Great news: Starting in 2024, you can transfer the unused money in your 529 account into a Roth IRA on behalf on the beneficiary (wahoo!) The government’s new SECURE 2.0 Act has some of us popping champagne, and others wondering, what the heck is this?
If you’re a parent or plan on having kids one day, this post is a healthy wallet must-read. In here we’ll cover:
Get ready to celebrate with us, current and aspiring mammas! Once you’re done reading, you’ll be closer to feeling like a 529 account pro.
(And if you need “family planning” help with all things money, remember Penny’s got your back! We’re here to be your digital financial mentor and biggest cheerleader. Join us today.)
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📸: Death to Stock. First Steps. Marisa Smith
A 529 account is a way to save money for your children’s future education, with added tax benefits: the money you withdraw to cover costs is tax-free.
Eligible expenses are always tax-free at the federal level – and sometimes, state level too. They include things like tuition, required books, and even electronics, if it’s required by the course or institution your child’s at. (Great way to cover their new laptop!)
There are 2 types of 529 accounts:
As you can probably guess, the general plan gives you more flexibility, so it’s the popular choice.
From these, you can also choose HOW to distribute the money with an Individual vs. Custodial 529 account.
Now that you have a general idea, you might be wondering: should you open a 529 account for your kids? Keep reading!
You should consider opening a 529 account if:
A 529 account is a great way to save for your kids’ future education. But that’s not the only thing that makes it so delicious for your savings.
With a 529 plan, you can choose an investment plan to match your financial goals, and watch your money grow. (And it will, because investment returns are better than any good-ol’-shabby savings account.)
If you need help with investing or financial planning, we can help you create a money plan tailored just for you.
You don’t need to wait until you’re debt-free to start contributing to a 529 account. You can start with small amounts, then increase when you can. There’s a balance.
With Penny, you can estimate how long it’ll take for you to be debt-free, and what your actual minimum payment should be to pay it off sooner.
If you don't feel financially ready for the commitment of contributing to a 529 account, that’s okay!
You can hold off for now, or find an alternative that works for you (like adding more money into a high-interest savings or Roth IRA). But first, you gotta know your numbers to make the best decision for you and your kid’s future.
You can save a hefty amount in a 529 account!
You can also choose to “superfund” your 529 account (max $80k per person, or $160k per couple) by using up your federal gift-tax exclusion for up to 5 years.
Head’s up: Superfunding is ONLY IF it makes sense for your financial picture. Otherwise, unless you’ve become extra-savvy with 529 lingo and taxes, we wouldn’t recommend it.
You’re probably better off contributing into a Roth IRA instead to make up for potential gaps in your kid’s school budget.
No! Misunderstood, maybe.
The 529 account gets a bad rep for 2 reasons:
Sounds great on paper, but tricky in practice! How do you know how much money your child will (actually) need? What if you contribute too much, and now it’s locked in?
Great news: If you have another kid in the family (including a niece/nephew) you can add them as a beneficiary instead, or roll leftover cash into a different 529.
As mentioned earlier, now you also have the option to move your 529 money into a Roth IRA account thanks to the SECURE 2.0 Act. So, once all kiddos have graduated, you can start a retirement for them.
Although there’s a surprising amount of expenses you can (and should) include, there are also things that don’t qualify. For example, you can use a 529 to pay for required electronics (like a laptop), but you can’t apply it for gas or parking costs from driving to school.
Great news: The rules are straightforward. Once you learn the ins and outs of what’s allowed, it’s easy to navigate. Just remember to save all receipts and keep detailed records, so you can easily back up your eligible expenses with proof if needed.
Overall, a 529 account is a great way to save for your children’s future education. There are lots of rules to watch out for, but it’s worth it once you learn the ropes.
The 529 allows you to:
Plus, thanks to the government’s new SECURE 2.0 Act, you can now transfer unused 529 funds into a Roth IRA account starting in 2024 – and continue to set yourself up for financial success! Here’s to more rules changing and more win-wins all around.
If you’re a mamma (or an aspiring one) and you want to learn how to secure a brighter financial future for your family, join us at Penny!
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