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Why You Should Enroll In A 529 Plan For Your MBA

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I knew about 529 college savings plans but always thought it was a way to save money in order to send your children to college in the future. It wasn’t until I was in grad school when I learned that 529 plans can be used to help pay for your MBA. I learned how 529 plan contributions grow tax free as gains aren’t taxed and that there are tax benefits for 529 plan contributions. At the time, the Bright Start Illinois tax deductions for 529 plan contributions resulted in $500/ year savings in state income taxes. Enrolling in a 529 plan for your MBA will help you save money to pay for your MBA degree and avoid student loans.

What Is A 529 Plan for MBA?

A 529 plan for MBA is the same exact plan as a 529 college savings plan. It is a tax-advantaged savings plan to encourage savings for future education investments. They are legally known as “qualified tuition plans” and are sponsored by states, state agencies and educational institutions. All 50 states sponsor at least one 529 plan. There are two types of 529 plans: education savings plans and prepaid tuition plans. Education savings plans let a saver open up an account to save for a beneficiary’s future qualified higher education expenses. That beneficiary can be yourself or someone else. Prepaid tuition plans let you pre-pay all or parts of the costs of an in-state public college education that can also be converted for use at private and out-of-state colleges.

529 Plan Investment Options

Each 529 plan offers multiple investment options. It’s up to you to decide which option or options are best for you based on your risk tolerance and your time horizon for using the money. As part of this selection process, it’s also important to look at the fees for each investment option. Fees do differ by investment.

529 Plan Qualified Expenses

Typically, the first thought that comes to mind is tuition, but the qualified expenses are actually broader than that. You can use the funds in your 529 account to cover a variety of education expenses including tuition, fees, books and a computer. The funds in your 529 account can be used at any accredited institution.

529 Tax Benefits

529 plans are funded with after tax dollars but money earned on the investments in a 529 plan grow tax free and you do not pay any taxes when you take money out to pay for qualified expenses, similar to a Roth IRA. Additionally, many states offer tax deductions or other benefits on the contributions you make to a 529 plan. Over 30 states offer tax benefits for contributing to 529 plans which are outlined here. Benefits vary by state so be sure to research what your state offers.

529 Plan for MBA Personal Experience

I live in Illinois and got my MBA at a college in Illinois. I enrolled in the Bright Start Illinois 529 plan (education savings plan). Illinois in 2019 has a flat state income tax of 4.95%. Single filers can deduct up to $10,000 a year. This means they expect to save up to $495 / year in state taxes. Joint filers can deduct up to $20,000 / year. This means that they can expect to save up to $990 / year in state taxes. My part time MBA spanned 4 calendar years. I made the full contribution I was allowed to deduct for 3 years. Each time used it to help fund tuition the following calendar year.

I usually aligned my 529 contributions to getting my bonus or selling my ESPP shares. Since I could deduct up to $10,000 a year I would contribute that amount. I made my 529 contribution all at once. You can also set up automatic investments from your bank and possibly with your payroll so you have smaller, continuous contributions throughout the year. By contributing $10,000 / year I saved almost $1,500 in state taxes. When I received my tax refund check I put it directly toward my next tuition bill. I also made some money on the investments and I wasn’t taxed on the gains. I found the whole process very easy with the ability to do everything online. It only taking a few days for the funds to clear when I needed to use the funds for my tuition bill.

529 Plan For MBA Additional Resources

Each state has certain restrictions about this deduction. Be sure to learn about what your state offers and what the restrictions are. By pure chance, in hindsight I learned I picked one of the best 529s offered but it is best to do your research first! I found a blog post by Smart Money Mamas very helpful which goes into great detail how to choose the best 529 plan for yourself or your family.

Are you enrolled in a 529 plan for your MBA or a 529 plan for yourself for grad school? How did you decide which plan to enroll in?

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The Ultimate Guide To Employee Stock Purchase Plan (ESPP)

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Why You Should Enroll in an employee stock purchase plan

Why do you care about Employee Stock Purchase Plans (ESPP)? If you enroll in the employee stock purchase plan offered by your company you can make more money! ESPP is a benefit offered by some publicly traded companies to their employees. ESPP is the ability to purchase company stock through payroll deductions at a discounted rate.

