June 3, 2025 • 39 mins
We dive into the world of 529 college savings plans, exploring their tax advantages, flexibility, and potential for creating generational wealth. This educational episode clarifies common misconceptions and provides practical advice for families considering this powerful financial tool.
• 529 plans offer tax-free growth when used for qualified educational expenses
• Qualified expenses now include K-12 tuition, student loans, and apprenticeship programs
• Plans work best with a long investment timeline, ideally starting when children are very young
• There are multiple options for unused funds, including changing beneficiaries or Roth IRA rollovers
• The 10% penalty is waived for scholarships, military academies, and other specific situations
• Starting early can create significant generational wealth by eliminating future student loan burden
• Proper planning can minimize tax impact even if funds aren't used for education
• Parents should prioritize their own retirement savings before funding education accounts
Remember to subscribe to the podcast to hear more information to help you pursue your financial goals.
How to get in touch with us:
Keith Wilson keith.wilson@lpl.com
Anthony Ruffalo: anthony.ruffalo@lpl.com
check out our websites!
Keith Wilson https://www.wfa-nc.com/
Anthony Ruffalo: https://ruffalowealthmanagement.com/
Our YouTube Channels
Keith Wilson: https://www.youtube.com/@ThatFinancialGuy
Anthony Ruffalo: https://www.youtube.com/@anthonyruffalo2704
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
Mr Anthony Ruffalo, certified.
Go ahead and say it.
Speaker 2 (00:04):
Certified financial planner.
Speaker 1 (00:06):
Thanks for being with us today again for our podcast,
Unsolicited.
You have to be here.
You're the co-host.
Speaker 2 (00:12):
What's up, my friend, I can't do this.
Speaker 1 (00:15):
I can't do this by myself.
Sure, you could.
Speaker 2 (00:19):
It's not that complicated.
Speaker 1 (00:21):
For the three people that are listening.
Is it that many?
For the three people that arelistening, is it that many?
Well, last podcast you said forthe three people that are
listening, it's up to six.
Speaker 2 (00:31):
All right, look at that.
It's a what a double.
Speaker 1 (00:35):
It's 100% growth rate , we're gaining ground.
So this is what I want to talkabout today.
What do you want to talk abouttoday, keith?
I am seeing a lot of this withthe younger families coming in
and really over the years, Isn'tevery family younger than you?
Speaker 2 (00:56):
No, I mean, do you really have any families that
are older than you, that arestill alive, that are not in a
graveyard?
Yes, I do.
It never gets old making fun ofyour age all right so what do?
Speaker 1 (01:10):
you want to talk about 529s, let's go, let's 29
yeah, 529 planes is what I wantto talk about, and, and
specifically 529 planes becauseyou tell me, if you hear this,
so again, young families,they're starting out, maybe
they're got an infant, athree-year-old, a four-year-old,
and college planning is ontheir mind, because they want to
(01:32):
start early, which is fantastic.
And they hear, maybe they do alittle research, college
planning, college education,funding, and they hear the term
529 plan.
So they've got, they've gotenough to hurt them as far as
the knowledge is.
That's why they come in and say, okay, keith Buffalo, anthony,
(01:57):
is a 529 plan worth it?
That's the question I pose toyou, young sir.
Speaker 2 (02:07):
Yeah, is it fine?
So I'm going to tell you rightout of the gate I am biased in
the fact that I love 529 plansand I think that there's a huge
lack of understanding in themarketplace about them and I
think there's also competingdollars for them.
So people get talked out offunding 529 plans by the captive
(02:28):
insurance agents that want tosell the whole life, or the VUL
or the IUL to fund the college,to capture those contributions
and make a commission.
I think you got a lot ofcompeting dollars out there in
the marketplace and then youalso have some people out there
(02:51):
that will push you away fromthem because they don't
necessarily understand the rulesand the outs on the back end,
because there's a lot of nuances.
I think there are a lot offantastic tax advantages and
there are several outs, so tospeak, and so let's just say you
(03:15):
have an unused 529 plan.
If you understand the actualtax liability on the back end
and how to navigate that, it'sreally not that big of a deal on
the back end anyway.
You can't pull up and youcompare it to what you would
have been paying if you didn'tget the tax deferral over 10 or
15 or 20 years.
Now I just wrote a lot ofgeneralities there and also let
(03:40):
me throw this caveat out there Ido not sell 529 plans.
Speaker 1 (03:50):
I want to get into that because there's state
sponsor plans where you can, asthe investor, as the parent, you
kind of do it yourself.
There are advisor-driven plansas well, yes, so before we get
into that, let's let our sixlisteners know what is even a
(04:12):
529 plan?
And you touched on it.
It's essentially atax-advantaged savings account
for education.
So the contributions that youmake, you do not, unlike a 401k,
you do not get a federal incometax deduction.
Some states offer a stateincome tax deduction if you
(04:38):
purchase their own in-state plantheir own in-state plan, Like
my state here in South Carolina.
