¶ Understanding 529 Plans
Welcome to a Wiser Retirement Podcast . Before we get started with the episode , i want to tell you about a new e-book available on our website called Buyer Beware . Why do they keep trying to sell you that annuity ? This e-book covers the various types of annuities , negatives to owning annuities and better investment alternatives to annuities .
To download this e-book , you can click the link in the episode notes or go to wisere investorcom and you'll find it at the bottom of the page . Now on to today's episode .
Welcome to a Wiser Retirement Podcast . We believe the best financial should always be conflict-free . I'm your host , Casey Smith , guiding you to financial freedom . co-host my , Missy Beach . Hey , missy .
Hey Casey , How are you doing ?
Doing good Great . Today we're going to talk about everything you know about five 29 plans .
There is a lot to know .
There's been so many changes that if you studied five 29 plans three years ago five 29 plans they do a lot more now than they did back then . The Secure Act and other things that have happened here recently . They got some ruling changes along the way . But let's just start at the top and say what is a five 29 plan ?
Because we have probably a lot of new parents that are listening to this and grandparents . They didn't have access to five 29 plans back in the day . The basically five 29 plan is a vehicle for college savings .
Yes , and it's a way to sock away that money and let it grow , tax deferred or not even tax deferred , i mean , you don't pay tax when you take it out .
Or education Right .
The ding ding ding value of the five 29 plan .
I just like it from a legacy standpoint . If you we talk about this with families all the time , but you realize that you're doing well for your own self and retirement , you have access in retirement What do you do with those additional dollars ?
And I think making sure that , or giving the next generation opportunity to make sure that they're also set for retirement . It starts with education , right . Oh , absolutely , and so it's great to be able to put money into a five 29 plan , especially with a very young child , because you get that compounding effect .
Yeah .
And it's great to help to help pay for an education for the next generation . Because education expenses are growing at six and a half percent per year . There's not much that really keeps up with that .
Oh no , and it goes back to that whole keyword compounding . And you know , even if you don't dream on , you know funding this account every single month when you're young with a newborn , just seeding that account with a few thousand dollars up front , when you know you might be lucky enough to be showered with some financial gifts when you have that newborn .
Right .
The amazing gift of compound interest just sets you up with a great head start to college funding .
Then even if you just added $25 a month to it after , just add something , it does help . It doesn't help us much when you got three years to go .
No , and unfortunately , yeah . That's when a lot of people start to focus on it , when it's high school time , right , and at that point , yeah , does it really even make sense to open a 529 ? Maybe not .
Correct , all right . So what are some tax advantages ? Let's go through that about 529 plans .
All right . Well , when you put money into a college 529 plan , your contribution is not deductible , Well at the federal level at least . but a lot of states , like our own in Georgia , do give a state tax deduction . So currently in Georgia you can contribute up to $8,000 per beneficiary each year and get a deduction off your Georgia taxes .
So it'd be 6% on $8,000 or four or whatever you put in .
I mean that's like real money .
Yeah , absolutely .
Yeah , nothing to shy away about , and so you just have to check with your state plan , because not all states do that .
Correct , all right . So what are the types of 529 plans ?
Well , two main types . There's your traditional 529 plan , where you put money in an account because you have no clue where your child's going to school Very typical . And then there's also the other type , which are prepaid tuition plans , where you might zero in on a particular school and actually prepay your students tuition at that university .
Which we don't have that in Georgia , but it's very popular in Florida .
Yeah , absolutely Yes .
But you have in that . So in the normal 529 plan you can go to school anywhere in the prepaid . You're going to school in that state , correct ?
Yeah , so you are choosing your child's future in that case .
Correct Which most states have at least one school that you would want to go to , so I don't think that's that big of a deal , especially Florida , right .
Yeah , exactly In the Southeast . I think you're pretty good .
Right . So when you think about the regular 529 plan , there's actually two account types . People miss this . There's opening up a 529 plan . That's a minor account . And then there's opening up a 529 plan that is in basically your name , with a beneficiary being your child .
So close observation , there's two different ways to do it , like you were just saying So , whether you want to be the custodial owner and your child really owns the account .
When they're 18 .
When they're 18 . So you know , do you want to give up ownership to your child when they're 18 ? Because then they can take that money out , pay a penalty and go buy a sports car . So there's kind of that chance that you are leaving up to your child .
And then there's the more traditional route where you , as either the parent or the grandparent , own that account and you are choosing the child as the beneficiary and you could then change the beneficiary . You know , it might not be that one specific child if he or she chooses not to go to college or chooses a different path .
So the key there is how it's treated on the FAFSA , which is the financial aid calculation form that all parents get to fill out . And you know , typically if you're even of modest income , you're not going to qualify for any financial aid . But schools will still make you fill out the FAFSA if you want any type of merit aid .
