Why is a 529 plan a bad idea?

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Why is a 529 plan a bad idea?

Why is a 529 plan a bad idea?

The rules on 529 plans are strict. The most important one is this: you must use funds in a 529 account to pay for qualified educational expenses. Otherwise, you'll owe taxes on the investment gains at whatever the IRS would normally charge you plus an additional penalty rate of 10 percent.

What are the negatives of a 529 plan?

Here are five potential disadvantages of 529 plans that might affect your savings choice.

  • There are significant upfront costs. ...
  • Your child's need-based aid could be reduced. ...
  • There are penalties for noneducational withdrawals. ...
  • There are also penalties for ill-timed withdrawals. ...
  • You have less say over your investments.

Is it worth getting a 529 plan?

529 plans typically offer you unsurpassed tax breaks. Earnings in a 529 plan grow tax-free and are not taxed when they're withdrawn. This means that however much your money grows in a 529, you'll never have to pay taxes on it. ... Regardless of how much money you make, you can continue to contribute to a 529 plan.

Can you lose all your money in a 529 plan?

False. You don't lose unused money in a 529 plan. The money can still be used for post-secondary education, for another beneficiary who is a qualified family member such as younger siblings, nieces, nephews, or grandchildren, or even for yourself.

How much can I put in 529 per year?

$15,000 One of the many benefits of saving for a child's future college education with a 529 plan is that contributions are considered gifts for tax purposes. In 2021, gifts totaling up to $15,000 per individual will qualify for the annual gift tax exclusion, the same as in 2020, in 2019 and in 2018.

What is the average rate of return on 529 plans?

In 2011, people thought a rate of return around 3% for a 529 plan was amazing. Since 2011, the S&P's compounded annual growth rate (CAGR) is ~12% from June 2011 to June 2020. That is a lot more tax-free growth than the 3% account owners got back in 2011.

What's the best way to save for college?

6 ways you can save for college

  1. Mutual Funds. Pros: The funds you save in a mutual fund can be spent on anything – cars, airline tickets, computers, etc. ...
  2. Custodial accounts under UGMA/UTMA. Pros: ...
  3. Qualified U.S. Savings Bonds. Pros: ...
  4. Roth IRA. Pros: ...
  5. Coverdell ESA. Pros: ...
  6. 529 plan. Pros:

How much should I put in a 529 plan per month?

With a 529 plan, solid monthly contribution amounts for a child born in 2017 would be about $165 for a public in-state school, $260 for public out-of-state, or $325 for a private university.

What happens to 529 if stock market crashes?

IRS rules for liquidating a 529 plan To claim the loss, the 529 plan account had to be completely liquidated, and any non-qualified distributions would be subject to income tax and a 10% penalty on the earnings portion of the distribution.

When should I transfer my 529 to cash?

A key point to understand: You must request a cash withdrawal from a 529 plan during the same calendar year as you make the payment. If the timing is off, you risk owing tax because it will be considered a nonqualified withdrawal.

How much money can you put into a 529 plan?

  • There are no annual contribution limits for 529 plans. However, each 529 plan has an aggregate contribution limit, ranging from $235,000 to $529,000. Families making a large 529 plan contribution should consider the annual gift tax exclusion amount and find out if they qualify for state income tax benefits.

How much should I contribute to a 529 plan?

  • Beginning in 2019, each year individuals may contribute up to $6,000 into a Roth IRA ($7,000 for those aged 50 and above). Individuals can contribute a maximum of $15,000 into a 529 plan on an annual basis, with the option of bundling 5 years of contributions ($75,000) into a single year.

Are 529 plans good investments?

  • 529 plans work a lot like mutual funds. Some states’ plans may operate differently, but most invest your money in stocks and bonds in the hope that it will grow faster than a regular bank savings account. Most plans do a pretty good job of managing your money.

Who can put money into a 529 plan?

  • Anybody can contribute money to a 529 plan. This includes not just the beneficiary and the account owner, but anybody else. Grandparents, aunts, uncles, cousins and complete strangers. To contribute money to a 529 plan, you need to know the account number, and, in some cases, the name of the beneficiary and the account owner.

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