The effort required is minimal and requires enrolling in ESPP and selling the shares to realize gains (or losses). You have a guaranteed return if you sell the day you receive the shares. If you decide to hold the shares for longer, and the shares increase in value, it will help you accumulate wealth. Companies can offer a maximum discount of 15% on company shares. With current savings accounts interest rates at best at 1.5% APY, and average stock returns at 5-7% a year, but not guaranteed, this is a great deal.

If you’re considering enrolling in ESPP here are the terms you should know, the benefits of ESPP and approximately how much extra income you may be able to make.

Employee Stock Purchase Plan Terms To Know

  • ESPP Enrollment Period: defined set of dates where you can sign up to participate and select the % election amount. If you miss this enrollment period you will have to wait for the next enrollment period (either 6 months or 1 year later depending on the terms)
  • ESPP Purchase Period: Timeframe in which company shares are purchased on your behalf through payroll deductions. There may be two purchase periods a year, one beginning Jan 1st  and ending on June 30th, with the second starting July 1st and ending Dec 31st. You do not have access to the money you’ve contributed during this time.
  • ESPP Purchase Price: Usually, the purchase price is the price of the stock on the last day of the offering period, with the discounted rate applied. In the example above, it would be the ending stock price on June 30th and December 31st.
  • ESPP Holding Period: You can sell your ESPP shares at any time, even the same day you get the shares. However, in order for the sale to be taxed as a capital gain it must be considered a qualifying disposition.
  • ESPP Qualifying Disposition: A qualifying disposition refers to a sale, transfer or exchange of stock that qualifies for favorable tax treatment. ESPP falls within this definition. To be a qualifying disposition, the employee must sell their position at least one year after exercising the stock or two years after the beginning of the ESPP offering period. As long as you hold your ESPP shares for this time period you are taxed at a capital gains rate. If you sell prior to this period, it is considered a disqualifying disposition. A disqualifying disposition is taxed at the income tax rate.

Employee Stock Purchase Plan IRS Limits

The IRS imposes a limit of a maximum market value of $25,000 per year. However, companies can decide to impose lower limits. That means if your company grants you shares at a 15% discount, the max you can contribute is $21,250. The purchase discount also tops out at 15%, but your company could choose to offer less than that as well. Every plan can vary so be sure to look into the details around what plan your company offers.

Employee Stock Purchase Plan Tax Rules

The stock discount price (up to 15%) is considered additional compensation and taxed as ordinary income. If you sell that day, it is disqualifying and will be taxed as a short term gain / ordinary income. If you hold shares for at least 2 years from the first day of the offering period and at least one year from the purchase date, the additional income is considered a “qualifying dispositioned” and will be taxed as a long-term capital gain (15% tax rate for most taxpayers).

Additional Income Earned with Employee Stock Purchase Plan

The tables below offer a guide to how much additional income you can make after taxes if you sell that day per year. If you decide to hold onto the stock for the time period outlined below, your taxes will be 15% (for most taxpayers) for the discounted amount + any gains you made while holding the stock. Remember, it is always possible for the stock to lose value.

Additional income you can make from participating in an employee stock purchase plan by tax bracket when you sell the same day you get the ESPP shares for single tax filers
*1% assumes average (mean) income of tax bracket
**Assumes all income would have been taxed at the rate of that bracket
Additional income you can make from participating in an employee stock purchase plan by tax bracket when you sell the same day you get the ESPP shares for married filing jointly tax filers
*1% assumes average (mean) income of tax bracket
**Assumes all income would have been taxed at the rate of that bracket

It’s hardest to maximize the program when you make less money, but that’s when this is actually the most valuable! When your tax rate is only 22%, you could make almost $2,500 after taxes. If you’re in the highest tax bracket you make only $2,000 after taxes. The first purchase period is always the toughest. You’re used to getting that money in your paychecks every pay period. After the first purchase period is done, if you sell all your shares immediately you have everything you’ve invested from the past 6 months plus the additional income you made as soon as the sale settles!

If you work for a public company, check out your internal benefits page and see if this is one of the benefits your company offers!

See Also: Company 401(k) Match and Why You Should Max Out Your 401(k)