In honor of National 529 Day, Mike and Amy discuss the importance of college savings, particularly through 529 plans. They explore various aspects of education funding, including the impact of student loans, how to determine the right amount to save, the tax advantages of 529 accounts, and what expenses can be covered. They also address concerns about what happens to 529 funds if a child does not attend college, the role of grandparents in contributing to these plans, and how to choose the right 529 plan for individual needs.

Takeaways

• College savings is a significant financial goal for families.
• Starting to save early is crucial for education funding.
• 529 accounts offer tax-free growth for education expenses.
• Qualified expenses for 529 withdrawals include tuition, room, and board.
• Unused 529 funds can be transferred to other family members.
• Grandparents can contribute to 529 plans without affecting financial aid.
• Choosing the right 529 plan involves comparing fees and investment options.
• State tax advantages can influence the choice of a 529 plan.
• Understanding the rules around 529 withdrawals is essential for maximizing benefits.
• It’s important to stay informed about changes in education funding policies.

Chapters

00:00 Introduction to College Savings and 529 Plans

03:13 Understanding Student Loans and Their Impact

06:13 Determining the Right Amount to Save for Education

09:18 Tax Advantages of 529 Plans

12:32 Qualified Expenses Covered by 529 Plans

15:15 Options for Unused 529 Funds

18:25 Contributions from Grandparents and Other Relatives

21:20 Choosing the Right 529 Plan

Links

Schedule a consultation with Amy: https://www.instarfp.com/contact

Schedule a consultation with Mike: https://nextmissionfinancialplanning.com/contact/

Transcript

Mike Hunsberger (00:00)

Hey, Amy, how’s it going?

Amy (00:01)

It’s going really well. How are you?

Mike Hunsberger (00:02)

Doing good. So Amy, we’re releasing this podcast on May 29th. Do know what a holiday that is?

Amy (00:09)

Well, I do because I read our notes. So May 29th is National 529 Day.

Mike Hunsberger (00:17)

Yeah, that’s right. So today we’re going to be diving into college savings and planning and how you think about that and specifically around 529. So stay tuned.

So we’re recording this in late April. as I said, we’re going to talk about 529s. But just wanted to talk a little bit, first of all, about student loans, lots of things going on with the new administration, some court cases, challenging student loan repayment plans that are out there. lots of unknowns right now. ⁓

It’s really a ⁓ ever moving situation. And so we’re not going to dive too much into that today just because there isn’t a lot of actionable information right now with so much in flux. But we’ll probably do a show in the future once some of that becomes more clear and we can actually talk about it with some level of certainty.

But the other thing that came out recently was the number of folks that are in default for student loans. Had all the pauses that went on with the COVID pandemic and that extended and kept getting extended. late last year, or actually toward the end of last year, payments resumed. And now folks are hitting that nine month period where they’re starting to be in default if they haven’t made payments. And so the new administration announced that they are going to start ⁓ collecting and referring some of those defaults. currently, it’s over 5 million people are in default on student loans. So ⁓ again, not a good situation. And there’s several more million that have our

just short of being truly in default. So the administration has announced that starting May 5th, they are going to look at wage garnishment ⁓ and referring things to the treasury. So if you’re supposed to get a tax return, your tax refund, that’s going to get stripped away to pay for your student loans if they’re in default.

Just be aware of that. Hopefully none of you are in that situation, but you know make sure if you are you’re talking to your payment processor and seeing what options you have ⁓ going forward so ⁓ It’s really what I had any any other thoughts on student loan stuff I know it’s not really our topic today, but it’s wanted to kind of hit that since we’re talking education in college

Amy (03:40)

Yeah, I mean, it’s worth mentioning because I know that people have a lot of questions, but to your point, you know, we don’t have a lot of actionable information, but I think this one will definitely be on the docket for later on when we have more clarity.

Mike Hunsberger (03:55)

All right, so yeah, you want to kick us off?

Amy (03:56)

So. ⁓Yeah, yeah. So, you we’ve talked before, we’ve talked before about education. We’ve got, ⁓ actually, we covered 529s in some detail. ⁓ Last year around this time, we’ve also talked about post-911. ⁓ College is expensive. It’s one of the most, one of the biggest goals that people are saving for beyond retirement. ⁓ In some cases, it’s bigger than a house payment. Not always, but sometimes. ⁓

So it’s very important. This is something that families struggle with and it’s important enough to talk about again. So we have some questions lined up that people typically come to us with. ⁓ And Mike, to kick us off, the first question is ⁓ the most obvious one to start with. How can families determine the right amount to save for their child’s education?

