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529 Plan Rules: How to Maximize Your Plan

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice. It may not have not been reviewed, commissioned or otherwise endorsed by any of our network partners or the Investment company.

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A 529 plan is a tax-advantaged saving plan that allows invested funds to both grow and be withdrawn tax-free for qualifying educational expenses. Also called “qualified tuition plans,” 529 plans are sponsored by individual states or state agencies as well as by educational institutions.

It’s important to research your options carefully to find out what tax breaks are available where you live, as different states and schools have different 529 plan rules. There are different kinds of 529 plans as well, so you’ll need to decide which is right for your family. This guide can help.

What is a 529 plan?

Two types of 529 plans exist that provide tax breaks on federal and state taxes:

  • Prepaid tuition plans: These plans involve purchasing credits at colleges or universities at the current price for someone who will attend school in the future. Most plans are sponsored by state governments and allow tuition and mandatory fees to be prepaid at public and in-state institutions. Students must attend a participating school to get the full value of prepaid credits.
  • Education savings plans: These plans involve putting money into an investment account and using the money to buy assets such as exchange-traded funds or mutual funds. Money can be withdrawn to pay for tuition, room and board, and mandatory fees at any university or college.

Education plans provide more flexibility, but account holders must choose what to invest in, and the investments could lose money. Target-date funds that automatically invest in an appropriate mix of investments simplify the process of selecting investments, but there’s still no guarantee investments will perform well.

Of course, there’s also a risk with prepaid tuition plans unless they’re guaranteed by the state. Some states guarantee the funds, but if your state doesn’t, you could lose some of your investment if the plan sponsor runs into financial problems.

What are the 529 plan rules?

One big benefit of 529 plans is that almost anyone can open one, including parents, grandparents, relatives, friends, and even some corporations. Students can open 529 plans to save for their own college expenses if they are 18 or older.

Whoever chooses to open the account should understand the difference between the account owner and the beneficiary. The child who uses the funds to go to school is the beneficiary. The money is used to benefit that child by covering school costs; however, the child doesn’t have ownership or legal control over the money — unless they are over the age of 18 and open an account for themselves, making them both the owner and beneficiary.

Anyone can be the account owner, but it’s usually a parent. Ownership also can be transferred, with the original owner naming a successor owner. This is helpful when grandparents open an account and then name the child’s parent as a successor owner, for example.

Assets in a 529 savings plan owned by a parent or dependent child are considered parental assets on the Free Application for Federal Student Aid (FAFSA). If any 529 funds exceed the Asset Protection Allowance limit (typically around $10,000), that will decrease the student’s FAFSA aid by up to 5.64% of the account’s value.

What can 529 funds be used for?

While 529 account rules vary by plan, funds generally can be used only for qualifying educational expenses.

If the account is a prepaid tuition plan, funds can cover only tuition and mandatory fees, not room and board. Additionally, funds can pay for those costs only at participating colleges and universities, so if a student chooses to attend a different school, the plan pays for less. If the beneficiary of the plan chooses not to go to school, funds can be transferred to a different beneficiary.

If the account is an education savings plan, the money can be used at almost any college or university and can pay for tuition, room and board, and mandatory fees for undergraduate, graduate or professional programs. The money also can be used to pay up to $10,000 annually for each beneficiary for tuition at public, private or religious elementary or secondary schools.

Contribution limits of 529 plans

Unlike many tax-advantaged accounts, there are no annual contribution limits; however, there’s an aggregate limit that varies by state. Typically, you can’t contribute more than the expected costs of higher educational expenses. 529 plan rules vary by state, but limits typically range from $235,000 to as much as $529,000.

While there’s no annual contribution limit, taxes can be triggered if a particular contribution is too large since contributions are treated as gifts. In tax year 2020 and 2021, a person can give a gift valued at up to $15,000 per recipient without owing gift taxes. That means a relative or friend can contribute up to $15,000 into a 529 without triggering taxes. Additionally, gifts above the annual limit can count toward a lifetime exclusion that allows for $11.58 million in 2020 and $11.7 million in 2021 per person to be transferred without owing taxes.