Speaker 2 (04:48):
if you use the South Carolina state plan, there is a
state income tax deduction forcontributions to the South
Carolina state plan.
There is no federal, so moneygoes in on an after-tax basis
and then it grows on atax-deferred basis.
As long as you use it forqualified educational expenses,
(05:09):
I'll turn it back over to you.
Speaker 1 (05:11):
And those qualified educational expenses include
what you would think it wouldinclude tuition, room and board,
books, supplies, even a laptopcomputer that they're going to
use for eligible expenses in anaccredited college.
And I'm going to get back toother expenses, but let's stick
with the college first.
(05:32):
So the average in-statenational tuition and room and
board is pushing $27,000,$28,000 a year.
Pushing $27,000, $28,000 a year.
So people say, well, I want tofund that for my child's
(05:52):
education.
So college is one, but they'veopened it up with a secure act
and other things.
It used to be, that's it.
Those are the only eligibleexpenses that you can withdraw
money from this account and payzero taxes on the growth and
zero penalty.
Speaker 2 (06:07):
Yeah.
So pause there.
So let's just say just.
Let's give the listeners a verysimple example to follow.
Let's say you have aone-year-old and you put $10,000
, you make a $10,000contribution to the plan and
that contribution gets investedinto whatever funds there's
(06:28):
usually a lineup of fundssimilar to a 401k.
There's a limited lineup offunds that are available inside
of the plan that's offered bythe individual state and then
you invest it in the market.
Obviously, it's not withoutrisk.
It gets invested into themarket.
Let's say you pick somethingvery simple like an S&P 500
index fund or a small cap or amid cap index fund and
(06:50):
hypothetically that $10,000doubles to $20,000 by the time
the kid gets to college.
Now, hopefully it does morethan double.
But to keep it very simple, sothe tax advantage to the plan is
your contribution was 10 andyou have $10,000 in growth.
(07:11):
The plan is worth 20.
If you took it all out to payfor a qualified education
expense, you will not pay a dimein taxes on the $10,000 worth
of growth.
That is the big tax advantage.
Speaker 1 (07:24):
No tax throughout the years as it's growing, no tax
coming out or penalties if usedfor that eligible expense for
college.
But there are other eligibleexpenses that they opened up
Private tuition, k through 12,$10,000 that you could withdraw
to pay for that.
What if the kid and you neverknow?
(07:47):
At age one you don't know whatthis is going to happen.
But what if the kid's abrainiac?
They got a full rod scholarship.
You can pull the money out eventhough they don't need it and
avoid the 10% penalty.
But in that situation you wouldstill pay tax but you wouldn't
have the 10% penalty because ifyou withdraw for anything,
(08:10):
that's not eligible tax ongrowth and a 10% penalty on the
growth.
So you can avoid the 10%penalty if they get a full ride
scholarship and then the Kthrough 12 tuition $10,000.
That's the other thing and theyopen it up for sometimes the
529 plan is not enough to coverthe tuition and the kid's got to
(08:32):
get a student loan.
You can withdraw to pay on astudent loan up to $10,000.
So there are other caveats tothat.
It's not just for college andyeah, we'll get into this next,
which is the Rolf.
Speaker 2 (08:49):
One thing I tell people, to keep it really simple
, is that if you have anathletic kid, if you have a
smart kid, or if you have a kidthat's dedicated to our country,
that wants to serve, you're notgoing to be penalized for those
three things.
Speaker 1 (09:02):
That's a good way to put it.
And they've opened it up to theRoth.
So if there's money left overin the 529 plan after they
graduated or if they didn't goto school, it doesn't matter you
can take money out and fund aRoth IRA for the child.
There are some rules on that.
It can only be up to thecontribution limits.
(09:23):
It's not like you can put 100%of the money in for the child.
There's some rules on that.
It can only be up to thecontribution limits.
It's not like you can put 100%of the money in for the Roth.
Current contribution for theirage would be $7,000.
And you can do it cumulatively.
$35,000 can go into that Rothover a number of years.
And the other caveat they'vegot to have that opened for 15
(09:47):
years.
It doesn't mean it, just youhave to have it been open for 15
years.
So there's some ways out.
Now that's what it's about.
Is it worth it?
Let's talk about when this thingreally works and when it
doesn't.
So the plan really works whenyou have a long investment
(10:08):
runway because you're startingearly.
Uh, I would say somebody andI've had this happen a lot of
times people come to me mychild's 16 years old.
Should I start a 529 plan?
Yeah, I probably not.
You got two years.
Speaker 2 (10:25):
Yeah, it's kind of late.
Ship is sale.
Speaker 1 (10:29):
Yeah, you just cash roll that, you just, whatever
your contribution you were goingto make, I would say just put
it not.
You know you're going to beinvesting conservatively because
your horizon is two yearsbefore you're going to need the
money.
So it works far better, in myopinion, if you have that long
(10:49):
runway, start early.