Mike Hunsberger (04:49)

But this is difficult. You’re talking about if you’re starting early, which is always the best when you’re having to save for a big expense, you could be 18, 15 years from that actual goal. is the kid even going to go to college? So lots of challenge. It’s both art and science. College has you know, is steadily increasing in cost as we’ve talked about before. you know, this year, think we’ve, for next year, we’re seeing the first couple schools that are over $100,000 cost of attendance all in per year. So, you know, I mean, that’s just astronomical $400,000, you know, if they get done in four years, if they’re not getting any kind of aid. So,you know, it can vary greatly. ⁓ So, you know, a lot of times it’s just start saving, you know, what do you have that you can put away? You know, start start doing that. And then as you get more clarity on, you know, what the kids like, you know, what their goals might be, then you can really dial into how much do you need. ⁓ But there’s lots of different things like, you know,

I got lucky. I only have one daughter and had the GI Bill that I could transfer. We’ve talked about the GI Bill stuff before, but didn’t really have to save a lot because that’s going to basically provide her undergraduate education. And I know you’ve got two kids, so one GI Bill. so you’re in the, how do we divvy this up?

probably paying for at least, you know, at least part of one kids school. so again, it’s it’s understanding what your resources are, you know, isn’t GI bill. But if you have multiple kids, OK, that may take care of one of them. Still going to have to save some for the others. And the other, you know, art piece of this is the schools have very different funding models. So some of them are going to give out.

you know, merit scholarships based on the kids grades. Others are fully just based on the need and that the family has. So and that can change drastically depending if you’re still if you’re if still in the service when your child’s going to school, you may qualify for more aid because you get a bunch of tax advantaged ⁓ income, B.A.H., B.A.S. And so that doesn’t show up.

through the FAFSA to the schools. So it looks like you’ve got you’re making less than you really are, which is which is great because you qualify for more aid. If you’re retired and you’ve got a pension coming in and you’re working a second job, maybe the spouse is also working. You’re probably earning, you know, a significant amount of money and you’re not going to qualify for that much need based aid. So it really is a hard thing to do 15 to 18 years before you’re going to need the money. So, you know, it just makes sense to start saving some, even if you base it on, OK, I’m going to save to target a being able to pay for a state school. You know, that could be a good target to start with and just, you know, make it make it the continued investment.

and savings to try to meet that goal and then adjusting as you get closer and see what that actually looks like. Anything you want to add that I missed or anything or clarify?

Amy (08:53)

No, I mean, it’s such a complex thing and people have a hard time, know, and we’re talking specifically about 529s later on. know, to your point, like just start saving. think sometimes people try to think about under saving because they feel like the 529 isn’t flexible enough. I actually am okay with,

saving maybe even a little bit more than you think you need to because it is so much more flexible than it was to begin with. ⁓ But you’re right. You’re absolutely right, Mike. mean, it just is a moving target, but it’s better to start than to wait and then be surprised and not have enough time to catch up.

Mike Hunsberger (09:37)

So again, once you kind of set that target, we’re talking 529s. What are some of the tax advantages of saving into a 529?

Amy (09:50)

Yeah, so I think about 529 accounts ⁓ as almost like it’s to a degree can be like a brokerage account that you don’t pay any taxes on unless and until you take a distribution that’s not qualified. ⁓ And so, you know, and that goes back to the flexibility we were just talking about. ⁓ So several tax benefits, ⁓ you know, at the state level depends on your state, ⁓ which, you know, state of residence, sometimes contributions can be made ⁓ and deducted on your state taxes. ⁓ At the federal level, ⁓ no deduction there, but your earnings still grow tax free. like I said, it’s like a brokerage account that you don’t pay any taxes on unless and until you take withdrawals. If you use the withdrawals for qualified education expenses, then they’re tax free. So you don’t pay any tax at all, even on the growth. ⁓

And then, you know, one of the things that we were just talking about, like, how do you know how much to save? If you kind of overshoot things a little bit and you have post 9-11 GI bill, there’s ways that you can take the money out. It’s not a qualified expense, but you’re not subject to the penalty because you can offset what you received for GI bill aid. And that, again, that’s why I call it sort of like a brokerage account. So you will pay taxes on that growth, but you’re not going to pay the penalty and you didn’t have to pay tax on the growth as you went along. on the dividends and things. Does that make sense, Mike?

Mike Hunsberger (11:21)

It does. It does. Yeah, no, that’s that’s great clarification there. And yeah, was just talking to a client the other day and they’re moving to Arkansas and Arkansas, you know, they can contribute $10,000 a year as a couple into 529s and that’ll be a state tax deduction. So, you know, it definitely varies. Some states don’t have income tax, so you’re probably not going to get a deduction there, but ⁓ states that do sometimes have pretty generous, ⁓ you know, savings for college.

Amy (12:04)

Yeah. And I mean, some of them are very generous. yeah, I think West Virginia, South Carolina, I don’t even think they have a limit on how much you can deduct. You can deduct, you know, whatever you contribute for the child. ⁓ So we’ve talked about, you know, tax advantage, kind of how to figure out how much ⁓ qualified expenses, what are the things that you can use the 529 to fund besides tuition? tuition is at what…

What else can you use? Room and board, books, things like that.

