In 2020, I transferred funds from my bank account to a Vanguard 529 account. If you have heard of a 529 plan, that’s great! You are already well prepared to fund education expenses.
If not, I’m happy to give you a brief overview.
Related: Working on those 2020 Goals!
Vanguard is the company I use. It’s the company I use for investing in my Roth IRA’s, so it was convenient to open a 529 account there as well. I also chose them for the 529 because of the investment options within the 529 plan.
Table of Contents
529 College Savings Plan: An Overview
The 529 is named after its respective section in the IRS code. Similar to how the 401(k) got its name. 529 plans are tax-advantaged accounts designed specifically for saving money for education.
Don’t let the common name “College Savings Plan” fool you. They can be used for all sorts of education related expenses, from elementary school all the way through college and beyond. In college, 529 funds can be used for tuition, fees, books, supplies, approved study equipment, and room and board.
529s are state plans. Each state will have its own version and may have multiple options, administered by independent companies. Vanguard is the administrator for one of Nevada’s 529 plans. You Do NOT have to live in the same state, however, going to school in the same state as the 529 plan may have additional tax benefits.
529 Tax Advantages
The money that is transferred into the 529 account is after-tax money. The tax advantages come in on the earnings. Earnings grow federal income tax free. Withdrawals used for qualified education expenses are free from federal income taxes and, in many cases, state taxes. You do get penalized if the withdrawals are not for qualified expenses.
529 Contribution Limits
There are no annual contribution limits. There are maximum contribution limits. Each state is in control of what the contribution limits are. In the case of the Vanguard 529 in Nevada, there is a $370,000 contribution limit. This is only a limit on the contributions, and there is no limit on earnings.
Hopefully you could afford to go to school if you had that much available.
The contribution limit is often tied to the gift tax exclusion of the person making the contribution. This is the amount of money a person can give to someone else without being taxed. The limit for this in 2020 is that same as it was in 2019; $15,000.
Keep in mind that this is per person. A married couple can contribute a total of $30,000.
For a state-by-state guide check out PolicyGenius. They include maximum contributions, plan options, and specific tax benefits listed alphabetically by state.
Here’s how I transfer funds to my Vanguard 529 College Savings Plan
Here is what it will look like when you first log into Vanguard. You will see a summary of your accounts and their respective balances. This is what Vanguard refers to as the “Accounts Overview” page. You can come back here at any time by going to the toolbar at the top, hovering over “My Accounts”, and clicking on “Accounts Overview”.
Step 1: Click on the “Holdings” Tab, next to the “Balances” tab.
Step 2: Click on “Transact”
Click on transact under the 529 plan that you would like to transfer money into.
Step 3: Click on “Electronic Bank Transfer”
This tutorial covers transferring money electronically from your bank account. There are other options available, but the steps from here on out would differ.
A New pop up screen will appear.
(If nothing happens after clicking the link, make sure you are allowing pop-ups from Vanguard.)
Step 4: Select the “Electronically from your bank account” bubble. Click “Next”.
We already said in the previous step how we wanted to transfer money, but they ask again.
You may have noticed the big tax warning:
I am no legal expert or tax expert, so I’ll just show you what it says. Here is what it says when you click on “Learn More”.
Step 5: Enter the amount you would like to transfer into the 529 account from your Bank Account
Make sure you consider the gift tax exclusion of $15,000. Anything more will be a tax liability to you, the contributor.
Step 5.1: Add a bank account, if needed
I have contributed from my bank account in the past, but if this is your first time, or you want to use a different bank account, here is how it will look If you click on add a new bank:
Step 6: Review and Click “Submit”
Make sure everything looks good. Ensure that it is the account you want to transfer from/to and that it is the amount you want to transfer.
Step 7: Review Confirmation and Click “Done”
Vanguard advertising after clicking Done
I’m not sure if this is the same ad everyone will see. Ugift is what Vanguard uses to send links to friends and family if they would like to contribute to the 529 plan.
Now that you are putting money into the 529 plan, you need to decide how the money will be allocated. This is similar to steps you would take for allocating money within a 401(k).
Step 1: From Accounts Overview page, click on “Go to my 529 plan account”
A new window will pop-up.
Step 2: Click on the 529 account
You can select the 529 account by clicking anywhere within the white box.
Step 3: Click on “Change investment options”
Step 4: Click on “Continue” for Allocation for Future Contributions
You have the option to change your current allocation, or to change the allocation of all future contributions.
You can change the allocation as needed, as there is no limit to the number of times.
Step 5: Select your allocations
Read the notes at the top of the Vanguard page. You can only select up to 5 funds, etc.
Note: The screenshot does not display all of the allocation options. You would need to scroll down.
Step 6: Review and click “Submit”
Take a second to review your allocations. If you are sure that it looks good, then go ahead and submit it.
Note: Allocations in the screen shot are for tutorial purposes only. I do not recommend any certain allocation.
Step 7: Review Confirmation and Click “Done”
Vanguard will thank you for your business and send you a confirmation email. If you need to review anything that you have done, you can go to your Transaction History.