Can You Take Your Child’s 529 to the Moon?

By Published On: January 22, 2023Categories: Kids & Money3.6 min read

For the early stages of a child’s life, new parents often focus on vital needs: health, shelter, and safety. That’s why baby shower wish lists are filled with adorable onesies and BPA-free baby bottles. But with today’s changing world and rising costs of education, there’s one more baby essential to add to your gift registry: a 529 plan.

You’ve probably heard of a 529 plan and know them as the go-to savings plans to pay for college. What you may not know is that a 529 plan can now fund up to $10,000 per year of K-12 tuition at private, religious, or public schools.

For college students, 529 plans cover qualified expenses such as tuition and fees, room and board, plus computers and books. In some cases, they can even cover a portion of student loan repayment.

That’s why many parents choose to fund a 529 plan sooner than later, so they will hopefully enjoy years of tax-free growth.

But with so much to consider, it’s easy for analysis paralysis to get in the way of choosing a 529 plan. To help you decide, we put together this list of the top three things every parent needs to know about 529 plans, so you can get your money working for your child’s future.

Plenty of Room to Grow

Like Roth IRAs, 529 plans are funded using after-tax dollars.  However, you can contribute more more to a 529 plan than a Roth IRA*. Your 529 plan earnings grow tax-free as long as they are used towards qualified education expenses, and you’re not forced to take money out of it – ever.

This freedom allows anyone – grandparents, relatives, friends – to make contributions to your child’s education.  Any time, and with minimal restrictions on how much they chose to contribute**.

Never Lose Control of your Money

In the past, families opened custodial accounts to ensure kids’ long-term financial success. This proved to be risky, as children gained control of the account at age 18 and could mismanage their nest egg.

When you fund a 529 plan, you remain the owner of the account and never lose possession of the funds. You decide what goes in and out, and therefore enjoy an extra level of protection for your long-term financial planning efforts.

Take Advantage of Tax Breaks

All 50 states have or sponsor at least one type of 529 plan. Many states also offer tax and financial benefits when you fund a 529 plan. Regardless of which state you live in, money in a 529 plan grows tax-free as long as the funds are withdrawn for qualified education expenses.

One point to note: while there is no limit to how much you can contribute to a 529 plan, most states limit contributions that qualify for state income tax deduction or credit. It’s worth a conversation to discuss the nuances of 529 plans in your state when choosing one for your family.

But What If….

Parents today face uncertainty about their kids’ future education and work opportunities. With shifting professional trends and mounting student debt levels, it’s impossible to predict what path your child may take in 18 years.

With a 529 plan, there’s no need to worry about overfunding or unused money. If 529 funds are not used for education, you only pay taxes on earnings plus a 10 percent penalty on those earnings. With so many years of tax-deferred growth, your diligent planning may lead to success – whether they start their own space exploration business at 18 or become the next Nobel Prize-winning PhD after decades as a professional student.

Questions about starting or funding a 529 plan? I’m here to help you navigate this important next step in your family’s financial planning. Let’s set up time to talk next steps on your journey to building financial security.

*While there are limits on how much can be contributed to a 529 plan (and these limits vary state by state), they are extremely high.  The average family is typically very far from reaching the contribution limit.  Every state’s 529 plan allows for maximum contributions of at least $235,000 per beneficiary, with some states allowing more than $500,000.  Contributions made past these upper limits will be rejected and returned to the investor.

**You can contribute up to 5 years of the annual gift-tax exclusion limit ($85,000 for individual or $170,000 for a couple) as if you funded it over 5 years.

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