The title pretty much covers it. Suppose I start investing my into a 529 savings program for my child. If he decides not to go to school, what are my options? I know I can leave it in there in case he changes his mind, but what if I decide enough is enough with waiting for him? Can I transfer it back to me and take a tax hit? Can I roll it over into a retirement account in his name? Can I cash it out and give him the (assuming a tax hit). All of the info online is suspiciously mute on this.
On a side note or perhaps related. Can I open a retirement account for him? I teach my students about the time-value of money and I’d love to start a IRA for him while he’s 10 - even if it is a lumpsum - just to give him one less thing to worry about.
I’m pretty sure that for the most part 529s are transferable between people. If used for education then there are no tax penalties. I had these same questions when I first learned about the 529s, what happens if she doesn’t want to go to school, gets a scholarship, etc. From what I’ve learned that so long as the money is used for school it can be used tax free, after that it will be taxed.
If you take the money out as the account owner, you will have to pay the taxes. If the funds are given to the Beneficiary, then he/she will have to pay the taxes and penalties.
Well you can keep the money for him in case he/she changes his/her mind, as you noted. You can change the beneficiary to another child or grandchild or you can name yourself as beneficiary to yourself and use the money for your own education.
It does sound like the OP wants to use the money rather than just sit on it. You can obviously get it back but you’ll take a tax hit and how much this is depends on how you do it. For instance, if you’re looking at bankruptcy you need to be careful because a lot of the money is protected against a bankruptcy. Though not all of it is, last time I checked it was like a the prior years’ contributions and I think up to $5,000 of the year before that aren’t protected. But that could’ve easily changed by now, but you get the idea.
Bascially, if your 529 earned money, you will take a penalty on that. Not on the principal but on the earnings. Also any deductions your state gave you because of the 529 have to be repaid to the state and some states impose penalties on the repayment as well
But if your plan lost money it might not be so bad. Since you already paid taxes on it, you won’t have to pay any additonal penalties on the principal. It used to be that if you cashed out your 529 entirely you can claim your loss if you itemize your deductions. But that was awhile ago, so you have to look into that.
Your child must have taxable earned income in order to qualify for an IRA (or Roth IRA). If your child has a job, you can contribute to an IRA for him up to the amount of the compensation he receives. He doesn’t have to put his own money in the IRA – he can use it for whatever he wants, and then you can make the contributions, but only up to the limit of his income. Allowance or money you pay for doing chores doesn’t count.
According to a seminar I was in the other day, it is possible to open an IRA for your kid. It is even desirable, for some reason which I don’t remember for sure because I wasn’t really listening.
Oh yeah, I think it was to get a head start on time requirements. There’s some kind of minimum time requirement for an IRA before you can blah blah blah blah. By opening one for your kid, you’ve pretty much covered that requirement for them.
They weren’t really talking about necessarily dumping tons of money in, though.
Of course, you’d want to talk to an actual professional about this stuff before doing anything.
Have you checked at your bank? I think most of them have free financial advising these days.
My FA outlined the following cost-benefit analysis when we talked abuot opening an IRA vs a 529.
With an IRA, it becomes property of the kid when he or she turns 18. Some kids are still stupid when they’re 18 and might do unwise things with it. With the 529, you remain in control, since you are the account owner. If your kid decides not to go to college, you can use the money to further your own education, or use it for your other kid, who has decided to go to medical school…