he wants to study on the side etc . . . So, he's asking "What happens to that money if I don't use it?" It's a good question so I'm trying to sort out how to answer it.

Kid sounds awful TBH.

[Anonymous]

Anonymous wrote:Not leaving it for “future grand kids” when I have no idea if my kid will have any.

^ I can't assume my kids will ever get married or have kids. I'd rather use it for the kids college tuition first, grad school, ROTH, help out my nieces or nephews and withdraw anything remaining (I know there are tax ramifications) and the the kid it was saved for decide how to use the remainder.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:I gave it to my kid and told them to save it for grad school but if they didn’t go to grad school they could use it for a downpayment or something (didn’t want to leave it in the 529 in case they didn’t go to grad school).

So you paid the withdrawal tax on it? Or, did you cheat on your taxes? Curious.

For reasons not worth explaining we ended up paying out of other funds so we neither paid the tax nor cheated on our taxes as there is no requirement that the exact dollars used for tuition be traceable to the 529.

Basically we felt that we didn’t need those funds for retirement or other siblings but also we weren’t sure we’d be able to contribute more to grad school so we decided it was better to give the funds now with the understanding that it was all they could expect to get to fund grad school.

What this person did is literally fraud. You can’t just take the money back out of a 529 and give it to the kid. Legally the money you have saved tax-free in a 529 account must go toward educational expenses. Otherwise you must pay a significant tax penalty. If this were allowed then lots of people would be using 529s as a way to get around paying taxes on capital gains.

If you have $25k in qualified educational expenses and you get a check for $25k from the 529 the IRS isn’t going to check if there were other deposits and withdrawals to your checking account between when you got the 529 check and paid the tuition bill.

Everyone (well apparently except you) understands that money is fungible and the limit on abusing 529s is having qualified educational expenses— not proving that the exact same dollar bills are traceable from the 529 to the college.

Got it. I get that money is fungible. When you wrote “we decided it was better to give the funds now with the understanding that it was all they could expect to get to fund grad school” I thought you meant you just withdrew the 529 funds and gave them to the kid full stop.

[Anonymous]

Anonymous wrote:

Anonymous wrote:I’m pretty confident that my DC will go to college, and we won’t qualify for aid. Given that, we are funding enough to cover 90-100% of in-state tuition and we will come out of pocket for anything other than that. I’m not at all worried about wasting these dollars.

OP here,

I've got enough put away for about 6 years of in-state tuition and room and board for each kids. I've told my oldest that he has a budget of $X total, and he's found some schools, a couple safeties and a couple matches where the NPCs say he could get the degrees he currently wants debt free. The ones he likes best would come in at the top of budget, and would probably require him to get a job and earn his own spending money, but that's fine. That is what this money is intended for.

But now, as he's getting ready to apply, he's realizing that there are programs where his stats will give him huge amounts of automatic merit, and where he would be able graduate with significant savings. These schools aren't as good a fit in other ways, but they aren't bad schools, just not exactly what he has been saying he wants in terms of size, location, extracurriculars, other subjects he wants to study on the side etc . . . So, he's asking "What happens to that money if I don't use it?" It's a good question so I'm trying to sort out how to answer it.

Well that depends upon your own family choices.
For us, it stays in the 529 for each kid (each was fully funded for college and beyond). If they don't use it, it will remain there to grow for their own kids (or for future education for them or a partner). We already gift them $19K/year that they use for savings/IRAs/401K funding. One kid has $50K left after grad school. That will likely pay for at least one kid at a current $90K school in 20+ years (the grand kid doesn't exist yet). If we fund another 529 for any future grandkids with $100K once they are born, they will be set

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Move whatever I can to Roth IRAs for them and leave the rest in the 529 for them to use for any future grandkids.

This exactly.

+2

OP, if it were my son I would tell him that the money would be available to him for grad school if he doesn't use it all, and to fund his Roth the first several years he is working. But I would not tell him he could cash the whole thing out as some kind of incentive bonus to go to a cheaper school - it's my money that I've saved, earmarked for education. Not his money that he can spend on either an expensive school or a cheap school and a car, for example.

This 1000%! We have saved for the kids education, we already help them with iras and 401k savings, so they can use it all for their education/grad school/etc.
But if saved, you don't select a "lesser school" just so you can drive a fancy car upon graduation. You pick the right school for you.

[Anonymous]

Anonymous wrote:For those with high assets, saving 529 for grandkids could end up involving a heck of a lot of tax-free growth.

That is why we do it.

One kid is done with school and has $75K remaining. That will easily fund one of their future kids thru undergrad (at a current $90K costs). Just let it continue to grow tax free and reap the rewards. We will fund future 529s for all grandkids as well, as soon as they are born/on the way. Put in $75-100K when they are born and they will be set for undergrad. Add a bit more before they turn 5 and they will have medical/law/any graduate school funded as well

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:I’m pretty confident that my DC will go to college, and we won’t qualify for aid. Given that, we are funding enough to cover 90-100% of in-state tuition and we will come out of pocket for anything other than that. I’m not at all worried about wasting these dollars.

OP here,

I've got enough put away for about 6 years of in-state tuition and room and board for each kids. I've told my oldest that he has a budget of $X total, and he's found some schools, a couple safeties and a couple matches where the NPCs say he could get the degrees he currently wants debt free. The ones he likes best would come in at the top of budget, and would probably require him to get a job and earn his own spending money, but that's fine. That is what this money is intended for.

But now, as he's getting ready to apply, he's realizing that there are programs where his stats will give him huge amounts of automatic merit, and where he would be able graduate with significant savings. These schools aren't as good a fit in other ways, but they aren't bad schools, just not exactly what he has been saying he wants in terms of size, location, extracurriculars, other subjects he wants to study on the side etc . . . So, he's asking "What happens to that money if I don't use it?" It's a good question so I'm trying to sort out how to answer it.

Kid sounds awful TBH.

Not really. Depends what the kids means by "what happens to the money"?

Does the kid want to save on undergrad so they won't have any loans, and use the educational money (I know you cannot officially do that without penalties) for a house downpayment when he is 25? It may not be just to blow money on a sports car. He could just be financially savvy.

And yes, as a teen, if someone had told me "you have $X for college you can attend school y and pay 25% of X total or School Z and send the entire $X over 4 years. Afterwards, you get whatever is left to spend for a house/first car/retirement/somethig reasonable" I would have jumped on that and graduated debt free and well established for starting out.

That is very different than "do I get $50K for a brand new car and do I have to start a job right away"