Money Management

Although 529 plans aren’t perfect, they’re a great college savings option. Read on to see why. 

The cost of college keeps rising. And even if you’re vigilant about saving for it, you may be worried you’ll inevitably fall short.

That’s why it’s important to not just save for college, but invest your money. And while you may be inclined to do so in a regular brokerage account, a 529 plan could be a better bet.

But recent data from Vanguard reveals that a lot of parents seem opposed to 529 plans. Here are three reasons these accounts aren’t being utilized — and why they’re not necessarily good ones.

1. Parents don’t know enough about how they work

For some parents, the hesitancy to open a 529 plan stems from a lack of knowledge about how they work. But actually, these plans are pretty simple to understand.

Different states sponsor 529 plans, but you aren’t limited to opening a 529 offered by your state of residence. The money you put into a 529 will not result in a federal tax break, but your state might offer some tax incentives, particularly if you invest in a plan sponsored by your state.

The benefit of funding a 529 plan is that your investments in that account get to grow tax-free. And withdrawals are tax-free, provided that money is used for qualifying education expenses.

Those aren’t just limited to college, though. You can use money in a 529 plan to pay for private school when your kids are younger.

2. Parents don’t believe they have enough money to fund one

There’s generally no minimum amount of money required to open a 529 plan. So if you only have a few hundred dollars to allocate for college savings, so be it.

Of course, if your goal is to be able to mostly or wholly cover your kids’ college tuition, then you’ll clearly need to try to ramp up over time. But you can get started with a tiny amount of money if that’s all you have available.

3. Parents fear their money will go to waste if a child doesn’t go to college

It’s true that non-education withdrawals from a 529 plan are subject to penalties and taxes. But those only apply to the gains portion of these accounts, not principal funds contributed. To put it another way, if you funded your 529 plan with $50,000 and your balance is eventually worth $90,000, using all of that money for non-education purposes would result in taxes and a penalty on the $40,000 gains portion only.

You should also know that 529 plans allow you to switch beneficiaries without penalty. So if one child of yours opts out of college, you can use that money to pay for your other child’s expenses.

You should also know that starting next year, you can roll up to $35,000 in 529 funds into a Roth IRA without a penalty. So if your child doesn’t need the money for college, it can be used for retirement instead.

A 529 plan isn’t necessarily the best college savings choice for everyone. But you may want to consider using one due to the tax benefits involved. And you may feel more comfortable opening one now that you know a bit more about how these plans work.

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A Roth IRA offers tax-free withdrawals, but it’s not always the best choice. Learn about three situations where opting for a traditional IRA makes sense. 

There are plenty of reasons a Roth IRA is attractive to investors. You get tax-free distributions in retirement, which is a pretty sweet perk, even though you don’t get to deduct your contributions on your taxes. You’ll also avoid taxes and penalties if you withdraw your contributions (but not the investment earnings) at any time.

The traditional IRA has a lot less luster for most people. Sure, some people can deduct their contributions, though withdrawals are taxed as regular income. But the tax-free retirement income coupled with the additional flexibility make the Roth IRA more appealing to many retirement savers.

Still, there are a few scenarios where the traditional IRA makes sense. Here are three times you should consider a traditional IRA over a Roth IRA.

1. You want to reduce your upfront tax bill

As I mentioned earlier, you don’t get to deduct your Roth IRA contributions for tax purposes. But depending on your income, filing status, and whether you or your spouse is covered by a retirement plan at work, you may be able to deduct your full traditional IRA contribution.

Which option yields the better tax savings? It’s impossible to know unless you have a crystal ball.

Younger investors are often better off choosing the Roth IRA, especially if their earnings are relatively low and they don’t have a large tax liability. Unlimited tax-free growth over decades is pretty tough to beat.

But someone nearing retirement has less time for their money to compound. That means growth is limited, as well. A traditional IRA is more likely to make sense for an older investor, particularly if they have a high income and are eligible to deduct contributions.

2. You’re rolling over a traditional 401(k)

If you leave your job, you may opt to do an IRA rollover. Essentially, you transfer your money from a 401(k) to an IRA and maintain its tax-advantaged status.

