Until now, I never had a 529 account. I don't have children. I am done with my education. Well, paid education anyway. Since 529 contributions are not tax deductible and withdrawals are only tax free for qualifying education expenses, I would not benefit from having a 529 account. That is, until now.
Today, I came across an article about how a bill (SECURE Act) with wide bipartisan support will soon allow tax free withdrawal from 529 plans to repay student loans up to $10,000. For more on the SECURE Act, which includes other retirement plan changes including part-time workers eligible for employer retirement plans, delayed RMD age by 18 months, ability to contribute to retirement accounts past age 70, annuity options in 401(k), etc. see here.
My first thought is, why haven't I heard about this before? This is huge! Many people have student loans and can save money on taxes. If I only knew about it sooner, I would have opened a 529 sooner and be sitting on nice gains right now! My second thought: what am I waiting for?
I still owe almost $6,000, $5844 to be exact, in student loans on a graduated repayment plan with 8 years left. My monthly payment is $35.70, scheduled to go up to $46.41 next month. Assuming the SECURE Act gets passed soon, I could start saving money because 529 plan earnings to pay back student loans will become tax free!
I already have account with Merrill Edge so I researched their 529 plans. They offer plan with no set up fees and investment option of S&P 500 equity index fund at 18 basis points. While that is 6 times higher than the 3 basis points charged by index funds if you are not using a 529 plan, I find the higher fee justified given the tax benefit. Also, I will not be investing that much money in a 529, so the 18 basis points won't be much on a dollar basis, only $1.80 per year per $1,000 portfolio value.
The question is how much to contribute? I have no children and might never have any education expenses in the future. So the 529 plan is just to repay my student loans. I don't want to contribute too much. I will be withdrawing when I have gains and not withdrawing when I have losses. Since the stock market is somewhat overvalued right now and a bear market is long overdue, chances of losses are pretty significant in the next few years. The market should be higher in 5 years though, even if we have a bear market during that time. I figure it is probably better to err on the side of under than over contributing. After some deliberation, I opened my very first 529 account with Merrill Edge, set allocation to 100% Equity Index Fund, and set up recurring contribution of $30 every month, starting on June 24.
If I keep this up for the next 5 years, I will have contributed a total of $1,800. My student loan remaining balance will be just under $3,000. Assuming a conservative 7% annual return (I'm factoring in a mild bear market in there), my contributions will be worth around $2,070, with around $270 earnings. Given 15% tax rate on qualified long term capital gains and dividends, I would be saving roughly $40 in taxes. I know, it's not much, but when you are on the journey to total freedom, every penny counts!
Note that 529 distributions to repay student loans under the SECURE Act won't qualify for student interest deduction. That won't matter to me, as I plan to continue working at least for the next 3 years and my income doesn't qualify for student interest deduction anyway. If I retire early after 3 years, I will probably end up in the 0% tax bracket, so again the interest deduction won't matter to me.
The risk of enrolling in 529 plan for me right now is that my time horizon of about 5 years may not be long enough to have investment gains if we enter a severe bear market during this timeframe. If someone invested in the index fund starting June 2007 for five years, one's total return would be -2.5% even with dividends reinvested. That is a risk I am willing and able to bear. The chance of the stock market with negative return over a 5 year period is low and I plan to withdraw anytime after passage of the Act as long as I have gains, so that should help mitigate the risk.
What do you all think? If you don't already have a 529 plan, does the SECURE Act make it worthwhile for you to open one?
That's all I have to say about it for now. I'm pretty excited. I'll let you all know how things turn out!
No comments:
Post a Comment