Practical advice to brighten up your financial future.
It’s easier said than done, but the right decision is not to overfund your children’s 529 plans.
529 plans are tax-advantaged investment accounts intended to cover university expenses. Similar to deposits to the Roth retirement account, the money you contribute to a 529 is taxed up front. Contributions and their income will not be taxed when you withdraw them to cover eligible study expenses, such as tuition, room and board, laptop and this copy of Infinite joke… even if it only serves as a coaster. In addition, the recipient can use up to $ 10,000 per year for K-12 education expenses, and up to $ 10,000 over their lifetime for pay off student loans.
Perhaps the biggest flaw in the plan is that it can only be used for qualifying education expenses. To withdraw the money from the account you are not using, you will have to pay a 10% penalty and income taxes on the income (your initial contributions are not taxable).
- Keep in mind that you can withdraw the amount of a student’s non-taxable scholarship or grant and use it for any purpose without penalty. Income taxes will always apply, so it’s like keeping the money in a regular taxable brokerage account.
- Here are some ideas to find out what to do with a 529 plan if the recipient doesn’t end up going to college.
The solution is to save some money from your college fund elsewhere, such as a taxable brokerage account. Some people save for college on time permanent life insurance policy, a type of account that generally allows you to withdraw your premiums without tax or penalty.