But if you have a traditional 401(k), you’ll want to roll it over into a traditional IRA. Though it’s possible to roll over a traditional 401(k) into a Roth IRA, you’d owe taxes on the entire amount you’ve rolled over. However, rolling over a Roth 401(k) to a Roth IRA won’t result in a tax bill.

The rules for rollovers can get complicated. If you have questions, be sure to contact your IRA broker.

3. You earn more than the Roth IRA income limits

Technically, you can only contribute to a Roth IRA if your income is below an annual limit. If your modified adjusted gross income exceeds the following thresholds, you’re ineligible to make a contribution in 2023:

$153,000 if you’re single, head of household, or married filing separately and you didn’t live with your spouse at all during the year. If your income is between $138,000 and $153,000, you can contribute a reduced amount.$228,000 if you’re married filing jointly or a qualifying widow(er). If your income is between $218,000 and $228,000, you can contribute a reduced amount.$10,000 if you’re married filing separately and lived with your spouse at any point during the year. If you have income for the year and it’s less than $10,000, you can contribute a reduced amount.

There is a workaround called a backdoor IRA, though. You fund a traditional IRA, then immediately convert it to a Roth IRA and pay the applicable taxes. The rules can get complex here too, so you may want to consult with a financial advisor.

But sticking with the traditional IRA will probably make sense if you plan to make withdrawals in the next five years. Due to the Roth IRA five-year rules, you’ll owe income taxes on any rolled over amount if you haven’t had the account open for five years.

Traditional IRA vs. Roth IRA: Which should I choose?

There’s no perfect answer to this question, but here are some factors to weigh in your decision:

Would you rather get a tax break now or later on? If you want to lower your taxable income now, the traditional IRA wins. If you’re willing to pass on a tax break now and get tax-free withdrawals later, choose the Roth IRA.Do you think you’ll need to access your IRA contributions? If you’re deciding which account to open and you don’t have much saved, consider sticking with the Roth IRA. You can withdraw the contributions if necessary without penalty, whereas any early withdrawals from a traditional IRA will usually result in taxes and a 10% penalty.Can you afford a big tax bill if you’re doing a rollover? If you’re considering rolling a traditional retirement account into a traditional IRA versus a Roth IRA, be prepared to pay taxes on the amount you roll over by tax day.

Choosing between a traditional IRA versus Roth IRA can have important tax consequences. But don’t get so hung up on the decision that you delay saving for retirement. You’re allowed to have both a traditional IRA and Roth IRA, so you’re not locked into one account forever. The best thing you can do is start investing ASAP, so that you can maximize the power of compounding.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Robin Hartill, CFP® has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Image source: Getty Images
If you want to join a warehouse club so you can score discounts and keep more money in your bank account, you have a few choices. Costco and Sam’s Club are two of the most popular options, and there’s a lot to consider when deciding between them.To help you out, look for these four signs that you should put those Costco membership fees on your credit card rather than signing up for Sam’s Club. 1. You live closer to a Costco than a Sam’s ClubThe average cost of gas has come down a bit compared with recent record highs, but you’ll still pay a pretty hefty amount to fill up your tank. In fact, according to AAA, the national average price of gas was $3.563 per gallon as of July 18, 2023. Since you do pay to travel to a warehouse club, you’ll want to consider which one is closer to you. If Costco is more convenient and cheaper to visit, you’ll most likely save more by shopping there than at Sam’s Club. Plus, you’ll be more likely to visit often to make your membership fee worthwhile. 2. You prefer Kirkland products to Member’s Mark productsBuying house-brand products is a great way to save as they can often be cheaper than their name-brand alternatives. Kirkland is Costco’s house brand, while Member’s Mark is Sam’s Club’s. If you tend to prefer Kirkland items, then Costco is a better store for you. Fortunately, both Costco and Sam’s Club offer free samples so you can try out products before you buy. This gives you a chance to make a more informed choice about which store’s products are tastier. 3. You don’t mind paying a little more upfront for a membership The entry-level membership at Sam’s Club will cost you $50 per year, while the Sam’s Club Plus membership costs $110 annually. Meanwhile, Costco’s Gold Star membership comes at a price of $60 per year while the Executive membership has a $120 annual fee. If you’re hoping for the absolute lowest price for your membership, Sam’s would be the better bet. But, if you are OK with paying more upfront to be able to take advantage of other Costco perks (such as its travel service or tire shop), then Costco would be a better fit. 4. A positive shopping experience is a top priority Costco consistently returns high marks for customer service. In fact, according to a YouGov poll in the second quarter of 2023, 68% of people have a favorable opinion of Costco, earning the store a No. 1 ranking in terms of popularity. Sam’s Club, on the other hand, comes in third after Costco and Dollar Tree. While it still has a 65% favorability rating, that is lower than Costco’s score. So if you want the best experience shopping, Costco may be the store for you. Ultimately, you generally can’t go wrong by getting a membership for either warehouse club. Take the time to research each to see which one provides the products you like best and is the most convenient for you to visit, so you can find the perfect store for you. Alert: highest cash back card we’ve seen now has 0% intro APR until nearly 2025If you’re using the wrong credit or debit card, it could be costing you serious money. Our experts love this top pick, which features a 0% intro APR for 15 months, an insane cash back rate of up to 5%, and all somehow for no annual fee. In fact, this card is so good that our experts even use it personally. Click here to read our full review for free and apply in just 2 minutes. Read our free reviewWe’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Christy Bieber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale. The Motley Fool has a disclosure policy. 

