What do you mean precisely by tax-free?
- Tax-deferred earnings mean earnings from your 529 investment are reinvested into the underlying fund without paying income tax.
- Tax-free withdrawal on qualified educational expenses. However, withdrawing money for things other than qualified expenses will be considered a nonqualified withdrawal with tax consequences.
What are qualified educational expenses?
- College and University tuition and mandatory fees.
- Books, supplies, and required equipment.
- Room and board for students enrolled at least half-time.
- Computers, peripheral equipment, educational software, and internet
- Payments on qualified education loans. (Terms and conditions apply)
- K-12 tuition expense at public, private, or religious schools. (Terms and conditions apply)
What does SECURE 2.0 do with 529 plans?
- Setting Every Community Up for Retirement (SECURE) allows unused money in 529 plans to be transferred to a beneficiary’s Roth IRA.
- The beneficiary of the 529 account and owner of the Roth IRA must be the same person, and some other limitations and terms apply.
What are the investment options within 529 plans?
- It depends on which state. Each state has its own 529 plan. Generally speaking, there will be something like this: (1) Target Enrollment Date, (2) Static, (3) Customized
- Investment options also depend on the investment company currently working with the state. For example, most states work with Vanguard, and others work with TIAA. So, it depends on which state you have your 529 in to say what investment options you can choose from.
Does the 529 Plan have any fee?
- Yes, generally speaking, there are two fees. The state administration is charging one fee, and the other one is being charged by the fund (investment company such as Vanguard)
- From time to time, state administration may change their administrative fee, which you will see in the quarterly newsletter. On the other hand, the fund can change its fee as well. For example, Utah’s my529—one of the underlying funds, Vanguard Total International Stock Index Fund—changed its fee from 0.08% to 0.05% during the summer of 2024.
What are some mistakes people make on 529 Plans?
- One must remember to use money from the 529 to pay college tuition. Some parents forget they have 529 accounts and use credit cards to pay for tuition because it will earn reward points.
- A second one is a change in children’s plans. For example, sometimes they want to start a business instead of going to a college for higher education.
What if I use the money to buy a house for my child instead of putting it into 529?
- Well, that is an exciting idea, given the inflationary environment we are living in. The same amount of money that can afford a house won’t be able to afford the same size house 25 or 30 years later. It all depends on how you think about higher education.
- I believe in education and knowledge because education can change one’s life, and knowledge can set one free. A free house cannot achieve either of these two. So, I prefer a 529 account to a free house for the next generation.
