Dave Ramsey Says You Should ‘Underfund’ Your 529 Plan: Here’s Why
Written by
Yaël Bizouati-Kennedy
Edited by
Jenna Klaverweiden
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A 529 plan is a tax-advantaged savings account designed to encourage saving for educational costs, according to the Securities and Exchange Commission. You can use a 529 plan to pay for various educational expenses, including college tuition.
Financial expert and host Dave Ramsey is a big proponent of 529 plans. However, he also advised against overfunding them.
Why You Shouldn’t Overfund Your 529
In an episode of his namesake show, Ramsey responded to a caller asking how much he should put in his child’s 529 plan. Ramsey said he should put in $20,000 at most, and he advised against overfunding 529 plans.
“I would not overfund your 529. At today’s world, I would underfund your 529 … The higher ed landscape is going to change so much in the next 18 years as the student loan epic failure debacle unfolds,” Ramsey said.
“They have been overcharging for too long, and it’s come home to roost. And people are not going to college in record numbers … The lack of demand is going to drive the price down,” Ramsey continued.
Advantages of 529 Plans
These plans have several advantages, including tax ones. “As long as the money stays in the account, no income taxes will be due on earnings,” according to Fidelity.
In addition, when you withdraw money to pay for qualified education expenses, it may be free from federal income taxes and, in some instances, free from state taxes.
Penalties and Limitations
It’s important to note that if you withdraw the funds for nonqualified education expenses, there might be a 10% federal penalty tax. There might also be state and local taxes, according to Fidelity.
What’s more, as of Jan., 1, 2024, and as part of the Secure 2.0 Act, owners of 529 plans are able to make tax- and penalty-free rollovers to Roth IRA retirement accounts. However, there are several limitations.
“This has been welcome news to many families who worried about having unused or leftover funds in a 529 plan account,” Jeff White, CEPF, wrote in a Saving for College article.
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