Stuck with big losses in your 529 account this year?
The Wall Street Journal reports on a way you may be able to deduct these losses. But be forwarned: there are many caveats, especially if your state offered up front tax benefits for your contributions. And if you child isn’t going to school in the next year or two, do you really want to withdraw funds from your 529 account with stock prices are this low?
Here’s the explanation, in part:
Imagine a couple that put $120,000 into a 529 tax shelter for a grandchild a year ago. If the market had continued to boom, that money would have grown tax-free. As long as it was eventually spent on qualified tuition expenses, no tax would have been paid on withdrawals. These 529 plans are terrific tax shelters for middle-class couples with children or grandchildren.
Obviously, though, investing has been a hazardous occupation of late. Imagine that same couple now looks at the 529 and realizes those investments have plunged to just $70,000 in value.
Yikes. That’s a $50,000 loss.
The couple can close the account and withdraw the money. At that point, they may be able to deduct nearly all of that loss from their taxable income. That wouldn’t restore all the money lost, but could at least soften the blow.
Many Americans may be missing out on this deduction. Most 529 plans are sold through financial advisors, but comparatively few know about this rule. (For those seeking more details, they can be found in IRS Publication 970, Tax Benefits for Education, page 51, and in the Federal Register, Vol. 73, No. 13, page 3445.)
Investments in 529 college savings plans seem to be declining as people worry about stock market losses.
This is a dumb move. Why you would contribute funds when the Dow was at 14,000 and not when it’s at 9,000 is beyond me.
But you need to be smart about it. If your kid is going to college in less than 5 years, most of your money should be in low risk investment options. Most 529 plans offer age-based plans that keep more of your money in less risky options such as bonds when your child gets closer to college.
Also keep in mind that your kid will be in college for about 4 years. So if your kid starts college in 5 years, the average time you have to keep your money in your 529 plan is another 7 years. 7 years is a long time in the stock market. After all, the stock market is currently at 5 year lows. It has gone up and dropped back down in a period of just 5 years.
If your state offers upfront tax deductions for contributing to 529 plans, then you have all the more reason to contribute. Scared about investing in stocks? Then just buy the low risk options in the 529 plan. They may only return 1-3% per year, but if you get an upfront tax deduction you’ll be laughing all the way to the bank.
With the stock market hurting everyone’s 529 plan, it’s nice to be able to do something to make your 529 go up.
FreshmanFund.com is offering up to 100 people a $5 gift certificate to FreshmanFund. You can transfer this to your 529 plan.
For details on how to get your certificate, visit:
http://529s.com/freshman-fund-gift-certificate.html
The Wall Street Journal just published an article about college planning and 529 plans in this turbulent stock market. Among the points it makes: if you feel the need to get your money out of your 529 plan and your kid is in college, ask the college if you can pre-pay for tuition and fees. If you pull the money out of the 529 plan now and pay for college later, you will have to pay the 10% fee for withdrawing and not using the money to pay for qualified college expenses.
Here’s a link to the article.
My daughter just turned 2, and I started investing in her 529 plan when she was about 3 months old. Needless to say, the account isn’t worth as much as I’ve put into it.
No one is happy about the global stock market crash. But that doesn’t mean you should stop contributing to 529 plans. Think about it this way. You may have “bought” the stock market at 14,000, and 13,000 and 12,000 and 11,000. Now that it’s cheaper, should you stop buying it? One of the nice things about 529 plans is they let you set up a regularly monthly contribution. If you stick to your plan, that means you buy into the market every month. This allows you to dollar cost average your investments.
Although my time horizon is long, you need to evaluate your strategy if your kid is going to college soon. Many 529 plans offer time horizon funds which automatically switch some of your money into bonds and less risky investments when your kid gets closer to college. That way a sudden crash in the market, like what we’ve seen lately, won’t keep you from being able to pay for college.
Unless you think the market will continue on a downward trajectory from now until when your kid goes to college, it probably makes sense to stick to your plan and keep investing on a regular basis.