So you're going to go down this path anyway . So with the FAFSA , if it's a student owned account in this custodial arrangement , it's going to count 20% of that custodial 529 plan or student owned 529 plan towards your ability to pay . If it's a parent owned plan , it's only 5.64% .
So there's a little bit of an advantage to leaving it in a parent or grandparent owned account versus a student owned account . And then there's also the income component . When you're taking withdrawals from the 529 plan that's going to show up as income to either the parent or the student .
So if it's a student owned plan , you know that's showing as income or ability to pay , which is kind of ironic because they're just paying for tuition . This is not really like wage income , So it's just counterintuitive . So I would say in most cases it makes sense to leave it as a parent or grandparent owned plan .
Okay And I would agree with that . So let's think about 529 plan , the investment options . So typically I would describe it as kind of like a 401k plan So you can do the set it and forget it option which we often tell people just do the age based . So the age based is a glide path from risky to very conservative .
So it starts off with mostly stocks when they're young And then as you get closer to high school age , it starts moving into really short term US treasuries for most part , and then you know essentially the plan is made up of mutual funds . So you can also go on your own and select funds from that list .
But most people aren't going to do this and monitor that , and so I always like the idea of just being on that glide path . You don't want to be in a situation where you know you have a 2022 , you're all equity section of your 529 plan just dropped 18% , right .
Yeah , you know , a 529 plan is not really the right account to take on unnecessary risk .
Right .
So that's why it will you really counsel clients , just follow the age based allocation , because that's going to take down your risk as your client , as your client , as your student gets older and is approaching college . So let the plan do what it's supposed to .
But it's pretty straightforward . I mean , when you fill out the application , you select the age based and after that it's on autopilot . What about contribution limits to a 529 plan ? Can I put in as much as I want to ?
Well , it depends . It's considered a gift . So if you are the owner and the child's the beneficiary of the plan , you can put up to the annual gift tax exemption without following or without filing a gift tax form .
Or you could front load it And this is what a lot of grandparents like to do if they're trying to whittle down the value of their estate And , like a husband and a wife would , front load five years worth of the annual gift tax and put that in one beneficiary's account and get around the annual gift tax exemption .
So that's a good way to really super fund an account when a child is young and get a good head start . And then also , on the flip side , it depends on the 529 plan . States vary in terms of lifetime contribution limits . You know it may be half a million , it could be 250,000 .
So it just depends on that particular plan how much they will allow the account owner as a contribution . You know the account size can grow beyond that , but in terms of contribution money put into the plan there is typically a limit .
Okay , let's talk about ownership and beneficiaries
¶ 529 Flexibility and Eligible Expenses
. So if you want to change let's say your child doesn't go to college or goes on the college on a full scholarship and you want to move that beneficiary to someone else , who's allowed to who are you allowed to move that ?
to . It could be a family member , it could be a friend , it could even be yourself , you know , say you want to go back and take some adult classes and continue your quest for knowledge . That's fine .
But the most common thing we see is families kind of tearing it down to younger kids in the family when there's balances left over from the older kids that are unused , and then we really encourage clients . If you know your children haven't used it , just let it sit for the next generation , because I mean again the power of compound interest .
You can leave it in there .
You don't want to change the age based number , You don't want to leave it in super conservative for kids that aren't even with us yet .
But but yes , that's when you want to let it go super aggressive because these kids aren't even , yeah , a glimmer in anyone's eye .
yet So what are eligible expenses for 529 ?
Those are going to be like your tuition , books , fees , supplies you could buy a computer . It does not cover travel expenses That's a big one that a lot of people ask me about . So you can't cover their plane ticket to and from school , But you can also cover housing and meals .
So even if a student lives off campus in an apartment , the school will publish what the typical housing cost is for a student living on campus And you can withdraw the amount that's equivalent to an on campus living situation for your off campus student . So I feel like there's just a myriad of expenses that qualify .
So there's never really an issue about does this really qualify , Because chances are it's going to be a yes .
Got it Flexibility .
This is really good because I feel like , as I was just saying , you know there's so many expenses that qualify , but yet you do have a lot of options now if you know the money goes unused for a number of reasons .
For example , if your child gets a scholarship For example , here in Georgia so many clients have kids that are going to Georgia or tech or somewhere in the state And if you're going to get in one of those schools , you are going to be going on the hope or the Zell Miller scholarship , just because our schools in the state are so competitive .
In order to be admitted You've got to have that high GPA . So you're going to have a scholarship . So the amount of the scholarship that you receive you are eligible to withdraw penalty free from your 529 account . So if you're worried about overfunding because your child might get a scholarship , that can come right out Again .
As we discussed , you can change your beneficiary . As a last resort , you could always withdraw the funds with a 10% penalty on just the growth or the appreciation .
Never your principal .
