The 10% penalty on growth is not the only consideration when withdrawing funds for non-qualified expenses. You will also be subject to income tax on the growth depending on your tax bracket. So the cost of those withdrawals is considerably higher than you're stating. Assuming an federal income tax rate of 24% + 10% penalty in your $20,000 example the cost of just taking the money out is $6800 not $2000. On top of this you may also pay state income tax on the withdrawal and to add to the pain some states will impose an additional penalty on top of that. CA penalizes 2.5% for non-qualified withdrawals.
Yep, this was my concern as well. At least I understand the 10% penalty much better, but it's the tax bracket that can also get you. Thanks for commenting on this!
Yes this is true! Quite the oversight. But I still think an extra 10% isn't that horrible on top of the capital income tax. Your basically betting 10% of your money (gains) that your kid will go to college. If you throw it in a mutual fund you still get taxed. The real question is.... do they add the two together (tax + fee) on the first number OR do they tax you first then take the 10% off the remaining amount?? LOL... who knows
Another alternative use not mentioned in the video - if your kids have kids, you can transfer the 529 to your grandkids. Just keep it invested in growth funds over most of that time, until your grandkids get closer to college.
Smart. It sounds like what you are really saying, is that you can really just sort of leave it in there as an investment, and use it when any other need arises, which might include grandchildren.
a 6th way not mention in the video would be option 1b. Wait 15 years and that 529 can be rolled into a retirement fund account for that child (same beneficiary)
Yes, but wait and be careful with this! Every state needs to change their state laws to make it qualify (and not be taxable). As of right now, rolling it into a IRA would be considered taxable at the state level. Plus, some states may never adopt this rule - CA notably doesn't like to allow these things (e.g. using a 529 plan for K-12 education or student loans). So while it's a great benefit, it's too early to see how many states will allow it.
One thing I’m confused about. If I know I’m not going to more school, wouldn’t it be good to take the 10% penalty now, instead of 10% in say 20 years? Because in 20 years 10% will be much higher than it is now. Meaning if I take it out now and throw it into a brokerage account, I would be saving money in the long term by avoiding paying 10% on a much bigger sum in a decade or two?
It's a very personal choice on what to do with the funds. You can definitely do that. You could also leave the funds and change the beneficiary in the future (maybe grandchildren). You can basically setup the 529 plan as a dynasty education trust. You might find this helpful: thecollegeinvestor.com/42154/dynasty-529-plan/
I just read an article on dynasty 529 plans. Some people save money this way to pay for other generations to go to college. For example, if you’re kids don’t use it, you could give that money to your grandkids.
Can't find the answer. What if we Contribute $100,000 into 529 plan of our own money. And son doesn't go to college and we decide to take it out. Are we going to be taxed the money we put in or just the Growth part?
You are only facing a tax and penalty on the growth/earnings. But there are a lot of other choices you can make before you even get there (new beneficiary, yourself, future grandkids, IRA, K-12 education for future kids, etc.) See this article: thecollegeinvestor.com/41434/avoid-529-plan-penalty/
Absolutely. In fact, grandparent 529 plans will become even more lucrative next year from a financial aid perspective due to FAFSA changes. See this: thecollegeinvestor.com/38293/help-grandkids-pay-for-college/
I’m not going to school because I’m in a trade but my grand parents had a account open for me with money in it I think it was a 529 plan hm would the fee cost to get the money out if it was around 50 grand
Thank you for this video. It was very informational. Suppose I live in California where there are no tax benefits for contributing to a 529, and I have multiple kids close in age, would it make sense to contribute to a single account or have separate accounts? Furthermore, would I be able to transfer a partial amount to another account if my second child decides to go to college, while my first child is already attending college?
@@ddo920 you have to designate a beneficiary of the account. If you have 2 children in college at the same time, you could not legally withdraw for the 2nd child as they are not the beneficiary. The 2 smaller accounts will grow at the same rate as 1 larger account.
@@josephrusso87 Yes, it can be anyone - no relationship/blood/family required. The only requirement is that the beneficiary must be a US citizen or a resident alien, and must have a social security number or federal tax identification number.
Wow, inaccurate info on 529 withdrawal for non-qualified expenses! You also have to pay income taxes at your current normal rate *in addition to* the 10% penalty on the gains. This can be especially painful if the added income from this non-qualified withdrawal drives you up into a higher tax bracket. So in the video example, you'd pay the $2,000 penally PLUS, let's say your marginal tax rate is 15%, an additional $3,000 income tax. So of that $20,000 gain in your 529, you'd only net $15,000. And worse, if this withdrawal drives you into a higher tax bracket, the $3,000 added income tax might be just the start - you might pay higher income taxes on your existing income that falls in that higher bracket.
