For many children of immigrant parents like me, education and getting a college degree is a cornerstone of their “American Dream”. While there are many avenues to help fund college, one tool that has been used for families to invest in education goals is the 529 plan.
Here’s a quick summary of how a 529 plan works:
- You can open a 529 plan with an eligible custodian that offers these investment accounts, and start funding the account with after tax dollars (aka: money from your checking or savings account).
- You can choose investments within the 529 plan that align with your risk tolerance, time horizon, financial resources and goals.The money that’s invested in the account has the potential to grow tax-deferred (aka: you don’t pay any taxes while the money is in there).
- When you withdraw money from the 529 plan for qualified educational purposes (ex: tuition, room and board and books to name a few), those withdrawals are income tax free.Any withdrawals that are not considered qualified educational expenses are taxed and assessed a 10% penalty on earnings.
529 plans have traditionally been used solely for funding educational expenses. However, recent changes have given these plans an extra opportunity for parents and guardians to build generational wealth for their children. If your child has leftover funds in their 529 plans that they don’t plan on using, they can rollover up to $35,000 over time into a Roth IRA in their own name! You heard that right – you can start building tax-advantaged, long-term retirement savings for your children. Here are some considerations to keep in mind:
- The rollover each year is capped at the maximum allowable contribution limit of IRA plans.For 2024, the maximum contribution limit for under age 59.5 is $7,000.
- The 529 plans must have been opened for at least 15 years or more.
- It must be a direct conversion from the 529 to the Roth IRA (aka: you can’t withdraw money from the 529 to put in your bank account first and then contribute to a Roth IRA).
To learn more about how to get started with building generational wealth through a 529 plan, head to our Contact page to book your call with us today.