The other times that it willwork is if you're already on
track with your own retirement,and you can speak to this as
well as I can.
Sometimes people get lopsidedand they want to, you know,
over-contribute to that 529 andpause on their own retirement.
I think that's, in my opinion,a mistake, because you can
(11:13):
always worst case scenario, youcan always get a loan for
college, you can't get a loanfor retirement.
So I want to make sure you'reon track with your own
retirement before the 529.
Speaker 2 (11:24):
And educational.
So the core part of myfinancial planning process, as
you know, is I address threecore areas Retirement, education
and survivorship for myaccumulators.
And in the educationalcomponent, that number tends to
surprise people from a cash flowperspective because it's
(11:45):
compressed Retirement we'resaving for 30 and 35 years.
It's like amortizing a mortgage.
Right, if you buy a house for$700,000 and you amortize it
over 30 years, the payment'sgoing to be much smaller than if
you get a 15-year mortgage andyou amort advertise it over 15.
So with college savings, usuallypeople aren't starting them at
(12:08):
age zero or one, it's usuallylike four or five and they're
like, oh man, I got to getsomething going.
And then guess what?
It's 13 years.
You got 13 years now, not 18.
And that pushes that number upbecause you lost out on
compounding interest.
So for the educationalcomponent, yes, get started as
(12:29):
fast as humanly possible.
There's no reason why, if youknow that you think you're going
to have a family let's sayyou're married in your 20s and
you're like, hey, between 25 and30, we're going to just travel
and have fun and enjoy beingnewlyweds and then we're going
to start a family at age 30.
There's no reason why you can'tstart a 529 plan at age 25,?
(12:54):
Well, without having a childfirst, you can absolutely start
a 529 plan in your own name andthen just change the beneficiary
late you know, down down theroad to get a jump on some of
that funding.
Now I know it's kind of a cart.
You know you put in the cartbefore the horse.
Now I don't see that too often,too often, but it is, it is.
(13:16):
So that's kind of like one ofthose strategies that people
don't really talk about all thatall that often.
You know it's cause.
You know you gotta, you have to.
There are several othercomponents to a financial plan
that you got to take care offirst.
But if I'm working with a youngcouple and they've got all the
boxes checked and they're saying, hey, you know what, we're on
(13:37):
track for our own retirement,we've got emergency savings,
we've got non-qualified moneythat we're putting away, we've
got our life insurance takencare of, contributing to stuff
at work, and they're reallyfeeling good and they're like
you know we're going to have afamily.
But you know, just anothercouple of years.
I may throw that out there as ahey, get a jump on the funding
(13:58):
Instead of spreading out thateducational funding over 18
years, now maybe you spread itout over 22 years.
And I absolutely love having atax advantage account earmarked,
just psychologically that youknow.
Hey, this is for college.
I've got 529 plans for both mygirls and I love looking at the
(14:22):
numbers and I know, hey, I'm setLike my girl's college, if I
don't do anything else, is setnow Like they're done.
It's funded Now.
Of course we still need to getsome the count on the investment
returns.
But from a psychologicalaccounting perspective it kind
of checks a big checkbox for meand it makes me feel good as a
(14:43):
parent.
Sure.
Speaker 1 (14:45):
Now let me ask you this share some clients.
Well, I'll ask you point blankhave you ever had a client with
a 529?
Well, you don't do 529 plansfor your clients, do you?
Speaker 2 (15:00):
No.
So here's what.
I don't sell them and I don'tsell 529 plans.
Speaker 1 (15:07):
What I do is I'll direct them to the state, to the
state plan.
Okay, same thing, it doesn'tmatter.
So have you ever seen it fromstart to finish?
No, someone started.
I have several times, becauseI'm old.
Speaker 2 (15:21):
Yeah, again, you're about 80 years old and you've
gone through that cycle aboutthree or four times.
Speaker 1 (15:28):
I was about to say three or four generations, yeah,
three great-great-grandchildren.
No, I have seen where Irecommended the FOB 29 plan,
either in-state version oradvisor-driven, it doesn't
matter.
We started the FOB 29 plan someas early as an infant, a birth
less than one years old.
Most of the time it's three,four, that's years old.
(15:51):
That's when they start to click.
And we did the planning ofprojections of how much to fund
each month for each child.
Then we got to answer thequestion do you want to fully
fund, do you want a partial fund?
And I've seen it all over theplace, even fully funded.
I've seen this thing work wherethey're calling each semester
(16:13):
for the distribution and hey, wegot tuition coming up.
We need to take a distributionto pay for it, tax-free,
penalty-free.
So I've seen the success ofsomebody actually going to
college.
I've seen somebody where theydropped out of college.
They went for a couple of years, made the distributions, they
(16:37):
dropped out and did somethingelse.
There's money left over.
I've seen it where they did notgo to college and the parent
has funded some portion, maybenot fully.
Hey, man, I've been plunkingdollars down for you to go to
college.
I thought you were going to doit when you were three years old
(16:57):
.
