Parents & Money: VUL life insurance and 529 Plan (for higher education) Saving 4 the Future
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Can You Use the ‘529’ Money for Grad School?
Experts answer this and other questions about strategies for college savings
Our college Q&A column addresses whether 529s can be used for grad school, what to do with extra 529 money, help from grandparents, and more. PHOTO:ISTOCKPHOTO/GETTY IMAGES
By
CHANA R. SCHOENBERGER
October 9, 2016
13 COMMENTS
When planning for college expenses, tax-advantaged “529” accounts have been a popular savings tool. But readers are often unsure about the details. Questions about the state-sponsored plans, which typically invest in mutual funds, continue to dominate our college-finance mailbag. Here are experts’ latest answers.
***
If our only child receives a full scholarship, or we decide to not tap into his 529 for his undergraduate expenses, can we use it for grad school? Can we keep the account in his name and then will it to another beneficiary? Does it have to be liquidated at our death?
Yes, 529 funds can be used for graduate school. You can also change the beneficiary to any direct relative of the original beneficiary; this can be done at any time and doesn’t need to be done through a will. And note that if your child receives a scholarship, you are permitted to withdraw that amount from a 529 without incurring penalties, though if the money isn’t used for educational expenses, you pay income taxes on any earnings.
In terms of how ownership transfers fit into your estate plan, you’ll want to consult an estate lawyer because 529 plans can have different rules on this. For some plans, you can designate a successor owner or contingent account holder. Upon death, ownership would transfer to that person, says Karen Wallace, a senior editor at fund researcher Morningstar.
One exception, she notes, is “if the parents have made a five-year lump-sum contribution, which allows you to ‘superfund’ a 529 plan and avoid paying federal gift taxes if you spread the amount equally over five calendar years and complete IRS form 709 with your federal tax return in each of those five years.” In that case, if the parents die before the end of that five-year period, there could be estate-tax consequences, she says.
***
ILLUSTRATION: DAN PAGE
My daughter, age 28, has extra money in her 529 account because she received significant scholarship assistance during college. I did not know at that time that I could withdraw the amount of the scholarship from the 529 account without paying tax or penalty. Can I get it out tax- and penalty-free now, even though she graduated several years ago?
Scholarship withdrawals don’t incur penalties but you do incur income taxes on any earnings. There is no requirement that you withdraw money from a 529 in the same year that you receive a scholarship, although it’s a good idea, says Thomas Rowley, director of retirement and education strategies at Invesco. To be safe, though, since it is years later, check with the plan administrator to make sure you can still properly withdrawal the money and not pay the 10% penalty on any gains you earned.
***
I have eight grandchildren and as they reached grade school I started each of them with a 529 account, contributing $400 a month to each and increasing it to $1,000 a month during high school. I am listed on each of their college bursars’ accounts as a person to share financial information, so that when the school notifies the student that a payment is due, I receive the same notification. Upon receipt I email Vanguard to sell enough of the investment to cover the cost and send the money to my bank. I then forward the money to the school. Is there anything wrong with my system?
You should check with your tax adviser on whether your reporting requirements are different if the check is made out to you or the school directly, says Ms. Wallace. Note, also, that “schools receiving money from a [grandparent-owned] 529 plan may treat it in a way that has a big reduction on financial aid,” she says. If your student has a chance at qualifying for financial aid, you may want to look into the best time to withdraw those 529 funds—such as junior or senior year—so as not to jeopardize any aid award the student might get.
***
Instead of using a 529 account, can a grandparent use the gift-tax exclusion to help grandchildren pay for college expenses? And if a grandparent pays college tuition and dorm costs directly to the university, am I correct that the money isn’t considered a gift and isn’t taxed?
Yes. You are allowed to give a grandchild (or anyone else) up to $14,000 a year without having to file the gift-taxform, and the child can use that money for college (although once the money is transferred, you lose control over how it is spent). You can also pay the school directly without gift tax kicking in, “although many schools consider this type of payment as student support, which can result in a dollar-for-dollar reduction in aid eligibility when the student applies for financial aid the next year,” Mr. Rowley says.
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“A better solution may be to contribute to the student’s 529 plan,” which is assessed at a lower percentage than student income in the financial-aid calculation and therefore has a lower impact on aid reduction, Ms. Wallace says.
***
I’ve read about waiting to withdraw money from a 529 until a student is a junior or senior, to better enable that student to qualify for grants. Where, then, do people expect to get the money for the first few years? Doesn’t this tactic defeat the purpose of having a 529 at all?
Don’t fret, there generally is no need to wait. After all, the Free Application for Federal Student Aid, or Fafsa (used to determine need-based financial aid), considers both assets and income anyway.
