More on 529 plans...

You probably remember me calling attention to a comment made by My Pocket Change in one of his posts about the feasibility of using 529 plans for general savings, instead of educational savings. My post was met with some amount of skepticism and I was planning a more formal response until I saw this one over at My 1st Million at 33. Bravo to the sheer amount of work put in to model the possibilities!

ML, the guest blogger who put the post together, calls this part one, and truth be told, I'm very interested in what else could possibly be added to the equation (pun intended). At the end of part one, the following conclusion is reached (emphasis mine):

At this point, you’re probably thinking, “Why bother!” Indeed, 401(k), Roth IRA or the traditional IRA, even the non-deductible kind are much better ways to save for retirement. It is only after those have been maxed out, does the 529 plan emerge as a potential alternative. As described so far, it’s applicable to only a very small segment of the population with high disposable income or a lump sum to invest early on.

If the story ends here, this would not have been a useful exercise. Fortunately, there is much more, both in terms of the 529 vs. taxable plan comparisons and ways of utilizing the 529 for qualified educational expenses thus avoiding the 10% penalty. Please stay tuned for Part 2!

Looking forward to what's next. Thanks for carrying the torch and deeply researching this one!

Using a 529 for non-educational retirement savings??

I came across a very interesting post that alludes to a loophole in the 529 educational savings plan. Miller over at My Pocket Change writes:

"There might be games you can play using a 529 account. I briefly looked into this at some point in the past. Basically, your money grows tax-free in a 529 account, but if you spend any gains on non-educational expenses, you pay a penalty. There is a breaking point (in time) in which even with this penalty, you’d be better off using a 529 account (given, against its intended use)."

Now, given that I don't have kids and don't intend to, I would have to do some reading to understand whether or not there is something here or not. Anyone have anything to add here? Is this something that can be exploited?