No, you don’t. All the contributions were post-taxed income. The growth has not been taxed.
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Actually, my statement is correct. If the funds are used for educational expenses, then the growth is tax free. If the funds are not used for educational expenses, then the growth is NOT tax free. You need to be aware of these things.
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My family does not make those kind of incomes, but did start a 529 when she was an infant. Invested aggressively in growth for the first 14 years. Somewhere during the final years, we were barred from contributing more, because with the compounded appreciation we had maxxed out.
Not only was there enough to be full pay for Ivy undergrad, but still enough to now pay for first 2 1/2 years of grad school (even with the stock market dip of the past two years).
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Let’s look at the data on 529s:
In December 2022 there were 15.81M 529 plans in the US with a total value of $457.7B. The average value, then is $28,953. That, does not pay for a T50 school. Interestingly, the state with the highest value of 529s is…Nevada.
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The key with 529s (IRAs, or any purpose oriented market investments) is to look 2 - 3 years ahead (the typical time it takes for a market recovery). Until then, any market dip is actually in your favor, because it means you’ll be buying cheap and will have made more money by the time you need it.
However, at around age 14, start moving 70-90K of your 529 investments each year from whatever domestic growth index funds they offer into their money market fund (ideally not bond/fixed income, as you’ll still lose).
This way you lock in your aggressive earnings to be able to pay tuition each year, regarding how poorly the market might be doing for a while.
Absolutely!
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Or any school.
So I think we can all agree, that the “average” is not relevant to a parent. What’s relevant are real college costs and to save based on those!?
And if a family DOES have the means to save consistently from the first day, then a 529 can grow to what is needed to pay for college.
Sure, but it’s a college savings account so all the legit uses should be qualified educational expenses. Even if we had under-estimated market performance or had a kid end up in a cheaper state school and ended up with excess funds, we would have saved them for grad schools, grandkids or whatever. We don’t even get close to the line of what is allowed as a qualified expense, staying away from school supplies, computers, etc. – just direct school bills plus books listed on the syllabuses. We keep a spreadsheet of each expense and each savings account withdrawal and send it to the IRS every year (not required) showing it net to zero – i.e. withdrawals exactly equalling qualified expenses.
Agreed. My point stands, though. While there are outliers (of course). 529s are not paying for T20 costs of $80-90K a year. The data supports that statement.
My point still stands. Growth IS taxable. Thank you.
Understood. You are saying “average” (=underfunded/poorly managed) 529s currently in place don’t pay for college cost.
I misunderstood that you were talking in absolutes as far as that a properly funded and managed 529 wouldn’t suffice. That is factually untrue.
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The average 401K and IRA balance is also way lower than needed for retirement. That doesn’t make the value and logic of the product any less for those who can and do contribute more.
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I should have been more precise. My apologies.
I never said that.
The point of a 529 is to fund higher education - otherwise, you’d be choosing other investment options!
Let’s just look at authoritative statements, instead:
“Earnings grow federal income tax-free, and earnings are free from federal income tax when: Withdrawn for qualified higher education expenses” (https://www.njbest.com/why-njbest/njbest-benefits)
“You won’t have to pay federal or state income taxes on the money you withdraw to pay for qualified higher education expenses at eligible educational institutions”
Yes, “when used for qualified higher education expenses”. The point of the 529 is not to be an investment vehicle, but to pay for education. If you over-save, then you DO pay tax on the growth. If you don’t, you WILL be seeing the IRS at your door.
Perhaps, however, this is a discussion for another topic.
Unless you keep in the 529 to continue appreciating, and change the beneficiary, e.g., to a future grandchild, another sibling - or roll it over into an IRA over the years.
(If taxation is a concern, then you plan your steps accordingly to minimize tax impact.)
Absolutely, just concerned to leave blanket statements for others to read, when your statement was meant to be qualified for a very specific (less common) scenario (here: an overfunded 529, when at the same time you also had just argued - equally unqualified - that 529s are too underfunded to ever pay for college.)
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Sure, if you misuse the product, growth is taxable, as a penalty for misuse. Most tax deferment or avoidance products have penalties if you don’t use them appropriately.
So it sounds like we agree. If you use a 529 account for valid college expenses (its stated purpose), growth is not taxed. If you misuse it for something its not supposed to be used for, you blew it and will pay tax penalty.
We could probably say something similar about almost everything. Accessing a public park is free, unless you break the rules and the police issue you a ticket. By your logic, public parks aren’t free to access.
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Actually, public parks aren’t free, they are paid for by taxes. But, yours is a ridiculous argument. There are substantive differences between local services and infrastructure and tax-preferred, college savings mechanisms. That being said, I will take Mark Twain’s advice on this matter going forward.
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LOL. I predicted you would try and make the “paid for by taxes” argument, which is why I used the word “access to.” And if you really want to keep going you could point out the exceptional public parks that do charge for entry fees, etc. We could be pedantic all day.
I have no idea why you are so committed to the idea of putting so much emphasis on the idea that people who misuse the college savings funds will pay a tax penalty, but we’ve already agreed with your edge case. It doesn’t change the underlying fact that if used as intended, which is very easy to do and what most people who create the accounts intend to do, you don’t pay taxes for growth.
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Please move on from debating about 529 penalties or move it to the financial aid forum or PM.
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