Never your principal So you always can take that principal out . And if you think about it , that 10% penalty and tax on that appreciation , 10% if that money has been in there 20 years , that isn't always a bad deal .
Yeah right , all right . so other areas under flexibility you can actually use the 529 plan to pay off your student loan .
Yes , to pay down or off your student loan .
That's a new feature . Also , let's talk about , you know , k through 12 tuition . It's limited . I believe $10,000 a year is what you can spend on that .
Exactly .
I'm not sure what the advantage of paying for kindergarten first , second , third grade if you're starting from zero .
Yeah , some people will do a quick in and out , like with Georgia because you're getting that tax deduction of you know about 500 bucks . You know they'll put it into the 529 plan , get that $480 deduction or whatever on the 8,000 and then immediately pull it out to pay private school . So there's that option .
Another really cool provision that's come out is the ability to roll over unused 529 funds to a Roth IRA .
Yeah , there's some stipulations though .
You're right .
So you have to have the account open for 15 years .
Which is a long time .
Which is a long time and you have to . The max you can roll over is $35,000 .
And only up to that year's contribution limit .
So like this year $6,500 . You know the answer to this , but is that rolling into a Roth for the beneficiary or is it rolling to the Roth for the account owner ?
It would be for the beneficiary .
So the child would have a Roth IRA and rolling that over .
Yeah , so I mean a new college graduate what a great way for a parent to like seed a Roth . IRA .
True . So when it comes down to the 529 , I see as great legacy planning for grandparents , For young families , it's a great way to kind of hedge your expenses that could be very big in the future .
¶ Education Cost and Future Planning
I mean , you have one in college , I have one on the way to college , And when you look at the cost of education it's mind blowing . And we were just looking at state schools .
But if you want to go to Ivy League school or even going down to an art school like down at SCAD , that's a big number And so you never know where your child is going to end up . And so just having this , I don't think you have to cover 100% of their tuition . Most families that we work with are not covering 100% .
Now the child might be doing 50 through scholarship and the parents are covering other 50 , but child is earning and maintaining that scholarship . But every family is different .
Oh yeah .
We've had families that are very successful to say I paid my way through college , they can pay their way through college . I would argue that you can't pay your way through college anymore .
Oh no , especially I don't think that that really exists .
You're going to like a private institution .
Right , there's no way It's .
there's an article It's an article many years ago actually now talking about Yale And the guy who wrote the article in the for the Washington Journal had gone to Yale and his son was now in Yale and he said that he worked his way through Yale . He worked in the summertime , he had jobs during the school year and he was able to pay his way through .
This is obviously very , very long time ago And he's saying there's no way his son at the wages that they were being paid at the time , which back then we were talking about , you know , $15 minimum wage , things like that but there is no way he could possibly earn enough money .
you would take him like 10 years or something to get to pay his way through college . And I sit on a board of a school and I Rates is article one of our board meetings and I was almost laughed at because I was two years too early , fast forward . And then all of a sudden there's this huge push people can't afford colleges .
The loan rates are horrendous , right , and the people are coming out of college with what I think the average is around . I have to look it up . I thought it was a rick around 10 000, . but if you take away the , the low you know yeah you , look , you look at the median is much , much higher .
Wow , doctors still come out with hundreds of thousands of dollars . Um , and they're , and you could argue , their profession isn't really , is it really ?
paying that back .
Yeah , is it once . It as it once was since it's all corporate now , unless you're a specialist of some sort true um , i think you should do this . There should be a website developed , or the schools who are the one who the main beneficiaries of these loans .
You should say this is my declared major , this is the type of field I think I'll go into , and it takes those salaries , not the top-end salaries . It takes those average salaries for your region that you're going to live in and says This is your roi on your college education .
Yeah , this is your break even .
Yeah , Yeah so there'd be no more history majors , unless they're gonna become lawyers or become teachers , right and but um , but yeah , i remember it . Even in in uh flight school There were people that had taken out 150 000 loans to get their Flight school training to get to an airline .
When they got to the airline back then it was only paying Maybe 28 000 dollars . Your first year 45 . Most you ever made was probably 60 Until you could upgrade to captain . But there was no upgrades because you know everybody was in bankruptcy . You know this . After 9 , 11 , right , um , fast forward .
Now it's very different , but the roi on that 150 did not look very good . Yeah and then these people married each other . Oh , so you end up with with uh 300 000 dollars in student loans , and the household income is less than 80 grand .
Does not compute does not compute .
It worked out for them . It's all . It's worked out for the people that I know because the airline industry did recover and And they're doing okay , but that was a big burden for me for over a decade . Um , so you start to think about that .
Um , you know , sometimes it's important to have a , a prestigious school name , but is that really what you need for what you're trying to do ?
Yeah , and I would argue in this day and age , it does not matter , school name does not matter if you want to be a pastor of a church Or start a ministry .
Why would you go to duke And pay all that money to go to duke When you could go to uga for free ? I know .
