Opening a 529 Plan When You Don’t Have Any Kids

What do you do with your extra savings when you run out of tax advantaged retirement accounts to put your money in? Mr. Chedda and I ran into this problem (but can you really call it a problem?) earlier this year.

We each filled up our IRAs in January, and we’re on track to max out our job sponsored retirement plans (his 401(k) and my TSP) by the end of the year. We have a substantial emergency fund in cash and some backup emergency money in taxable investments. And we still have money left over!

The quest to pay as little as possible in taxes brought us to an interesting idea. What if we opened 529 plans for ourselves? Would we be able to use all the money in them? What the heck is superfunding?

Mr. Chedda and I are now proud owners of two Virginia529 plans with $4,217.75 in each one. (It really tickles me that since we opened them on the same day and invested the same amount in the same funds, the two balances are always exactly the same.) He owns one that I’m the beneficiary of, and I own one that he’s the beneficiary of.

So why did we choose to contribute to Virginia 529s?

We live in Virginia

We live in the DC suburbs in Virginia. If you don’t, you could still invest in a plan from any state you want, but your own state might offer you more tax advantages.

Virginia529 Plans Offered us State Tax Deductions

The state of Virginia allows any person to deduct up to $4,000 a year in 529 contributions on their VA state taxes. Mr. Chedda and I each contributed $4,000 to a 529 plan. Coincidence? Uh, no. We did it for the tax advantage!

Most of our income is taxed at the highest VA state tax level, which is 5.75%. To deduct $4,000 of income from our taxes saves us .0575 x $4,000 = $230.

So together we saved $460 by hiding our extra money away in a 529 plan. Not bad!

We can invest our 529 contributions in low-fee index funds

Virginia529 has what is basically an invest-it-yourself option called inVEST. If you contribute to a VA 529 inVEST plan, you can invest money within that plan in Vanguard index funds.

All of our 529 money is invested in the creatively named “Stock Index” fund (which is the institutional version of Vanguard’s total stock market fund, VTSAX).

529 plan
Testudo, the University of Maryland mascot. Will we end up giving him our 529 funds?

The expense ratio on that fund is 0.12%. (Before July 2016 it was actually 0.17%, but they lowered it just in time for us to get in!) That’s not the lowest fee level we have our investments at, but it’s still pretty low and it’s worth it to get all the tax advantages of a 529 plan.

The inVEST plan is actually such a low-fee, high-quality plan that it was given the Morningstar Gold rating this year, one of only 3 plans nationwide to rate that highly.

(The RetireBeforeDad blog did a great rundown of all of the VA 529 options to be had, which I referred to several times when deciding how to start and invest in our 529 plans.)

You don’t pay taxes on investment growth

This is a biggie! Straight from the VA 529 website: “You pay no income tax as your contributions grow and no income tax when you use the funds for the beneficiary’s qualified higher education expenses.”

We don’t plan to withdraw most of the money from these accounts for decades. Those years and years of investment growth will (hopefully) mean many thousands of dollars will be added to our 529 plans by the stock market.

Since that growth will be within our 529 plans, we won’t have to pay income or capital gains tax on it when we withdraw the money! That’s huge!

We’re sure we’ll use the money without paying a penalty

If we withdraw money from our 529 plan for reasons other than qualified higher education expenses (college), we’ll be charged a 10% penalty on earnings and our earnings won’t be tax free.

Therefore, we definitely wanted to make sure that we would only withdraw our funds from the 529 plan under circumstances that didn’t trigger the penalty fee.

529 plan
We could use our 529 funds to take photography classes! Mr. Chedda’s photography classes in college yielded this lovely photo!

We might use it ourselves

I’m currently enrolled in a Master’s in Statistics. RIght now, my work and a tiny bit of money left over from my own 529 (thanks mom, dad, and my college scholarship!) are paying for my tuition.

But, if I switch jobs before I finish the degree, or if they stop wanting to pay for it, or if one of us wants to do different classes toward another degree (do we each need more than two?) we could withdraw 529 funds penalty free to pay for that kind of expense.

We can use it to “superfund” a future kid’s 529

This is the most likely option. We don’t have any kids, but we’re a young, married, healthy (at least in the reproductive sense), heterosexual couple who plans on having children, so we’ll probably end up having at least one child.

Right now, though, Mr. Chedda and I are the beneficiaries of our accounts. If we want to pay for a kid’s education expenses we’ll have to transfer the 529 to them. And transferring a 529 can incur a gift tax (that the giver has to pay) if the account is worth more than $14,000.

The way to get away with transferring more than $14,000 (but less than five times that) from your 529 to your child’s? SUPERFUNDING!

Basically, you can gift your kid (or anyone else) your 529 all at once, but file a form that will make your gift effectively spread out over the following 5 years. So instead of being able to gift $14,000 without tax implications, you can gift up to $14,000 x 5 = $70,000 per gifter. You then don’t contribute any more money for the next five years.

So we’ll probably make several more years’ worth of $4,000 contributions to each of our 529 plans before we ever have kids. Then, when we do have a kid, we can gift it all of the accrued money at once!

The last ditch option—try at your own risk

529 plan
Mr. Chedda also took this one that I really like

If we can’t find a way to spend our 529 plan investments on qualified

educational expenses for either of us, for our potential offspring, or for our cute niece who we might end up contributing some money to for college anyway, there are some more outlandish options.

People on the internet have many bright ideas about how to withdraw money from your 529 plan penalty free. I’m not sure how many of them are fraudulent…

For example, some have suggested that you can name your frail, trusted grandmother as the beneficiary of your plan. When she dies in the near future, you can withdraw your contributions and earnings without penalty, though you will have to pay income taxes on the earnings.

Or, more in the spirit of education, you could plan a trip for yourself to some far flung corner of the country where you immerse yourself in a course on horticulture, or fromagerie, or whatever the heck you can find that counts as “higher education.”

We aren’t worried

The point is: we are not worried. So far we have a piddly $8,000 invested in 529 plans. As our plans for kids and further education firm up, we’ll decide exactly how much to contribute. And in the mean time, we’ve already saved ourselves $460 on our state taxes!

 

What do you think? Are we planning too far ahead? Do you have a 529 that you’re not totally sure what you’ll do with?

4 thoughts on “Opening a 529 Plan When You Don’t Have Any Kids”

  1. I did this exact same thing, although as more a test so that I would know what I was doing when I ultimately do have children. Since I don’t have any children, I opened up a 529 plan in my own name and put in $25 per month. I consider it a good cost to have some background in how a 529 plan works before I have children.

    My state doesn’t offer a tax deduction, so I decided to go with the NY 529 plan. They have Vanguard funds, allow you to invest as little as $25, and have expenses ratios of 16 basis points. Ended up putting my money in the aggressive growth fund, which is 70% total stock market fund and 30% total international fund.

    Really think it’s a good idea for most people who plan to have kids to at least get a bit of knowledge in how 529 plans work before children enter the picture.

    1. Whoa, $25 is an unusually low minimum investment! I think Virginia’s is $250 within the first year.

      I really feel like at the level you (or I) are contributing, there’s no downside to opening a 529. It will almost certainly save you some money in the long run, as you as you aren’t hurting for cash in the mean time.

  2. I’m impressed with your plan (and Financial Panther’s too). With no children in the picture I haven’t focused on understanding 529s. But I didn’t realize there’s a lot of built in flexibility. Great move!

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