Should you do an age based 529?
Parents with young children may find age-based asset allocation the best strategy. Most direct-sold 529 plans offer age-based portfolios, which generally start out invested in equities (stocks) and automatically shift toward more conservative fixed-income assets as the beneficiary gets closer to college.
Whether it makes sense to open a custodial 529 or an individual 529 can depend on how much control you'd like to have over the account. Opening an individual 529 could be the better option if you: Want to retain control over investment decision-making. Are unsure if your beneficiary will actually go to college.
An age-based mutual fund invests in more aggressive equity mutual funds for younger children, then automatically shifts to more conservative bonds as the child ages and gets closer to college. This makes sense, as you want 529 money to be conservative as the child gets closer to withdrawing the money for college.
529 Plans. The major differences between a UGMA or UTMA account and a 529 college savings plan include the tax impact, the financial aid impact, account ownership, and permitted uses. 529 plans have a more favorable tax and financial aid impact and provide the parent with more control.
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Average college savings by age.
| AVERAGE AMOUNT SAVED FOR COLLEGE | |
|---|---|
| Age 0 – 6 | $7,929 |
| Age 7 – 12 | $15,359 |
| Age 13 – 17 | $27,559 |
| Age 18+ | $27,778 |
529 college savings plans do not have contribution deadlines. You may contribute to a 529 plan at any time throughout the year, and you do not have to stop making contributions once the beneficiary reaches a certain age.
What happens to unused 529 funds? Your 529 account will never expire, even if your child ends up not using it. You can leave the funds in the account, allowing investments to grow tax-deferred, and use the funds down the road for a grandchild or another qualified family member.
What Happens to 529 Money When a Child Turns 21? 529 accounts owned by parents stay in the parents' control so long as they'd like.
Cashing out your 529 is always a possibility, but it will cost you. If assets in a 529 are used for something other than qualified education expenses, you'll have to pay both federal income taxes and a 10% penalty on the earnings.
There is no minimum age requirement to start a 529 plan. You can start a 529 plan for your child or grandchild as soon as you as you receive the Social Security number. Many parents and grandparents start 529 plans for their children or grandchildren at birth, and experts recommend it.
Should parents or grandparents own 529 plan?
As a result, financial planners have encouraged parents to only open up a 529 plan in their name and have the grandparents contribute directly to their plan. Untaxed student income can offset financial aid by 50%, meaning that a $5,000 distribution from grandparents 529 could reduce financial aid by $2,500.
Parents who open a 529 plan when their child is a high school freshman can still take advantage of the federal (and sometimes state) tax benefits, even if college is just a few years away.
The disadvantages of 529 savings plans include limited investment options, potential fees, a penalty if you don't use the withdrawals for eligible items, and more. Review all of them below and then decide if a 529 savings plan is right for you and your future college student.