529 plans also give you the option to contribute a lump sum of up to $75,000 without triggering gift taxes. That’s because the five-year election option allows you to prorate contributions of $15,000 of more over a five year period. When you make a $75,000 lump-sum contribution, it’s treated as if you’d contributed $15,000 annually over five years.

529 withdrawal rules

Money from a 529 must be withdrawn during the year the beneficiary incurs qualified higher education expenses (QHEEs). Any funds withdrawn to pay for QHEEs will be considered qualified distributions and can be withdrawn tax-free.

Penalties and taxes come into play if money is withdrawn to pay for anything other than QHEEs — or if a child hasn’t incurred enough QHEEs in the tax year to account for the withdrawals. You’ll need to be careful not to withdraw funds in December to pay tuition in January if the child didn’t have enough QHEEs in the year the money was taken out.

There’s one exception to this penalty, though: If the beneficiary receives a scholarship, funds can be withdrawn from the 529 account to offset the scholarship value, and only ordinary income tax will need to be paid.

If you claim the American opportunity tax credit …

Anti-coordination rules also require that you reduce the amount of QHEEs in a year if you claim the American opportunity tax credit or lifetime learning credit. For example, if a child incurred $5,000 in educational expenses but you claimed a $2,500 American opportunity tax credit, you’d have only $1,000 in qualified educational expenses because $4,000 of the money spent on tuition was necessary to justify claiming the tax credit. If you don’t comply with this rule, you’ll owe ordinary income taxes on any money withdrawn — but not the 10% penalty for other nonqualified withdrawals.

If you take out too much money …

If you withdraw too much, you can roll the money into a different 529 plan to avoid penalties. However, you must act within 60 days of the withdrawal, and must not have rolled over money from the same beneficiary’s 529 in the past year. If a period of more than 60 days has passed and you’re still within the calendar year, you can prepay expenses to increase your QHEEs. If the tax year has ended, however, you won’t be able to roll the funds over and then will be required to pay the penalty.

Bottom line

State and federal tax breaks are available for 529 plans, but 529 plan rules vary by state. While these 529 plan rules are complicated, it’s important to understand them so you can reap all the benefits of investing in a 529 and make saving for college a little easier. If you’re wondering if a 529 plan meets your investment goals it may be a good idea to discuss the decision with an investment advisor.

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Roth IRA Contribution and Income Limits in 2021

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A Roth IRA provides generous tax breaks for retirement investing, but there are annual Roth IRA contribution limits that are affected by household income. These limits can change from one year to the next, and your age also affects how much you can invest.

For 2021, the Roth IRA contribution limits are the same as they were in 2020: $6,000 for those under the age of 50 and $7,000 for those over the age of 50.

These limits are the maximum each person — or married couple — can contribute. As the table below indicates, once your income reaches a certain level, Roth IRA contribution limits decline until you’re not allowed to contribute anything.

 

Eligible to contribute full amount ($6,000)*

Eligible to contribute reduced amount

Not eligible to contribute

  • Single

  • Head of household

  • Married filing separately (if you didn’t live with your spouse at all during the year)

$125,000

Income between $125,000.01 and $140,000

Income over $140,000

  • Married filing jointly

  • Qualified widow(er)

$198,000

Income between $198,000.01 and $208,000

Income over $208,000

  • Married filing separately (if you lived with your spouse)

N/A

$10,000

Income over $10,000

*This contribution limit is your combined contribution limit for both traditional and Roth IRAs.