“It’s important to realize that whether or not you withdraw the money from a 529 account that lists your child as a beneficiary, the money in the account will be counted as assets in the federal formula for student financial-aid eligibility,” Mr. Rowley says. Parents’ assets are counted at a 5.64% rate, students’ at 20%, and grandparents’ assets aren’t counted at all, even if they hold 529 accounts with the student as the beneficiary.
But grandparent-owned accounts can be an issue, which is where that “waiting” advice comes from: While money that comes out of a parent-owned 529 for educational expenses isn’t considered student income for aid calculations, if a grandparent owns the account, 50% of withdrawals count as student income, which can affect aid. That’s why experts suggest using parents’ 529s for the first few years of college, and grandparents’ 529s for later years.
Ms. Schoenberger is a writer in New York. She can be reached atreports@wsj.com.
Corrections & Amplifications:
Withdrawals from a “529” college-savings plan that aren’t for qualified educational purposes will incur income tax on any earnings, but if the withdrawal is because of offsetting scholarships the student received or other exemptions, there won’t also be penalties. An earlier version of this article incorrectly stated that money taken out because of a scholarship will incur neither taxes nor penalties. (Oct. 10, 2016)
https://www.wsj.com/articles/can-you-use-the-529-money-for-grad-school-1476065100
Experts answer this and other questions about strategies for college savings
Our college Q&A column addresses whether 529s can be used for grad school, what to do with extra 529 money, help from grandparents, and more. PHOTO:ISTOCKPHOTO/GETTY IMAGES
By
CHANA R. SCHOENBERGER
October 9, 2016
13 COMMENTS
When planning for college expenses, tax-advantaged “529” accounts have been a popular savings tool. But readers are often unsure about the details. Questions about the state-sponsored plans, which typically invest in mutual funds, continue to dominate our college-finance mailbag. Here are experts’ latest answers.
***
If our only child receives a full scholarship, or we decide to not tap into his 529 for his undergraduate expenses, can we use it for grad school? Can we keep the account in his name and then will it to another beneficiary? Does it have to be liquidated at our death?
Yes, 529 funds can be used for graduate school. You can also change the beneficiary to any direct relative of the original beneficiary; this can be done at any time and doesn’t need to be done through a will. And note that if your child receives a scholarship, you are permitted to withdraw that amount from a 529 without incurring penalties, though if the money isn’t used for educational expenses, you pay income taxes on any earnings.
In terms of how ownership transfers fit into your estate plan, you’ll want to consult an estate lawyer because 529 plans can have different rules on this. For some plans, you can designate a successor owner or contingent account holder. Upon death, ownership would transfer to that person, says Karen Wallace, a senior editor at fund researcher Morningstar.
One exception, she notes, is “if the parents have made a five-year lump-sum contribution, which allows you to ‘superfund’ a 529 plan and avoid paying federal gift taxes if you spread the amount equally over five calendar years and complete IRS form 709 with your federal tax return in each of those five years.” In that case, if the parents die before the end of that five-year period, there could be estate-tax consequences, she says.
***
ILLUSTRATION: DAN PAGE
My daughter, age 28, has extra money in her 529 account because she received significant scholarship assistance during college. I did not know at that time that I could withdraw the amount of the scholarship from the 529 account without paying tax or penalty. Can I get it out tax- and penalty-free now, even though she graduated several years ago?
Scholarship withdrawals don’t incur penalties but you do incur income taxes on any earnings. There is no requirement that you withdraw money from a 529 in the same year that you receive a scholarship, although it’s a good idea, says Thomas Rowley, director of retirement and education strategies at Invesco. To be safe, though, since it is years later, check with the plan administrator to make sure you can still properly withdrawal the money and not pay the 10% penalty on any gains you earned.
***
I have eight grandchildren and as they reached grade school I started each of them with a 529 account, contributing $400 a month to each and increasing it to $1,000 a month during high school. I am listed on each of their college bursars’ accounts as a person to share financial information, so that when the school notifies the student that a payment is due, I receive the same notification. Upon receipt I email Vanguard to sell enough of the investment to cover the cost and send the money to my bank. I then forward the money to the school. Is there anything wrong with my system?
You should check with your tax adviser on whether your reporting requirements are different if the check is made out to you or the school directly, says Ms. Wallace. Note, also, that “schools receiving money from a [grandparent-owned] 529 plan may treat it in a way that has a big reduction on financial aid,” she says. If your student has a chance at qualifying for financial aid, you may want to look into the best time to withdraw those 529 funds—such as junior or senior year—so as not to jeopardize any aid award the student might get.