But you can get it in both divinity school right .
Exactly , exactly Um . So you just have to have um thinking and put put guardrails in Um and in some families . Obviously it's very important that they have the highest level of education , but I still go back to what's the outcome on that ? Where does it end up ? Absolutely , and you don't know , sometimes you don't know .
Sometimes a smaller school is good Um the student . You know their child feels like they get one on one attention and that will help them be confident . So about coming out of school being confident .
Oh , absolutely Right .
But the five to a nine plan is certainly a great way to plan for the for the unknown . Exactly , and it looks to me like if you save too much , there's lots of avenues .
There is and the chances of saving too much in this day and age , with that's true over six percent inflation and education .
Well , if you think about all , stock portfolios should be giving you a little less than probably seven percent , seven and a half or a little less than eight percent . So seven to seven and eight percent average annual rate of return . You're only going to be invested in that for maybe what ? eight years , and then the next 10 years .
It's more conservative , right .
Yeah .
So let's say you average a six percent rate of return over 18 years , the cost of tuition still going up by six and a half .
Yeah .
So you're a half a percent short , plus or minus . You know that every every single year , so you're not putting it in there in hopes that you're going to save . You know every dollar's going to create two dollars in education money . You're putting a dollar in there just to keep up with the six and a half percent , which is crazy .
Keep , in pace , keep in pace , you know . And the other great thing about these five 29 plans is everything's so digital , you know . They all have just a link that you can send your friends and family .
So when you know junior's birthday rolls around , they just click on the link and send you know , 50 bucks to the five 29 , and grandparents love that because sure they're going to buy the loud toy too , but you know when they can invest in their grandchild's future . education like that's kind of the warm and fuzzy that they're looking for too .
Right , the . I guess the last thing I'll end on is just fees . You should never be paying a financial advisor to manage a five 29 plan for you . We don't charge for those here , we don't . we open up the right five 29 plan for the situations of they're in Florida . We'll open up in Florida .
then Georgia we open up in Georgia , but you don't need to add management fees on top of a five 29 plan .
That's the fastest way to lose ground .
Exactly . Ultimately , the five 29 plans are going to have fees themselves , which some of the cheapest ones are the Vanguard based ones , like in Nevada . So we'll use those a lot . But we also will use Georgia's because people like the tax credit which I think kind of negates out the V difference , putting on where you are on your state bracket .
But ultimately I think the strategy is go directly to the source . It's very easy to sign up and very easy to check , age based , and after that you don't need a financial advisor . You might need a planner like Missy or myself to be able to help you calculate how much you need to be saving .
But as far as management , you don't need to be tacking on a 1% or even a half percent management fee to something that is just as robot , automated , like in a five 29 plan environment that we have today .
Exactly , yeah . And from the advisor side , it just feels so wrong to ever think about charging a client to manage education dollars . Yeah , right .
Even if it was in a brokerage account . Yeah , yeah , well that's where we're different , i guess , but there are a lot of people out there that charge money for managing five 29 plans , and if you have that person , you need to fire them . Well , thanks for listening today's episode .
If you're interested in learning more about why is wealth management or want to schedule a consultation , meet with me or one of our fordivers financial advisors . You can do so by going to our website at wiserinvestorcom or you can click on the link in the episode notes . Also might want to consider looking at two other podcasts .
We had episode 125 , 10 tax planning strategies for hiding individuals . Episode 127 , the cost of inheriting wealth estate tax opportunities to avoid it . We've done a couple of great YouTube videos here recently .
Six habits of financially successful people and how to be a long-term investor are all part of our AYZer Retirement YouTube channel , where you can see Missy and Mikaela and myself and Brad add additional content to the podcast . All right , thanks , missy . Great conversation .
All right , we'll see you next time . See you , casey .
Thanks for listening to a YZer Retirement podcast . We hope you enjoyed today's episode . Make sure to subscribe wherever you're listening . That way you don't miss any new episodes . We'd also appreciate if you could leave a rating and review . If you have any questions about anything that was discussed today , head to wiserinvestorcom and reach out .
This episode was produced and edited by Ken Houtley . This podcast is strictly for informational purposes only and is not to be considered as investment advice or a solicitation to buy or sell any financial products , securities , digital assets or any other investment vehicles or a basis to make any financial decisions .
Wiser Wealth Management Incorporated is a registered investment advisor with SEC . The host and or guest may personally own securities , digital assets or other investment vehicles mentioned on this podcast .
Neither the host nor guest of the show are compensated for their participation and no referral fees are paid to or received by any host or guest for clients , listeners or similar interests . Investments involve risk and , unless otherwise stated , are not guaranteed .
Be sure to first consult with a qualified financial advisor , tax professional , insurance professional and or legal professional before implementing any strategy discussed herein . Past performance is not indicative of future performance .