And then here's this money leftover.
Um, so in those situations I'veseen it where, hey, sally
didn't go, but john is two yearsaway.
Let's change the beneficiaryfrom sally to john all right.
Speaker 2 (17:13):
so let me pause for a second.
Let me ask you a couplequestions.
So in your process becauseyou've been through the process
from, essentially, inception ofthe plan to distribution of the
plan, so when you started, whatis your process for monitoring
(17:36):
the projected values and howdoes that change over the years?
Speaker 1 (17:42):
Okay, I think I understand what you're saying.
So in the early years-.
Speaker 2 (17:46):
You're like I don't know what this kid is going to
be, I don't know where they wantto go.
I don't know, I don't know.
Like, how do you even oh, oh,this is what we want to fund.
Speaker 1 (17:54):
That's up to the client.
So I ask that do you, is it?
Is it your desire to fully fundtheir college education?
Yes, all right, let's talkabout the numbers right now it's
do you if they're in state andwe have no idea.
But we got to start withsomething.
(18:14):
So I'm in North Carolina.
Let's say they go to ChapelHill, it's about 28 grand a year
.
If you go to Duke, it's like ahundred grand a year.
But anyway we start there andsay, all right, based on this
projection we're going to haveto do let's say it's at birth,
maybe it's 350 a month.
Okay, if they're doing monthlycontributions, some of them say,
(18:39):
yes, it is my strong desire tofully fund it, and the reason is
they just came out of asituation where they're saddled
with student loan.
They've got a successful career, though I don't want that to
happen to them.
Others say, nope, I want tomaybe halfway fund it or even a
quarter funded.
I want them to have some skinin the game to fund this or no,
(19:05):
I can't afford to fully fund it.
So that's what we base theprojections Investment wise.
In the beginning.
If we've got a long runway,we're 100% aggressive and it's
almost.
You could do target date fundsif you wanted to.
I don't recommend them.
(19:26):
But periodically we're going toscale back as they're getting
closer.
We don't want it to be 100percent stock and they're 17
years old.
Speaker 2 (19:37):
Yeah, what my question is on the funding.
So you start out and you'relike hey age, I don't know if
they're going to go to ChapelHill or they're going to go to
community college.
So you arrive at you.
How do you arrive at picking anamount to fund?
Speaker 1 (19:53):
I asked them, and I start with the in-state tuition.
Speaker 2 (19:57):
We have to start somewhere, so you start with the
in-state tuition right, I startwith the in-state tuition Four
year full room and boardin-state tuition, which is what
you did, about 27,000 a year.
Now 27, 28.
Yeah, so if you're right now,if you're a parent and your kid
is getting ready to go to aNorth Carolina four year in
(20:18):
state, like away room and board,you're looking at about one
hundred and five thousand bucksright now.
Right, like that's that's,they're starting today.
That's not 15 years ofinflation.
Right, that's today, that'sthere.
Speaker 1 (20:34):
Well, the software that I use does that projection
for me.
But to your point, I've alsohad people midstream.
We're changing our minds alittle bit.
Now they're the parent, maybein their 40s versus early 30s.
The parent may be in their 40sversus early 30s and that decade
(20:57):
has given them experience tothink differently.
I think the wisest thing I'mspeaking as the parent would be
let's do two years of technicalschool, community college, get
our credits and transfer.
And Keith, can you run thenumbers?
(21:17):
If we stop right now, becausecommunity college is far less
and sometimes we can say you'refully funded right now with
growth if we're only going to dotwo years.
So it's all over the place.
As far as we got to start withwhat the parent actually is
looking for and, just like anyfinancial plan, it's dynamic and
(21:39):
it's going to change.
Speaker 2 (21:41):
Right.
So you're adjusting fundingalong the way and from what I've
experienced as well because Iactually just had one of my
longest tenured clients They'vebeen with me about 14, 15 years
they had 529 plans already I'vejust been helping monitoring the
funding levels along the wayand he said to me he's like
(22:04):
we're getting ready to go,ironically, to Chapel Hill and
he's like you nailed it.
You absolutely nailed thefunding level, the projections,
yeah, the projections, and Ilook back and we've adjusted it
probably every two years basedon the returns.
So, on the returns that theyget, some years the returns were
(22:26):
good and also some years theydidn't make contributions that
they thought they were going tobe able to make.
So you adjust based on theclient's budget.
Thought they were going to beable to make, so you adjust
based on the client's budget.
Some years they were reallyflush with cash because of
bonuses and things just wentwell, and other years they
(22:47):
didn't have what they thoughtthey were going to have.
But as we got closer and closer,it was like the pressure kind
of is on more and luckily we hada nice tailwind for the last
decade with returns which reallyhelped lift the accounts up,
and then we also slowly startedlocking into the FDIC money
market account to remove anymarket fluctuation.
(23:08):
And they just kind of aboutthree or four years ago there
was a real good run and theyjust kind of topped up, topped
up the account and I used themoney market rate.
