529 plan regrets?

[SMD]

Originally Posted by keithl

You could a Roth IRA instead, the money you put in can also be used for college and if you end up not needing the money for college you'll have it for retirement.

Problem with that for some will be income limits and phaseouts. That doesn’t apply to 529.

[SMD]

Originally Posted by raky

I personally don't like the idea of limited investments/having to follow certain rules as to what the money can be used for. I do put money away in them but that said, it will be enough to cover undergrad not further education. That money is tied up in other investments.

I have been getting better returns in real estate. I am both in the multifamily and single family space. In a nutshell, multifamily investments (apartment complexes) seem to get around a 16-18% internal rate of return once you factor the refinance/disposal after a 5 year hold. Apartment investments have a somewhat controlled return as they are valued based on Net Operating Income. The idea is to get a distressed property and turn it around or to get one that is stabilized and decrease the expenses (thereby increasing the income). I do this completely passively as I am not looking to buy another job. As a limited partner I just put money in a syndication and get quarterly distributions without all the headaches.

I have a single family in an A+ area that I am currently getting 7% return on not factoring in potential appreciation. All real estate with current tax laws gives you the benefits of depreciation so your cash flow can be offset by depreciation and be considered "tax free" until you sell/or 27.5 years, whichever comes first. When you sell you have the option to do a 1031 exchange and go into another property. I personally haven't done that as there are rules you need to follow with time limit constraints. That said, even having to pay capital gains taxes, I still think I will come out ahead since I am limited in the funds that I invest can invest with in the 529.

I will add the caveat that everyone has different risk tolerances. I know my kids education will be covered one way or another so in the meantime I tend to take somewhat non-traditional methods to investing. Sorry if this is confusing, I wrote it pretty quick...

I understand and most of my money is invested in my business. I was more referring to traditional tax deferred vehicles that can be invested in the broader market indexes.

[keithl]

Originally Posted by SMD

Problem with that for some will be income limits and phaseouts. That doesn’t apply to 529.

That's true, but depending of your circumstances it could be a better way to go. That's what I'm going to do.

[SMD]

Originally Posted by keithl

That's true, but depending of your circumstances it could be a better way to go. That's what I'm going to do.

Don’t forget about potentially early withdrawal penalties if under 59 1/2 (to the extent you pull earnings out). Doesn’t apply to your basis.

[cruise_bone]

Originally Posted by SMD

So what is a better vehicle? You can immediately put 140k into a 529 and have it grow tax free without tax consequences. After 5 years you can continue to put 28k in each year without gift tax consequences. Not sure what else is out there that is better. My SEP IRA allows a larger contribution each year tax free but that is an entirely different animal and cannot be withdrawn for education without adverse tax consequences.

I had a client who did this the day his twins were born. He and his wife maxed out the 5 year gift.
I think his wife's parents (who were also loaded) also dumped some serious cash into those accounts.

[cruise_bone]

Originally Posted by SMD

Problem with that for some will be income limits and phaseouts. That doesn’t apply to 529.

Not if you do a backdoor Roth every year, which everyone here should do if you are AGI limited, as I suspect most are.

[SMD]

Originally Posted by cruise_bone

Not if you do a backdoor Roth every year, which everyone here should do if you are AGI limited, as I suspect most are.

Do you mean convert a traditional to a Roth and take the tax hit on the conversion immediately? I looked at this when I was in the AMT zone where it would have been at the 28% rate, but once you earn past the AMT that is a large nut to take (albeit lower in 2018), especially in high tax jurisdictions like NYC and CA. But you are correct this is a very good option for younger people who earn too much but are looking for ways to grow earnings tax free.