529 tips, tricks, insights

Not so much a college hack, more for K-12 private school. We are sending our son part time to a private kindergarten and we are trying to figure out how we can pay for him to go full time next year. One strategy I'm looking at is funding a 529 to pay for the private school. I'd basically put the money into the 529 for the tax deduction and then withdraw it to pay tuition. Thoughts? Suggestions?

Bumping up this topic ... any tips on 529 drawdown strategies? We have a brand-new HS grad starting college in August.

Currently our 529 is in 90% treasuries; we have enough to cover three years of expenses and can cashflow the rest without loans. This is our only kid, and he's not planning on grad school.

My current thoughts are: (a) use 1/4 of the balance each year, and cashflow the rest; (b) pay in full from the 529 each semester, while putting the cashflowed amount into the 529 for tax-free growth; or (c) pay in full from the 529, but invest the cashflowed amount in a tax-exempt money market for more flexibility and better investment options.

I don't think there is an argument for taking out federal loans (unsubsidized) at current interest rates, but feel free to prove me wrong.

The information about Qualified Educational Expenses is really helpful!

I found the section on the IRS website. Thought I'd put the link here in case anyone wants to find it quickly. [

https://www.irs.gov/publications/p970#en_US_2024_publink100077339]

Very thoughtful analysis. You can move funds, without tax consequences, between qualifying family members, which includes siblings, so maybe that could help your circumstances? Also, you can leave the 529 funded indefinitely, which buys you some time as well. As for qualifying expenses, or QHEE, check IRS Publication 970 and review the categories, as you may have more qualifying expenses than you realize - that may give you a slightly better tax treatment / outcome as well. Hope this helps.

Just read your note above. Are you familiar with all of the expense categories which qualify as QHEE? You may be pleasantly surprised to see more expenses are qualifying 529 expenses than you realize. I spent several year working in the 529 industry and would be happy to discuss with you further if you're interested. Vince

Off campus housing is a qualified expense as long as the amount is underas long as the amount spent is within the college's stated cost of attendance for room and board, even if the student lives off-campus; essentially, you can use your 529 plan to cover off-campus rent up to the amount the college estimates for on-campus housing costs.

https://moneyguy.com/article/foo/ or older https://www.bogleheads.org/wiki/Prioriti... show just how low a priority funding a 529 is. Your funding of their Taxable brokerage would hurt their FAFSA more (if applicable) than if you held into that money in your name and disbursed it to them later, in a different way. You might have done it right for your own circumstances, but I'm in a few "paying for college" forums where new parents (or even new couples without kids) are chattering about 529s as a top priority, well ahead of properly funding their own retirement. Congrats to your student.

Thanks for sharing this. I have much younger kids and am trying to figure out FI and college as well (as you know from a prior post about timing retirement with the FAFSA I believe). Maybe they'll go to grad school and it could be used for that?

According to collegesavings.com: "... you can withdraw up to the same dollar amount as the scholarship from the 529 plan. This will be a non-qualified withdrawal but only the earnings portion will be subject to federal and state income taxes. Normally, there would be an additional 10% federal tax penalty on the earnings; however, since this withdrawal is due to a scholarship, the tax penalty will not be imposed."

You should investigate whether there is a state tax penalty for early withdrawal and whether the Federal exemptions apply. My guess is that if you got a state tax benefit for making the 529 contribution, you would be required to pay that back.

You could also use the 529 funds for the unqualified expenses and pay the "penalty", and you would probably still come out ahead (when you calculate the tax advantages accrued over the years and the penalty you would pay on the 529 funds it is likely to still be net good). This is similar to what Mad Fientiest has recommended for people who have "oversaved" into a 401(k) or similar. Basically, take the early withdrawal, pay the penalty, and feel good about it because you are still way ahead.