I said, hey, listen, you knowyou're just about there.
We had outperformance becauseof the market, let's lock it in.
And that was it.
We just kind of took the riskoff the table.
(23:30):
It was beautiful.
Speaker 1 (23:32):
Have you ever had a client that regretted taking out
a 529 plan?
Speaker 2 (23:42):
no, I the only.
I have had one instance, andthese are very, very wealthy
people where grandparents, way,I mean we're talking about a
hundred million dollar net worthpeople, the, the, the upper
(24:07):
generation.
My clients were the parents ofthe children and the
grandparents maximum funded.
I don't remember the name, Ithink it was like a there's a
there's a cap on five, 29 plansand I think back then it was
like maybe 260, 200.
(24:27):
It's like in the three hundredsnow, but the grandparents
maximum maximum funded each ofthe three grandchildren with
like 200 and some odd thousanddollars.
This is about a decade ago andthe kids never, the kids didn't
use those, uh, those funds andthe parents were a little bit,
(24:51):
they were, um, they they werestruggled to get the money out
on and use it for the For theirkids post college.
They were.
Just there was way too much.
I mean I think there was almosta million dollars there and it
(25:12):
was too too much money and Ithink that was that was a bit
excessive A little, because theyall went to public, they all
went to in-state public schoolsthey didn't go to.
Had the three kids gone toprivate institutions, they would
(25:32):
have been right on with thefunding Right.
I just want to clear somethingup about the maximum
contribution institutions, theywould have been right on with
the funding, right.
Speaker 1 (25:36):
I just want to clear something up about the maximum
contribution.
That varies from state to state.
There's not one for federal, sosome in-state plans not
colleges, but in-state planshave their own.
Some could be $235,000, couldbe $590,000.
But yeah, I could see wherethat would be somewhat of a
(25:59):
regret.
I haven't had any with regrets.
I've had some with money leftover, not millions.
And those that had money leftover.
This is my advice.
Okay, you're a parent, youfunded the college, they're out
of college, there's money leftover.
What do we do?
(26:21):
Here's my advice, or things toconsider.
I should say If there's anotherchild that's going through
college at the time, or maybethey're in high school, you can
change the beneficiary to themand let them use it.
That's one.
If there's not, consider thenew Roth contribution with that
money left over and I've donethat several times, even though
(26:44):
it's brand new where we just gofrom that custodian, the 529
plan.
It's a Roth contribution.
They've got to have earnedincome of at least what you're
putting into it up to thecontribution limit, which is
$7,000.
And cumulatively you can onlydo $35,000.
And you've had to have it openfor 15 years.
(27:06):
So that's something with themoney left over.
Another thing, and this is myregret, I had 529 plans on all
three of my children.
They're now adults and only oneand a half of them went to
college, if you understand whatthat means.
And I had money left over.
(27:28):
It wasn't a ton of money, okay,but it wasn't chump change.
Wasn't a ton of money Okay, butit was, it wasn't chump change.
Um, I, I did change abeneficiary on one and
eventually cashed out and paidthe Piper.
I regret just keeping thosethings alive, and this is why, a
(27:55):
little over two years ago, Ibecame a grandfather.
If I would have kept thosethings alive, I could have then
transferred the beneficiary tomy grandchild.
The amount of money that wasgoing to go in there, yeah, it
would have pretty much fullyfunded and she would have been
(28:15):
okay, close to it anyway, closeto it anyway, close to it and
whatever.
I didn't think my 22 year oldat that time was going to have a
baby.
You know you don't think ofthat.
Yeah, I would say keep thatthing alive there.
To my knowledge, there's notreally a limit of how long I've
heard 35 years or something likethat to keep it alive, or you?
(28:36):
I mean you can keep changingbeneficiaries for the
grandchildren, if you know, ifyou're a parent or even a
grandparent.
Um, I re.
I really regret that, becauseas soon as my grandchild was
born, I opened up a 529 and I'mfunding.
Speaker 2 (28:54):
Well, one thing here's one thing that I you know
how I counsel clients and Itell my girls is we've got money
set aside for college, for thefamily.
So, yes, I show them theaccounts.
This is money set aside foryour college, because I also
want to encourage them to go tocollege.
To go to college and knowingthat it's it's funded, I think
(29:19):
instill is helping, instill asense of responsibility to take
responsibility for your, youracademics.
So I talked to them about that.
But I don't tell them it's yourmoney, I tell them it's the
family's money.
So, the family has put moneyaside for your education and,
whatever it's going to be, we'regoing to take care of it.
(29:41):
We're, we're, we're gonna, youknow, we're gonna, we're gonna
fund it.
There may be some money leftover, there may not be money
left over, but I don't want themthinking that they're entitled
to that money.
If it is, if there's anythingleft over, because the way that
I I look at it is that it is, Iwant, want it there, uh,
generationally, um, either frommy grand, either from my
(30:02):
grandchildren, um, uh, or Idon't know who else it could be,
but for my, for mygrandchildren, um, when it, when
it comes up, or maybe, um,maybe a niece or a nephew.
