Today’s read is a short, dense, informative piece. A bit different from the long form I usually post. Here it goes.

I’m a believer in generational wealth. Wealth is not transferred from one account to another. Sustainable wealth transfer happens between the ears. Give a man a fish and feed him for a day. Teach a man to fish and you feed him forever.

We all know how much I love a tax advantaged account. The 529 plan is one I haven’t written about…until now.

A 529 plan is a tax-advantaged account designed to cover education expenses. As most readers are CRNAs or other healthcare professionals, we all know how enjoyable education expenses can be. Miserable at best, scaring at least.

Because we spent decades in the liberal education system, that means our children will have a predisposed affinity for higher education (right, wrong, or otherwise). Teach your children about responsible personal finance habits to set them down the right path. But consider a little boost to get them there.

The 529 plan is a way we can transfer monetary aid to our children and help them overcome financial barriers of education. I’m still up in the air about the actual transfer of significant monetary wealth, but that’s another discussion for another time.

The U.S. Government

The government doesn’t do anything well, so when a problem arises, they incentivize citizens to do things for them. Take housing. There are TONS of tax incentives for real estate investors. The government can’t provide housing for everyone, so they provide a monetary incentive for others to join the cause.

Education is no different. The government fails to curb the skyrocketing education costs, so they offer incentives for us regular people to deal with their inferiorities. They handout student loans like candy on Halloween. $200,000 for a degree that will lead to a $30,000 per year job…ABSOLUTLY. And then the taxpayers are on the hook for repayment.

What a great philosophy. Bail out college educated individuals who have reasonable earning potential with taxpayer dollars. Divert funds from people who truely need a hand up in life.

I love this country, just ask Mrs. TFC, but man, the government is so unbelievably inefficient in many areas.

The primary incentive of the 529 plan is a post tax account that can be used for education expenses. The money can be withdrawn tax free if used for approved expenses such as tuition and room & board. Other expenses include textbooks, computers, fees, and other equipment needed for school.

Roots of the 529 plan.

In 1996, two senators, Bob Graham and Mitch McConnel created Section 529 of the tax code. Notable changes were made in 2017 which expanded approved expenses to private or religious school tuition for K-12 students. The SECURE Act of 2019 Added apprenticeship programs to the approved list. And 2022’s SECURE 2.0 brought one of the most notable changes – a Roth IRA rollover.

Basics of the 529 plan.

There is not a federal income limit for contributions to a 529 plan, but states have a max income limit of $235,000 (Georgia and Mississippi) to $550,000 (Missouri). Most states are above $350,000 meaning CRNAs typically qualify.

529 contributions count towards gift allotments of $17,000 annually per donor (2023). So, there isn’t a limit on your 529 contributions, but the tax benefits decrease after $17,000 per beneficiary per year. Some states even have tax breaks on the contributions themselves.

Accounts can be purchased through the state or a brokerage. Typically, capital is invested in a target date fund, just like a typical 401(k). The account holder manages the account regardless of the beneficiary’s age.

Beneficiaries

Beneficiaries include:

·         Child (including foster or adopted)

·         Child’s dependent

·         Sibling (including step sibling)

·         Parent (including stepparent)

·         In-laws (pretty much any of them)

·         First cousin

·         Spouse of anyone listed

You don’t need to change plans if the beneficiary changes, so it’s quite easy to include more people as time goes on.

Withdrawals

Contributions are posttax. Growth and withdrawals are tax free provided the funds go towards the aforementioned education expenses. If the beneficiary earns a scholarship, that amount can be withdrawn without penalty, but taxes are still owed. Great for a student earning a full ride who has minimal expenses.

The 2017 expansion to include K-12 programs allows a $10,000 max annual withdrawal for tuition without penalty or taxation.

Withdrawing money for non-educational expenses incurs a 10% penalty. Plus the growth is taxed as income.

Unused Funds

No harm, no foul. Consider holding out a few years to be certain of their decision not to attend college. Or if there are leftover funds from an undergraduate program, hold off to see if grad school is in the cards.

Up to $10,000 can go towards existing student loans of the beneficiary, which again, can include any number of people.

Still have money left over? The account can transfer to any of the other qualifying beneficiaries. SECURE 2.0 allows $35,000 to be rolled over into a Roth IRA for the beneficiary provided the account has been open for over 15 years. This option is available January 1, 2024. All the more reason to start early.

Ultimately, the account can be cashed out which comes with that 10% penalty.

Please provide feedback on the short, factual, information dense posts mixed in with the rambling of the long form posts. Thanks for reading!