Ep. 102 – College Planning Using a 529 Plan
Have you been thinking of how to start saving for your child’s or grandchild’s college education? How about setting up a 529 Plan?
A 529 Plan allows you to invest in your child’s or grandchild’s college education before they even get to that stage. This type of investment has many benefits, including being tax-free during the growth period.
In this episode of the Secure Your Retirement podcast, we explain in detail what a 529 Plan entails and the benefits it offers. Listen in to learn how to open a 529 account and the investment options available for you.
In this episode, find out:
- Understanding the 529 Plan and the tax-free benefits it offers.
- This plan won’t affect your child’s ability to get financial aid because you’re the one in control of the money and not your child.
- The hands-on and hands-off ways to control the investment options for a 529 plan.
- The options available for you if you’re worried you won’t use all the money in a 529.
- Understanding that you can open and use a 529 plan in any state across the country.
- The current situation on whether the plan is likely to go away any time soon.
- The 529 investment plan doesn’t lock you in and you can make changes.
- How and where you can open a 529 account.
Tweetable Quotes:
- “It’s the parent or the grandparent that’s in control of the money.”– Radon Stancil
- “You can set the 529 plan up anywhere; it’s not based on residency.”– Murs Tariq
- “They want this plan to be as easily accessible because saving for education is very important.”– Murs Tariq
Resources:
If you are in or nearing retirement and you want to gain clarity on what questions you should be asking, learn what the biggest retirement myths are, and identify what you can do to achieve peace of mind for your retirement, get started today by requesting our complimentary video course, Four Steps to Secure Your Retirement!
To access the course, simply visit POMWealth.net/podcast.
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Here’s the Full Transcript:
Radon:
Welcome everyone to our retirement in action. Today, we’re going to be talking about something that may or may not affect you personally, but you might know somebody that it could assist with, and that is setting up the why, the how, everything around a 529 plan. Now, a 529 plan, just to help you appreciate is all about college. Helping pay for college. We have a lot of our clients that are grandparents. We have some that are parents and they’re thinking, “How can I be able to get money in a place that’s efficient and can help my grandchild or my child when it comes to college? And so, we get this question, “Well, should I set up a 529 plan?” So what we thought we would do today, is take you through the concept of how it works, the advantages, and just what the process would look like.
Radon:
So, we’re going to step through those different things. I will tell you that we’re going to walk through all of these different little points. And then at the end, we’re going to come back and say, “Okay, if you think that you want to set up a 529 plan, what are the steps to do so.” So make sure you listen to the end, because at the end that’s where we’re going to go through those steps. So, let’s start our conversation around this idea of saving for college for child, or grandchild, through the 529 plan. So, Murs, can you bring up maybe some of the advantages and let’s just start having the conversation around this idea.
Murs Tariq:
Yeah. Yeah. And I think to start off with that, the concept of saving for college, it’s always at the forefront of a lot of family’s minds, whether you just had a kid or you’ve got a kid that’s a few years out from college, it’s always, “Well, what if they don’t get a scholarship or what if they don’t get financial aid, how are we going to cover this major expense?” And it is a major expense and it keeps going up every single year. The average annual cost for, let’s say, if you’re going to go to an in-state public college as of 2020, right now, is just shy of $22,000 a year. That’s for room, board and tuition and not some other fees in there. But if you decide to go the private schooling route, the private college, that can be as much as $50,000 a year.
Murs Tariq:
So, say, you have a kid that’s going to go to school for four years and you would like to help cover that. Well, that’s a $200,000 expense. So, it’s something that you have to come up with some type of game plan, and there’s a lot of different ways that you could do it. Sometimes we’re fortunate enough to where the grandparents are going to cover all of it. And so, you don’t really have to worry about it. But if you have to save yourself, there’s all these different things that you can be doing. And so, today we’re going to talk about the 529 and the advantages of it. I’m pretty fresh on it because I had my first kid last year in March of 2020, and I immediately set up a 529 for him as soon as I got his social security card.
