Latest news with #529plan
Yahoo
3 days ago
- Business
- Yahoo
A 529 account can make saving for your child's future go farther
Listen and subscribe to Decoding Retirement on Apple Podcasts, Spotify, or wherever you find your favorite podcasts. The cost of college has more than doubled in the past 20 years, and as a result, families are struggling to plan appropriately for their child's higher education goals. According to research by the Society of Actuaries, 6 in 10 Americans have said they delayed their retirement to plan for a family member's education. Though a lot of important factors determine the most realistic and cost-effective plan to pay for college, Tricia Scarlata, head of education planning at JPMorgan Asset Management, spoke on Yahoo Finance's Decoding Retirement podcast about how essential a 529 account can be in ensuring capital goals are met. "My goal is to always talk about how if you're not investing and you're not potentially leveraging a 529 account, you're missing out on that tax-free growth and compounding over time," Scarlata said (see video above or listen below). "Cash is just not going to get you there. And so investing and leveraging that tax-free benefit is really what we try to encourage people to do." This embedded content is not available in your region. A 529 plan is a tax-advantaged savings account dedicated specifically to saving for future education expenses. It's not just for college — these accounts can also be used to pay for trade schools or tuition for K-12 education, offering tax-free withdrawals for qualifying expenses. The money in the account is then invested, compounding with tax-deferred earnings to be used by the designated beneficiary. "If you just look at the two accounts side by side, a taxable and a nontaxable account, all things being equal, you make a $10,000 contribution upfront, and then you subsequently put in $500 a month — at the end of 18 years, you have almost $42,000 more in the tax-free account," Scarlata explained, breaking down the difference a 529 account can make when saving for education. "That's a big amount." Read more: How much should I save before going to college? By adding education plans to your long-term savings goals, you can also avoid the temptation of borrowing against your own 401(k) to pay for a child's tuition. "What we do find is a lot of [parents] are borrowing against their retirement to pay those tuition bills," Scarlata said. "And that's where I always get concerned, because when you start to borrow against your retirement or your 401(k), what we see is that most people then don't contribute. A lot of times they're missing out on that company's match, and that's free money." She also explained that it's a common misconception that the money in the account won't be useful should the designated beneficiary decide not to go to college. As long as the account has been open for 15 years, up to $7,000 can be rolled over into a Roth IRA for the beneficiary per year, with a lifetime rollover cap of $35,000. "If you're able to do that $35,000 over five years, and starting when the adult is 23 — at 65, it's almost $400,000," she said. Read more: How to open a savings account for a child Though it may seem restrictive to plan in advance for a child's education, Scarlata emphasized that it's ultimately more effective for everyone in the long run to do so. "It's a family decision," she said. "And what we have found is that parents do not jeopardize their college savings fund. They almost never take those dollars out early — they wait till that child goes to college and then they withdraw." Each Tuesday, retirement expert and financial educator Robert Powell gives you the tools to plan for your future on Decoding Retirement. You can find more episodes on our video hub or watch on your preferred streaming service.