Typically, the best 529 plan is offered by your state. Find your state here and see what plan is best for you: thecollegeinvestor.com/24499/529-plan-where-to-open-in-state/
The earnings are taxable, and yes you pay taxes on the earnings. Your withdraw is pro-rata contributions and earnings. So if you contributed $1,000 and it grew to $10,000, your taxes would be on $9,000. But even if you withdraw $100, the taxes are on $90.
That depends on your state. Federally, you can use $10,000 from a 529 one-time to pay down student loan debt. However, not all states allow this. Depending on your state, if you do it, you could owe taxes and/or penalties on the amount withdrawn. See our 529 Plan Guide by State, find your state, and see what is allowed: thecollegeinvestor.com/529-plan-guide/
Was that WRONG, or I am wrong??? If 27K contributed (post tax) + $20 LT growth. WONT you be paying $20K x 15 or 20% LTCG tax , so $3 or 4K, PLUS 2K, hence end up with either $41 or $42 K. How do you end with $45K. EXPLAIN or CORRECT the video
The 10% penalty on growth is not the only consideration when withdrawing funds for non-qualified expenses. You will also be subject to income tax on the growth depending on your tax bracket. So the cost of those withdrawals is considerably higher than you're stating. Assuming an federal income tax rate of 24% + 10% penalty in your $20,000 example the cost of just taking the money out is $6800 not $2000. On top of this you may also pay state income tax on the withdrawal and to add to the pain some states will impose an additional penalty on top of that. CA penalizes 2.5% for non-qualified withdrawals.
Yep, this was my concern as well. At least I understand the 10% penalty much better, but it's the tax bracket that can also get you. Thanks for commenting on this!
Yes this is true! Quite the oversight. But I still think an extra 10% isn't that horrible on top of the capital income tax. Your basically betting 10% of your money (gains) that your kid will go to college. If you throw it in a mutual fund you still get taxed. The real question is.... do they add the two together (tax + fee) on the first number OR do they tax you first then take the 10% off the remaining amount?? LOL... who knows
Thank goodness we don't have to pay state taxes here in TEXAS!!!!!!!!
@@AR-yx5wg it's funny how Texans are so proud, you don't hear as many Floridians bragging about not having state taxes.
@@diegouy8277 you also dont hear Texans worry about other states. Seems like Floridians cant help themselves.
Another alternative use not mentioned in the video - if your kids have kids, you can transfer the 529 to your grandkids. Just keep it invested in growth funds over most of that time, until your grandkids get closer to college.
Smart. It sounds like what you are really saying, is that you can really just sort of leave it in there as an investment, and use it when any other need arises, which might include grandchildren.
There won't be another generation
@@davislucins4865 damn 😂 that’s crazy. Do you really believe that or was that a troll comment?
a 6th way not mention in the video would be option 1b. Wait 15 years and that 529 can be rolled into a retirement fund account for that child (same beneficiary)
Yes, but wait and be careful with this! Every state needs to change their state laws to make it qualify (and not be taxable). As of right now, rolling it into a IRA would be considered taxable at the state level. Plus, some states may never adopt this rule - CA notably doesn't like to allow these things (e.g. using a 529 plan for K-12 education or student loans). So while it's a great benefit, it's too early to see how many states will allow it.
You can also use it for a down payment….
Thank you, great info.
Thank you so much that was the information I need
On the withdrawal option, do you also need to pay income tax on the growth in addition to the penalty?
Nevermind, Terry answered my question below
One thing I’m confused about. If I know I’m not going to more school, wouldn’t it be good to take the 10% penalty now, instead of 10% in say 20 years? Because in 20 years 10% will be much higher than it is now. Meaning if I take it out now and throw it into a brokerage account, I would be saving money in the long term by avoiding paying 10% on a much bigger sum in a decade or two?
It's a very personal choice on what to do with the funds. You can definitely do that. You could also leave the funds and change the beneficiary in the future (maybe grandchildren). You can basically setup the 529 plan as a dynasty education trust. You might find this helpful: thecollegeinvestor.com/42154/dynasty-529-plan/
I just read an article on dynasty 529 plans. Some people save money this way to pay for other generations to go to college. For example, if you’re kids don’t use it, you could give that money to your grandkids.
Yes, that's a great strategy to use to create a family education trust essentially.
Thanks well done!
Nicely done. Very simple. Thank you.
Can't find the answer. What if we Contribute $100,000 into 529 plan of our own money. And son doesn't go to college and we decide to take it out. Are we going to be taxed the money we put in or just the Growth part?
