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529 Plan investments vs taxable retirement income??

April 28th, 2008 at 08:44 pm

I have socked away about $2700 into the baby bean's 529 plan.

My strategy is to build a diversified Vanguard portfolio, one fund at a time.
So far, the money is invested in:
-Vanguard Aggressive Growth Index Portfolio -Vanguard 500 Index
-Vanguard Developed Markets International Stock Index
I'll add more options once more money is in the account.

Also, I had a conversation with my MIL today. The in-laws want to contribute to his college, but they are retired. Every dollar they would contribute would come out of an IRA, and would thus increase their annual taxable income. They are trying to avoid this as they live in a very high tax state (Vermont).

This is a problem that hadn't even occurred to me. So, we tried to figure out what accounts would work best for them. I'm at a loss, so if any of you have any ideas on how to address this problem, I'd be interested to here them.

3 Responses to “529 Plan investments vs taxable retirement income??”

  1. monkeymama Says:

    They might want to look into ESAs. I don't know off the top of my head if they can contribute to a grandchild and get the deduction, but there is a deduction for ESA contributions. It is something I would look into.

    I was going to say, you could always take the deduction and pass on the tax savings to them, as a gesture. BUT I do not know if you can do ESAs in conjuction with 529s, or what all the limits are. ??? Something I would look into.

    Anyway, along the same tokens, you could always agree to pay the increased taxes in exchange for the contributions. I don't think there are a lot of other options.

  2. monkeymama Says:

    Nevermind - ESAs don't seem to be deductible. I know - the basics - I should know - but I don't know anyone who uses them. Now I see why. Big Grin They don't seem to have any advantage over a 529 then. So nevermind on that.

  3. thriftorama Says:

    The added complication with their tax situation is that as long as they stay under a certain income limit, their property, school, and state taxes are cut in half. They are barely under that now and losing it would be very expensive because their taxes are so high in Vermont.

    There may just be no way to do it.

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