Mike Hunsberger (12:36)

Yeah, you can. It’s pretty wide open for the 529 fund. like you said, tuition, room and board, book supplies, ⁓ and even sometimes certain technology ⁓ can be taken out for that, like laptops and things like that. ⁓

It’s important to understand the specific guidelines and you know before you take your money out if it’s not one of the real standard things, but It’s pretty broad You know and sometimes you kind of got a sword through especially if you’re qualifying for some of the tax credits Those are typically more specific usually that’s around ⁓ You know the tuition maybe fees ⁓

sometimes books. So, you know, there are various things when you’re actually paying for college, these strategies of when you use, you know, what dollars for what specific expense and what’s allowable and things like that. So make sure you’re doing your homework. The other thing you can’t do is if you are taking the tax credit and, you know, using five twenty nine dollars, you can’t use the five twenty nine dollars to qualify for the tax credit.

at the same, know, using those same dollars because, you know, that’s kind of double-dipping. You’re already getting the tax advantage of the 529, so they don’t want to give you the credit based on that. again, when you’re actually coming up with the bill-paying strategy, you know, probably right about now, if they’re a senior in high school, you know, and kind of drafting that four-year plan, take all this into account. When do you use the 529 versus when making sure you qualify for a tax credit or some other GI bill? How do you stagger all that to make sure you’re getting the best bang for your buck? Anything else on that?

Amy (14:50)

No, no, I mean, I think you made a really good point in terms of understanding the difference. So not just what the 529 can cover, but what credits. So if you fall in that income bracket and you can take advantage of any of the credits, the education credits, understanding what those credits can be used to fund and the fact that you can’t use the, you can’t cover the same bill with.um, a credit and 529 money and you can stack it together, but you can’t, you know, so if you’re going to get the four, you know, for a whole 4,000 of the American opportunity tax credit, um, and there’s nothing else, then you couldn’t use 529 plan money that year for qualified expenses. Um, but most people are paying more than 5,000 or $4,000. So there’s, there’s other options for that 529 money.

Mike Hunsberger (15:39)

No, exactly. So you alluded to it. But, you know, I think the number one concern that folks have when they’re like thinking about saving for college, especially in the 529 is, well, what happens to my funds if Junior doesn’t go to school? What are my options? I just, you know, did I think they keep the money or, you know, what can I do with it if if they don’t go to school?

Amy (16:10)

Yeah. And this is a big question. And I think that it was right to worry about this when 529 accounts were pretty new, but they’ve become so flexible at this point that there’s tons of options at this point. So if you’ve started saving for your child, they decide not to attend college. There’s plenty of other options. First, one option is that you can change the beneficiary to another eligible family member. So it could be you.

It could be your spouse, it could be a sibling, it could be a niece or a nephew that you have. ⁓ You can withdraw the funds. if you make a withdrawal and ⁓ you don’t have any way to kind of offset or an exemption to the penalty, you’re going to pay 10 % penalty on the earnings plus tax on the earnings.

And I’ll also note here, if you were able to get a state tax deduction, there’s a good chance you’re also going to have to recapture that deduction at the state level too. ⁓ The other things, the other ways that are in play for 529s at this point, depending on whether you meet the criteria, you ⁓ can roll funds from a 529 to a Roth IRA ⁓ now. And just quickly going back to other eligible family members.

You don’t have to use it for the child. You could use it for the grandchild. So if your children have kids and you’ve got leftover money, you can keep it and use it for grandchildren’s education. And when you think about the amount of time you may have accumulated that money, that’s really powerful for the grandchild’s education. What I miss, Mike, I feel like there’s so many different ways to use 529 money now.

Mike Hunsberger (17:55)

Yeah, I think you hit some of it earlier. But, you know, if if they get a scholarship, you know, you’ll pay the you’ll pay the tax on the earnings. But you’ve had tax free growth ⁓ for for many, many years ⁓ that can help. But yes, you’ll pay that you won’t pay the 10 percent penalty. ⁓ You know, I think you hit the big ones. The Roth piece is is the newest. that came out with I think secure 2.0, one of the secure changes. And so that’s nice, some requirements there, you gotta have the account open for like 15 years and when the money went in and things like that, but it’s still a great option and that would be for the beneficiary. you could, if they didn’t use it for college, you can.get them started, get your kids started off on the right foot with the ability to fund their Roth IRA. So that’s a good option. And yeah, lots of things. I definitely encourage folks to consider saving in a 529 if there’s any.kind of remote possibility that they’re going to need it for college. It’s a good vehicle to do that. So yeah, I think you hit those things.

