CHET and 529 Plans Explained Part 2 #34
Are you ready to dive back into the world of 529 plans? I’m glad to have you back as we finish this two-part series examining how 529 plans work and what savvy investors like you can do to make the most of your finances. Last week, I walked you through what 529 plans are and how the one I’ve been using in Connecticut (CHET) works.
This week, we’ll look at rolling over a 529 plan, how to withdraw funds without a penalty, why 529 plans are a good tool for tax-deferred savings, and much more. Even if you feel like you’ve got this topic covered, I know there will be something you can learn from this episode - don’t miss it!
You will want to hear this episode if you are interested in...
Using a different 529 plan with a rollover [1:45]
Challenges with age-based portfolios [5:00]
What does it look like to withdraw funds from a 529 plan for higher education? [8:20]
Can you use a 529 plan as a tax-deferred savings vehicle? [12:30]
Do you have to take funds out of your 529 plan before you die? [14:00]
Closing thoughts [16:00]
Can you roll over your 529 plan?
So you’ve planned ahead and started investing in a 529 plan but you’ve lost confidence in how the fund is managed, what should you do? Is it possible to roll over a 529 plan to get better results? Yes!
Federal tax law allows you to roll over any or all of your 529 accounts from your current 529 plan to a different 529 plan, but only once in any 12-month period. (You can get around the 12-month restriction by naming a different family member as beneficiary of the 529 plan you are rolling into.) If you violate the 12-month rule, you must treat the transaction as a nonqualified distribution and pay federal tax and 10% penalty on accumulated earnings.
Have you thought about rolling over your 529 plan? What factors should you base this decision on? Make sure to tune in to this episode as I expand on this critical topic and so much more!
Withdrawing funds from your 529
The time has come to use that 529 plan you set up all those years ago for your child or grandchild - what happens next? When it comes to using your 529 funds, there are some important restrictions that you need to be aware of.
Funds from a 529 plan can be taken out tax-free to pay for qualified education expenses, which include costs required for the enrollment and attendance at in-state, out-of-state, public, and private colleges, universities, or other eligible post-secondary educational institutions. Qualified 529 plan expenses also include up to $10,000 per year in K-12 tuition expenses.
It’s up to the 529 plan account owner to calculate the amount of the tax-free distribution and how they want to receive the funds. Withdrawal requests can usually be made on the 529 plan’s website, by telephone, or by mail.
Tax-deferred savings
Did you know that you can use a 529 plan as a tax-deferred savings vehicle? It’s true! No, you don’t have to do anything shady or illegal, you just need to be smart about it.
All 529 plans offer generous tax breaks, provided you use the money for qualified expenses. While your contribution is not deductible on your federal taxes, your investment will grow tax-deferred and withdrawals will not be subject to federal tax.
If you want to know more about how to use a 529 plan as a tax-deferred savings vehicle, make sure to listen to this episode!
Resources Mentioned on This Episode
Episode #33