A conversation with Pam Krueger, creator and co-host of PBS’s MoneyTrack and founder of Wealthramp.com
If you’re a parent, you’ve probably heard about 529 plans, and if not, now’s the time to get informed. A solid 529 plan can help you save for your child’s education and get on the path toward professional and financial success.
But are all 529 plans created equal? And do you have your plan set up correctly? Unfortunately, 529 plans aren’t as simple as they may seem at first. They’re not just a to-do item to cross off. Rather, 529 plans should be integrated into a holistic financial plan.
Whether you already have a 529 plan or are looking to open one soon, here are five little-known facts that may impact your decision and how you manage the account. Take a look today and make sure you’re making the most of your 529.
#1: It’s Best to Fund Your Own 401(k) First
You know the saying, “Put on your own oxygen mask first.” It’s the same with your 401(k) and your child’s 529 plan. It only makes sense to start funding a 529 plan if you’ve been significantly contributing to your own 401(k) (and ideally maxing it out). Think of it this way: you don’t want your children to end up supporting you when you’re older. Once you’re on track for your retirement plans, you can begin to save for your child’s higher education next.
#2: Each of Your Children Should Have Their Own 529 Plan
Unless you have twins like me, odds are your kids are all on different time horizons for college. We recommend each child have their own 529 account so you can invest based on their plan. In addition, if one child has leftover funds or doesn’t need as much as the other, you can transfer the amounts in each fund between the kids tax-free.
#3: Aim for Larger Lump Sums Right at the Get-Go
If possible, save as much as you can as early as you can. This will allow you to get the full advantage of compound growth. It’s simple. Compound interest allows your money to grow at an accelerated rate. So, the more you put into the account earlier, the more you’ll earn over time.
Obviously, do this within reason. As I mentioned, you’ll want to “put on your own oxygen mask first.” Only amp up your 529 savings if you’ve already maxed out your 401(k) retirement accounts.
#4: Make Sure You Have a State-Sponsored 529 Plan
Did you know not all 529 plans are created equal? Be sure you are saving in the right one. Unfortunately, some plans, particularly ones associated with banks, require costly fees whenever you invest funds. Over time, this takes a financial toll on your hard-earned savings, and you save far less.
State-sponsored 529 plans, however, don’t require extra fees as long as you live in the state where the plan is offered. I know I may be biased, but I believe New York’s 529 plans are excellent choices for New York residents. Reach out to me or a member of my team, and we can talk you through what a New York 529 plan can do for your family.
#5: New Laws Will Allow You to Roll Over Extra Money into a Roth IRA
Here’s exciting news: In 2024, the law is changing to allow you to roll over unused 529 plan funds into a Roth IRA (up to $35,000 per individual). This is fantastic news for families because it allows them to continue saving, but for a new goal: retirement. It used to be that if your child’s education cost less than the amount you saved, unused funds could only be rolled over to another dependent, like a grandchild, or you had to pay a penalty and capital gains to access the money.
Fortunately, the government has lifted these regulations, allowing you to continue making wise financial decisions for your child—not just for higher education, but now for retirement. In addition, there’s no longer a limit to the number of 529 plans your child can have in their name. For example, you and your parents can both open 529 plans for the same dependent. Just imagine how this could maximize your child’s savings.
In short, 529 plans can be fairly complex, and the law changes have compounded that complexity. It’s important to understand how they fit in as just one part of a comprehensive financial planning strategy. If you have questions, talk to a member of our team. We’re here to help you and your family get on the right path toward financial success.
Lake Road Advisors, a Fee-Only, independent financial planning firm with offices in Corning, NY, Ithaca, NY and Portland, OR works with clients virtually all across the country. Paul Sydlansky, the founder of Lake Road Advisors LLC, has worked in the financial services industry for 20+ years. Prior to founding Lake Road Advisors, Paul worked at Morgan Stanley in Manhattan for 13 years. While at Morgan Stanley, Paul was a senior-level manager within the Institutional Equities Department. In 2018 he was named to Investopedia’s Top 100 Financial Advisors list. Paul received a Bachelor’s degree in Economics from Marist College and holds an MBA from New York University Leonard N. Stern School of Business. Paul is a CERTIFIED FINANCIAL PLANNER™ and a member of the National Association of Personal Financial Advisors (NAPFA) and the XY Planning Network. They can be reached by phone at the Corning, NY office at (607) 463-8400, Ithaca, NY office at (607) 438-2914, or Portland, OR office at (607) 292-2172 or at the firm’s website at https://www.lakeroadadvisors.com/
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
Prior to investing in a 529 Plan, investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax-free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.
