Time to start? Where to start?

June 28, 2022

With the markets where they are, many people are wondering if now would be a prudent time to start investing and making some financial changes. This includes not only investing for your own retirement, but choosing to start saving for future goals such as a child’s education. Why could now be the time to start? Well, prices are low as we are in a bit of a bear market. If you have been thinking about starting, your dollars are worth more in the market now than they have been in the recent past. For the same reason, now could be the time to start investing for your child’s education. Unsure of where to start? Well, you’re in luck, this week I have some selections from previous blog posts detailing the basics of investment accounts and the 529 College savings account. Check the links below for the full blogs.


The three main types of Investment accounts are pre-tax, after-tax, and taxable accounts. As you can see one of the main differences between these accounts is their taxability and when the money you put in is being taxed.


“A pre-tax, or tax deferred, investment account is exactly what it sounds like: investments made pre or before taking out taxes. Another name for a pre-tax account is a ‘qualified account’ as opposed to a taxable account which would be referred to as a ‘non-qualified’ account. Examples of qualified accounts are individual retirement accounts (IRA) and company 401(k) or 403(b) plans. In the example of a company retirement plan, your contributions are pulled directly from your paycheck and deposited into your account without being assessed federal or state income tax. An IRA, or Traditional IRA, differs in that contributions can either be made as a rollover from a previous employer plan or as an after-tax contribution with the ability to take a federal income tax deduction in the amount of your contribution….”


“The best example of an after-tax investment account is the Roth IRA. Contributions made to a Roth IRA are made directly from your bank account or by check which means that you have already paid taxes on those dollars. Contributions made to a Roth IRA are tax free upon withdrawal regardless of when you make the withdrawal (i.e., there is no 10% penalty to withdraw contributions prior to age 59 ½)…”


Part of being a citizen of the United States, or really any country for that matter, is paying your taxes. When you earn money from employment and receive a paycheck, part of that paycheck goes to the state and federal government. Investment income and returns are not excluded from this. Taxable, or brokerage accounts, are the simplest type of investment account to understand…”



529 Plan Basics

“When you open a 529 account, you remain the owner of the account. This means that, even if your child is listed as the beneficiary, you have all rights to the account balance and have the full ability to make changes to the account at any time. This includes the ability to change the beneficiary of the account to another one of your children if your current beneficiary (usually your eldest) does not need the whole balance or doesn’t pursue further education after high school. You can even use the funds in the account for your own benefit however, this comes with both taxes as well as a 10% penalty from the IRS…”

            “…In 2017, the Tax Cuts and Jobs Act made it possible to use a 529 account to pay for K-12 private education…… tax-free withdrawals for K-12 education are limited to $10,000 whereas withdrawals for college are unlimited. In addition, TCJA 2017 also made it possible to use 529 funds to pay for apprenticeship programs and trade schools. With the growing number of students going into the trades, this is another excellent benefit”

            “Much like a 401(k) or IRA, contributions to a 529 account grow tax deferred. This means that you will not incur any taxes on the account value until you make a non-qualified withdrawal. In the case of a 529, a non-qualified withdrawal refers to any withdrawals that are not made for qualified educational expenses. For example, you cannot take a tax free withdrawal from your 529 to pay for a new Mustang convertible!.. Over 30 states offer a state income tax deduction or credit for 529 contributions, although most states require that you use the state sponsored plan (7 states have exempted that requirement). Some states limit how much you can deduct from your taxes while others will allow you to deduct the entire amount of your contribution. Some states also other anyone who contributes to the account (grandparents, loved ones, etc.) to take a deduction while others only allow a deduction for the account owner. It is important to know the laws specific to your state of residence.”


Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

Prior to investing in a 529 Plan investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.

A Roth IRA offers tax deferral on any earnings in the account. Qualified Withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 1/2 or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.