Calculating your phase out contributions

If your income is below the threshold at which contributions start phasing out, it’s easy to know how much you can contribute. If your income is the range where you’re still allowed to contribute but can’t contribute the full amount, you’ll need to figure out your max Roth IRA contribution. Here’s how the math works out:

  • Calculate your modified adjusted gross income (AGI). Your modified AGI is your adjusted gross income with certain deductions added back in, including your deduction for IRA contributions.
  • Subtract from your modified AGI $198,000 if married filing jointly or a qualified widow; $0 if married filing separately and you lived with your spouse; or $125,000 for all other cases.
  • Divide the result by $15,000 ($10,000 if you’re married filing jointly, a qualifying widow or widower; or you’re married filing a separate return and you lived with your spouse during the year).
  • Multiply the resulting number by the normal maximum contribution limit.
  • Subtract the resulting number from the normal maximum contribution limit.

If you were married filing jointly and your modified AGI was $200,000, here’s what this calculation would look like:

  • $200,000 – $198,000 = $2,000
  • $2,000 / $10,000 = .2
  • .2 x $6,000 (the normal contribution limit if you’re under 50) = $1,200

Your maximum contribution would be $1,200

Tax benefits of Roth IRA

Roth IRAs work differently than traditional IRAs or traditional 401(k)s. With these other retirement accounts, you put money in with pre-tax dollars but are taxed when you withdraw money. When you invest in a Roth IRA, you put in after-tax dollars but the money grows tax-free and is withdrawn tax-free.

Roth IRAs also differ from traditional IRAs and 401(k)s in another important way. As Brown explained, Roth IRAs aren’t subject to required minimum distributions (RMD). With traditional IRAs or 401(k)s, you’re required to start taking some money out beginning at age 70 and a half. RMDs ensure you withdraw funds so you can be taxed on them.

Roth IRAs aren’t subject to RMDs, which means you can allow the money to keep growing as long as you’d like. You can leave your money to your heirs and they won’t pay taxes on withdrawals either — and can stretch withdrawals out over time.

What if you make too much to contribute to a Roth IRA?

If you make too much to contribute to a Roth IRA, you have other options.

“Many 401k plans offer a Roth option,” explained Brown. “If available, they’re often the best place to make contributions since there are no income limitations and you can contribute up to $19,500 if you’re under age 50 and up to $26,000 if you’re over age 50.”

Brown also advised that you can make “backdoor” contributions to a Roth IRA if you’re eligible to contribute to a traditional IRA. Traditional IRAs have no income limits unless you or your spouse are covered by a workplace retirement plan.

You can contribute to a traditional IRA and convert it to a Roth just by submitting some simple paperwork to your plan administrator; however, you must pay taxes on money you’re converting.

This isn’t an issue if you convert in the same year. Let’s say you contribute $6,000 to your IRA, take a $6,000 deduction, then convert the traditional to a Roth IRA. You would pay taxes on the $6,000. However, if you contributed to a traditional IRA in 2017, took a $6,000 deduction and converted the traditional IRA to a Roth in 2018, your taxable income in 2018 would be $6,000 higher. Additionally, if your initial $6,000 contribution had grown to $6,500, you’d be taxed on the full $6,500 you’re converting.

Of course, you also have the option to contribute to a traditional IRA and just leave the money there, but if you or your spouse are covered by a retirement plan at work, the income threshold at which eligibility phases out for traditional IRA contributions is lower than the threshold for a Roth IRA.

Where to open a Roth IRA

You can open a Roth IRA at almost any financial institution. This includes banks, robo-advisors and brokerage firms.

The right place to open your account will depend on the following several factors:

  • How much help you want in managing investments. You’ll receive no help from a discount online brokerage. A robo-advisor, on the other hand, will ask simple questions and then allocate your money into an appropriate mix of investments.
  • Account minimums. Some financial institutions require a minimum deposit.
  • Investment options. Look for a financial institution that allows you to invest in a wide array of assets including individual stocks, Exchange Traded Funds and Mutual Funds.
  • Fees. Most discount online brokerages don’t charge fees for opening accounts. The general rule is that if you get help managing your money, you’ll pay fees. Fees for robo-advisors are typically pretty low, but you could pay a lot for management by a registered investment advisor or wealth management firm.
  • Commissions. You’ll generally pay commissions for buying and selling stocks and ETFs, but some brokerages offer commission-free ETFs or waive commissions if your balance is high.

