Tag Archive for: 529 plans

How Can I Give My Kids a Head Start on Investing?

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The earlier you start investing, the better. You’ve likely heard this advice before, and hopefully it’s helped you make some smart financial moves. But there’s one group that may not yet know this bit of investing wisdom: the kids in your life.

Whether you have kids, grandkids, or nieces and nephews, these youngsters have an enormous asset on their side: time. Helping them get an early start with investing can give them a huge financial boost. The good news is that there are a lot of ways you can help set up the next generation for financial success. Let’s explore some options.

529 Plans: A Great Tool for Future Education Costs

With rising education costs, 529 plans are often the first type of investment account that parents open for their children. It makes sense. They’re one of the best tools available for long-term education savings. 

You probably already know the main benefits: tax-deferred investment growth, tax-free withdrawals for qualified education expenses and no federal contribution limits (though gift tax may apply beyond annual contributions of $19,000 for 2025). Friends and family can contribute, and funds can be used for a growing range of expenses: college, of course, but also up to $10,000 per year for K–12 tuition. And excess funds can be rolled over to another family member, used to pay for grad school or even used to pay off student loans. 

Custodial Accounts: More Flexibility but Less Control

But what if you want to help your child invest toward future expenses not covered by a 529 plan, like car repairs, travel or the down payment on a house? That’s where custodial accounts might be appropriate. UGMA (Uniform Gifts to Minors Act) and UTMA (Uniform Transfers to Minors Act) accounts are typically easier to set up than a trust and can accomplish some of the same goals.

Custodial accounts let you invest in a variety of assets in a child’s name, including stocks, bonds, mutual funds and even real estate. UTMA accounts also let you hold complex assets like art and intellectual property. There are no contribution limits, and the funds can be used for anything that benefits the child while they’re still a minor. However, your child takes complete control over the account when they reach adulthood (usually age 18–21, depending on the state). At that point, they can use the funds for any purpose.

Note that investment earnings may be subject to the so-called kiddie tax. For 2025, that means the first $1,350 of unearned income is tax-free, the next $1,350 is taxed at the child’s marginal rate, and anything above that may be taxed at the parent’s marginal tax rate. Another word of caution: Custodial accounts are considered the child’s asset, which may impact financial aid eligibility more than a 529 plan would.

Roth IRAs: Even Kids Can Start Saving for Retirement 

If you’re thinking even longer-term, you can help your kids start saving for retirement by opening a custodial Roth IRA on their behalf. Roth IRAs allow them to enjoy decades of tax-free investment growth and tax-free withdrawals in retirement. 

To fund any IRA, the child must have earned income—such as from babysitting gigs or slinging ice cream over the summer. Those contributions cannot exceed their total earnings or the $7,000 annual limit (for 2025), whichever is lower. Then, once the child reaches adulthood (usually 18–21, depending on the state), they can transfer those savings to a new account to keep building a bright financial future. 

Beyond Investment Benefits: Teaching Financial Literacy

One of the best financial gifts you can give a child isn’t just money—it’s knowledge. And opening an investment account is an opportunity to introduce your family to some of the most important concepts in personal finance. 

You can start by talking to your kids about budgeting, saving and what it means to invest. Review account statements with them to highlight the power of compounding and the benefits of tax deferral. Use the target-date portfolios in a 529 plan to teach your kids about the value of diversification. Bring them into decisions when picking investments for a custodial account or Roth IRA. It’s a great chance to discuss the long-term advantages of choosing broader market exposure over trying to pick single stocks. 

The earlier a child understands how money and investing works, the better their odds for achieving long-term financial goals. We’re here to help you give them that head start—whether it’s setting up accounts, discussing financial strategies or sharing more ideas for teaching kids about money.

Veronica Cabral

Wealth Advisor, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

What to Do With a 529 Balance

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Watching your child earn a college diploma is a proud moment for any parent. It also marks another great moment: No more tuition bills. But after all the saving and planning you’ve done, what if there’s still money left over in your child’s 529 plan? Fortunately, you’ve got plenty of options. Here’s a list of strategies to make the most of those surplus education savings.

Keep Paying for School

If your newly minted graduate is pursuing a higher degree, that’s an easy way to spend down the balance in their 529 plan. These funds can be used to cover the same types of qualified educational expenses for graduate programs.

Name a New Beneficiary

If grad school isn’t in your child’s future, the most straightforward option for surplus funds is to assign the 529 account to a new beneficiary. You can change beneficiaries with no penalties or tax consequences, but the person must be related to the original beneficiary by blood, marriage, or adoption. That definition is broader than it sounds: For example, it includes in-laws, first cousins, first cousins’ spouses, and stepparents. You can even name yourself as the new beneficiary and spend the funds on your own continued education.

Repay Student Loans

If your graduate has taken on student loan debt, you can use 529 funds to help pay it down, subject to a lifetime limit of $10,000. You can also use up to $10,000 per sibling to repay their loans, which you can do without changing the beneficiary.

A few things to bear in mind: Most, but not all, student loans qualify. Private student loans must meet several criteria to be included in the program. For example, they must have been used solely for qualified education expenses for a degree or certificate program at an institution eligible for Title IV federal student aid. And they can’t be personal loans from a family member or a loan from a retirement plan. 