Amy (19:30)

Okay. So another question ⁓ is, so we talked about grandparents a little bit. ⁓ I know that there are grandparents that specifically want to save and other relatives. I actually have always contributed to my nieces and nephews 529s ⁓ as gifts for them. ⁓ So walk us through how people can do that if they want to.

Mike Hunsberger (19:52)

Sure, so there’s really two ways. If the parents have a 529 already established, like you said, and you make gifts, you you give it to the parents, say, this should go in there, the kids 529s. That’s one way it’s still owned by you as the parent. The other option is the grandparents could just create their own 529 and designate the grandchild as the beneficiary.a little bit of a benefit with that because and this is also a recent change with the new FAFSA simplification act that happened the other year is it used to be that if income came in it kind of would get counted against the student you know if it came from the grandparent that would get reflected. That’s the only the case so the grandparent and have that 529

They could pay for all of college and it, you know, wouldn’t show up on the financial aid forms and it may allow the student to qualify for more aid. you know, options around that going forward and, you know, a good, good way to save if the grandparents are, you know, considering that. Good thing is, you know, a lot of times there’s multiple grandchildren. So run less into the.concern of, I only got two kids.

So the grandparents may have, you know, multiple grandkids. So there’s kind of even less of a worry of that, you know, not getting used eventually. Well, a parent may only have, you know, two, three kids if they, you know, are multiple siblings and then they have multiple sets of kids. You end up with.eight, 10 grandkids that now that that 529 can be used for any of them. So it could be a good, good option for saving.

Any other thoughts on that?

Amy (21:59)

Yeah, and well, I would just say that, you know, for for those living in states with a state income tax who also offer a deduction for contributions, these also usually I, in fact, I haven’t encountered a state that doesn’t allow it for a grandparent ⁓ contributing. ⁓ So ⁓ there’s a potential for quite a bit of tax savings for grandparents living in high tax states. ⁓ So.

Mike Hunsberger (22:28)

Yeah, that’s a point.

Amy (22:29)

⁓ no, Mike, one other thing. mean, I thought maybe that would be our last question, but I, you know, I keep running into this question a couple of you know, ⁓ as I go along and I’ve got clients who are just having babies and things now. ⁓ so how do you pick a five 29 plan? You know, there’s a whole bunch of different ones. How do you, how do you pick one?

Mike Hunsberger (22:51)

Yeah, that’s a great question. ⁓ So the first thing I’d definitely look at is, again, at least consider your state plan if there is some tax advantage with that. You know, the plans vary. I think most of them are slowly improving. It used to be that some states, you know, the choices weren’t very good and they were really expensive, you know, with fees and…the management fees on the ⁓ investments. So, you know, if you have a plan that looks expensive compared to maybe look at a couple of their different plans and compare, you know, make sure that the tax advantage is still worth it compared to what you’re going to end up paying. So that would be the first criteria. If you’re in a state that doesn’t offer any kind of tax break because there is no income tax or they just don’t. know, lots of options you can pick. You can use any state’s plan and you can also, you know, most brokerage accounts like your Fidelity, your Vanguard, your Quab’s all have their own 529. So at that point, you really want to look at, you know, what are the fees and, you know, what are the investments like that?

you know, you will be able to use within there because you don’t want to be paying more than you need to. but like I said, a lot of them have come, you know, come around. They offer index funds, which are relatively low expenses and, you know, allow you to, you know, pick and find one that’s good. and

If you Google online best 529 plan, there’s going to be numerous sites that come up and say, here’s our ranking one to 50 of all the plans and stuff. And so I’d look at a couple of those and just see what, you know, if there’s somewhat of a consensus, maybe, ⁓ these are all within the top five. Maybe you start looking there and just seeing what could be.

Any other thoughts on that or what you recommend?

Amy (25:13)

Yeah, no, I agree with everything you said. I’ll just add to ⁓ that, you know, for those who have still have a DOD ID number. So active duty reserves retirees. If you have a DOD ID number, you can get into the MWR library online and log in and you actually have access to the Morningstar 529 center. So you get into the Morningstar access center or investor center.

And then on the left-hand side, you can ⁓ go to the 529 plan center. And there’s a ton of information in there. You can compare all the different investment options, get Morningstar’s ⁓ kind of feedback. ⁓ And then Mike, to your point, plenty of good websites out there that give their take on things as well. ⁓ But start with your state plan if you have an income tax and if you get a deduction for it.

⁓ or some other advantage and then if you don’t then go looking for the best plan that suits your needs.

Mike Hunsberger (26:12)

Yeah, that’s a great tip. I forgot about that. But yeah, that’s a good thing that, like you said, you have advantage. You should take advantage of if you still have access to that.

Amy (26:24)

Yep. ⁓ Well, Mike, I think that hits everything. ⁓ We hope that you understand your 529 options better, understand how the plans work and how valuable they can be in your college savings. ⁓ Thanks for tuning in and we’ll see you next time.