If you want to join a warehouse club so you can score discounts and keep more money in your bank account, you have a few choices. Costco and Sam’s Club are two of the most popular options, and there’s a lot to consider when deciding between them.

To help you out, look for these four signs that you should put those Costco membership fees on your credit card rather than signing up for Sam’s Club.

1. You live closer to a Costco than a Sam’s Club

The average cost of gas has come down a bit compared with recent record highs, but you’ll still pay a pretty hefty amount to fill up your tank. In fact, according to AAA, the national average price of gas was $3.563 per gallon as of July 18, 2023.

Since you do pay to travel to a warehouse club, you’ll want to consider which one is closer to you. If Costco is more convenient and cheaper to visit, you’ll most likely save more by shopping there than at Sam’s Club. Plus, you’ll be more likely to visit often to make your membership fee worthwhile.

2. You prefer Kirkland products to Member’s Mark products

Buying house-brand products is a great way to save as they can often be cheaper than their name-brand alternatives.

Kirkland is Costco’s house brand, while Member’s Mark is Sam’s Club’s. If you tend to prefer Kirkland items, then Costco is a better store for you. Fortunately, both Costco and Sam’s Club offer free samples so you can try out products before you buy. This gives you a chance to make a more informed choice about which store’s products are tastier.

3. You don’t mind paying a little more upfront for a membership

The entry-level membership at Sam’s Club will cost you $50 per year, while the Sam’s Club Plus membership costs $110 annually. Meanwhile, Costco’s Gold Star membership comes at a price of $60 per year while the Executive membership has a $120 annual fee.

If you’re hoping for the absolute lowest price for your membership, Sam’s would be the better bet. But, if you are OK with paying more upfront to be able to take advantage of other Costco perks (such as its travel service or tire shop), then Costco would be a better fit.

4. A positive shopping experience is a top priority

Costco consistently returns high marks for customer service. In fact, according to a YouGov poll in the second quarter of 2023, 68% of people have a favorable opinion of Costco, earning the store a No. 1 ranking in terms of popularity.

Sam’s Club, on the other hand, comes in third after Costco and Dollar Tree. While it still has a 65% favorability rating, that is lower than Costco’s score. So if you want the best experience shopping, Costco may be the store for you.

Ultimately, you generally can’t go wrong by getting a membership for either warehouse club. Take the time to research each to see which one provides the products you like best and is the most convenient for you to visit, so you can find the perfect store for you.

Alert: highest cash back card we’ve seen now has 0% intro APR until nearly 2025

If you’re using the wrong credit or debit card, it could be costing you serious money. Our experts love this top pick, which features a 0% intro APR for 15 months, an insane cash back rate of up to 5%, and all somehow for no annual fee.

In fact, this card is so good that our experts even use it personally. Click here to read our full review for free and apply in just 2 minutes.

Read our free review

We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Christy Bieber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale. The Motley Fool has a disclosure policy.

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