WARNING: Don’t overfund your 529 Plan!

We see this mistake most often with new members who have older children and have already saved for college.

The Problem

If you overfund your kid’s 529 Plan, you could pay up to 57% in taxes and penalties.

Eek!

How do you overfund a 529?

Well if you saved enough to send Junior to a Stanford/Yale/Harvard and he ends up going to a state school, then he won’t need all the money you saved.

So he could finish school and still have money in his 529 Plan.

If you take money out of a 529 Plan and don’t use it for school, then you’ll get taxed ordinary income (your tax bracket) PLUS a 10% penalty on the gains.

I’ll spare you the calculation, but if you saved for Stanford and he goes to Berkeley, you could end up paying $97,000 in taxes simply because you didn’t plan it right.

The Solution?

We call it a Stanford fund.

First, you fill up your 529 Bucket with enough to send Junior to UC Berkeley.

THEN if you want to save enough for Stanford, you put the excess in a regular old brokerage account. 

Sure, you’ll lose the tax advantages of a 529, but you won’t overfund it, and overfunding it is FAR more costly than paying long-term capital gains.

Then if he goes to Stanford, great. You’re covered.

And if he doesn’t go to Stanford, great. It turns into extra retirement savings for you.

The Rough Numbers

You’ll need $500k for Stanford in 18 years. If you save ~$160k today and invest it correctly, it will grow to $500k by then.

You’ll need $250k for UC Berkeley in 18 years. If you save – you guessed it – $80k today, it will grow to $250k in by then.

So in this example, you’d put $80k in the 529 Plan today and then another $80k in the Stanford Fund.

Financial Zen Masters don’t waste money, and I can think of no bigger waste of money than paying more taxes than you need to.

Talk to your financial professional about your particular situation and if you don’t have one, you can schedule a Discovery Call with us.