What if you go over your contribution limit?

Keep careful track of contributions to your Roth IRA so you don’t go over the allowable contribution limit. However, if you do find that you contributed too much, you have a few options:

  • Withdraw the excess. Contact your plan administrator and request to withdraw the funds. You won’t be penalized for early withdrawal if you’re only withdrawing contributions above the limit, but if the excess funds earned a return, you also must withdraw the earned amount.
  • Move the contribution to the next tax year. You can apply over-the-limit contributions to the following tax year. If you went over in 2020, you could count some of the contributions as occurring in 2021. Just let your plan administrator know what you plan to do.

If you fail to be proactive about monitoring your contributions, you’ll end up owing a 6% excise tax on the contributions that exceeded your limit for the year. The excise tax is recorded on IRS Form 5329.

Knowing the max Roth IRA contribution limits is important. When you know how to calculate the amount you can contribute, you can make smart choices about investing for your future.

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TD Ameritrade Review 2020

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice. It may not have not been reviewed, commissioned or otherwise endorsed by any of our network partners or the Investment company.

Disclosure : MagnifyMoney is an advertising-supported comparison service which receives compensation from some of the financial providers whose offers appear on our site. This compensation from our advertising partners may impact how and where products appear on the site (including for example, the order in which they appear). To provide more complete comparisons, the site features products from our partners as well as institutions which are not advertising partners. While we make an effort to include the best deals available to the general public, we make no warranty that such information represents all available products.

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TD Ameritrade is one of the leading U.S. brokerages in today’s market. It offers a comprehensive range of account types, and there is no minimum investment requirement. With over 350 brick-and-mortar branches, and a choice of online and mobile trading platforms, TD Ameritrade bridges the gap between a traditional and online brokerage for investors who may want the option for in-person consultations.

TD Ameritrade
VISIT TD AMERITRADE Secured
on TD Ameritrade’s secure website
The bottom line: TD Ameritrade appeals to investors of any skill level, but watch out for trading fees for short-term ETF holdings and no-load mutual funds.  
  • Over 350 brick-and-mortar branches for in-person customer support as well as phone, text and chat support
  • Robust web, mobile and desktop apps integrated with financial news and a proprietary social signal tracker that interfaces with Twitter to assess consumer sentiment
  • More than 2,300 commission-free ETFs.

Who should consider a TD Ameritrade brokerage account?

With an extensive range of services and investment products, TD Ameritrade aims to reach investors of all levels, from beginners to experienced traders.

The fact that there’s no account minimum to open a TD Ameritrade brokerage account is attractive for new investors. Beginners and other hands-off investors will also appreciate the opportunity to invest in thousands of commission-free ETFs, which can make building a diversified portfolio easy. Active ETF traders, however, may wish to look elsewhere because TD Ameritrade charges a hefty $13.90 fee on commission-free ETFs held for less than 30 days.

Investors who want face-to-face interaction and customer support will appreciate the fact that there are brick-and-mortar branches of TD Ameritrade throughout the country. Educational seminars offered at local branches will also appear to beginning and experienced investors alike.

More seasoned investors will like TD Ameritrade’s robust resources, including pro-grade trading platform, thinkorswim, plus a comprehensive suite of investment research tools. These tools include Social Signals, which pulls Twitter insights on particular investments into one place as well as a trading simulator that allows you to track investment performance without putting real money at risk.

All investors have the option to set up a free consultation with an independent registered financial advisor through TD Ameritrade’s AdvisorDirect referral program.

