529 plan

529 Plan

529 Plan: Contribute Today For Your Child’s Tomorrow

Money Maroon

It is important to secure your financial future first, before turning to your children’s. However, once you turn to the financial future of your children, a 529 plan should be on the top of the list. 529 plans allows account holders to put away funds for a beneficiary, typically a child or other loved one.

529 Plan
529 plan, a plan for your child’s future

Overview: 529 Plan

529 plans are authorized by Section 529 of the Internal Revenue Code and were designed to encourage saving for future education costs. When first instituted, 529 plans were limited to covering the costs of post-secondary education. Overtime, qualified education costs covered by 529 plans were expanded to also cover K-12 education in 2017 and apprenticeship programs in 2019. In view of the rising costs of education, if you have children, a 529 plan should be apart of your financial tool kit.

Types Of 529 Plans

Generally speaking, there are two types of 529 plans. A prepaid tuition plan or an education savings plan. According to the SEC, most all States and the District of Columbia sponsor at least one of the two types of 529 plans. Additionally, some private colleges and university may also have similar plans. Note that Wyoming is the only State that does not offer its own 529 plan.

Prepaid Plan

The prepaid 529 plan allows account holders to purchase units or credits at participating colleges and universities (usually public and in-state) for future tuition and mandatory fees at current prices. As such, you are locking in today’s prices. This can be a significant benefit in view of costs savings when taking into consideration the consistent rise in education costs over time.

Savings Plan

529 savings plan allow an account holder to open an investment account to save for the beneficiary’s future. The saved amount can then be used to pay for qualified expenses. Such qualified expenses include tuition; room and board; mandatory fees; and, books, and computers.

With regard to the investment account, in ways similar to a brokerage account, the account holder can chose from a range of investment options (target date funds, ETFs, Mutual funds) that is offered by the respective State or vender used by the State to carry out the 529 program. As such, prior to selecting a fund to invest in, it is important to carefully review the options available and the associated fees.

Taxes

529 plans are often referred to as a tax advantage account because of the associated federal and State tax advantages.

Contributions

Many States offer tax benefits for contributions to a 529 plan. These tax benefits typically include a State income tax deduction up to a certain limit contributed. Usually, these tax benefits are limited to residents of that State. For example, if you are a resident of Maryland and have a Maryland 529 plan, you would be able to deduct a certain amount of your Maryland 529 contributions from your Maryland State income tax. On the other hand, if you are not a resident of Maryland, and have a Maryland 529 plan, you would not be able to deduct your contribution from your home State’s income tax. 

Unfortunately, unlike the State tax deduction, on a federal level, the money you contribute to a 529 plan is not tax-deductible for federal income tax purposes.

Withdrawal

With regard to withdrawals for qualified expenses, 529 earnings are not subject to federal income tax and, in many cases, State income tax. However, if 529 account withdrawals are not used for qualified expenses, the funds will be subject to both State and federal income taxes and an additional 10% federal tax penalty on earnings.

Growth

Another benefit of 529 plans is the tax-free earnings that grow over a period of time. Growth of funds in your 529 account are not taxed. Therefore, the longer your money is invested in a savings plan, the more time it has to grow and the greater the tax benefit. The upshot here is a simple one. Although contributions are not deductible from your federal income tax, earnings in a 529 plan grow federal tax-free and will not be taxed when the money is taken out to pay for qualified expenses. 

Conclusion

It is important to secure your financial future first, before turning to your children. However, once you turn to the financial future of your children, a 529 plan should be on the top of the list. 529 plans allows account holders to put away funds for a beneficiary, typically a child or other loved one. A 529 plan is an easy way to get your child off on the journey to financial independence.

For your convenience, we have provided a chart below with links to the related State 529 plan. Continue on your journey to financial independence. 