You are only facing a tax and penalty on the growth/earnings. But there are a lot of other choices you can make before you even get there (new beneficiary, yourself, future grandkids, IRA, K-12 education for future kids, etc.) See this article: thecollegeinvestor.com/41434/avoid-529-plan-penalty/
There is a small amount of funds left in the 529 plan my parents created for me. Can the beneficiary be updated from myself to a grandchild?
Absolutely. In fact, grandparent 529 plans will become even more lucrative next year from a financial aid perspective due to FAFSA changes. See this: thecollegeinvestor.com/38293/help-grandkids-pay-for-college/
@@Thecollegeinvestor thank you sir
I’m not going to school because I’m in a trade but my grand parents had a account open for me with money in it I think it was a 529 plan hm would the fee cost to get the money out if it was around 50 grand
Thank you for this video. It was very informational. Suppose I live in California where there are no tax benefits for contributing to a 529, and I have multiple kids close in age, would it make sense to contribute to a single account or have separate accounts? Furthermore, would I be able to transfer a partial amount to another account if my second child decides to go to college, while my first child is already attending college?
We always recommend separate accounts per child. Use a tool like CollegeBacker to make it easy! thecollegeinvestor.com/31692/collegebacker-review/
Seems like the more would grow more w 1 account. Why do they nerf separate accounts?
@@ddo920 you have to designate a beneficiary of the account. If you have 2 children in college at the same time, you could not legally withdraw for the 2nd child as they are not the beneficiary. The 2 smaller accounts will grow at the same rate as 1 larger account.
Can you use the funds to pay for trade school? I live in Louisiana
Yes, you can use 529 plan funds for trade schools. See our guide: thecollegeinvestor.com/529-plan-guide/louisiana/
Is there a way to use the money for a child who isn't my own?
Yes, you simply select an account beneficiary for who you want. You can change the beneficiary once per year.
@@Thecollegeinvestor even if there's no legal or blood relation?
@@josephrusso87 Yes, it can be anyone - no relationship/blood/family required. The only requirement is that the beneficiary must be a US citizen or a resident alien, and must have a social security number or federal tax identification number.
Wow, inaccurate info on 529 withdrawal for non-qualified expenses! You also have to pay income taxes at your current normal rate *in addition to* the 10% penalty on the gains. This can be especially painful if the added income from this non-qualified withdrawal drives you up into a higher tax bracket. So in the video example, you'd pay the $2,000 penally PLUS, let's say your marginal tax rate is 15%, an additional $3,000 income tax. So of that $20,000 gain in your 529, you'd only net $15,000. And worse, if this withdrawal drives you into a higher tax bracket, the $3,000 added income tax might be just the start - you might pay higher income taxes on your existing income that falls in that higher bracket.
thank you
what about for someone like me, i plan to go to university in Europe, could 529 be used for that?
Maybe. Depends on the school. See this guide: thecollegeinvestor.com/19627/can-use-529-pay-college-overseas/
Where do you open a 529? Bank?
Typically, the best 529 plan is offered by your state. Find your state here and see what plan is best for you: thecollegeinvestor.com/24499/529-plan-where-to-open-in-state/
If you take the withdrawal penalty, are the funds taxable, on top of the 10%?
The earnings are taxable, and yes you pay taxes on the earnings. Your withdraw is pro-rata contributions and earnings. So if you contributed $1,000 and it grew to $10,000, your taxes would be on $9,000. But even if you withdraw $100, the taxes are on $90.
I have 129k in myn but my job pays me 100k and I don’t need schooling so how do I take this out ? I’m 18 edit: looking to buy a house and cheap car
Can you open a 529 for yourself? And not for kids?
Yes! I don't know if I have a video on it, but we have this article on it: thecollegeinvestor.com/18214/using-529-uses-benefits/
@@Thecollegeinvestor thanks ! One more question I have an existing student loan can I use it to pay off that?
That depends on your state. Federally, you can use $10,000 from a 529 one-time to pay down student loan debt. However, not all states allow this. Depending on your state, if you do it, you could owe taxes and/or penalties on the amount withdrawn. See our 529 Plan Guide by State, find your state, and see what is allowed: thecollegeinvestor.com/529-plan-guide/
@@Thecollegeinvestor is that one time 10k penalty free and except from taxes?
@@ljrockstar69 It's tax and penalty free as long as your state allows it.
Was that WRONG, or I am wrong??? If 27K contributed (post tax) + $20 LT growth. WONT you be paying $20K x 15 or 20% LTCG tax , so $3 or 4K, PLUS 2K, hence end up with either $41 or $42 K. How do you end with $45K. EXPLAIN or CORRECT the video
I need help
I have some questions
Do not listen to this terrible advice. She completely missed the income tax implications.
Finally a hot investment girl been studying and it’s been all old white men
Thank you