Also, 529 plans are run by states, and their rules don’t always align perfectly with federal legislation. We can help you check your 529 to see whether withdrawals for student loan payments will trigger any state tax penalties.

Roll Over Funds Into a Roth IRA

The SECURE 2.0 Act of 2022 added a brand-new option for unused 529 funds. If your 529 plan is at least 15 years old, you can transfer up to $35,000 into a Roth IRA in the beneficiary’s name with no taxes or penalties. 

The biggest limitation with this option is that rollovers are subject to the annual $7,000 Roth contribution limit. (If the beneficiary is 50 or older, that amount rises to $8,000.) You also can’t roll over more than the income earned by the beneficiary in that tax year. Any other contributions made to your beneficiary’s traditional or Roth IRA will reduce the amount you can roll over that year.   

Take the Money…and the Penalty

If you spend 529 funds on nonqualified expenses, you’ll be charged federal income tax and a 10% penalty on the earnings portion of your withdrawal. While doing so isn’t always ideal, it is an option—and sometimes, it may be the best one. For example, if you face a pressing financial need and your only other choice is to take on high-interest debt, paying the taxes and penalties on a nonqualified 529 withdrawal may be less expensive in the long run.

It’s also possible that the earnings portion is small enough to render the penalty insignificant. Let’s say you had $500 dollars left in the account, with contributions accounting for $420. In that case, only $80 would be subject to taxes and penalties. You might decide it’s worth taking the hit to be able to close the account and move on.

The bottom line is that 529 college savings plans have more flexibility than you might think. Reach out, and we will gladly help you weigh all the options for leftover funds. Congratulations to all the recent grads out there—and to the parents who helped foot their tuition bills.

Bryan Cassick, MBA, CFP®

Wealth Advisor, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

Secure Act 2.0: Spending Today, Saving Tomorrow

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It can be hard to save for your future retirement when current expenses loom large. We advise proceeding with caution before using retirement savings for any other purposes, but SECURE 2.0 does include several new provisions to help families strike a balance. 

  • Student Loan Payments Count as Elective Deferrals (2024): If you’re paying off student debt and trying to save for retirement, your student loan payments will qualify as elective deferrals in your company plan. This means, whether you contribute to your company retirement plan or you make student loan payments, your employer can use either to make matching contributions to your retirement account. 
  • Transferring 529 Plan Assets to a Roth IRA (2024): This one is subject to a number of qualifying hurdles, but SECURE 2.0 establishes a path for families to transfer up to $35,000 of untapped 529 college saving plan assets into the beneficiary’s Roth IRA. With proper planning, this may help families “seed” their children’s or grandchildren’s retirement savings with their unspent college savings.
  • New Emergency Saving Accounts Linked to Employer Plans (2024): SECURE 2.0 has established a new employer-sponsored emergency savings account, which would be linked to your retirement plan account. Unless you are a “highly compensated employee” (as defined by the Act), you can use the account to save up to $2,500, with your contributions counting toward matching funds going into your main retirement plan account. 
  • Relaxed Emergency Plan Withdrawals (2024): SECURE 2.0 relaxes the ability to take a modest emergency withdrawal out of your retirement plan. Essentially, as long as you self-certify that you need the money, you can take up to $1,000 in a calendar year, without incurring the usual 10% penalty for early withdrawal. Once you’ve taken an emergency withdrawal, there are several hurdles before you’re eligible to take another one.
  • Additional Exceptions to the 10% Retirement Plan Withdrawal Penalty (Varied): SECURE 2.0 has established new exceptions to the 10% penalty otherwise incurred if you tap various retirement accounts too soon. For example, there are several new types of public safety workers who can access their company retirement plans penalty-free after age 50. Various exceptions are also carved out if you’re terminally ill or a domestic abuse victim, or if you use the assets to pay for long-term care insurance. The Act also has modified how retirement plan assets are to be used for Qualified Disaster Recovery Distributions. Many of the new exceptions are fairly specific, so check the fine print before you proceed. 
  • Relaxed Emergency Loans from Retirement Plans (2023): If you end up living in a Federally declared disaster area, SECURE 2.0 also increases your ability to borrow up to 100% of your vested plan balance up to $100,000, with a more generous pay-back window. 
  • Expanded Eligibility for ABLE Accounts (2026): ABLE accounts help disabled individuals save for disability expenses, while still collecting disability benefits. Before, you had to be disabled before age 26 to establish an ABLE account. That age cap increases to 46. 
  • A Tax Break for Disabled First Responders (2027): If you are a first responder collecting on a service-connected disability, at least a portion of your disability payments will remain tax-free, even once you reach full retirement age and begin taking a retirement pension. 

Next Steps

If you missed the first part of the blog series, we discussed key provisions in the newly enacted SECURE 2.0 Act of 2022, including updates that impact (1) savers/investors and (2) employers/plan sponsors. Check in next week for the last part of this blog series, where we share tax planning tips under this new Act. 

Justin D. Rucci, CFP®

Wealth Advisor, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

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