States of the United States of America
and Washington, D.C. 529 Plans		Abbreviation
AlabamaAL
AlaskaAK
 ArizonaAZ
 ArkansasAR
CaliforniaCA
 ColoradoCO
 ConnecticutCT
 DelawareDE
FloridaFL
GeorgiaGA
 HawaiiHI
 IdahoID
 IllinoisIL
IndianaIN
IowaIA
 KansasKS
KentuckyKY
 LouisianaLA
MaineME
 MarylandMD
 MassachusettsMA
MichiganMI
 MinnesotaMN
Flag of Mississippi ("New Magnolia Flag").svg MississippiMS
 MissouriMO
MontanaMT
 NebraskaNE
 NevadaNV
 New HampshireNH
 New JerseyNJ
 New MexicoNM
 New YorkNY
 North CarolinaNC
 North DakotaND
 OhioOH
 OklahomaOK
 OregonOR
 PennsylvaniaPA
  Rhode IslandRI
 South CarolinaSC
 South DakotaSD
 TennesseeTN
 TexasTX
 UtahUT
 VermontVT
 VirginiaVA
WashingtonWA
 Washington, D.C. (District of Columbia)DC
 West VirginiaWV
 WisconsinWI
 WyomingWY

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Start investing

How To Start Investing Now

Money Maroon

On the journey to financial independence, you will need to save and invest. Once you have saved for your emergency fund, the question is, how to start investing? You start by first investing in yourself. Whether this is by investing in your education to obtain a better job/career option, or doing your due diligence to make appropriate decisions. Investing in yourself is the key to success.

Investing in your future is an extension of investing in yourself. Once you begin to look to the financial markets, when asking how to start investing, look to learning more about the opportunities that are available to you. Educate yourself.

How To Start Investing For Retirement

No matter your age, you should begin thinking about your retirement and related investment options. In thinking about your retirement, you will no doubt hear about traditional IRAs, roth IRAs, SEP, roth 401Ks, 401Ks, 403Bs, 457Bs and TSPs to name a few. Do not simply get lost in the alphabet soup of different retirement plans. Do your due diligence. An investment in your retirement plan education is invaluable to your financial future.

Your retirement plan will depend on (1) whether or not you are an employee vs self-employed and (2) whether or not the retirement plans are employer sponsored or self controlled. It is incumbent upon you to fully understand the plans  that are available to you, their contribution limits, mandatory withdraw, age of withdrawal, tax position and penalties associated with early withdraws. It is also incumbent upon you to take advantage of any matching benefits provided to you. For example, a 401K match. 

The 401K match provides free money from your employer and is a sure-fire way to achieve financial independence early. Employer 401K match can come in a variety of shapes and sizes. In one instance, the employer will match a portion of your contribution up to a limit. Typically, this limit is represented as a percentage of your salary. Further, an employer may match your contribution if you contribute or irrespective of if you contribute. If your employer provides a 401K match only if you contribute to your 401K, ensure that you are contributing at least up to that threshold. An employer 401K match is free money. Take advantage.

How To Start Investing – Brokerage Account

After establishing your retirement accounts, it is time to begin thinking about other investment options. For example, brokerage accounts. Brokerage accounts are investment accounts that allow you to buy and sell investments such as stocks, bonds, mutual funds, and Exchange-traded funds (ETFs).

There are a number of different brokerage firms where you can set up a brokerage account. These brokerage firms are well known and include Fidelity, Merrill, E-Trade, TD Ameritrade, Robinhood and Vanguard to name a few. Essentially, the brokerage firm is an intermediary that holds your brokerage account and act as an intermediary between you and the investments that you buy and sell.

Once you set up a brokerage account, which is usually free, you will be able to deposit money into that account that you can use to buy investments. Once you begin investing, you can buy and sell investments through your brokerage account. Do your due diligence prior to trading on the different platforms and understand the risk associated. Knowledge is power.

Investing In Education

Once you have done your research and have established your own investment plan, begin thinking about your legacy, your children and their future. Think about a 529 plan. By contributing to a 529 plan, you are able to offset some or all costs associated with a college education. In many States, two 529 plans are available, an investment plan or a prepaid plan.

  • The investment plan allows you to contribute by buying and selling shares offered by the State or the State’s agent (similar to investing in the stock market).
  • The prepaid plan is based on the cost of attending a college. Here, you are prepaying the cost of attendance.

While 529 plans are not deductible on your federal tax filings, many States allow you to deduct a set portion of your 529 contribution from your State tax filings.