Murs Tariq:
So, pretty much, the 529 is on a high level. I think they call it a 529 college savings account. However, it can be used for a lot of different education expenses. So it can be used mainly for college, but also they’ve introduced the idea that you can actually start using it as early as elementary school. So, elementary school K through 12, if you want to cover, say, you’re sending your kid to a private school and there’s tuition involved, you can actually use the 529 in that world. Now, why would you ever put money into a 529 plan? Well, the idea is that you start saving into this account, and you’re investing in this account too, you’re using some different mutual funds that are there. And we’ll talk about that in a little bit.
Murs Tariq:
But the earnings that you make all throughout the process, that is all growing tax free provided that you use it for qualified expenses. So provided that you use it for this list of all different reasons, which is pretty much, room, board, tuition, any college or education oriented expenses. There’s a whole list of how you can use it, and it’d be a qualified distribution. So, let’s say, you get down the road and your kid is accepted to college and they go to a state school and you get that first bill, that first tuition bill. And I know they do it in semesters, but let’s just say you wanted to pay the whole thing upfront. You could take a withdrawal out of this 529 for $20,000, $30,000, whatever that number is. And a nice piece of that will be tax-free.
Murs Tariq:
So that’s a very nice benefit to it. So that’s kind of the high level as to why someone would think about setting it up. Ultimately, it’s to grow some money, invest some money, and get some tax-free benefits as we’re withdrawing the money. So, I think it’s a great thing to think about. It may not be for everyone. And we’re going to go through some of the reasons as to why, and some myths that are out there as well as to how the 529 works. But I think one thing that a lot of people are concerned about is, “Hey, if I start saving all this money for my kid for them to go to school, well, what is the impact going to be on their ability to receive financial aid?” So, Radon, you want to go through that? It’s not much, but it’s something to think about.
Radon:
Yeah. And before I go into that topic though, I wanted to hit on this, what Murs just talked about, about being able to grow the money in a tax, it is tax deferred and tax free if, in fact, we use it for college expenses. Now, as Murs just talked about, some of the college expenses are already today’s dollars hefty. So, let’s say that you do have a grandchild. And I just like to talk about some basic numbers on this. So, take Murs, right? So, his child, he’s got 17, 18 years before his son or your grandchild, if they’re just being born, is going to go to college. So just imagine that if we could double the money twice, so whatever your dollars are. So you put $1,000 in today, it then doubles to $2,000, then to $4,000, because every 10 years you double, if we earn 7.2%.
Radon:
So if I put in $1,000 and it grows to $4,000, well, now that $3,000 I get to use for college expenses and not owe any tax on that. I just want to give you perspective, because you now just take that multiply it. If I’m putting in $10,000, it becomes $40,000 and I don’t have to pay the tax on that. So it can be huge. Now, there are some caveats here, and sometimes people think about the idea of, “Well, what if my child is going to get some kind of financial aid? Would it hurt them if I have saved a substantial amount of money over in the 529 plan? And maybe you’ve got a couple of grandchildren and one of those grandchildren can get financial aid and I don’t need all the money? Well, the good part is, the money that’s in the 529 plan is not considered the child’s money.
Radon:
It’s considered the parent’s money or the grandparents’ money. So there’s a very small equation that for the benefit of that child that they may look at on that 529, but it’s a very small number. The vast majority of the count is considered the parent’s money. And the parent is the one who is actually going to be able to be in control. That’s why it’s called the parents’ money, because they’re the ones that are in control. And we’ll talk about that a little bit here, because this might be a concern you might think, “Well, what if I have a 529 plan? I got $50,000, $60,000, $100,000. What if my child just starts spending the money frivolously or not on college?” Well, they don’t have the control. It’s the parent or the grandparent that’s in control of the money.
Radon:
They are the ones who say how much money goes to the beneficiary, how much money can they get for these different things, whether it be tuition, books, all those different things that you can use it for. So, don’t think that your child’s going to run away with the money. It is really the parent and the grandparent who actually control that. But now, not only do they control how they get the money, they also control another aspect, which are the investment. So, Murs, can you talk a little bit about the investment side and the control there?
Murs Tariq:
Yeah, so the way, and we haven’t said this yet, but the way that a 529 is set up, so let’s say, you’re a parent and you have a kid that you want to set up an account for. The parent is actually the owner of the account. And you’re naming a beneficiary just like you would for an IRA or a 401k. You’re naming your child as the beneficiary of the account. So, parent is the owner, which means, like Radon said, they’re in control of all the distribution decisions, and then the beneficiary just reaps the benefits of being the beneficiary and getting college paid for in all essence. So, when it comes to control of the investments, that’s once again on the owner’s responsibility.
