Back To School?*
*While sheltering more money than IRAs or 401(k)s
December 17, 2012
It is worth maxing out IRA or 401(k) plans, but then what? What can you do to protect a substantial amount of dollars from capital gains taxes? Tax-advantaged retirement accounts are great, but the contribution limit is low.
My idea is to use the 529 college savings plans for long-term tax-free compounding regardless of your intended use for the proceeds. In increments of up to $370,000, one can establish a 529 in Nevada with yourself as the donor and beneficiary. For couples, you can each do the same for a total of $740k. Costs for an equity index fund are low and capital gains are not taxed. I invested mine in the Vanguard Total Stock Market Index Fund (VTSMX); you might consider doing the same.
If you do not need this capital for a long time, ideally a whole generation or longer, this is an ideal way to protect assets from taxation. But what are the drawbacks? Well, to avoid penalties upon withdrawal, you need to spend it on education. But education inflation is meteoric, so it is likely that there will be educational expenses.
But let’s imagine that you want to withdraw money and lack education bills. One could barter: pay college bills for someone who could pay your bills in return of an equal pre-tax cost. One could take college courses during retirement (wine tasting course? golf class?). Or just pay the fee: on the back end the fee is less than the tax-free compounding effect within a few decades.
July 7, 2015
Vanguard claims that,
We hire top investment professionals with the experience and expertise you’d expect from Vanguard.
But this is an unmanaged fund, so as long as they can keep the books straight, they could also,
hire psychotic crack fiends with the experience and expertise I’d expect from San Quentin.
for all that I would care….
… A 529 savings plan is an investment account intended for college and other higher-education costs. They are sponsored by individual states and offer various tax benefits. Earnings are deferred from federal taxes. Withdrawals for qualified higher-education expenses are also tax-free. You can make up to five years’ worth of contributions at one time without triggering gift tax. The uses are pretty generous - you can use the money for tuition, room and board, books, and other expenses…
… This is a tax-advantaged fund 67x your IRA contribution limit. For 2015, the IRA contribution limit is $5,500 ($6,500 for people 50 or older). One might as well fund it, but the scale is small. The 529 limit is $370k. If you are married, you can each invest $370k with oneself as the owner and beneficiary. At that scale, this investment has already been worth over $1.1 million since inception and over $391k since I last discussed it. This is an ideal vehicle for long-term tax-free compounding.
July 13, 2026
The initial contribution alone results in ~$4.7 million balance with expected covered expenses of around 19% of that balance or ~$875k. Want to do the same starting today? Markets are more expensive but with a long enough time horizon, compounding can still work in your favor. Give it plenty of time.
This is not here or ever tax advice but one can fund these all at once by lending the money to max them out to each kid to fund their own. Charge AFR (currently 3.93%). Gift the interest payments due back to you. That way they can get the full balance invested on day one. Today the maximum aggregate balance is $575k per beneficiary. The balance may grow with returns but additional contributions can no longer be made.
Now what? If you’re looking at ~$3.8 million more than you expect to need (or more based on subsequent deposits to kids), there are all sorts of ways to use over funded 529. Here are some of the most fun ones that you can do today. Additionally, these examples prove the point that when it comes to tax advantaged accounts, there is no such thing as too much of a good thing.
Learn to fly at Embry-Riddle. Semester at Sea could use $50k per person to cruise around the world with some classes. Visit ten countries in 100 days from the comfort of a premium cabin. Take a NOLS year in Patagonia. Coincidentally it is right around the same $50k price for expenses that can be charged to the 529. They explicitly support 529 funding --
NOLS supports a variety of outside financial aid options:
TL; DR
In short, over funding is a fun problem to solve. And whatever you can’t spend fast enough can just be saved for subsequent generations.