How To Start Investing – Caution

Once you have educated yourself and have made the decision to invest for yourself, with a financial planner or with an advisor, you will begin using different investment accounts to your advantage. Pay special attention to the fees and the taxes associated with each account.

One of the biggest item that you should pay attention to is the fees associated with your retirement accounts and the investment options. Whether that is the fees charged by an investment fund, your advisor or related financial professional. 

It is important to remember that over time, fees can cripple your financial growth. While paying 1% of your total investment per year may not seem like a lot when you begin investing, Think long term. Project the number of years until retirement and also the amount of funds that you will have in that account. Paying 1% in fees each year can be a significant detriment to your financial growth, imagine if you are paying more. As always, do your due diligence and think long term in your financial decisions.

Conclusion

On the journey to financial independence, you will need to save and invest. Once you have saved for your emergency fund, the question is, how to start investing? You start by first investing in yourself. Whether this is by investing in your education to obtain a better job/career option, or it is doing your due diligence to make appropriate decisions. Investing in yourself is the key to success. Continue investing by educating yourself about the financial markets, plan and execute your plans.

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Video Summary

Child wealth

How To Make Your Kid A Millionaire

Money Maroon

One of the biggest regrets for most adults is not starting to save for retirement earlier. If this is your biggest regret or a regret that is high on your list of regrets, why not take the steps necessary to prevent this regret from being a generational regret. Have you ever wondered how to make your kid a millionaire? Why not give your children an advantage in the game of financial independence and wealth? Contribute to your child’s future early, often and consistently.

Savings

Many strive to save for their children, but few do. If you are able to put away $10 per month for your child, you are a head of the game. On the journey to financial independence, time is your child’s biggest asset. Imagine saving $10 per month, that is $120 per year. Over 18 years, that is $2160, not including interest. If you are in a better financial situation and is able to put away $100 instead of $10, that is $21,600 over 18 years, not including interest.

While interest earned on your savings account at an average bank is very low, high yield savings accounts can offer more than 20 times the interest rate of your average bank. A high yield savings account can turbo charge your child’s savings account.

How to make your kid a millionaire – contribute to your child’s savings account early and often.

Stock Market

While minor’s cannot invest in the stock market, you can do so for them. You may open a Guardian Account or a Custodial Account for your child.

Guardian Account

  • You are able to retain ownership of the account
  • Gains are taxed at your tax rate

Custodial Account: 

  • The child owns the account although you are in control of the account
  • Gains are taxed at the child’s tax rate
  • Note that once the child reaches 18 or 21, the assets in the account come under the child’s control

Roth IRA

You may also open a Roth IRA for your child. We are proponents of Roth IRAs because of the many advantages. For Roth IRAs for kids, the only barrier is income. Once the child has taxable income, an account can be opened. However, the same contribution limits applies for the account as any other Roth IRA.

How to make your kid a millionaire – invest early and often.

529 Plans

The third rung in your child’s wealth building chest is a 529 plan. Let’s face it, college is expensive and seems to be getting more expensive.

  • Average public university cost per year: $10,116 
    • Public university cost to graduation (average): 4 x $10,116 = $40,464
  • Average private university cost per year: $36,801
    • Average private university cost to graduation: 4 x $36,801 = $147, 204

By contributing to a 529 plan, you are able to offset some or all costs associated with a college education. In many States, two 529 plans are available, an investment plan or a prepaid plan.

  • The investment plan allows you to contribute by buying and selling shares offered by the State or the State’s agent (similar to investing in the stock market).
  • The prepaid plan is based on the cost of attending a college. Here, you are prepaying the cost of attendance.

While 529 plans are not deductible on your federal tax filings, many States allow you to deduct a set portion of your 529 contribution from your State tax filings. As such, contributing to your child’s future and also receiving a State benefit. A win-win of sorts.

How to make your kid a millionaire – Reduce their college cost burden.

Conclusion

On your journey to financial independence, it is only natural to wonder what can be done to give your child an advantage on their journey. Time is your child’s greatest asset. As such, contributing to your child’s future early, often and consistently will greatly increase their chances of financial success. Saving, investing and funding a 529 plan are instrumental financial tools that you can use to jump start your child’s journey to financial independence. Make your kid rich.

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Video Summary