You know, help out a niece or anephew because you, that's an
easy beneficiary change to um tomake and that's and that's a
(30:26):
huge, that is a tremendous um,familial, generational wealth
creation tool, because you'vegot the compounding interest is
working for you on your side.
And if that's $25,000 or$50,000, because I put $10,000
(30:52):
in and maybe it's grown to$30,000, it only cost me $10,000
, where it would have cost thebeneficiary not only 30, but if
they have to borrow and then payinterest when they come out of
college that could cost them$50,000.
And then when you layer on theopportunity cost of hey, if I
(31:13):
didn't have a student loan and Ididn't have to repay the debt
and I could have immediatelycome out of college and started
investing that money, now you'retalking about a difference of
hundreds of thousands of dollarswith my one initial investment
of $10,000.
And that's real generationalimpact.
I'm not going to bore you withall the numbers, but I've laid
(31:34):
out an example that I use withclients and a 50, just a $50,000
investment could turn intogenerationally, over 50 years,
the difference of almost amillion and a half dollars
because of the opportunity costsof investing and the negative
interest that they would havehad on the loan payments to go.
(31:54):
So if you're fortunate enough Iknow not everybody is in the
position, but if you'refortunate enough where you know
you have the extra money and youcan set it aside, I absolutely
love 529 plans for just thisreason, for creating familial
generational wealth, and becausewe all know, yeah, there's
(32:16):
different philosophies on oncollege, on education now, but I
think we can all agree thateducation is a good thing.
Nobody will disagree.
I know education isn't foreverybody, because there are
just some people that aren'thardwired to go to college and
get a degree or, you know,become an expert, or you know a
(32:40):
technician, or you know anattorney, a doctor, a lawyer, an
engineer, a teacher.
You know, not everybody'shardwired like that.
There are definitely vocationalpeople that are hardwired and
learn differently and arehappier doing different things
and there's no shame in that and529 plans can be funded for
those as well, those technicalcertificates.
(33:02):
But I think we can all agreethat education in general it's a
good thing, the more educationthat you have, and it will help
you in life and as a patriarchof a family, I can't see how
that could be a bad thing inorder to fund that Love it.
Speaker 1 (33:24):
I want to end with this.
We're not going to get in deep.
There are other alternatives.
You could simply have a taxablebrokerage account.
You could have an UTMA account,but you have less control of
that because the child gets thatmoney where they go to college
or not, at usually age 21.
But for 529 plans, my opinion,I think they're the king.
(33:48):
If it's for college funding,they're the king.
And now, with all the lessrestrictions on it, the ways you
can maneuver.
In the event the child doesn'tgo to college, in the event
there's money left over, as wetalked about.
So my take absolutely worth it,but only if it fits in your
(34:11):
overall financial plan.
Speaker 2 (34:14):
Yeah, I'll give you Keith who paid.
If, let's say, you had leftovermoney in a 529 plan and you
took the withdrawal, who paysthe tax?
Speaker 1 (34:25):
Yes, this represents a great tax planning strategy
distribution direct to thebeneficiary, even though maybe
the parent's the owner.
If it's paid directly to thebeneficiary, the child, whatever
(34:48):
age, is responsible for thetaxes and the penalty on it, not
the owner.
Again, if it's paid direct tothe beneficiary, the custodian
can do that.
So here's the planning strategy.
Imagine this I'm 22 years old,I graduated college.
(35:09):
There's money left over in the529 plan that mom and dad did or
you never went or you neverwent, it doesn't matter.
Let's just pick a figure.
Let's say there's 25 grand inthere.
Okay, all right, we're going topay the 25 grand to the child
that's added to their ordinaryincome tax.
Well, let's say they don't havea job or they're very low
(35:32):
income earners and they're in avery, very low income tax
bracket, maybe a 0% tax bracket,which, if they are, if they're
single, you know it's it's gottabe like, uh, under 10 or 12,000
or something like that Plusyour plus, your, plus your
standard standard exemption.
(35:54):
Your standard deduction maybearound 12, 13,000.
There's a way that they wouldnot pay federal income tax.
Or if you stretched out over acouple of years maybe do one in
December and then one in Januaryto empty it out.
That takes a lot of taxstrategy on that.
So get with your tax advisor,cpa and all that good stuff,
(36:17):
cover, cover your basis on that.
But to your point, there is away that you can pull money out
distribution.
Possibly it's got to be paiddirect to the beneficiary and
possibly avoid income tax, butno 10%.
It depends on your income taxbracket for the beneficiary.
Speaker 2 (36:40):
Listen.
The point that I'm trying tomake here is that if you have
parents that are in a 37%federal bracket and there's
leftover money, the parentsdon't necessarily have to get
clipped at the highest federalrate.
It could be 10%, 12%, 5% at thekids rate.
