Saving early matters | NY 529 Direct Plan (2024)

FAQs

How much is $100 a month in a 529 for 18 years? ›

This chart shows that a monthly contribution of $100 will compound more if you start saving earlier, giving the money more time to grow. If you save $100 a month for 18 years, your ending balance could be $35,400. If you save $100 a month for 9 years, your ending balance could be about $13,900.

Investment choices can be limited

But 529 plans are administered by each individual state, and the plans may not offer an attractive investment opportunity, depending on which plan you choose. For example, some state plans may offer only high-cost funds or a limited selection of funds.

At today's world, I would underfund your 529 … The higher ed landscape is going to change so much in the next 18 years as the student loan epic failure debacle unfolds,” Ramsey said. “They have been overcharging for too long, and it's come home to roost. And people are not going to college in record numbers …

It's important to note that your investments can fluctuate, and you can lose money in a 529 plan. Your purchasing power can also decrease due to inflation, which means your investments may not keep up with the cost of college.

Ideally, you should save at least $250 per month if you anticipate your child attending an in-state college (four years, public), $450 per month for an out-of-state public four-year college, and $550 per month for a private non-profit four-year college, from birth to college enrollment.

Once the account owner/beneficiary becomes an adult, they assume control over the 529 plan. With an individual 529 plan, the owner is usually a parent or other adult who saves money on behalf of a chosen beneficiary, typically their child.

Then, at the end of December, the Department of Education revised the Free Application for Federal Student Aid (FAFSA), creating the so-called grandparent loophole. The grandparent loophole allows grandparents to use a 529 plan to fund a grandchild's education without affecting the student's financial aid eligibility.

It's easy to see why Americans don't embrace 529 plans. They often have limited investment options, high fees, complicated rules and anxiety-producing investment risks. All that said, the plans may ultimately be worthwhile for most families, as long as parents choose carefully. Focusing on fees is crucial.

With the new regulations, 529 plan account owners or beneficiaries can roll over 529 funds into a beneficiary-owned Roth IRA tax-free and penalty-free as of January 1, 2024, subject to the limitations described below. If you qualify, this can be a great way to help kick start a beneficiary's retirement savings.

529s are funded with after-tax dollars, which means that over time the investments grow tax-free. These plans are attractive for wealthy families because they provide a way for a parent or grandparent to transfer much more money to a child than they would be able to without incurring gift taxes, Stokes says.

Is there anything better than a 529 plan? ›

Some 529 alternatives include using a custodial account, Roth IRA or Coverdell Education Savings Account.

Average 529 Balance and More Savings Statistics

In June 2022, the average 529 balance was $25,903. In June 2021, the average 529 balance was much higher at $30,287.

IRS rules for liquidating a 529 plan

To claim the loss, the 529 plan account had to be completely liquidated, and any non-qualified distributions would be subject to income tax and a 10% penalty on the earnings portion of the distribution.

529 Plans

There are two major advantages to 529s. First, unlike a Roth IRA or 401(k), you can contribute as much as you like until you meet a specific balance (often $400,000). Second, you won't be taxed on your investments as they grow. And finally, you can withdraw money tax-free.

Must only be used for education

Only certain education expenses qualify, so you need to make sure you're withdrawing money for qualifying expenses to avoid taxes. If you use 529 savings plan funds for non-qualified withdrawals, they may incur a 10% penalty. And they may be subject to federal income tax.

For in-state, four-year, public college: minimum $300 per month. For out-of-state, four-year, public college: minimum $500 per month. For private, non-profit, four-year college: minimum $650 per month.

The 5-Year Election

Individuals may contribute as much as $90,000 to a 529 plan in 2024 ($85,000 in 2023) if they treat the contribution as if it were spread over a five-year period. The 5-year election must be reported on Form 709 for each of the five years.