TD Ameritrade fees and features

Stock trading fees
  • $0.00 per trade
Amount minimum to open account
  • $0
Tradable securities
  • Stocks
  • ETFs
  • Mutual funds
  • Bonds
  • Options
  • Futures / commodities
  • Forex
Account fees (annual, transfer, inactivity)
  • $0 annual fee
  • $75 full account transfer fee
  • $0 partial account transfer fee
  • $0 inactivity fee
Account types
  • Individual taxable
  • Traditional IRA
  • Roth IRA
  • 529 Plan
  • Joint taxable
  • Rollover IRA
  • Rollover Roth IRA
  • Coverdell Education Savings Account(ESA)
  • Custodial Uniform Gifts to Minors Act (UGMA)/Uniform Transfers to Minors Act (UTMA)
  • Custodial IRA
  • SEP IRA
  • Solo 401(k) (for small businesses)
  • SIMPLE IRA (Savings Incentive Match Plan for Employees)
  • Trust
  • Guardianship or Conservatorship
Mobile appiOS, Android, Windows phone
Customer supportPhone, 24/7 live support, Chat, Email, 364 branch locations
Research resources
  • SEC filings
  • Mutual fund reports
  • Earnings press releases
  • Earnings call transcripts
  • Earnings call recordings

TD Ameritrade offers numerous features that set it apart from other online brokers, including an extensive library of educational materials as well as investor education seminars held periodically throughout the year.

While its resource materials and trading platforms are a cut above competitors, many of its costs and fees are in-line with industry averages:

  • There are no commissions charged for online stock or ETF trades
  • There are no commissions, assignment fees, or exercise fees for option trades, and contract fees are just $0.65 per contract
  • Online trades of stocks not listed on U.S. stock exchanges incur a $6.95 commission
  • A $25 fee is charged for broker-assisted trades
  • There is a $5 fee for using the interactive voice response phone system

TD Ameritrade trading fees for certain ETFs and mutual funds

Although TD Ameritrade offers thousands of commission-free ETFs, any funds participating in the ETF Market Center and sold for no commission must be held for at least 30 calendar days. If you sell before this time is up, you’ll be assessed a $13.90 short-term trading fee.

The day the ETF is purchased counts as calendar day zero, so the clock doesn’t start on your 30 days until the next business day following the purchase. Because of this fee, the actual cost of a commission-free ETF could exceed the expenses associated with buying and selling ETFs that aren’t commission-free.

TD Ameritrade lets users trade over 13,000 mutual funds on its platform, including hundreds of funds that carry no transaction fee. However, TD Ameritrade charges a $49.99 trading commission to trade no-load mutual funds. Users looking to minimize costs should carefully review potential trading fees involved in buying and selling many funds.

TD Ameritrade investment options

TD Ameritrade offers investors the opportunity to invest in a wide range of different asset classes including:

  • Stocks
  • Options
  • ETFs
  • Mutual funds
  • Futures
  • Forex
  • Bonds and CDs
  • Annuities

It’s possible to buy stocks on U.S. exchanges and on overseas exchanges. Investors also have a choice of more than 2,300 commission-free ETFs as well as more than 13,000 mutual funds total including hundreds of funds with no transaction fees.

Investors benefit from the fact they’ll pay no commissions when trading most stocks, options and ETFs — but should be aware that there are still trading costs associated with some investments.

Trading stocks not listed on U.S. exchanges will result in a charge of $6.95 for buying and selling, while there is a fee of $2.25 per futures contract and a fee of $0.65 per options contract. No load mutual funds also come at a cost of $49.99, although investors can avoid this fee by choosing from one of the many no transaction fee funds.

No commissions also doesn’t mean no trading expenses. Investors who purchase certain commission-free ETFs still have to pay fund management expense ratios, which are charged by the fund itself and entirely separate from trading commissions charged by brokers. However, TD Ameritrade‘s ETF screener can help you to find ETFs with 0% expense ratios, as well as other low-cost exchange-traded funds to keep fees to a minimum.