***
Instead of using a 529 account, can a grandparent use the gift-tax exclusion to help grandchildren pay for college expenses? And if a grandparent pays college tuition and dorm costs directly to the university, am I correct that the money isn’t considered a gift and isn’t taxed?
Yes. You are allowed to give a grandchild (or anyone else) up to $14,000 a year without having to file the gift-taxform, and the child can use that money for college (although once the money is transferred, you lose control over how it is spent). You can also pay the school directly without gift tax kicking in, “although many schools consider this type of payment as student support, which can result in a dollar-for-dollar reduction in aid eligibility when the student applies for financial aid the next year,” Mr. Rowley says.
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“A better solution may be to contribute to the student’s 529 plan,” which is assessed at a lower percentage than student income in the financial-aid calculation and therefore has a lower impact on aid reduction, Ms. Wallace says.
***
I’ve read about waiting to withdraw money from a 529 until a student is a junior or senior, to better enable that student to qualify for grants. Where, then, do people expect to get the money for the first few years? Doesn’t this tactic defeat the purpose of having a 529 at all?
Don’t fret, there generally is no need to wait. After all, the Free Application for Federal Student Aid, or Fafsa (used to determine need-based financial aid), considers both assets and income anyway.
“It’s important to realize that whether or not you withdraw the money from a 529 account that lists your child as a beneficiary, the money in the account will be counted as assets in the federal formula for student financial-aid eligibility,” Mr. Rowley says. Parents’ assets are counted at a 5.64% rate, students’ at 20%, and grandparents’ assets aren’t counted at all, even if they hold 529 accounts with the student as the beneficiary.
But grandparent-owned accounts can be an issue, which is where that “waiting” advice comes from: While money that comes out of a parent-owned 529 for educational expenses isn’t considered student income for aid calculations, if a grandparent owns the account, 50% of withdrawals count as student income, which can affect aid. That’s why experts suggest using parents’ 529s for the first few years of college, and grandparents’ 529s for later years.
Ms. Schoenberger is a writer in New York. She can be reached atreports@wsj.com.
Corrections & Amplifications:
Withdrawals from a “529” college-savings plan that aren’t for qualified educational purposes will incur income tax on any earnings, but if the withdrawal is because of offsetting scholarships the student received or other exemptions, there won’t also be penalties. An earlier version of this article incorrectly stated that money taken out because of a scholarship will incur neither taxes nor penalties. (Oct. 10, 2016)
https://www.wsj.com/articles/can-you-use-the-529-money-for-grad-school-1476065100
By the way this should be a sticky for the board. Lots of good info here.
By the way, if you take out the death benefit of either term or whole life, will that be taxed as ordinary income?
By the way, if you take out the death benefit of either term or whole life, will that be taxed as ordinary income?
No child should have a whole life policy, those policies are strictly to make money for the agent.
Life insurance should only be to cover a death for funeral costs and to supplement a lost income. A child has none. They should only be a rider onto your existing term life policy. I have a child rider on my term policy. Its 25k for if a child passes.
My life insurance for my self or wife covers if either passes and replaces 10 yrs of income. The smart living widower will put it into an investment like mutual funds or an ETF and long term interest should give about 8-10% yearly which is what the widower can live off of without touching the principal.
And anyone want to question the truth behind whole life, variable or any of that BS, go ask an elderly person with a policy for 40-50 yrs or even less. Ask them to ask their agent how much is in the policy today. You will hear "due to market fluctuations, blah blah blah..."
Stay away from that. Life insurance is insurance, not an investment product. Do not treat it as such.
Plus ask them when they're elderly can they take that little money out, sure at an 8% interest rate, so is that money ever really yours? Never....
Life insurance should only be to cover a death for funeral costs and to supplement a lost income. A child has none. They should only be a rider onto your existing term life policy. I have a child rider on my term policy. Its 25k for if a child passes.
My life insurance for my self or wife covers if either passes and replaces 10 yrs of income. The smart living widower will put it into an investment like mutual funds or an ETF and long term interest should give about 8-10% yearly which is what the widower can live off of without touching the principal.
And anyone want to question the truth behind whole life, variable or any of that BS, go ask an elderly person with a policy for 40-50 yrs or even less. Ask them to ask their agent how much is in the policy today. You will hear "due to market fluctuations, blah blah blah..."
Stay away from that. Life insurance is insurance, not an investment product. Do not treat it as such.
Plus ask them when they're elderly can they take that little money out, sure at an 8% interest rate, so is that money ever really yours? Never....
thanks
so if I want a policy like the one you and your wife have what should I specifically ask for?
It's just a plain term policy. Depends on how long you want it for. 20 yrs usually or 10. Then you'll have to renew and a new medical at that time. Smart thing is to get 10x your income on average. You can get companies to bid you quotes online.
