Looking for some financial advice for 529

[purbeast0]

So I want to start 529's for both of my kids. I've slacked on my one son who is 6 years old now and my youngest is 1.

My plan is to start my 6 year olds with $X * 78 (6 years, 6 months) and then contribute $X per month.

My plan is to start my 1 year olds with $X * 13 (13 months old) and then contribute $X per month.

I was going to just do this in Vanguard then I saw there is a separate one for MD that gives other benefits such as writing off $2500/yr in state income. However looking at this comparison tool here it looks like there are some higher fees.

Vanguard 529 plan comparison tool

Additionally, I am wondering if I will get taxed for that lump sum of my 6 year old with a gift tax. I thought I read on the Vanguard page that you can basically do a lump sum and say its "over 5 years" and that is allowed to be up to $150k, which I am nowhere NEAR that, nor will I be after the lump sum + 5 more years of contributions.

But being a noob to all this shit I am just wondering if someone can clarify any of that, and also if they think going with MD or Vanguard one is better, based on that comparison link.

I plan to call Vanguard when I have time too in order to hear from them some of these answers too.

 

[Tweak155]

Not sure as far as the gift tax issue, but I'd be surprised if you'd be in trouble there. Last I looked into it, the yearly limit for gifts was $14k or so, and technically you can do that as once from you, and once from your wife (and this is per kid). This should put your limit near $30k per child before needing to worry about taxes.

That said, you could potentially completely avoid that complication altogether if you open the 529 in your name. In some states (maybe it is all, I only looked for my state at the time), you can transfer the account to anyone in your immediate family in the future without issues. I actually opened the account prior to my child being born due to this. Might be something you look into if the above is still a limiting factor.

EDIT:

I'm definitely no expert and could be wrong, anyone can feel free to correct me.

 

[dullard]

529 laws vary from state to state. So, you'll have to ask someone from MD. The 529 laws that I follow are different. Doing a quick glance at your state laws though, it *looks* like you are correct on everything.
1) You must use maryland529.com if you want the state income tax deduction.
2) The fees are ~0.5% higher at maryland529.com than Vanguard (the maryland529 website misleads by saying only 0.1% yearly fees and ignores their other fees, you have to dig to find the total).
3) MD lets you do a one time deposit and spread it out over 5 years to get around gift taxes. The current gift tax kicks in at $15k, times 5, times two adults (you and your spouse) and you can contribute $150k per child one time. After that, you'll be limited to $30k per child per year. Note: you still are limited to $2500/year/child state income tax deduction, so contributing $30k will not get you a full state income tax deduction.

You'll have to do the math to see what is better: state income tax deduction or lower fees. For example, if you pay little or no state income tax, then a deduction doesn't do you any good.

 

[bbhaag]

I wish I knew more about this program but I don't. Ask me about IRA's and SEP-IRA's and I can talk your ear off but 529's and HSA's always confused the hell outta me.

Paging @s0me0nesmind1 He always seemed to know his shit when it came to this kinda stuff. Especially the more not so common stuff like this.

 

[dullard]

I wish I knew more about this program but I don't. Ask me about IRA's and SEP-IRA's and I can talk your ear off but 529's and HSA's always confused the hell outta me.

529's are similar to an IRA but for education instead of for retirement.

With an IRA:

• You can put a limited amount of money in (usually saving on income tax that year),
• Money in the IRA can grow tax-deferred,
• Then you withdraw it penalty-free for retirement funding purposes. Note: you will have to pay income tax when withdrawing.

With a 529:

• You can put money in (usually saving on state income tax that year),
• Money in the 529 can grow tax-deferred,
• Then you can withdraw it penalty-free for education funding purposes. This is different than the IRA since there is no income tax when withdrawing.

There are other important subtle differences, mostly because the 529 plans are all state controlled and thus can vary from state-to-state. But the overall concept is the same between an IRA and a 529 if you just switch your mindset from retirement funding to education funding.



HSAs take the best features of the IRA and Roth-IRA, discard the bad features, and combine them into the best tax savings legally allowed.

• Like an IRA, you can deduct the HSA contributions from your income tax on the year the money is put into the account.
• Like both an IRA and a Roth IRA, the HSA money can grow tax-deferred.
• Like a Roth IRA, both the HSA starting money and the HSA investment gains can be withdrawn tax-free.
• The only gottcha is that with an HSA you need to keep track of all medical bills from the day you open your HSA to the day you withdraw the money. Otherwise, you have to pay taxes and fees on the money you withdraw.

 

[dank69]

From what I understand you do not need multiple accounts for multiple children since the money in an account can be used for the child whose name is on it or any of their siblings (and maybe even extended relatives).

 

[NutBucket]

You are correct but I think you still need separate accounts based on the person using the funds. But to your point I wouldn't fund the younger kids as aggressively as the older kids assuming there are left over funds after the older ones are finished.

 

[PowerEngineer]

One point to remember is that you can transfer 529 accounts from one state to another. You might be best served by starting your accounts in Maryland so you can take advantage of income tax break.

If the difference in fees is 0.4% it would appear that the $2,500/year tax break would more than offset the fee difference until the 529 balance exceeded $60k. I might start with one account and build that one up to $50k, transfer that account out of state, and then open a new second account in Maryland and shift my contributions to that one. Later you can move funds between the two (or more) 529 accounts to adjust their balances as you see fit.

I think the "gift" tax is only an issue when others (e.g. grandparents, etc) make contributions to the 529 accounts.