7 Smart Moves To Make When Your Child's 529 Account Hits $20K
Your child's 529 account has crossed $20,000, which may feel significant enough to pause. But is this the moment to relax, reallocate or rethink your whole strategy?
Financial experts say the answer is more nuanced than you might expect. Here are seven things to do when your child’s 529 plan hits $20,000.
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1. Don't Stop Contributing
The first thing to do when a 529 plan hits $20,000 is to look at the full picture of costs remaining, according to Chad Gammon, a certified financial planner (CFP), enrolled agent (EA) and owner of Custom Fit Financial. Then, keep contributing, because college costs often end up being more than parents have bargained for.
Michael Cano, a certified public accountant (CPA) and founder of FirstStep Financials, reminded parents that while saving $20,000 feels great, “college savings is a long game.”
After all, if the account runs short, and you're using this as the main account to pay for college, then what resources do you have left to pay the expenses? Asked Jeff Stouffer, a CFP and investment expert with JustAnswer.
2. Don’t Withdraw Too Soon
Additionally, parents can run into tax problems around when they take the money out to make payments. Stouffer warned not to take the money out too early.
“If funds are withdrawn in December and not spent until the following January, there will be an adverse tax impact," he said.
3. Reassess Your Investment Allocation
Some parents might think that once they cross the $20,000 mark, they should make a portfolio shift. However, Cano doesn't recommend an allocation change based on balance, but on the child's age. For example, a five-year-old and a 17-year-old with the same balance should likely have very different allocations.
"The time to reduce risk is when kids hit middle school, and then you can get more conservative once your child goes into high school," according to Cano.
And as the child enters their senior year of high school, Cano said, the savings target “should reflect actual schools being considered, expected scholarships and realistic costs."
4. Consider Superfunding
For families who have the means, there are opportunities to “superfund,” Gammon shared, where you contribute up to five years’ worth of contributions in a lump sum. “You won't be able to make more gifts for a five-year period.” This can help super charge your savings through compounding.
That super funding can also extend across a family, Stouffer said, with different family members gifting money each year up to five years.
For families who can't front-load or superfund, Cano said, "Consistency beats complexity. Automatic monthly contributions are often the strategy that wins."
However, Gammon warned that if multiple family members, such as parents and grandparents, have opened 529 accounts for the same child, there could be an overfunding problem. He recommended talking through a strategy with the family.
5. Know The Full List of What 529 Funds Can Cover
Many families operate under a "tuition only" assumption that leaves qualified tax-advantaged dollars on the table. Gammon shared that qualified expenses can include room and board, books, fees, and certain technology expenses.
Additionally, Gammon said, "The 529 can be used for room and board if the student is enrolled at least half-time.”
Beyond traditional four-year programs, Stouffer noted that 529 funds can cover registered apprenticeships, required books, equipment, speech therapy and trade school education.
6. Keep Saving -- Don't Fear the Financial Aid Impact
Some people under save in their 529s because their fear their child won’t qualify for financial aid, but it’s better to have assets and not depend upon aid.
Financial aid is reduced by 5.64% of the balance of the 529 account, Stouffer said, and any assets owned by the student will cause a 20% reduction in financial aid.
A 529 balance should not stop parents from saving at the cost of losing financial aid, Gammon urged. Also, remember that unused 529 plans can be rolled over into Roth IRAs for children’s retirement benefit down the line.
7. Keep Up Retirement Planning
While saving for a child’s college experience is important, Cano reminds parents not to sacrifice retirement planning or funds to fully fund a 529.
“There are many ways to pay for college,” he said. “There aren't scholarships for retirement."
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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