Parenting is probably one of the most expensive endeavors in life that anyone can embark on. Raising a child from infancy to college is a significant investment, and that doesn’t even count expenses incurred during pregnancy or through early adulthood. Lucky for us, the government agrees that it’s expensive to have and rear a child, and they’ve given us a few options for some financial relief when it comes to having kids.
College Savings Account 529
In my opinion, college savings accounts are not used nearly enough. In a 529 plan, money is put in post-tax, but the big savings come on the back end. When invested, the money grows tax free and can be used for any of the beneficiary’s/beneficiaries' educational expenses in the future. Tax-free withdrawals include $10,000 for private schools K-12 or student loan payments. Sadly, it currently cannot be used for daycare or pre-school.
A sneaky benefit is that a 529 can reduce a taxable estate. That way, any gift tax or lifetime gift tax can be avoided by donating into the account rather than being gifted directly. Grandparents can also contribute to 529s, making estate planning even more attractive with with this type of account.
The other big benefit that some haven’t realized yet is that in 2022, the Secure 2.0 Act made it possible to roll 529 funds over to an IRA. This means that if the recipient doesn’t use all of the funds on educational pursuits, it can become part of a retirement account. Currently, the limit is $35,000 in a lifetime, and you have to make sure to rollover with the standard IRA limits of $7,000 ($8,000 for those over 50). The other limitation is you had to have had the account for 15 years. The last limitation is that only the contributed amount can be rolled over to an IRA. These are all great ways of helping and allowing grandparents and parents to set up their grandchildren for the future.
It is important to realize that because of the rollover limitations to an IRA, you shouldn’t max out the fund and some planning will have to be evaluated by parents ahead of contributions. My wife and I have 529 plans for our girls and decided to make it so it should cover tuition once the investments have matured, but with the rollover to IRA allowed now we don’t have to be as careful to not overfund the accounts. Prior to the change you wanted to keep a 529 slightly under funded once fully mature because otherwise there could be wasted money. We still have to be somewhat careful to not overfund too much, but using only the earnings for school.
If you have further questions feel free to reach out and we would be happy to assist in setting up these funds.
Having and taking care of children is always going to come at a significant cost to you, so take advantage of every benefit you can. Please refer to Part 1 and Part 2 of this series for my first three tips, and stay tuned for Part 4 for more ways you can save with kids!
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