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7a. Fully fund your IRA

7b. Save for your children's college fund.

I'm good with either decision. Also, some people don't have kids, so there's that.

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Reasons       

 

Congratulations!

  • There's not much to this, so I apologize in advance for the oversimplification .

  • The truth is, if you are this far into the guidelines, then you should feel very proud of yourself.

  • If you have kids and want to help with their college fund, great. Open up a 529 Plan and start contributing today. Other family and friends can also contribute to this.

  • If you don't have kids (or want to focus on retirement), also great. Fully fund that IRA, 401k, or 403b and really maximize the growth potential of your retirement account.

 

Tips        

 

Make Sure You Can Afford It

  • Yes, yes yes, check that damn budget again. I'm very proud of you that you're at this stage, but please don't over-indulge and hinder your amazing financial position.

  • For 529 Plans, I put a lump sum in and will only add contributions from family and friends. That is what my current budget allows for right now. But if I can afford it in the future, then I will put in monthly contributions.

 

What is a 529 Plan?

  • A 529 plan is a tax-advantaged savings plan designed to encourage saving for future education costs. There are two types: College Savings Plan & Prepaid Tuition Plans

  • College Savings Plan

    • These plans operate much like a 401(k) or an IRA, where you invest your contributions in mutual funds, ETFs, or other investments.

    • The funds can be used for a wide range of qualified educational expenses, including tuition, room and board, books, and supplies at most accredited colleges and universities in the U.S. and some abroad.

    • Earnings grow tax-free, and withdrawals are also tax-free when used for qualified education expenses.

  • Prepaid Tuition Plans

    • Allows you to lock in future tuition rates at today's prices for certain colleges and universities.

    • Typically offered by states and have residency requirements.

    • These plans may only cover tuition and fees, not other expenses like room and board, and they may be limited to specific in-state public colleges.

  • Key Features of a 529 Plan

    • Tax Benefits: Contributions are made with after-tax dollars, but the earnings grow tax-free, and withdrawals are tax-free when used for qualified education expenses.

    • High Contribution Limits: Unlike other tax-advantaged accounts, 529 plans typically have high contribution limits, often exceeding $300,000, depending on the state.

    • Control Over the Account: The account owner (usually a parent or grandparent) maintains control over the funds, including the ability to change beneficiaries.

    • Flexibility in Use: Funds can be used for a wide range of education-related expenses, including tuition, fees, books, supplies, and room and board. Recent changes allow up to $10,000 per year to be used for K-12 tuition and up to $10,000 in total for student loan repayment.

    • Impact on Financial Aid: 529 plans are considered a parental asset when determining financial aid eligibility, which generally has a lower impact on aid compared to assets owned by the student.

  • Potential Drawbacks

    • Penalties for Non-Qualified Withdrawals: If funds are used for non-qualified expenses, the earnings portion of the withdrawal is subject to income tax and a 10% penalty.

    • Investment Risk: Like any investment account, 529 plans are subject to market risk, and the value of your investment can go up or down.

  • Who Can Contribute

    • Anyone: Parents, grandparents, other relatives, or friends can contribute to a 529 plan. Some states also offer tax deductions or credits for contributions to a 529 plan.

  • Rollover Benefits

    • Changing the Beneficiary:

      • How It Works: You can change the beneficiary of a 529 plan to another qualifying family member of the original beneficiary without incurring taxes or penalties.

      • Eligible Family Members: Includes siblings, children, parents, nieces, nephews, and even first cousins of the original beneficiary.

      • Why Do It: This is useful if the original beneficiary doesn’t need the funds, perhaps because they received scholarships or decided not to attend college.

    • Rolling Over to Another 529 Plan:

      • How It Works: You can roll over funds from one 529 plan to another 529 plan for the same beneficiary or for a new beneficiary who is a family member of the original beneficiary.

      • Limitations: Rollovers to another 529 plan for the same beneficiary can only be done once every 12 months.

      • Why Do It: You might consider a rollover if you find a 529 plan with better investment options, lower fees, or better state tax benefits.

    • Rollover to a Roth IRA

      • New Provision Starting in 2024: Beginning in 2024, you can roll over unused 529 plan funds to a Roth IRA for the beneficiary.

      • Limits: The rollover amount is subject to annual Roth IRA contribution limits, and the 529 plan must have been open for at least 15 years. The lifetime limit for such rollovers is $35,000.

      • Why Do It: This option provides a way to repurpose unused 529 plan funds for the beneficiary’s retirement savings without incurring penalties for non-qualified withdrawals? (Fidelity Investments).

    • Penalty-Free Withdrawal for Scholarships

      • How It Works: If the beneficiary receives a scholarship, you can withdraw up to the amount of the scholarship from the 529 plan without paying the 10% penalty. However, you will have to pay income tax on the earnings portion of the withdrawal.

      • Why Do It: This allows you to use the 529 plan funds for other purposes if the beneficiary receives substantial scholarship aid.

    • Rolling Over to an ABLE Account

      • How It Works: You can roll over funds from a 529 plan to an ABLE account (a tax-advantaged savings account for individuals with disabilities) for the same beneficiary or another qualifying family member.

      • Limitations: The rollover is subject to the annual ABLE contribution limit, which is $17,000 for 2024 (including the rollover amount).

      • Why Do It: This is beneficial if the beneficiary or a family member has a disability and could benefit from an ABLE account? (Fidelity Investments).

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