You contribute after-tax money, so gets US off your back because the money growing from now on is all tax-free as long as it’s use for college expenses.
There is a contribution CAP of about $300k to $350k, depending on the state of the plan.
What if you child decide to not go to college and wants to be a rock star instead?
In that case, you can change the beneficiary of the 529 plan to a close relatives, such as you other children, grandchildren or even yourself or your spouse.
However, if no one is going to use that money for college education and you decide to withdraw the money, you’ll be hit with a 10% penalty PLUS income tax.
Besides, money in a 529 Plan is considered during financial aid application process as parents’ assets.
Let’s take a look at another very similar savings vehicle…the ROTH IRA.
The ROTH IRA is not just for retirement.
You contribute after-tax money, so gets US off your back because the money growing from now on is all tax-free as long as you withdraw your money after 59 1/2.
But Uncle Sam is very smart, he limits what kind of money you can contribute AND how much you can contribute each year.
Contribution must be earned income, meaning from a JOB.
The current annual contribution limit of $5,500, an extra $1,000 for catch-up if you’re 50 years old.
10% penalty on withdrawal before 59 1/2 PLUS income tax except if you’re using the money for college expenses, down payment for first home, and medical expenses.
An of course, if you take the money out after you turn 59 1/2, you can use it whatever way you want.
Best of all, money in an retirement account is not considered when applying for financial aid.
However, there is a income limit for contribution as well. So if you make too much money, you cannot contribute to a ROTH IRA.
What if you want to contribute more than $5,500 a year and still take advantage of tax-free growth?
* QUICK FACTS: $5,500 a year for x40 years = $220,000. Is that enough for your retirement. Rule of thumb is you’ll need x20 times of your current income for a COMFORTABLE retirement.
Your next option is an indexed universal life insurance.
You contribute after-tax money, so it gets Uncle Sam off your back because the money growing from now on is all tax-free.
The money in the cash account can be used for anything, such as college tuition and expenses. If your child decides to not attend college, he or she can use the money as down payment for his/her first home or invest in a business, etc.
When my daughter earns her first paycheck at 16, I opened a ROTH IRA for her to get her started. Even though she does not make $5,500, but because I started her early, I put the full amount of her earned income, so she has more years to save. We all know $5,500 a year is not a lot. With the money in the ROTH IRA, we invest in low-fees index funds.
All her gift money from birthdays and holidays goes into her life insurance cash account making “money babies” safely at 10% annual return and tax-free.