Murs Tariq:
Now, they have made it pretty simple in the 529 world, there’s investment options out there. So depending on how savvy or involved you are, you could pick between a bunch of different funds that they have available. They’re going to have all kinds of things like your major indexes and some growth type of investments, typically all mutual funds. And if you want to be hands-off, they have what are called life cycle funds or target date funds as well, where you can just say, My kid should be going to college, in say, 2040. And so, I’m going to pick a lifecycle fund that is going to be managed with that time construct of [inaudible 00:10:37] we make it less risky. So the parent or the owner of the account is in control of the investment options as well.
Murs Tariq:
So, depending on how you like to work within investments, if you like doing all the fun picking and everything like that, there’s plenty of options in that direction. If you like to be hands-off, and you’re really just focused on getting money into this account, and you want someone else to grow it, well, they typically are going to have funds that allow you to just put the money in there. They’re called lifecycle funds. So, let’s say, for example, your child is going to go to college, in say, 2040, well, there’s an investment manager that’s going to handle the risk of that fund until we get to 2040. So, there’s hands-on ways and hands-off ways, and they’ve made it pretty simple from the investment perspective.
Murs Tariq:
Once again, the idea is to really fund it, get the money in there and let it grow tax-free. And so, the investment options are there to do that. So, that’s kind of on the control. Ultimately, the parent or the owner of the account, which it could be a grandparent as well, is in complete control. Whereas, there are other types of accounts out there that eventually the minor becomes a majority. So, past age 18, and all of a sudden they are now in complete control of the account. So, just something to think about if a 529 is something that seems like it could be of interest to you. Now, I think, there’s all these myths out there as to, “Well, if I set this 529 up, I’m locked in.” And so, we want to just debunk some of these and help you understand what you are actually signing up for. So, the first one is a very common one. “What if I don’t use all the 529 money that I’ve set aside for my child? What happens then?” So, Radon, you want to take that one?
Radon:
Yeah. Sometimes people think if I don’t use the money, I lose the money. Now, that’s a pretty big statement to say. You put in tens of thousands of dollars maybe, or whatever you put in. You don’t want to say, “Okay, I’ll lose the money.” The fact is, you do not lose the money. What do you lose? Well, if you don’t use it for college expenses, then you’re going to have to pay tax on the money. But you would have had to pay tax on the money no matter what. Okay? So, I’m just going to have to pay tax on the money that has accumulated, anything that I’ve earned, not all of it. Because remember, I’m not putting the money in tax-free, by the way.
Radon:
Sometimes people think you get a deduction for putting it into 529. You don’t. Whatever you put in is already taxed. So it’s the growth that you’re getting that tax-free growth up. So I would actually pay a tax on that as well as a 10% penalty for not using it for college. Now, I just want to say something on that, and we may say it again here in a minute, but you don’t have to just use it for one beneficiary or the one that you originally does. So let’s go to Murs’ scenario. Murs has a son, Jay. And now, let’s say that Murs ends up having another child, we’ll call her Jamie. Okay. So now, Jay and Jamie are there. So, well, let’s say that Jay does not go to college. He can use the money for his other child, Jamie. I just named your second child. That’s pretty cool.
Murs Tariq:
I know. Yeah.
Radon:
So, the other child, he can use the expenses for her and go down that path. So, now think of a grandparent. A grandparent might have five or six grandchildren maybe. You’re not just putting it in for that named beneficiary. You can have multiple beneficiaries and use it for someone else if you want to. So, just think about that a little bit when it comes to this idea of, I’m fearful that I might have to pay this tax and the penalty down the road. Now, the second myth is, “I can only invest in my state’s plan.” So, Murs, you can handle that one.
Murs Tariq:
Yeah. So, sometimes you think, well, if I live in North Carolina or if I live in New York, these are state sponsored plans. So, the North Carolina one is called the NC 529 Plan. So they are state sponsored, they’re state run, and there’s regulation around them. So it’s a good thing that they’re state sponsored. It makes them very easy to use and very affordable as well. There’s hardly next to nothing when it comes to fees in these accounts, really just the investment vehicle fee. But sometimes we wonder, “Well, if I set up one in North Carolina, does that mean my kid has to go to a North Carolina school?” The answer is, no.