Yahoo
23-05-2025
- Business
- Yahoo
I overfunded my kids' 529 plan — now I'm facing a punishing 10% penalty. Why I'd save less if I could go back
Imagine you're a diligent parent who, haunted by your own student debt, maxes out a 529 college savings plan for your kids every year to afford a pricey private college. Then life veers off script: Your kids picked more affordable in‑state schools, graduated early and even received help from a generous grandparent. Thanks to Jeff Bezos, you can now become a landlord for as little as $100 — and no, you don't have to deal with tenants or fix freezers. Here's how I'm 49 years old and have nothing saved for retirement — what should I do? Don't panic. Here are 5 of the easiest ways you can catch up (and fast) Nervous about the stock market in 2025? Find out how you can access this $1B private real estate fund (with as little as $10) Two decades later, the 529 still bulges — largely from investment gains. Cashing out for non‑education expenses would trigger ordinary income tax plus a 10 % penalty on the earnings portion, according to the IRS. Now, you're asking the same question many savers face: How much is too much to save for your kids' college, and what are your options if you overshoot? Here's what you need to know about 529 plans and what to do with what's left over. A 529 plan is a tax‑advantaged investment account specifically for education costs. Anyone can open one and name a beneficiary (like a child, grandchild or even yourself). There are typically two types of 529 accounts: Savings and investment plan: You save money in a 529 investment account. Growth is tax-free if used for qualifying expenses. This is the most flexible plan, as it can be used for K-12, college and apprenticeships. Prepaid tuition plan: This plan locks in today's tuition rates, usually for in-state, public colleges, and is less flexible. There are several benefits of a 529 plan, including tax breaks and the ability to control investment options. You can also switch the beneficiaries of a 529 investment plan, too. For example, you can change it from yourself to your child, and then your niece or nephew, depending on how you plan to use the funds. However, there are also a few drawbacks. If you pull the money for non-educational expenses, you'll pay income tax plus a 10% penalty on the earnings. There is also some market risk. If the market crashes when your kids head to college, you could end up with less cash than expected. And there's a chance you won't need all the funds. So, what happens if there is money left over? There are a few ways to use it. First, you can save money and pull it out during your own retirement. Your income will be lower, so you'll pay less income taxes. You will still pay the 10% penalty, but remember, that is only on growth. Other options include: A Roth IRA rollover: Under SECURE 2.0, up to $35,000 of a 529 (held at least 15 years) can migrate to the beneficiary's Roth IRA, subject to annual IRA limits and income requirements. Other qualified training: Graduate school, trade programs, student‑loan repayment (up to $10,000 per lifetime) or even qualified international study count, too. Changing the beneficiary: Swap the account to cover college costs for another child in your family — a niece, nephew or even a grandchild down the line. Or, switch it to yourself and get that pottery certificate in Tuscany you've always dreamed of. (Just make sure it's eligible first.) Read more: This is how American car dealers use the '4-square method' to make big profits off you — and how you can ensure you pay a fair price for all your vehicle costs Consider using these strategies to hit the sweet spot — big enough to cover most costs, but small enough to sidestep penalties and wasted growth. Estimate the cost of four years at your state university, then add a small cushion (maybe 20 %). Adjust annually as tuition data updates. If your child ends up choosing a pricier school, you can cash‑flow the gap, apply for aid or take out student loans. This will prevent over-saving and give you more flexibility to save more for retirement or finance other goals. Ask grandparents and other family members if they plan to pay directly or fund their own 529 plan. It can be tough to have these conversations, and people may not know yet how much — or if — they can contribute. However, starting the discussion early can help you balance savings. Front‑loading (saving more when your children are very young) can turbocharge growth and reduce the risk of overfunding if plans change. Revisit the goal each year and decide how much is right to contribute. By high school, for example, you might realize your child is likely to attend a trade school, so you may readjust your contributions. Consider reshuffling the portfolio during each year of high school to mitigate risk. That locks in gains and shields you from a late‑cycle crash. Much like moving to reduce risk as you get closer to retirement, this helps protect your funds before you need them. Even with careful planning, you could end up oversaving. Make sure you have a plan now for where the funds will go. Leftover funds can be rolled to another relative, converted to an IRA for your kids, pay for your own training or used to bolster your retirement savings. Aim for moderation when funding a 529; save enough to cover a solid in‑state education, keep other savings on track and stay flexible. That way, you won't end up with a tax headache when those Ivy League dreams turn into a state school reality. Want an extra $1,300,000 when you retire? Dave Ramsey says this 7-step plan 'works every single time' to kill debt, get rich in America — and that 'anyone' can do it Rich, young Americans are ditching the stormy stock market — here are the alternative assets they're banking on instead Robert Kiyosaki warns of a 'Greater Depression' coming to the US — with millions of Americans going poor. But he says these 2 'easy-money' assets will bring in 'great wealth'. How to get in now Here are 5 'must have' items that Americans (almost) always overpay for — and very quickly regret. How many are hurting you? This article provides information only and should not be construed as advice. It is provided without warranty of any kind. Sign in to access your portfolio
