You just had a baby – congratulations! Have you considered saving for your new bundle of joy’s college education yet? Whether you’re new to parenting, already have children or teenagers, or are simply an invested aunt, uncle, or grandparent, it’s never too early – or too late! – to start planning and saving for college.
While it may seem daunting, saving up for educational expenses can be simple and stress-free with a robust savings account known as a 529 Account.
“A 529 is very similar to an Individual Retirement Account in many ways,” explained Daniel Lewis, Senior Financial Advisor for First Merchants Bank. “It’s a separate savings account with investment options that’s titled differently for tax purposes.”
Like an IRA, a 529 allows you to let your money accrue interest or choose to invest so that that money can grow.
“If you’re setting up an account for a child, many 529 accounts have an age-based portfolio that will automatically change the risk levels of investments depending on your child’s age,” Daniel explained. “So, for example, the investment strategy for a 529 belonging to a young child might be very growth-oriented, but one for a teenager will automatically transition into safer investments because that beneficiary will likely be withdrawing from the account soon.”
And, like an IRA – or even a Health Savings Account (HSA) – there are limits on when you can access your funds and how you can use them.
“Funds deposited into a 529 account must be used on qualified educational purchases,” Daniel said. “As long as you do that, any interest earned on the account is tax-free. If you spend the money in any other way it will incur a penalty similar to an early IRA or 401K withdrawal.”
So, what counts as a qualified educational purpose?
“Obviously tuition – but also room and board, trade schools, computers, and other necessary items,” Daniel said.
If you have more than one child – or niece, nephew, or grandchild – a 529 can be a versatile option, as you can easily change the account beneficiary.
“So if you have a child who decides not to pursue college, you can change the beneficiary to another child who does have those plans,” Daniel explained.
Only have one child – and one who doesn’t plan to attend college? No worries!
As of January 1, 2024, you can roll any leftover 529 funds into a Roth IRA without incurring any federal income tax or penalty, provided the account is at least 15 years old and the amount you’re rolling over has been in the 529 for at least 5 years. The Roth IRA must also belong to the same beneficiary – in this case, your child – and has a lifetime rollover limit of $35,000.
Parents should be aware that 529 to Roth IRA rollovers will also count toward annual Roth IRA contribution limits but without the Roth IRA income limit.
“So you’re not at risk of losing that money or having to pay a penalty if the child doesn’t pursue higher education or you happen to have money left over,” Daniel said.
Want to find out how you can open a 529 account? Visit your local banking center to learn more!
First Merchants Private Wealth Advisors products are not FDIC insured, are not deposits of First Merchants Bank, are not guaranteed by any federal government agency, and may lose value. Investments are not guaranteed by First Merchants Bank and are not insured by any government agency. This material has been prepared solely for informational purposes. First Merchants shall not be liable for any errors or delays in the data or information, or for any actions taken in reliance thereon. Any views or opinions in this message are solely those of the author and do not necessarily represent those of the organization.
