2752: Open a 529 Plan With These 6 Simple Steps by Caitlin See with Student Loan Planner on College Expenses

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[00:01:16] from Optimal Living Daily. This is Optimal Finance Daily, episode 2752. Open a 529 plan

[00:01:25] with these six simple steps by Kaitlin C. with studentloanplanner.com. And I'm your host and

[00:01:32] personal finance enthusiast, Diana Merriam. Welcome back to Optimal Finance Daily, where

[00:01:38] I'm here with you each and every day to read from some of the world's best finance blogs.

[00:01:43] So with that, let's get right to today's article as we optimize your life. Open a 529 plan with

[00:01:53] these six simple steps by Kaitlin C. with studentloanplanner.com. A 529 savings plan can

[00:02:01] provide you with a simple and affordable way to save for college. But many people don't know how

[00:02:06] to set up a 529 plan or contribute to one, preventing them from moving forward with

[00:02:11] maximizing this tax-advantaged investment tool. 529 plans have many benefits, including tax-free

[00:02:18] growth and withdrawals for qualified expenses. But they also have their drawbacks, like incurring a

[00:02:23] penalty for non-education withdrawals. The good news is that they're accessible to everyone with

[00:02:29] low minimums and no income restrictions. And it's fairly straightforward once you know how to start

[00:02:34] a college fund. Here's how to open a 529 plan and start saving smartly for college.

[00:02:41] Number one, explore 529 plans nationwide. Each state offers its own 529 plan, with the exception

[00:02:49] of Wyoming. But that doesn't mean you're limited to choosing your own state's plan. It's best to

[00:02:55] shop around and consider each 529 plan's costs, historical performance, and available tax benefits.

[00:03:02] You can visit each state's website or use the College Savings Plan Network as a starting point

[00:03:07] when researching 529 plans. Or use an investment advisor platform like College Backer, which can

[00:03:14] help you select and open a 529 plan. Number two, understand your state's 529 plan tax benefits.

[00:03:23] Many states offer a tax deduction or tax credit as an incentive to make contributions towards

[00:03:28] its 529 plan. These tax incentives range from having no tax benefit at all to allowing for 100%

[00:03:36] of contributions to be tax deductible. For example, at the time of this writing, California

[00:03:42] and Hawaii don't provide a state tax incentive for contributing to their 529 plan. Whereas Michigan

[00:03:49] and North Dakota provide a tax deduction of up to $5,000 for individuals and 10,000 for married

[00:03:56] couples filing a joint tax return. While Colorado and New Mexico allow residents to deduct the full

[00:04:02] amount from their state tax returns. And some states, like Arizona and Montana, offer a tax break

[00:04:09] to their residents even if an out-of-state plan is chosen. So depending on where you live, you'll

[00:04:15] need to determine if you're required to use a 529 plan specific to your state in order to claim its

[00:04:21] tax benefit. If not, you can explore other states' 529 plans to find the best match for you while

[00:04:28] still reaping the tax benefits. Number three, choose the 529 plan that fits your needs.

[00:04:35] There are different types of plans to be aware of as you learn how to set up a 529 plan.

[00:04:41] Most state plans allow you to invest directly in the plan on your own by selecting direct sold

[00:04:47] plans that have low fees and no sales commissions. But if you'd prefer investment advice, your state

[00:04:53] might offer advisor sold plans which offer professional services with a standard sales

[00:04:59] commission. Additionally, you'll need to choose between an individual account or a custodial

[00:05:04] account. Most families choose to open an individual account where the parent is the account owner and

[00:05:10] the child is the beneficiary. But in some cases, you might need to set up the plan as a custodial

[00:05:16] account in which the child is both the account owner and the beneficiary. The parent is then

[00:05:22] named as the custodian and will manage the account until the child becomes of age. It's also important

[00:05:27] to note that third-party ownership such as grandparents of a 529 plan account can actually

[00:05:33] hurt the student when being evaluated for need-based financial aid. So it's best to weigh all

[00:05:39] options to ensure you're choosing and setting up a 529 plan that fits your family's present and

[00:05:45] future needs. Number four, submit your 529 plan application to open the account. When you're ready

[00:05:53] to open the 529 plan account, visit the plan's website and select enroll, open an account or an

[00:05:59] equivalent option. You'll need to provide the following information for both the owner of the

[00:06:04] account, that is you, and the beneficiary, that's your child. Social security number, date of birth,

[00:06:11] and mailing address. You might also be asked to name a successor account owner who will assume

[00:06:17] control if the primary account owner dies. Number five, deposit money into your 529 plan.

