529 plans are one of the most popular investment vehicles for junior’s college because of their tax-deferred savings, but are they truly all that they are cracked up to be?
According to Tom Posey, CFP®, the biggest catch with a 529 plan is that if the money is not used specifically for educational expenses, your investment earnings are not only now subject to your regular income tax, but also an additional 10% penalty.
And what if your child doesn’t even attend college?
Then you have a lot of money in a 529 plan that if withdrawn for non-educational expenses, is taxed and penalized 10%.
So what’s one to do?
Mr. Posey recommends putting no more than 60% of the total expected college costs in a 529. This way if junior attends a lower-cost school, you will not have “extra” funds in your 529 plan that will be hit with taxes and penalties.
As for the remaining 40% of your anticipated college expenses, Mr. Posey recommends putting this money into a separate taxable investment account.
This way when your little bundle of joy is all grown up and off to school, you’ve minimized your taxes paid.
Know a friend saving for junior’s college? Share this tip with them.