The key is who the custodianmakes the distribution payable
(37:04):
to, and that's going to dictatewhat the 1099Q, whose name, is
responsible for the taxes on thenon-qualified distribution.
That's it, seacrest, out.
Speaker 1 (37:21):
All right.
And again, that's a lot of taxstrategy.
And again, yes, I think a 529plan is absolutely worth it if
it fits into your financial plan.
Seek financial help on that.
But yeah, we love it.
I think we covered our bases,as you said.
(37:41):
Seacrest out, ruffalo, good tosee you.
That's it for Unsolicited fortoday.
Thanks for listening.
Be sure to subscribe ordownload or follow.
Give us a rating.
We need more than six followersto listen to this thing.
See ya Later Hard work reallydoes come in payoff Every day
(38:03):
working.
We don't really need no daysoff.
Speaker 3 (38:05):
Remember to subscribe to the podcast to hear more
information to help you pursueyour financial goals.
Securities and advisoryservices offered through LPL
Financial, a registeredinvestment advisor Member, finra
slash SIPC.
The options voiced in thismaterial are for general
information only and are notintended to provide specific
advice or recommendations forany individual.
(38:26):
All performance referenced ishistorical and is no guarantee
of future results.
All indices are unmanaged andmay not be invested into
directly.
This information is notintended to be a substitute for
individualized legal advice.
We suggest that you discussyour specific situation with a
qualified attorney.
This information is notintended to be a substitute for
specific, individualized taxadvice.
(38:48):
Please seek a professional taxadvisor.
Speaker 1 (38:51):
Prior to investing in a 529 plan, investors should
consider whether the investor'sor designated beneficiary's home
state offers any state tax orother state benefits, such as
financial aid, scholarship fundsand protection from creditors
that are only available forinvestments in such state's
(39:13):
qualified tuition program.
Withdrawals used for qualifiedexpenses are federally tax-free.
Tax treatment at the statelevel may vary.
Please consult with your taxadvisor before investing.
Mr Anthony Ruffalo, certified.
Go ahead and say it.
Speaker 2 (00:04):
Certified financial planner.
Speaker 1 (00:06):
Thanks for being with us today again for our podcast,
Unsolicited.
You have to be here.
You're the co-host.
Speaker 2 (00:12):
What's up, my friend, I can't do this.
Speaker 1 (00:15):
I can't do this by myself.
Sure, you could.
Speaker 2 (00:19):
It's not that complicated.
Speaker 1 (00:21):
For the three people that are listening.
Is it that many?
For the three people that arelistening, is it that many?
Well, last podcast you said forthe three people that are
listening, it's up to six.
Speaker 2 (00:31):
All right, look at that.
It's a what a double.
Speaker 1 (00:35):
It's 100% growth rate , we're gaining ground.
So this is what I want to talkabout today.
What do you want to talk abouttoday, keith?
I am seeing a lot of this withthe younger families coming in
and really over the years, Isn'tevery family younger than you?
Speaker 2 (00:56):
No, I mean, do you really have any families that
are older than you, that arestill alive, that are not in a
graveyard?
Yes, I do.
It never gets old making fun ofyour age all right so what do?
Speaker 1 (01:10):
you want to talk about 529s, let's go, let's 29
yeah, 529 planes is what I wantto talk about, and, and
specifically 529 planes becauseyou tell me, if you hear this,
so again, young families,they're starting out, maybe
they're got an infant, athree-year-old, a four-year-old,
and college planning is ontheir mind, because they want to
(01:32):
start early, which is fantastic.
And they hear, maybe they do alittle research, college
planning, college education,funding, and they hear the term
529 plan.
So they've got, they've gotenough to hurt them as far as
the knowledge is.
That's why they come in and say, okay, keith Buffalo, anthony,
(01:57):
is a 529 plan worth it?
That's the question I pose toyou, young sir.
Speaker 2 (02:07):
Yeah, is it fine?
So I'm going to tell you rightout of the gate I am biased in
the fact that I love 529 plansand I think that there's a huge
lack of understanding in themarketplace about them and I
think there's also competingdollars for them.
So people get talked out offunding 529 plans by the captive
(02:28):
insurance agents that want tosell the whole life, or the VUL
or the IUL to fund the college,to capture those contributions
and make a commission.
I think you got a lot ofcompeting dollars out there in
the marketplace and then youalso have some people out there
(02:51):
that will push you away fromthem because they don't
necessarily understand the rulesand the outs on the back end,
because there's a lot of nuances.
I think there are a lot offantastic tax advantages and
there are several outs, so tospeak, and so let's just say you
(03:15):
have an unused 529 plan.
If you understand the actualtax liability on the back end
and how to navigate that, it'sreally not that big of a deal on
the back end anyway.
You can't pull up and youcompare it to what you would
have been paying if you didn'tget the tax deferral over 10 or
15 or 20 years.
Now I just wrote a lot ofgeneralities there and also let
(03:40):
me throw this caveat out there Ido not sell 529 plans.
