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M
529 a good idea with no kids yet?
Hello! We're expecting to welcome our daughter into the world later this year and we're taking stock of our finances. I've maxed out my work 401k, HSA, Roth IRA and also Spousal Roth IRA. My husband is a graduate student so we do all that we can to make this work and also take advantage of great tax benefits where we can. We have enough to put away about $6k in a 529 plan per year so should we do it? What are the pro and cons? I get that we could put this money in a regular account but also get that we would pay taxes on dividends and realized gains. Any tips from people who've been in our shoes or have advice to share?
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B
I get why you would consider it with how pricey these private schools are, but it's premature imo. Yes you will have to pay some taxes on your investment capital gains or dividends but as long as you go into something like an ETF and keep in invested, the taxes should be minimal. The main reason I'm saying this is because you never know if your child will actually go to college, even if you and your whole family have. There is no contribution limits to how much you can add to a 529 investment account, but remember the funds in the account have to be used for educational expenses. I think you can use the funds for pre-college tuition expenses too but hard to really know so early imo.
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L
Wait until after your daughter is born. Things in life can change and a lot of times they are out of your contrl. Until she's of what I call "practical age" put that amount into an investment account that is growing. You can then decide to move that money into a 529 later or simply keep adding to it for your retirement savings or whatever other savings goals you might have.
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@Marie414, first, congratulations on your first child later this year! Such an exciting time. Congratulations, too, on the financial preparation you and your husband have done already. My response is in two parts to answer your question. 1) opening a 529 plan requires a name and social security number, so it's impractical (you could make yourself or husband the beneficiary and then transfer, but ugh!), so wait until your daughter is born; 2) I would absolutely recommend a 529 plan. All gains (divvies and capital) are tax-free and while there is a 10% penalty on withdrawals not spent on education, you are still way ahead of keeping those funds in a taxable investment account. Under current law, k-12 expenses are allowed as is the ability to transfer to a new beneficiary (and maintain the tax-free growth), should your daughter not go to college. Even with the 10% penalty, the tax-free growth puts you ahead of a regular account and becomes, in effect, a back-up retirement fund.
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M
@Ilene795 Thank you this is all great to know! I didn't know half of what you shared. I'll wait to open one when once she's born and with an SSN.
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J
@Ilene795 I'd agree with this! No tax on growth for 15+ years beats any penalty. It's worth mentioning that 529 plans requirements are changing and evolving to include broader cases. Case in point, K-12 was recently added. Next thing you know daycare will be too!
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