Investing - Theory, News & General • Wiki - Prioritizing investments (proposed updates)

Edit add: found your post on backdoor AOTC - glancing through it - sounds complicated indeed. viewtopic.php?t=412052

The main complication is filling out the 8606 form. The rest of it is pretty simple

1. Gift appreciated stock to child (preferably in an UTMA)
2. Sell that stock
3. Pay college from that account
4. At tax time, do not declare the child as a dependent
5. At tax time, fill out 8606 for the child

The 8606 is pretty easy when it's one child you have to deal with. It's a bit more complicated with multiple children

Overall, my feeling is that it's just a bit more complex in Turbo Tax than dealing with Back Door Roth contributions.

One problem in general with this review process is that, while there is broad agreement that the page should be written for and accessible to novice readers, it's been hard to find agreement on what advice is appropriate for novice readers. In this case, however, I'm comfortable saying that this process is way too complicated to be mentioned. I've read about it for 10 minutes and can't even fully understand it. Not claiming a child as a dependent will cause the loss of a $2,000 child tax credit... the CTC ends once they are 18. The AOTC is more ($2,500), but you are also generating capital gains that you would not otherwise have in order to "soak" it. I would have to think about this carefully, and crunch some numbers, to fully understand what's going on and the quantify the benefit. I also don't understand how the Form 8606 factors in... that relates to non-deductible IRAs and none of the steps I read about involve an IRA. I'm sure there's a reason you could explain to me. But yeah, this is way beyond what should be discussed on this page.

I tend to agree with the more common advice for college savings:

• Unless you have reasons to think you won't have college expenses, save a reasonable amount per child in 529's, possibly up to the state tax benefit limit if you have one and if your budget can support it
• Rebalance within the account as the money grows and college gets closer
• Pay for college using 529 money, taxable money, and cash flow
• If there is unused money after your children are through school, change the beneficiary to grandchildren or other relatives. Money is fungible, and giving your children a good-size 529 will mean they will have to save less for their kids' college at probably a critical time in their own financial life

I still agree with you about use of the term "emergency fund" though.

My mistake!!! The correct form for kiddie tax is 8615, not 8606

I do agree that this is too complex to explain on the wiki. But, IMHO, most people really don't need/shouldn't use a 529.

However, I do think a mention of 529 plans should be on the page just because enough people think that as soon as they have a kid they should open up a 529. I'd show it on the same level as "save in taxable account" just so that people can see that it should be far down in their list of financial priorities.

Statistics: Posted by fyre4ce — Tue Aug 27, 2024 7:38 pm — Replies 337 — Views 22888