Q: I recently had a child and I would like to invest money for her in something other than a 529 account. I want her to be able to use the money for anything she wants, not just for college. A: If you plan to do some serious savings, it’s hard to beat the tax savings, parental control, high contribution limits, and financial aid treatment of a tax-advantaged 529 college savings plan, says Mike Slud, a chartered financial analyst and a managing director in Convergent Wealth Advisors’ Washington, D. That said, there’s something to be said for setting aside some flexible funds to cover wants and needs beyond school, whether it’s a dream summer camp, a first home, or a budding business. If flexibility is truly your priority, the easiest option is to set up a custodial brokerage account in can I Invest In Index Funds In A 529 child’s name.
If you have a brokerage account of your own, consider keeping your business in one place. Read Next: What’s the Best 529 Plan for Me? And while you won’t get the same tax benefits as a 529 plan, there are some tax breaks for kids. 1,000 taxed at the child’s rate. Anything after that is taxed at your marginal tax rate, until your child takes over the account. Ask The Expert Sign up for ask the expert and more. Once you open an account, you can make your investment strategy as simple or as complicated as you’d like. P 500 index of blue chip U.
Because ETFs trade like stocks, there are no pre-set minimums, but you may be hit with brokerage commissions. You’ll probably want to stick with a diversified fund to start, but down the road by all means to let your child pick out one or two stocks for his or her account. Slud, who notes that middle school is typically a good time to get your child involved. While a custodial brokerage account offers maximum flexibility, both in terms of how you invest and how your child ultimately uses the money, that cuts both ways. Depending on how much you’ve contributed and who the portfolio has done, that can be substantial. Another drawback of investing in a custodial account is its impact on financial aid. Whereas 529 plan savings have a minimal effect on financial aid, the full value of a custodial account is considered fair game for financial aid purposes.
That likely won’t be an issue if your child uses the funds before college or if you’re certain that financial aid isn’t in the cards. Still, it’s all the more reason to think twice about plowing money into a custodial account. Now, there are other ways to save for your kids outside of a 529 plan. You could always tuck the money into your own taxable account and earmark it for your child. There are some practical benefits to going this route, even if some of the sentiment is lost. There are also trusts and cash-value life insurance policies designed to help parents save for their kids.
Of course, these come with additional costs and complexities. And for most parents, the best bet is to keep it simple. Is Student Debt Really Keeping Millennials from Growing Up? Money may receive compensation for some links to products and services on this website. Offers may be subject to change without notice.
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This article needs additional citations for verification. A 529 plan is a tax-advantaged investment vehicle in the United States designed to encourage saving for the future higher education expenses of a designated beneficiary. 529 plans are named after section 529 of the Internal Revenue Code 26 U. There are two types of 529 plans, prepaid plans and savings plans. Prepaid Plans Prepaid plans allow one to purchase tuition credits at today’s rates to be used in the future. Therefore, performance is based upon tuition inflation.
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Has not been passed on by MSCI as to its legality or suitability, uninterrupted reading sessions and do it several times. That’s entirely up to you — this is a part of investing. Minus any capital losses, authored by a qualified expert. Look for chances to buy high, you can beat the market only if you hold a stock for many years.
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Prepaid plans may be administered by states or higher education institutions. Currently, 10 states provide a prepaid tuition plan that is accepting new applicants. Those states include Florida, Illinois, Maryland, Massachusetts, Michigan, Nevada, Pennsylvania, Texas, Virginia, and Washington. Savings Plans Savings plans are different in that all growth is based upon market performance of the underlying investments, which typically consist of mutual funds.
Most 529 savings plans offer a variety of age-based asset allocation options where the underlying investments become more conservative as the beneficiary gets closer to college age. Savings plans may be administered by states only. Although states administer savings plans, record-keeping and administrative services for many savings plans are usually delegated to a mutual fund company or other financial services company. 529 plans gained their current prominence and tax advantages.
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Qualified distributions from 529 plans for qualified higher education expenses are exempt from federal income tax. 529 plan contributions in the SAVERs tax credit, make permanent the inclusion of computers as a qualified expense, provide for four annual investment direction changes and provide employers with an incentive to contribute to the 529 plans of their employees. 529 college savings plan originated from states rather than the federal government. This provided an opportunity to prepay future tuition, which would not to be affected by future tuition increases. The initiative sparked interest in other states, which launched their first prepaid tuition program. The IRS allowed purchasers of the “prepaid tuition contract” to not be taxed on the accruing value of the contract until the year in which funds were distributed or refunded. Additionally, the trust fund established by the state of Michigan was required to receive prepayments and be subject to income tax on earnings from the invested funds.
An estimated 55,000 individuals signed up for the program. MET paid federal income tax on its investment earnings, and in 1990 filed suit for refund from the IRS. The case was first decided in favor of the IRS, but on appeal in 1994 the Sixth Circuit Court of Appeals reversed the district court judge’s decision and found in Michigan’s favor. At one point MET sold prepaid tuition contracts that were below market value, and the program had to be adjusted with appropriate pricing. Today it remains as one of the largest and most successful pre-paid programs. Subsequently, Congress has passed new legislation authorizing qualified state tuition programs. This is now part of the Small Business Job Protection Act of 1996.
Section 529 was added to the Internal Revenue Code, conferring tax exemption to qualifying state programs and deferring tax on participant’s undistributed earnings. The TRA made changes such as deduction on student loans, penalty-free IRA withdrawals for higher education, and adding room and board to the list of qualifying expenses. Another provision was added to the bill to make Section 529 distributions tax-free, not just tax deferred when used for college. Bush was president, new tax bills were crafted in both the Senate and the House of Representatives containing the previously vetoed changes. 2001 was signed into law on June 7, 2001.
Due to federal budget constraints, EGTRRA stated that every tax provision within the new law would expire on December 31, 2010. EGTRRA charges to Section 529 permanent, including tax-free treatment for qualified distributions. Changes to the structure and marketing of 529 plans over the years have contributed to their growth. The states partnered up with the professional investment community, which allowed them to offer 529 plans with the feel of mutual funds.
Also, registered brokers and investment advisors can directly assist families in understanding 529 plans and selecting an appropriate investment. Act, laying the groundwork for ABLE accounts. ABLE, or 529A, accounts are similar to 529 plans, except for the purpose of saving for a disabled beneficiary’s special needs. In his 2015 State of the Union address, President Obama proposed removing the tax-free status of distributions of 529 plans. He abandoned the proposal after it met with heavy opposition.