From National Apple Day (Oct. 21) to International Zebra Day (Jan. 31), it’s refreshing to know the calendar has it covered when it comes to celebrating the big and little things in life.
Seriously, even in this highly politicized age, American workers can still meet for a nosh in the breakroom on National Donut Day (June 2) or clink glasses at the bar on National Margarita Day (Feb. 22). Hey, if it’s carbohydrates, processed sugar and alcohol that brings a nation together, so be it!
Yet of all these "national holidays" we observe without getting a day off, 529 Day is the one that makes the most sense, in our humble opinion. And not simply because it’s the easiest date — May 29 or 5/29 — to remember.
For those who may not be aware, 529 Day, or 529 College Savings Day, was introduced to increase awareness of these plans and encourage families to start saving toward future education expenses in a tax-effective manner. 529 plans offer federal and state tax-free compounding for as long as funds are invested within the plan and without a required minimum distribution. Withdrawals for qualified educational expenses are federally tax-free and free of most states' income taxes as well.
Furthermore, there are no income or age limitations when it comes to a 529 plan, so any adult can open an account for any person's future educational expenses.
Wow! How wonderfully democratic is that? Unlike National Fitness Day (May 6), it doesn’t require a trip to the gym. And there’s more good stuff too as a result of SECURE Act 2.0.
“One of the best things about 529 plans comes with recent legislative changes that allow use of funds for K-12 private school tuition and a Roth IRA rollover of up to $35,000 of 529 plan funds, subject to annual limits," said Michael Nakanishi, financial advisor at Kingswood US. "Offering this type of flexibility takes away some of the anxiety of 'overfunding' a 529 plan and being penalized when a child receives a scholarship for college.”
As for potential disadvantages of employing a 529 plan to save for a child’s education, Nakanishi points out that some states have not adopted the recent federal changes to allow private school, K-12 tuition as a qualified distribution or a Roth IRA rollover option.
“These items are subject to state-specific adoption and are based on the state you reside in at the time of distribution, which may present a danger if a family moves or a student changes residency while in college,” he said. “Still, it's a better deal than we had 30 years ago, and state laws can change at any time.”
Richard Siminou, senior financial advisor at Siminou Wealth Management at Kingswood US, speaks about 529 plans from personal experience: He opened 529 accounts for each of his three children before they were a week old.
“The savings and growth over time has already covered approximately two to three years of college for each of them depending on which college they attend," he said. "When you pull funds out, as long as they’re used for qualified higher education expenses, there’s no federal income tax on the distribution, and often no state income tax.”
As for potential downsides, Siminou says a 529 plan may not be the best idea if you live in a state that doesn't offer tax credits or deductions for contributions. He also doesn’t recommend starting a 529 plan in a different state and reminds parents to “consider the possibility of your child not attending college.”
John F. Macielag, president of All Seasons Capital and Advisory at Stifel Independent Advisors, suggests clients think of 529 plans as a “tax-sheltered educational legacy trust in your family.”
“If the initial beneficiary decides not to go to college or delays attending college, the participant can make changes. A new family member can be named as beneficiary or if the original beneficiary is now an adult, they can become the participant. The adult child who takes over as participant can then name a sibling, other family member, or their own child as the new beneficiary. All the while keeping the funds growing and tax0sheltered,” Macielag said.
Along those lines, Joy Budnik, investment advisor at Jackson Square Capital, is a fan of the flexibility provided by 529 plans, especially the fact that there are no contribution limits. Coverdell Education Savings Accounts, for example, are capped at $2,000.
“They are also easily transferable, and the owner can retain control indefinitely, versus a UTMA where the beneficiary gains control at age 18,” Budnik said.
Flexibility and control? Come on! Not even National Yoga Day (June 21) can beat that.
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