I had a whole life since birth for 100k. When I was 20 my mom asked the agent how much cash was in the policy, was $105 he said. So for 20 years roughly $100 a month, that's what she ended up with. Told her cancel that shit.
Anything meaning what? The earlier type of avenues spoken on like a 529 or something else like ETF or mutual funds where you can put towards a college fund where it can be tax free. Look for those. But just diversify, and go a lil aggressive since they are young.
THIS would be a great thread topic...cause I want to do that, craft an investment portfolio small and aggressive for my kids. So THEY can benefit.
when I said anything I meant is there ANY type of life insurance that's good for kids?
Think you're stuck on whole like type thinking. If you have a policy or wife has one, like term, all you need is a child rider for the kids. It's one rider, covers all kids. In the event one of them passes, they are covered for funeral costs. Children have no income that benefits anyone.
Only a spouse who has an income, should have a policy in the event of a death to replace their income. It's why as a general rule, the policy should be 10x so you can find an investment that will replace that with something that over time return about 8-10% yearly over time.
Generally, if you're about 30, and make 50k a year, should have 500k and pay about $30 a month or less with term. Over 20 years when the policy is up for renewal and you've accumulated a healthy investment portfolio, you may no longer need 500k and get a smaller policy as you should have a nice little pocket change put away in case of your untimely death.
All thing advice youve said, is it based on the market being strong?
i really hope the fam is reading this and absorbing this
cause this is the kind of info that we always complaining that isnt passed on in our community.
this is Black Family Money 101 on here
salute.
Strong or not; I'd invest and keep investing in low costs index funds indexed to the S&P 500 and total us stock market; you can also find ones indexed to the global stock market to get exposure and returns from US and international stocks.
Thanks
Check this for some suggestions on ETF's
http://www.kiplinger.com/tool/inves...r-etf-20-best-exchange-traded-funds/index.php
But stay diligent and put away money monthly, stick to a certain amount, and pay "yourself" first.
http://www.kiplinger.com/tool/inves...r-etf-20-best-exchange-traded-funds/index.php
But stay diligent and put away money monthly, stick to a certain amount, and pay "yourself" first.
We been really slacking...that why I'm asking all these basic questions, I'm just starting to get this stuff set up...
So I'm looking at the EFT, life insurance, etc.
and with the new addition coming any and all suggestions are really appreciated fam
Get your will and estate plan together too; I'm reading this book now and it's a great read but pretty damn eye opening about how you can and need to protect your assets if you want to pass down to your heirs and/or preserve capital to ensure generational wealth:
Amazon product ASIN 0062336223
Amazon product ASIN 0062336223
Dope thread. Many moons ago as a financial advisor, we were instructed to push folks towards a VUL (commissions); however, I've always had term for many of the aforementioned reasons.
Also, If you don't already have a subscription to a financial mag, get one. I sub to Kiplinger's and the information in it is invaluable. However, I will say you can find good, general information just by searching the net.
Subbed.
Also, If you don't already have a subscription to a financial mag, get one. I sub to Kiplinger's and the information in it is invaluable. However, I will say you can find good, general information just by searching the net.
Subbed.
Couple of good online resources:
www.bogleheads.com
www.freemoneyfinance.com
www.thesimpledollar.com
Also, many local library system allow you access to Morningstar's website; $129/year subscription that you get access to for free as a library member; phenomal resources to research stocks/bond/mutual and index funds.
thank you both
I have to REALLY focus on money for NOW and in the future.
The newest addition to our family has been diagnosed with sickle cell disease
and I want to ensure not only education for my kids but also the best life insurance for us individually.
Especially to ensure that they are well taken care of.
If you're investing long-term I would dollar cost average so that you can take advantage of a fluctuating market.
Don't sleep on Bond funds too. If you're more advanced in age and you don't have a lot of doubling periods left, bond funds may be the way to go. Also with Municipal bond you get a tax exemption often times. And if you do plan to invest learn about the Rule of 72.
I'm doing this right now...I opened a coverdell then after listening to dave ramsey, realized that i need to get my debt cleaned up first.
Damn fam, wishing nothing but the best for you and the fam especially the newest edition. A prayer has been sent for strength and courage to fight the battle ahead.
Make sure your will and living trust us is done and/or up to date. Also for ALL the fam make sure your beneficiaries are up to date on all insurance, retirement accounts, etc.
If you're on Facebook; 'Your Money and Your Life' is a fantastic group talks about personal finance.
My pleasure bruh, thanks for creating this thread.
please continue to drop ANYTHING you feel would help!
Like I said earlier I really need to focus on this with the new addition and her medical situation.
So I understand bond funds are good
but what abut purchasing individual bonds?