What Is A Traditional 529? Is A 529 Plan Pre Tax? Let’s Discuss It
Want Answers to questions around 529 plans and a guide to open one in less than 5 minutes? We are here to help
"There is no force in the universe more powerful than compound interest."
– Albert Einstein
Hey there, everyone! Today, we’re going to talk about something that may not sound as exciting as March Madness, but trust me, it’s just as important: 529 plans. We have all the details you need to know below and a practical video above to show you how to set one up in under 5 minutes. Hope you find it helpful!
In this quick 3 minute read, we'll discuss:
What is a Traditional 529 plan?
What are contribution limits and rules?
Where can I open one? What will I need?
What are the investing options?
When can I use my 529 plan?
So let’s get started!
What Is A 529 Plan?
Well, my friends, a 529 plan is a tax-advantaged savings plan designed to help families save for education expenses. Whether it’s for your child, grandchild, or even yourself, a 529 plan can help make education more affordable and accessible.
Let’s start with the basics.
Who can invest in a 529 plan? Anyone can! That’s right, everyone. You don’t have to be a parent or even related to the beneficiary to open and contribute to a 529 plan. So, if you’re looking for a way to help a loved one pay for college or trade school, a 529 plan may be just what you need.
What Are Contribution Limits And Rules
Each state has its own contribution limit, which can range from a few thousand dollars to over $400,000. However, there are no federal contribution limits, which means you can contribute as much as you want, as long as you don’t exceed the state limit.
In terms of yearly contributions, you can contribute up to $15,000 per year without triggering the gift tax. This limit applies to each beneficiary, so if you’re contributing to multiple 529 plans for different beneficiaries, you can contribute up to $15,000 per beneficiary per year without incurring the gift tax.
What Are The Investing Options?
Most 529 plans offer age-based portfolios and static portfolios. Age-based portfolios are designed to become more conservative as the beneficiary gets closer to college age, while static portfolios maintain the same asset allocation throughout the life of the account.
It’s important to choose the investment option that best aligns with your investment goals and risk tolerance.
When Can I Use My 529 Plan?
Now, let’s talk about the fun stuff: when and how you can use your 529 plan. You can use the funds in your 529 plan for qualified education expenses, such as tuition, fees, books, and room and board. And the best part? When you withdraw the funds for these expenses, the earnings are tax-free! That’s right, folks. Tax-free.
However, if you withdraw the funds for non-qualified expenses, you’ll have to pay taxes on the earnings plus a 10% penalty. So, it’s important to only use your 529 plan funds for qualified expenses.
There are ways however to convert your 529 plans into IRA’s due to new rules. Check out our post around how to do this and set up the kiddos to be millionaires for less than $1 a day.
Final Thoughts…
In conclusion, a 529 plan is a great way to save for education expenses while taking advantage of tax benefits. Anyone can invest in a 529 plan, and it can be a very useful tool to set up your kids education. There are lots of other options out there, although this is definitely one worth considering.
