529 Plan

[Capt MJ]

Just one note that goes along with "proceed with all due diligence," is be sure DD/DS is a pretty sure shot to finish at the SA. I understand there is no way of knowing what medical stuff can happen to derail them, but it's worth having clear comms about intent to stay the course.

We had a sponsor daughter at USNA who decided to leave USNA voluntarily at the start of sophomore year. Her parents were adamantly against it, and had already shifted 529 money to other sibling then headed to college. Parents told her "figure out college on your own." Huge family rift. Former mid went to live with a family friend, broke with her family, and to her credit, got herself into a state school with several grants as an independent adult with low income. Clearly, there must have been all kinds of family issues already in play, but it happens.

 

[AROTC-dad]

V -

Take this with a BIG grain of salt but I think (?) I am starting to undertand based on the feedback from a few.

The SA students have an "out" that is handled same as the way a scholarship is. How much of an out is noted in your post above... for USNA, asuming 2 semesters a year it would add up to just about $50K. That is the amount that can be withdrawn without incurring the 10% penalty. When/if you take out $50K for a full year at an SA, some of that distribution will be contribution and some will be gains. The gain will be taxed. Assuming its in the kid's name, if it comes out early, rather than later, the kid's tax rate is low or at least as low as its ever likely to be.

Thus our highly preliminary plan based on limited data and input and needing review from professional tax and financial counsel (read BIG grain of salt)... is that we will take out just under $25K this year, then $50K a year thereafter till the 529 is exhausted. There will be no 10% penalty so long as the kid is at an SA and the withdrawl is less than the cost of the education at the SA. The kid will pay a minimal tax rate on the gain portion of the distribution and can re-invest the proceeds for their future (school, house, whatever).

We still have a lot of reading and checking to do to make sure this is 100% above board but based on what I have seen this far; it may be doable. I have a similar thread up on the Navy forum and someone there indicated they were on similar path.

Best of luck and do a lot of checking before yanking anything. We have time to get this right!

Cheers,

MDDADD,
IMHO, I think you have summarized the SA/529 doctrine pretty well. I too have found that different CPA's and EA's have scratched their head over this issue.

With regard to the valuation of USNA, I called admissions at USNA and they verbally advised me that the Cost of Education (COE) is $192,000 for 4 years (48K per year) which is in line with what USAFA posts on their website ($46,392 per year). USNA doesn't have anything in writing, though.

The key thing to focus on, is what your goal for the funds is. If you have another kid to fund in the future then it is probably better to change beneficiaries and let the investment continue to grow. If it is your last kid, then the strategy should be to extract the funds as you described in lockstep with the annualized COE. Again, your DS/DD will likely never be in this low a tax bracket again!

gokings814 (yes, I work in finance).

 

[USMAROTCFamily]

Thanks for resurrecting, MDDADD. We're going through this with our broker and accountant right now, and I'm appalled at the lack of experience and therefore guidance we're getting. We've been told that the funds (contribution portion, not earnings) can be withdrawn without penalty, but there are no rules for just how and when. The consensus seems to be to withdraw them on a schedule similar to when they would have been withdrawn at a civilian college, either by semester/trimester as bearhunter66 suggests upthread, or 1/4 of the funds annually, or ... but there is no rule and "whatever we choose to do is probably defensible" says our accountant. It's frustrating. We'd like to hold on to the funds until kiddo graduates from USMA just in case he ends up at a civilian college before then and needs them. If he doesn't need them, then we'd just like to roll the whole 529 into our retirement funds after he graduates.

The other issue we're having is finding clear documentation from USMA on the estimated cost of the "scholarship" for determining how much of the funds are eligible for withdrawal. Our accountant says we will need official documentation of this number and I'm having a hard time finding it. We're going to have to call the treasurer's office as what I'm finding in the docs on the usma.edu/parents website is totally confusing:

Payments from Qualified Education Programs Under Sections 529 and 530 (and Coverdell ESAs)
Again, some of our Cadets and Cadet Candidates are fortunate enough that parents, guardians and other family members established college funds for them when they were young. If there was a distribution from the plan in 2014, you will receive a Form 1099Q. The Cadet or Cadet Candidate must report this income on their 2014 tax return. Additionally, they need to know the breakdown of how much represents principal invested in the plan vs. earnings of the plan. The distribution of amounts contributed to the plan is not taxable; only the income earned.
...
Room and Board (half year per USMA’s FY13 Cost of Education Report) $2,126.65
Education (the actual 2013 tuition cost per semester at the U.S Military Academy) $24,888.50
...
The question may arise whether an appointment to the Military Academy can be considered a “scholarship award” within the meaning of the income tax laws. The Internal Revenue Service has ruled that such an appointment is not a scholarship award and that the education provided by the Military Academy must, therefore, be included as an item of support furnished by the Army.

We're completely confused at this point.

Check out this link, which may help: http://www.westpoint.edu/parents/SiteAssets/TAX MEMO 2014.pdf

 

[VelveteenR]

Thanks everyone. Lots of good information here.

(@USMAROTCFamily: That link is where I found the numbers in my post above.)