Dave Ramsey's Top Fidelity Funds For 529 Plans

Financial expert and host Dave Ramsey is a proponent of 529 plans, which are tax-advantaged savings accounts designed to encourage saving for educational costs. However, he advises against overfunding them. In an episode of his show, he responded to a caller asking how much to put in his child's 529 plan, saying he should put in $20,000 at most. He believes that the higher education landscape will change significantly in the coming years, with the demand for college decreasing and prices dropping. 529 plans offer tax benefits, such as tax-free withdrawals for qualified education expenses and tax deductions for contributions. However, there are penalties for withdrawing funds for non-qualified expenses, and it's important to consider the investment options and fees associated with different plans.

Fidelity-managed 529 plans offer a range of investment options

If you want a professionally managed portfolio that automatically adjusts the asset allocation based on your beneficiary's age, then an Age-Based portfolio might be right for you. Age-Based Portfolios are mapped to a beneficiary's year of birth and the approximate year the beneficiary is anticipated to start college. Each portfolio is managed with the asset allocation automatically becoming more conservative as the beneficiary nears college age.

If you prefer to choose your own mix of professionally managed portfolios that align with your risk tolerance or preferred investment exposure, then selecting from Static or Individual Fund portfolios might be right for you. Static portfolios offer a combination of equity, fixed income, and cash that remains the same over time, while Individual Fund portfolios offer equity, fixed income, money market, and bank deposit options.

Fidelity also offers a national 529 plan, the UNIQUE College Investing Plan, which is sponsored by the state of New Hampshire. This plan may be a good option if Fidelity does not manage a plan for your state. However, it is important to consider your own or the beneficiary's home state 529 plan, as some states offer favorable tax treatment or other benefits to their residents.

Prepaid 529 plans are restrictive

Another restriction of prepaid 529 plans is that they are generally offered by specific colleges or private organizations, and the funds can only be used at those participating schools. In contrast, education savings plans are much less restrictive and can be used at a wider range of educational institutions. Prepaid tuition plans also usually cannot be used to pay for future room and board at colleges and universities, and they do not allow you to prepay for tuition for elementary and secondary schools.

Furthermore, prepaid 529 plans may not offer as much financial benefit as you might think. While they allow you to lock in future tuition costs at current rates, investing in good growth stock mutual funds can often provide higher returns over time. Additionally, 529 savings plans offer more flexibility, as they can be used for a broader range of qualified expenses and do not have the same restrictions on usage and school choice.

Overall, while prepaid 529 plans can be a way to save for future college expenses, they come with a number of restrictions that may limit their usefulness. It is important to carefully consider the limitations and compare them with other investment options before deciding on the best way to save for your child's education.

529 plans are tax-advantaged

Moreover, over 30 states and the District of Columbia offer tax deductions or credits for 529 plan contributions. For example, New York residents can deduct up to $5,000 ($10,000 if married and filing jointly) from their state income tax. In South Carolina, New Mexico, and West Virginia, 529 plan contributions are fully deductible when calculating state income tax. These state-level benefits can further enhance the tax advantages of 529 plans.

Another tax advantage of 529 plans is the ability to reduce your taxable estate through accelerated gifting. This allows you to contribute up to five years' worth of gifts (up to $90,000 for individuals or $180,000 for married couples filing jointly) in a single year without incurring gift taxes. This strategy can help maximize your college savings while minimizing the impact on your taxable estate.

Furthermore, 529 plans offer flexibility in terms of investment options. While there are no annual contribution limits, there may be state-imposed maximum aggregate contribution limits, typically ranging from $235,000 to over $550,000. 529 plans also allow for tax-free rollovers to Roth IRAs, providing additional tax advantages for education savings.

Lastly, 529 plans are highly flexible in terms of usage. While the primary purpose is to save for college, the funds can also be used for other qualified expenses, such as K-12 tuition, apprenticeship programs, and student loan repayment of up to $10,000 lifetime. This flexibility ensures that the money in a 529 plan can be utilized in multiple ways to support education-related goals.

529 plans are flexible

529 plans are a great way to save for your children's education, but they also offer flexibility in several other ways.

Firstly, 529 plans are flexible in terms of investment options. While you can choose a prepaid plan that locks in future college expenses at current tuition rates, you may also opt for a savings plan that allows you to invest in various investment options, including age-based funds. These funds automatically shift from more aggressive to more conservative investments as your child gets closer to college age, allowing you to potentially achieve higher returns in the earlier years while preserving wealth in the later years.

Secondly, 529 plans offer flexibility in terms of state choice. Although each state handles 529 plans individually, you are not restricted to investing in your own state's plan. You have the freedom to choose the state that offers the best benefits for you, regardless of whether you've lived there or not.

Thirdly, 529 plans provide flexibility in terms of beneficiaries. If you don't use the funds for one child, you can transfer the money to another child or grandchild. This feature ensures that the money doesn't go to waste and can be utilized within the family for educational purposes.

Additionally, 529 plans offer flexibility by allowing you to use the funds for a range of educational expenses beyond just college tuition. You can typically use the money for K-12 tuition, apprenticeship programs, books, room and board, and even computers. This flexibility ensures that you can cover a variety of education-related costs.

Lastly, 529 plans now offer the option to roll over unused funds to a Roth IRA after 15 years. This feature, introduced by the Secure Act 2.0, allows beneficiaries to boost their retirement savings if they have money left over after college or if they don't attend college at all.

In conclusion, 529 plans provide flexibility in investment options, state choice, beneficiary changes, eligible educational expenses, and the ability to roll over unused funds to a Roth IRA. These features make 529 plans a versatile tool for saving and investing in education.

529 plans are not for everyone

First and foremost, 529 plans are designed specifically for education savings. If you are not planning to use the funds for education, you will face penalties for non-qualified withdrawals. These include income tax and a 10% tax penalty on the earnings portion of the withdrawal. It's important to ensure that you are financially ready to invest in a 529 plan and that saving for your child's college is a priority for you at the moment. If you have other debts or financial goals, such as paying off consumer debt or building an emergency fund, it might be better to focus on those first.

Additionally, 529 plans have limited investment options, and you must select from a menu of investment portfolios offered by the plan. This may restrict your ability to choose investments that align with your risk tolerance and preferences. The fees and restrictions associated with 529 plans can also vary, and it's important to understand all the specifics before investing.

Furthermore, while 529 plans offer tax benefits, these vary from state to state. Be sure to check the details of the plan in your state to understand the specific tax advantages and restrictions. For example, some states offer tax deductions or credits for contributions, but these may only apply to residents investing in their own state's plan.

Lastly, keep in mind that the account owner of a 529 plan has legal control over the funds. This means that if you are not the account owner, you may not have a say in how the funds are used or distributed.

In conclusion, while 529 plans offer a tax-advantaged way to save for college, they may not be suitable for everyone. It's important to consider your financial goals, investment preferences, and the specific rules and benefits of the plan in your state before deciding if a 529 plan is right for you.

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