[Kelly]

Please explain how a 529 (I think that’s what it is) works and how to set one up so I can make sure my kids are in a better place than me.

Explain it like I’m 5, thanks.

[Danny]

It’s a type of savings account where you can invest your after-tax money, let it grow over time and withdraw it tax-free (i.e. without capital gains tax on the profits) to fund your kids’ education-related expenses: K-12 and college tuition, as well as related expenses such as computers and software used for school work, off-campus housing, books & supplies, campus food and meal plans, special needs equipment.

Each state has its own 529 plan with slightly different rules.

You can join the 529 plan of any state, but check your state’s one first because it’s the only one that could also offer state-income-tax exemptions on your contributions to the 529 plan, or even contribution matches.

Any leftover funds in your 529 (that you won’t use for education expenses) can either be withdrawn (you’ll pay full income tax + 10% penalty on that) or transferred to a Roth IRA investment account, which will let your child withdraw them tax-free in retirement.

The main drawback of 529 plans is that some of them (but not all) have pretty poor investment options, so make sure you choose one that lets you invest in similar products to what you would invest in a self-directed brokerage account.

[Chris]

1) Determine if your state has 529 tax benefits. The most common is a STATE tax deduction, but others have state tax credits, contribution matches, or even just free money for opening an account.

2) If your state has benefits, it is likely the best state to choose. If your state offers no benefits, you can choose any state.

In the future, you should have the ability to transfer the 529 to another state’s 529, if desired.

3) Open the account, contribute very likely through the state portal or state selected brokerage account.

Many have a contribution link to share with other people to donate.

Name your beneficiary -very likely your kid. You can open multiple accounts.

4) Autoinvest into your ETF of choice. The SP500 choice is always a solid selection, even for 100% of the portfolio.

5) Wait. Wait for years and make annual contributions as desired.

6) The account is now funded and the beneficiary (child) is eligible for college.

6a) If the kid goes to college, they can withdraw as appropriate tax free and penalty free.

6b) If the kid has a scholarship, they can withdraw the equivelent amount from the 529 penalty free, but not tax free.

Split these withdrawls out over the 4+ years of college to reduce the tax burden.

6c) If the kid doesn’t go to college or there is extra money, these are the options:

6c1) Withdraw the funds with income taxes applying plus an additional penalty, nominally 10%.

6c2) Use the 529 to fund a Roth IRA up to the annual limits each year to $35k max.

Basically 6 years of Roth IRA funding if they have a job IF they were listed as the account beneficiary for 15+ years.

6c3) Transfer the beneficiary. This could include other kids, yourself, or even grandkids for a quasi-generational education and Roth IRA funding trust.

7) If you skip a generation, IE transferring from yourself to a grandkid, you may face additional tax consequences.

[Brad]

Like an HSA for education HOWEVER I didn’t have the fund selection freedom like an HSA, the tax deduction on funding them vary depending on state and this is no federal write off.

Some states are specific where the funds will be spent and which 529 savings plan you used.

[Scott]

A 529 is taxed money that grows tax free and is withdrawn tax free. It has to be used for education related expenses. ‘ Related’ is very liberal.

Clothes, a car, housing, food, books tuition.

While it is mainly for post high school, it can also be used for private primary school.

If there is money left over it can be rolled into retirement for the child.

Once your money is in a 529 you have to choose a type of investment that determines how much it grows per year.

[Tyson]

I’m in Texas and opened 529s for both of my kids this year. “Texas College Savings Plan” is the name of the Texas program.

There aren’t any upfront tax benefits as we don’t pay any state income tax in Texas.

The investments grow tax free as long as withdrawals are used for qualified educational expenses.

I just auto invest every month to both accounts into the S&P 500 fund (2018-US Stock Port).

Through their website, you can also also send links to family members so they can contribute to their college fund too!

[Author]

Posts