529 plan
What to do with a 529 plan?
No incentive to sell, can’t deduct loss.
Limited choices on what to roll into per family
Limited to one change per year
Selling out entirely and buying municipal bonds
Staying the course two children 8 & 11
John Hancock down 40%+ in two years
Its a shame the the sponsors haven’t made noise regarding this dilemma
Whats your take?
Permalink Submitted by Alan Spross on Mon, 2009-01-26 22:29
Perhaps you said you cannot deduct the loss because you cannot itemize or have AMT problems. But if you fully distribute the balance, the amount falling short of your investment in the plan qualifies for a misc. itemized deduction subject to 2% floor.
The 40% loss does not seem to be inconsistent from the norm, as that is about where the S&P 500 is. Perhaps that is why you have not heard from the plan sponsor. They may have more critical losses to deal with.
With 7 years until the very first distributions would be needed, it may be best to stay the course, especially if the loss is not enough to give you a large misc deduction that can be fully applied.
Permalink Submitted by john hopkins on Tue, 2009-01-27 13:50
Need some clarification: One can’t deduct tax losses from an IRA, why do you say that deducting a loss from a 529 plan is tax deductable?
Permalink Submitted by Alan Spross on Tue, 2009-01-27 18:40
Actually, the losses are handled in generally the same way with both IRAs , 529 plans, and non qualified annuities. If the required accounts are fully distributed and the amount received is less than the cost basis, the shortfall qualifies as a misc itemized deduction.
Traditional IRA contributions are mostly pre tax, therefore the chances of loss are reduced. But Roth IRA contributions and investments in 529 plans are made with after tax dollars, so these accounts have a considerable amount of tax basis in them.
Remember, the account must be fully drained to take the deduction. You cannot deduct any losses while the account remains open.
See Pub 970, p 56 for details:
http://www.irs.gov/pub/irs-pdf/p970.pdf
Permalink Submitted by john hopkins on Tue, 2009-01-27 19:19
Doing this 40 years and learned something today! Thank you
Suppose you liquidated the 529 plan, took the tax loss because it was substantial: would the same time restriction be in place as in year end harvesting, before you could reinvest?
Permalink Submitted by Alan Spross on Tue, 2009-01-27 20:53
To my knowledge the IRS has never addressed any waiting period. Since the loss applies to each annuity or 529 contract separately, there should be no waiting period to purchase another contract. If you want to re open the same 529 plan, it seems prudent to wait until the next calendar year, so at least you have a -0- balance at year end.
IRAs on the other hand are lumped together and you must close all of those of the same type (Roth vrs TIRA). In that case, you would probably be safe to contribute again for the next calendar year. That means NOT contributing after Jan 1 for the prior calendar year so that there would be no year end balance reported on Form 5498.
Permalink Submitted by charles lore on Thu, 2009-01-29 00:58
Before dumping 529 stop to consider:
You have control even after kid is majority age unlike ugma which tends to be alternative.
You may be bailing out of market at a point when valuations are at a low. Long time bears like Jeremy Grantham are now ramping up stock positions. The only way to be assured you are in at the bottom is to not sell.
As for muni’s be wary of real yields rising due to all the new gvt that needs to be absorbed … Let alone health care liabilities municipalities will soon be showing..
No easy solutions