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I Don’t Have Kids. I Save In A 529 Plan.

[This post is strictly educational in nature and is not investment advice. Please take a moment to read the website disclosure statement here.]

The creation of a 529 plan

I have a confession; I’m addicted to optimization.

You see, I get the same rush a gambler experiences when I review my savings in Microsoft Excel. Whenever my cash flow shows excess, my savings optimization starts anew. 

Hence, when I was fortunate during prior employment to run out of places to save outside of my HSA, Roth IRA, and SEP-IRA, my inner tax geek got to work. 

Already saving in a taxable brokerage account, I wondered what other tax-preferential accounts I could optimize for my future self and family. Upon further examination in May of 2020, I realized a 529 plan made perfect sense for my extra cents.

Hence the research commenced.

A brief history and functionality

Born in 1996 through congressional legislation and added to the United States Tax Code under Section 529, the 529 plan has morphed over the subsequent years through additional legislation to become powerful tax-preferential savings account for education expenses. 

Sponsored and run by each state with a custodial partner, such as Fidelity or Vanguard, they are a unison of public-private partnership. 

English translation: Each state chooses an investment firm that then runs the plan at the behest of the state. This is similar to how a 401(k) is sponsored by an employer and run by an investment firm.

While contributions are never deductible on federal income tax returns, some state plans allow for a state income tax deduction. Delightfully, contributions can be invested, and subsequent growth remains tax-deferred. Then, as long as withdrawals are used on qualified educational expenses, the money is tax-free! 

Now qualified is a fancy way of saying that the government approves of the use. Examples of qualified spending include elementary through high school tuition, trade school tuition, university tuition, room and board expenses, and necessary provisions – computers, textbooks, and the likes. 

Buying a car or a boat is not qualified and would incur a penalty, which starts at 10% and goes up depending on the state! Thus, 529 plans are meant for education, not your retirement!

However, as an added perk, if the recipient of the funds receives a scholarship, the account owner can withdrawal the amount without penalty and pay taxes on the gains – and state income taxes on contributions that were deducted.

Who uses 529 plans?

Generally, 529 plans are used by parents with kids because 529 plans require a beneficiary for the funds and a custodian who oversees the monies. Hence parents are the custodian, and their kids are the beneficiary. However, grandparents and family friends may establish a 529 plan for a child or adult as well. No lineage requirement exists that states a custodian and a beneficiary must be related. 

Additionally, contribution limits are on individual custodians, not beneficiaries. That means you, your spouse, and your parents can each contribute $15,000 a year for your child to go to school within separate 529 plans. If anyone is feeling particularly generous, they can make five years of contributions at once by placing $75,000 into an account.

I don’t have any kids yet – nor have they been conceived

That happens to be my situation. However, I am still saving in a 529 plan.

Yes, you read that right. I do not have a child, and my partner and I haven’t even thought about procreation or adoption yet. That is likely several years out as we are enjoying our time engaged.

So I opened a 529 plan where I am the custodian and the beneficiary nonetheless due to my inner optimization geek. Someday when we have a kid, I will change the beneficiary to be our future child. For now, contributions go in, and the account grows. And yes, you can do that.

Interesting quirks

While some states have limits on how long a 529 plan can be open or when the funds must be used, others do not. Even if a state has a limitation, you can do a qualified rollover to a different state’s plan. 

We live in Colorado, and I opened the plan in New Hampshire, as it offers many advantages over our state’s plan. Full disclosure, I have never been to New Hampshire and may never visit there. So for those now wondering, the answer is yes, there are no residency requirements to open a 529 plan with many states.

Say you hit the account maximum limit – some states have established these to prevent overfunding – and you can no longer contribute. Well, you can open a new 529 plan – sometimes in that same state – and start contributing to it. Again there are no limits to the number of 529 plans one can be a custodian on or beneficiary to.

What happens if I overfund my future child’s 529 plan or they choose not to go to college? Well, I can use the money to pay for grade school expenses and then change the beneficiary to their future child – i.e., my grandchild. When I become older, and near death, I can transfer my custodianship to my child to run the plan for my grandchild. 

Hence, if too much money goes in, the 529 plan will become a multi-generational education fund. I am skeptical this will happen as I don’t plan to overfund it, but anything is possible.

So here we are!

Now you can see why I opened a 529 plan, despite not have a kid nor expecting one soon. For those curious, I do not maximize my eligible contributions to the 529 plan. I put a small amount in each month automatically, which someday will compound into a reasonable amount. While this is a gamble, as I may die before I have a kid, I believe the risk is minimal.

In closing

The 529 plan is a powerful tool, and if you have not looked into one and plan to go back to school someday or have kids – they are a no-brainer. With the 2020 changes that made elementary through high school tuition/expenditures eligible for tax-free withdrawals, 529 plans are only becoming more versatile. I am a public school fan myself, but my kid will still have expenses that need to be covered!

By opening a 529 plan, you can save on taxes and make an impact in a child’s life, whether they be yours or another’s. Education is expensive, and until that is reformed, the 529 plan remains a potent way to combat the educational arms race.

So, do you have a 529 plan? If so, how do you use it? I would love to hear your thoughts in the comments below, and as always, have a great day!


Mile High Finance Guy

finance demystified, one mountain at a time






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