Summary: Don’t buy unless you have state tax deductions. Used back door and mega back door to invest Roth IRA instead.
In the study of personal finance, we cannot overlook the 529 plan. Let me explain the 529 plan clearly and concisely.
What is a 529 Plan?
A 529 Plan is an education-related tax incentive program in the United States. While it can provide federal tax advantages, it is essential to note that each state offers its own 529 plans, so you'll need to choose one specific to your state when investing.
The money you contribute to a 529 plan is after-tax money. The investment growth is not subject to taxation if you withdraw this money for qualified education expenses. However, if the funds are used for purposes other than approved educational expenses, they will be taxed based on your income for that year, and you may also incur a 10% penalty.
When investing in a 529 plan, it's crucial to understand what qualifies as education-related expenses. Typically, this includes tuition, books, and housing costs, among other education-related expenses. The fund can also pass to our sons and grandchildren.
Unlike a Roth IRA, a 529 plan has no income or annual contribution limits. However, the investment options available in a 529 plan are limited, and the return on investment is often not as favorable. With the availability of backdoor and mega backdoor options for IRAs, we do not recommend purchasing a 529 plan. This is because retirement plans are not considered in the Free Application for Federal Student Aid (FAFSA) scholarship evaluation, meaning they do not affect the eligibility for children's scholarships.
When will you buy it? We only recommend buying 529 when you have state tax deduction.
What is a 529 Plan?
A 529 Plan is an education-related tax incentive program in the United States. While it can provide federal tax advantages, it is essential to note that each state offers its own 529 plans, so you'll need to choose one specific to your state when investing.
The money you contribute to a 529 plan is after-tax money. The investment growth is not subject to taxation if you withdraw this money for qualified education expenses. However, if the funds are used for purposes other than approved educational expenses, they will be taxed based on your income for that year, and you may also incur a 10% penalty.
When investing in a 529 plan, it's crucial to understand what qualifies as education-related expenses. Typically, this includes tuition, books, and housing costs, among other education-related expenses. The fund can also pass to our sons and grandchildren.
Unlike a Roth IRA, a 529 plan has no income or annual contribution limits. However, the investment options available in a 529 plan are limited, and the return on investment is often not as favorable. With the availability of backdoor and mega backdoor options for IRAs, we do not recommend purchasing a 529 plan. This is because retirement plans are not considered in the Free Application for Federal Student Aid (FAFSA) scholarship evaluation, meaning they do not affect the eligibility for children's scholarships.
When will you buy it? We only recommend buying 529 when you have state tax deduction.
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