Retiring Early

Thursday, November 30, 2006

Using a 529 for non-educational retirement savings??

No schoolI came across a very interesting post that alludes to a loophole in the 529 educational savings plan. Miller over at My Pocket Change writes:
"There might be games you can play using a 529 account. I briefly looked into this at some point in the past. Basically, your money grows tax-free in a 529 account, but if you spend any gains on non-educational expenses, you pay a penalty. There is a breaking point (in time) in which even with this penalty, you’d be better off using a 529 account (given, against its intended use)."
Now, given that I don't have kids and don't intend to, I would have to do some reading to understand whether or not there is something here or not. Anyone have anything to add here? Is this something that can be exploited?

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6 Comments:

  • At 11/30/2006 12:04 PM, Blogger Brian said…

    I don't think the link you referred to is talking about any kind of loophole – to my knowledge there is none. Yes, you can withdraw funds for non-educational expenses, but the earnings are subject to income tax and a 10% tax penalty applies.

    The author is just stating that the tax-deferment benefits of a 529 plan might be enough to overcome the tax and penalty on non-educational expenses and, combined with these, might generate a higher return in the long run when compared to taxable accounts. However, I doubt that would be likely in a typical scenario.

     
  • At 12/01/2006 8:19 AM, Blogger fin_indie said…

    Loophole may have been the wrong word. What I read in his post was that there could be a tipping point, whereby your gains minus penalties and taxes would be greater. Assuming in retirement, you have a low income tax bracket, the question is: could this work? Again, we can talk in vague terms all day, I need to create a model and run some scenarios. I was wondering if anyone has already done this, however.

     
  • At 12/02/2006 1:56 AM, Anonymous Anonymous said…

    probably you should put the money only in it , if you have plan to study more

     
  • At 12/02/2006 7:37 AM, Blogger fin_indie said…

    So the question is: do you only pay penalties if you use the *gains* for non-educational expenses, or penalties for using *any* funds in the 529 for non-educational expenses? This may be the key question.

     
  • At 12/02/2006 9:15 PM, Anonymous Trent said…

    Since the money put in is after-tax money, you've already paid taxes on it. So just using the principal would be no better than putting the money in a mattress.

    If you aren't going to use the gains, why have them? A tipping point would be irrelevant.

     
  • At 12/30/2006 9:53 AM, Anonymous Greling said…

    but the earnings are subject to income tax and a 10% tax penalty applies.

    But consider that when you are retired, you will most likely be living off of an IRA and/or 401K, which has distributions that aren't treated for tax purposes as "income". In many cases, your income will be zero or very little and fall under a low tax bracket (10% or 15%). Hence, isn't a 10% penalty on the gains with a low tax bracket is still good if your invested money has grown say 4,000-5,000% over maybe 30 years?

     

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