529 Plans - Everything You Need To Know

529 Plans - What are they? Should you get one? What should you watch out for? All the answers 👇🏽

❓ What's a 529 plan?

A 529 plan is a tax-free savings plan to help pay for education. Investment growth is tax-deferred, but distributions are tax-free as long as you use them for education. Cool, right?

❓ What is "education"?

Education used to be post-secondary education (i.e., college+). The definition has since expanded (US News article in comments)

👉🏽 College tuition, fees, and room & board, books & supplies have always been covered.

👉🏽 Certain two-year colleges, trade schools, and even some international schools.

👉🏽 You can now pay $10,000/year for K-12 education (e.g., public and private schools). But 𝗻𝗼𝘁 childcare.

👉🏽 You can now pay off $10,000/lifetime in student loan debt.

That's a lot of tax-free ways to spend your distribution!

❓ Should I create a 529 plan?

Almost certainly, yes. If there is a higher education goal in your future - for yourself (yes, 529 plans are not just for kids!), your children, your future children, or your family (nieces & nephews qualify!), there are compelling reasons to set one up 𝗶𝗺𝗺𝗲𝗱𝗶𝗮𝘁𝗲𝗹𝘆.

👉🏽 Investment growth is tax-free. $1,000 a year invested in a 529 plan at birth will give you $38K to use when your child starts college (here's an investment growth calculator to play with).

👉🏽Distributions for educational expenses are tax-free.

👉🏽 Many states also allow deductions for 529 contributions (e.g., GA allows $8,000/year per beneficiary. A family filing a joint return (and with 2 children) can deduct $16,000 on their GA tax return).

The only reasons not to?

1️⃣ You're filthy rich and don't mind being inefficient with money.

2️⃣ You're currently living paycheck to paycheck.

3️⃣ You cannot afford to do this and save for retirement simultaneously. This is 𝗶𝗺𝗽𝗼𝗿𝘁𝗮𝗻𝘁 - never put education for a dependent ahead of your own retirement.

❓ OK, I'm sold. What do I watch out for?

👉🏽 Fees. Not all 529 plans are created equal. Clark Howard, Inc. has an excellent 529 plan selector. Use it well.

👉🏽 Plan choices. Age-based simple investments are the best.

👉🏽 Buy direct - never pay fees to invest.

❓ What about grandparents? Can they open 529 plans for their grandchildren?

Yes! Anyone can open a 529 plan to help any beneficiary (they don't even need to be related). Rather than have grandparents give cash gifts, consider having them contribute to their own 529 plan with your child as a beneficiary.

❓ Does having a 529 plan adversely impact a child's chances of getting scholarships and funding?

Yes, but not by much, given that parents' assets are likely much larger than that of the 529 plan itself. There's a detailed article on scholarship implications of 529 plans that you may want to browse if you think this is an issue for you.

🆕❓ What's this I hear about being able to roll a 529 plan into a Roth IRA starting in 2024? What should I be aware of?

Yes! The SECURE 2.0 Act allows people to roll over unused money from a 529 plan into a Roth IRA starting January 1, 2024. In the old world, any unused funds that you want to withdraw were subject to regular taxes and 10% penalties. With this Act, you can roll over up to $35,000 into a Roth IRA with no taxes or penalties.

The devil's in the details, though, and you should read the requirements. This is an awesome tool for contributing to Roth IRAs (under a certain income level). It's of little use to high earners, so you should be doing this before your child is a high earner. Some (just some!) of the requirements are:

• The 529 plan must have been open for a minimum of 15 years.
• The owner of the Roth IRA must be the beneficiary of the 529 plan.
• The rollover is subject to the requirement that the Roth IRA owner has compensation at least equal to the amount of the rollover.
• Contributions made to the 529 plan in the last five years, including the associated earnings, are ineligible for a tax-free transfer. (This is to prevent you from gaming the system to get a tax-free transfer.)
• Transfers you make from a 529 to a Roth IRA count against your yearly Roth IRA contribution cap, which is currently $6,500.
• The lifetime limit for rollovers is $35,000.

Summary

👉🏽 529 plans are a fab way to save & invest tax-free for education.

👉🏽 Always take care of yourself (retirement, healthcare, long-term care, etc.) before investing in a 529.

👉🏽 Pick a low-fee, age-based investment that also gives you a state tax deduction.

👉🏽 Start early to compound your returns.

Questions? Comments? Pop them 👇🏽 and I'll answer them.

Interested in more content like this and don't want to miss a post? Connect with me for 3x/week posts on cybersecurity, leadership, photography, life lessons & personal finance (View my profile, click 🔔).

#lessonsfromaCISO #personalfinance #commonsense #investing #financialliteracy #averageisgood #money

💰