[00:06:25] When you open a 529 plan, you'll need to make an initial contribution by transferring money from

[00:06:30] your bank or mailing a physical check. There's typically a $25 minimum but each plan's requirements

[00:06:36] will vary. You can then choose to set up automatic reoccurring payments by linking your bank account

[00:06:43] or you can opt to make one-time payments electronically or by mail. Your employer may

[00:06:48] also offer the ability to contribute through a payroll deduction which can make saving for

[00:06:53] college even more convenient. Keep in mind that you can crowdfund your child's college fund

[00:06:58] by asking friends and family to contribute for special occasions like birthdays or graduation.

[00:07:04] At number six, select your 529 plan investments. Once you've funded the 529 plan, you'll need to

[00:07:12] select your investments but be aware that your investment options are going to be limited

[00:07:17] which in the end makes it much easier to choose and get your investments rolling.

[00:07:22] Age-based portfolios are the most common 529 plan investment option because they take the

[00:07:27] guesswork out of investing. Simply select a target enrollment portfolio based on your child's age.

[00:07:34] And your investments will be automatically adjusted based on when your child will attend college.

[00:07:39] The portfolio will start with an aggressive mix of investments when your child is young

[00:07:44] and gradually shift to investments with less risk as your child approaches college age.

[00:07:50] Depending on the plan, you might also have access to static investment options

[00:07:54] that allow for more control of your portfolio's diversification and investment strategy.

[00:08:00] If you change your mind, you can switch investment strategies twice a year for

[00:08:04] funds that have already been invested or choose a different investment option for each new

[00:08:08] contribution. Additional tax implications. One of the benefits of using a 529 plan to save for

[00:08:16] college is that there isn't an annual federal or state contribution limit but each state has

[00:08:22] an aggregate limit currently ranging from $235,000 to $530,000 for each beneficiary

[00:08:30] which includes all 529 plans assigned to that specific beneficiary. Although there isn't an

[00:08:36] annual federal contribution limit, your 529 plan contributions could be subject to the federal gift

[00:08:42] tax but you can avoid this by claiming an annual gift tax exclusion for up to $15,000 per beneficiary

[00:08:50] or $30,000 for married couples. Or you can choose to spread larger contributions of up to $75,000

[00:08:58] or $150,000 if married by claiming five years worth of exclusions all in one year. You just

[00:09:08] listen to the post titled, Open a 529 Plan with These Six Simple Steps by Caitlin C.

[00:09:15] with studentloanplanner.com and I'll be right back with my commentary.

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[00:11:19] One lesser known fact about 529s is their flexibility in terms of beneficiaries.

[00:11:25] Contrary to common belief, if the intended beneficiary doesn't use the funds for education

[00:11:30] doesn't need them, the account owner can change the beneficiary to another qualifying family member

[00:11:36] without tax consequences. This feature allows for strategic planning within families,

[00:11:42] facilitating educational funding across generations. Also effective this year,

[00:11:47] 529 plan account owners are able to roll over unused 529 funds to Roth IRA accounts.

[00:11:55] There are a few stipulations to note. The 529 account must have been open for more than 15

[00:12:01] years. The eligible rollover amount must have been in the 529 account for at least 5 years.

[00:12:08] The annual rollover limit is subject to Roth IRA annual contribution limits,

[00:12:14] 6500 for 2023 and 7500 for individuals age 50 and older. There is a lifetime rollover limit of

[00:12:23] $35,000 for each 529 account beneficiary. Rollovers can only be made to the Roth IRA account

[00:12:31] owned by the named 529 account beneficiary and Roth IRA income limits do not apply for this type

[00:12:39] of contribution. But that will do it for today. Thank you for being here every day and listening.

[00:12:44] Have a great rest of your day and I'll see you tomorrow where your optimal life awaits.