What is a 529 Plan?

What is a 529 Plan?

• A tax-advantaged account where you can put after-tax money into and it grows tax-free. The money can then be withdrawn tax-free for higher education qualified expenses.
• Higher education is undergrad college and graduate school. It is NOT high school.
• Examples of higher education qualified expenses are tuition, room and board ON campus, COMPARABLE off-campus housing, REQUIRED books and supplies, computer, and internet access.
• Examples of *NON* higher education qualified expenses are clubs fees/dues, fraternity/sorority fees/dues, etc.
• Since the money you put in (your contributions) is AFTER-TAX you can withdraw your contributions (principal) at any time without PENALTY. You will owe taxes on a pro-rata basis however. Additionally, if you took a state tax deduction on your contributions going in then naturally that state may want that deduction back.
• If you withdraw the money for a NON higher education qualified expense you will pay a 10% penalty PLUS federal/state taxes on EARNINGS (the growth on your contributions).

Basics of Financial Independence: Paying off debts

2. Pay off any debts you have. Start with the highest interest debts and work down until all is paid off.

• The second thing one should do on the road to financial independence is pay off all high interest debt obligations. Of course that begs the question, "What is high?" For simplicity, let's define "high" as anything 1 point higher than the current 30-year fixed mortgage rate (currently 4% so "high" would be 5%+). I think that should be easy enough.

• Now that you have identified all your "high" interest debts, you should begin aggressively paying them off starting from the highest interest debt working downwards. Now of course you make minimum payments to all with the extra funds going towards the highest interest obligation until that is paid off, rinse-repeat. It also doesn't hurt to look into refinancing/consolidating these debt obligations under better rates when available. Often times a simple call can save mucho dinero.

• Now that you're left with NOT "high" interest debts, what should you do? You can ratchet down a notch or three on "aggressively paying them off" but you definitely want to pay MORE than the minimum required payments. Remember, this is the "basics of financial independence" not the "basics of getting rich via leverage." I know this can be a challenge for someone who has a car loan fixed at 2% and/or a mortgage fixed at 3.5% while the stock market (S&P 500) has double-digit returns over the last X years, but keep in mind there are also 1, 5, 10 and 15 year periods where even a 50/50 balanced portfolio has lost or made very little money (see chart below for 15 year real return periods). In conclusion, while your debt obligations are fixed who knows what the next X years of market returns will look like?

Who is HENRY?

H-E-N-R-Y = High Earner Not Rich Yet

Well, it all depends on your definition of high earner because I would definitely not put myself anywhere near there. But in either case, this isn't about me. This is about all the folks who graduated from college with lots of student loans and a "high paying job." What exactly is a high paying job? If you ask the IRS that would be anything above $55K which is where they start phasing out single filers for deducting student loans. The hard cut-off is $70K.

So for example, you finish college after busting your rump for 4-5 years and now have $32K worth of student loans to show for it. But you're one of the lucky ones, you managed to find a job that is paying you $60K to start in the always-expensive-cost-of-living Northeast.

Funny thing though is that after hearing your whole life about student loan tax deductions you realize that at your salary level this doesn't amount to much. You don't worry about it though as you put your nose to the grindstone and try to be the best employee ever. Three years later due to well earned raises you cross the $70K cut-off limit. You think no-biggie since you never really got much back from that measly deduction anyway. However, it still is a painful reminder to get that letter from your loan provider pointing out how much you paid in interest the previous year. I mean, those bastards are just rubbing it in your face that you won't be able to deduct any of that interest paid.

Two years later, you start thinking about buying a home because it is the prudent thing to do and there are no income limits on the tax dedcutions for interest paid on your home. But in the Northeast, your 5 years of prudent savings doesn't even look like it could be 10% of the selling price of the homes. Yeah, even in this downturn. And you wanted to put 20% down because you heard of all the no-money-little-money down horror stories. But wait, what about that news clipping you saw that spoke about an interest free $7500 loan from the Gov now expanding to possibly a $7500 grant (via tax credit) and you think, "Cut me a slice of that pie!" So as a good citizen you go to their website and read the fine print which clearly states that earners above $75K are phased out until a hard cut-off at $95K. So, using your salary numbers you do the number crunching and then it hits you.

HENRY, he is I and I am him.