I recently had a conversation with a client who had a big fat 529 plan and was planning to take a distribution from it to pay for his child’s first college tuition payment. We both knew that this 529 plan would cover all the costs associated with college. His question was surprisingly simple:
As long as this goes toward college expenses, I don’t have to pay taxes on the gains, right?
Unfortunately, my answer was anything but simple.
Talk of inflation has been swirling for some time amid all the stimulus that's been pouring into the market and the soaring debt levels in the U.S. The Federal Reserve has said that any inflation that does occur will be temporary, but one hedge fund macro trader says there are plenty of reasons not to Read More
I began by explaining what expenses qualified, and which ones did not. By the time I explained how tax-free educational assistance impacts a 529 plan distribution, my client’s eyes were starting to glaze over. I never even broached the impact that tax credits would have on the distribution. The problem was that I knew his situation well enough to know that he could very easily find himself getting taxed on a small portion of the distributions.
Instead of droning on and on, I stopped and offered to sketch out the concept and have presented it below. This made sense for the client and understood where the tax landmines were located.
I thought other investors and advisors could benefit from this flowchart:
And finally, I’m always looking for my next flowchart idea. If you have any ideas, please email me.
- The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Alpha Architect, its affiliates or its employees. Our full disclosures are available here. Definitions of common statistics used in our analysis are available here (towards the bottom).
- Join thousands of other readers and subscribe to our blog.
- This site provides NO information on our value ETFs or our momentum ETFs. Please refer to this site.
Article By Michael Lecours, CFP® - Alpha Architect