Trading platforms and tools

TD Ameritrade has a desktop trading app, a mobile app, and a web app, letting you buy and sell assets whenever and wherever you like. Some of the features you can expect from these platforms include:

  • Integrated research and data, including third-party research as well as financial news and social insights from Twitter
  • Real-time streaming quotes
  • Advanced charting tools including the ability to incorporate data from the Federal Reserve including more than 400,000 economic indicators
  • Access to current and historical market data

Unfortunately, not all tools are available on all TD Ameritrade platforms. Portfolio Planner, which assists you in building a portfolio that exposes you to an appropriate level of risk depending on your investment goals, is available only on TD Ameritrade‘s online platform.

Beginning investors may also find ThinkorSwim, TD Ameritrade‘s free desktop trading platform, to be too complex to navigate even with in-app support.

Research resources and trading simulator

TD Ameritrade truly sets itself apart from other brokers because of the quality and quantity of research and educational materials the brokerage provides. Some of these tools include:

  • Immersive online courses taught by investment coaches that provide education for all levels of investors. Courses include an introduction to retirement planning; lessons on fundamental analysis to help you learn to identify value stocks or technical analysis to help you learn to read the market; introductions to options trading or futures trading; and much more.
  • More than 200 instructional videos for investors at all experience levels, including an introduction to trading stocks.
  • Access to market news, including from third party sources such as Yahoo Finance as well as briefings on market events prepared by TD Ameritrade strategists.
  • Webcasts on a wide range of subjects including long-term investing, active trading, and portfolio management.

TD Ameritrade also offers paperMoney, a virtual stock market simulator so you can test trading strategies and track performance. With paperMoney, you can virtually trade stocks, options, futures and forex. You’ll have access to the same charting data and market indicators available to those trading actual money, but won’t put assets at risk.

Strengths of TD Ameritrade

  • No account minimums for TD Ameritrade brokerage accounts and no account value thresholds for site access: The fact that there are no account minimums is a huge draw for beginning investors, who should know that all online tools are available to them regardless of account balance.
  • Robust research tools and analysis: TD Ameritrade offers live CNBC streaming and access to third-party research tools to help investors come up with a customized strategy.
  • Robust mobile experience: In addition to being able to buy, sell and trade via the app, the app also allows access to more than 20 educational videos as well as research from leading financial analysts.

Drawbacks of TD Ameritrade

  • Short-term ETF trading fees: TD Ameritrade offers over 2,300 commission-free ETFs. You must own them for at least 30 days before selling, or you may be charged a $13.90 short-term trading fee — something to be aware of if you’re an investor who regularly trades ETFs and you’re focused on keeping costs as low as possible.
  • Higher costs and a higher account minimum for robo-advisory services: While competitors allow you to get started with just $500 — and some don’t even have minimum investment requirements — TD Ameritrade‘s robo-advisor requires a $5,000 minimum
  • Some trading platforms are complicated: Beginning investors will likely find thinkorswim to be overwhelming.

Is TD Ameritrade safe?

TD Ameritrade has a history of 40-plus years in investing. The online and mobile platforms have strong security requirements, including two-factor authentication, and shut down account access at the first sign of suspicious activity. TD Ameritrade also offers an asset protection guarantee that promises reimbursement for any securities or cash lost as a result of unauthorized account activity.

TD Ameritrade manages $1 trillion in client assets and has over 11 million funded client accounts. TD Ameritrade is a member of the Securities Investor Protection Corporation (SIPC), and securities in your account are protected up to $500,000. Certificates of deposit (CDs) purchased by TD Ameritrade are issued by banks insured by the Federal Deposit Insurance Corporation (FDIC). Cash in your investment account can be held in an FDIC-insured deposit account, where it is insured by the FDIC up to the legal limit per depositor, per bank.

Final thoughts on TD Ameritrade

Investors who have a range of investment needs may find TD Ameritrade to be a good all-in-one option. The robust online tools, accessible customer service and lack of account minimums make TD Ameritrade appealing to investors of all levels. Those looking for an affordable robo-advisor or who wish to actively trade ETFs, however, may wish to look elsewhere as their costs with TD Ameritrade will likely be higher than with many competitor offerings.

The rates and fees mentioned in this article are accurate as of the date of publishing.

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