Murs Tariq:
Can I set up one because we’re moving to California, can I go ahead if I live in North Carolina now, can I go ahead and set one up in the California 529 plan?” The answer is, yes. You can set it up anywhere, it’s not based on residency. You can shop around. I’ll tell you there’s not much shopping around to do. The only thing that you could think about is, if there is a state tax deduction, which they’re few and far between. There is no federal deduction for putting money into this. So it’s not like an IRA where you put a chunk of money in and you get a tax deduction. There is no federal tax benefit to the person putting money in. It’s only the tax benefit comes to the withdrawals for the person using the money for education.
Murs Tariq:
But there are a couple, I know New York is one of them currently, where you actually do get a state tax deduction for the amount of money that you put in. The caveat there is that it has to be with the New York 529 plan. So, just something to think about there. But, no, you can open it up anywhere and you can go to school virtually anywhere as well. So, just something to think through. Another one here is “Federal tax benefits associated with the 529 college plan will eventually disappear.” We’re always worried about, hey, here’s where we are today but they’re going to take that away tomorrow depending on who’s in office or depending on what the tax legislation is. It’s here today but it’s not going to be there tomorrow. So, what do we have to say about that Radon?
Radon:
Not much. Because I don’t like saying what the government’s going to do and not do. I will tell you what’s the current scenario, the Pension Protection Act of 2006 basically said, indefinitely, we’re going to get this benefit. So there’s nothing that times out at the current scenario. Can the government change anything? Yes, they can change it. But for now there is nothing on the books that say this is going to go away. And from everything you would hear right now with all the problems with college loans and those kinds of things, it would not make sense. Well, that doesn’t really mean much either. But you wouldn’t think that the idea of not encouraging savings for college, you wouldn’t think that would go away.
Radon:
And then the last one that we’re going to just talk about is basically not being able to make changes either on my investments or my plan. And let’s just make this real short and sweet. You can. You’re not locked into an investment plan. You’re not locked into a plan. You can make changes if you find another plan that you like better. You can roll the money from one plan to the other. So don’t feel that you’ve locked yourself in and you need to do years of research before you make a decision. But I think what we’d like to do probably at this point, Murs, is if you could, just walk us through maybe the steps of somebody setting up a 529, and what they would do to do that.
Murs Tariq:
Yeah. So, it’s pretty simple. Like I said, they want these to be as easily accessible as possible because saving for education is very important. So, there’s a couple of different ways you could do it. If you had more questions about it, obviously you can reach out to us. We can help you think through and walk through the setup process. We actually are not able to manage those ourselves. But as a service to our clients, we’re happy to think through it and help you administer the plan in itself. A lot of these you’re able to open them up online.
Murs Tariq:
So, for me, I went to the NC 529 plan and just typed in a bunch of information, my own information as the owner, my child’s information as the beneficiary. So that’s usually date of birth, full name, social security, all those different things. And then you’re pretty much there. And then you get to fund the account. A lot of the investment houses like Schwab and Fidelity and Vanguard, they have also created their versions of 529 plans as well. So you can virtually go anywhere you want to set these up. And they’re almost all doable online.
Murs Tariq:
When it comes down to the time to actually using the money, it’s like when you take money from an IRA or a 401k, you have to submit a form that says, “Hey, I need this money for this reason.” And then a check will be cut to you and you can use that money. So, overall, I think the 529 is definitely something to consider. It’s not for everyone. But it does have some significant advantages when we’re talking about saving for our kids education. So if you have more questions about it, please feel free to reach out to us, but that’s all we’ve got for you.
Radon:
All right. As I tell you, each of our retirement in actions, if we went through this and we went through a lot of information and you’re thinking, “Oh my goodness, I didn’t get a chance to make notes. I was driving. I was walking. I was doing whatever,” go to our website, pomwealth.net, go to the blog page. And you’ll see an article that we have had written on this particular topic. And feel free, you’ll be able to print that out, use it, go back to it, and it has all this information that we’ve been able to accumulate here and lay out for you today. But we thank you very much for listening. We look forward to talking to you next week.