Investing for my kids in a 529
529’s, UGMA’s, abcd’s. That’s how I felt the moment I started looking into how people invest for their kids. It can feel overwhelming to make the first move. Context is important, and you can feel good about investing for your kids, after you’ve invested in yourself.
There are multiple accounts available for you to invest in your kids. The most popular option, and most straightforward is the 529. I personally use these for my kids, and with the new rules from the Secure 2.0 Act you can transfer a $35,000 lifetime limit per beneficiary for 529 plan rollover contributions to Roth IRAs, so if the child doesn’t use all the money, or things adjust in the future, like free college, ect. Up to 35K will be a boost for your child’s retirement planning. There are a few other things to note in the Secure Act 2.0. You can’t contribute all 35K, its subject to the Roth IRA contribution limits which means you can put 7000 in per year, so if you have 35K left, that means it’s a 5 year period to roll that money over. but you can read more about those nuances in the Secure Act, but I have it noted below.
Section 126, Special rules for certain distributions from long-term qualified tuition programs to Roth IRAs. Section 126 amends the Internal Revenue Code to allow for tax and penalty free rollovers from 529 accounts to Roth IRAs, under certain conditions. Beneficiaries of 529 college savings accounts would be permitted to rollover up to $35,000 over the course of their lifetime from any 529 account in their name to their Roth IRA. These rollovers are also subject to Roth IRA annual contribution limits, and the 529 account must have been open for more than 15 years. Families and students have concerns about leftover funds being trapped in 529 accounts unless they take a non-qualified withdrawal and assume a penalty. This has led to hesitating, delaying, or declining to fund 529s to levels needed to pay for the rising costs of education. Section 126 eliminates this concern by providing families and students with the option to avoid the penalty, resulting in families putting more into their 529 account. Families who sacrifice and save in 529 accounts should not be punished with tax and penalty years later if the beneficiary has found an alternative way to pay for their education. They should be able to retain their savings and begin their retirement account on a positive note. Section 126 is effective with respect to distributions after December 31, 2023.
The reason I like 529’s is that you can gain tax benefits, and you don’t need to invest in your state, for example, some states might be have a better plan than your’s based on specific information. I also learned you can always take out principal you invested without implications. So if you feel you overfunded the account, and you don’t have another child or person to put that money towards, or things have changed, you can withdraw it and there shouldn’t be tax implications.
Another thing I like about a 529 is that it’s transferable, you can use it for yourself to go to gradschool, you can use it for private school, and you can use it between children. That feels like safety to me, instead of having rules around an investment, you have options!
My oldest son we didn’t contribute one single dime until he was 3. Our life didn’t allow for the extra of a 529, and that was perfectly ok! There is always an option to superfund or start small contributions, even $25 a month, when you’re capable. A lot of options exist to do quarterly payments as well, so you could $25 a quarter, truly anything better than nothing. There is a calculator I love to use