Speaker 1 (03:50):
I want to get into that because there's state
sponsor plans where you can, asthe investor, as the parent, you
kind of do it yourself.
There are advisor-driven plansas well, yes, so before we get
into that, let's let our sixlisteners know what is even a
(04:12):
529 plan?
And you touched on it.
It's essentially atax-advantaged savings account
for education.
So the contributions that youmake, you do not, unlike a 401k,
you do not get a federal incometax deduction.
Some states offer a stateincome tax deduction if you
(04:38):
purchase their own in-state plantheir own in-state plan, Like
my state here in South Carolina.
Speaker 2 (04:48):
if you use the South Carolina state plan, there is a
state income tax deduction forcontributions to the South
Carolina state plan.
There is no federal, so moneygoes in on an after-tax basis
and then it grows on atax-deferred basis.
As long as you use it forqualified educational expenses,
(05:09):
I'll turn it back over to you.
Speaker 1 (05:11):
And those qualified educational expenses include
what you would think it wouldinclude tuition, room and board,
books, supplies, even a laptopcomputer that they're going to
use for eligible expenses in anaccredited college.
And I'm going to get back toother expenses, but let's stick
with the college first.
(05:32):
So the average in-statenational tuition and room and
board is pushing $27,000,$28,000 a year.
Pushing $27,000, $28,000 a year.
So people say, well, I want tofund that for my child's
(05:52):
education.
So college is one, but they'veopened it up with a secure act
and other things.
It used to be, that's it.
Those are the only eligibleexpenses that you can withdraw
money from this account and payzero taxes on the growth and
zero penalty.
Speaker 2 (06:07):
Yeah.
So pause there.
So let's just say just.
Let's give the listeners a verysimple example to follow.
Let's say you have aone-year-old and you put $10,000
, you make a $10,000contribution to the plan and
that contribution gets investedinto whatever funds there's
(06:28):
usually a lineup of fundssimilar to a 401k.
There's a limited lineup offunds that are available inside
of the plan that's offered bythe individual state and then
you invest it in the market.
Obviously, it's not withoutrisk.
It gets invested into themarket.
Let's say you pick somethingvery simple like an S&P 500
index fund or a small cap or amid cap index fund and
(06:50):
hypothetically that $10,000doubles to $20,000 by the time
the kid gets to college.
Now, hopefully it does morethan double.
But to keep it very simple, sothe tax advantage to the plan is
your contribution was 10 andyou have $10,000 in growth.
(07:11):
The plan is worth 20.
If you took it all out to payfor a qualified education
expense, you will not pay a dimein taxes on the $10,000 worth
of growth.
That is the big tax advantage.
Speaker 1 (07:24):
No tax throughout the years as it's growing, no tax
coming out or penalties if usedfor that eligible expense for
college.
But there are other eligibleexpenses that they opened up
Private tuition, k through 12,$10,000 that you could withdraw
to pay for that.
What if the kid and you neverknow?
(07:47):
At age one you don't know whatthis is going to happen.
But what if the kid's abrainiac?
They got a full rod scholarship.
You can pull the money out eventhough they don't need it and
avoid the 10% penalty.
But in that situation you wouldstill pay tax but you wouldn't
have the 10% penalty because ifyou withdraw for anything,
(08:10):
that's not eligible tax ongrowth and a 10% penalty on the
growth.
So you can avoid the 10%penalty if they get a full ride
scholarship and then the Kthrough 12 tuition $10,000.
That's the other thing and theyopen it up for sometimes the
529 plan is not enough to coverthe tuition and the kid's got to
(08:32):
get a student loan.
You can withdraw to pay on astudent loan up to $10,000.
So there are other caveats tothat.
It's not just for college andyeah, we'll get into this next,
which is the Rolf.
Speaker 2 (08:49):
One thing I tell people, to keep it really simple
, is that if you have anathletic kid, if you have a
smart kid, or if you have a kidthat's dedicated to our country,
that wants to serve, you're notgoing to be penalized for those
three things.
Speaker 1 (09:02):
That's a good way to put it.
And they've opened it up to theRoth.
So if there's money left overin the 529 plan after they
graduated or if they didn't goto school, it doesn't matter you
can take money out and fund aRoth IRA for the child.
There are some rules on that.
It can only be up to thecontribution limits.
(09:23):
It's not like you can put 100%of the money in for the child.
There's some rules on that.
It can only be up to thecontribution limits.
It's not like you can put 100%of the money in for the Roth.
Current contribution for theirage would be $7,000.
And you can do it cumulatively.
$35,000 can go into that Rothover a number of years.
And the other caveat they'vegot to have that opened for 15
(09:47):
years.
It doesn't mean it, just youhave to have it been open for 15
years.
So there's some ways out.
Now that's what it's about.
Is it worth it?
Let's talk about when this thingreally works and when it
doesn't.
So the plan really works whenyou have a long investment
(10:08):
runway because you're startingearly.
Uh, I would say somebody andI've had this happen a lot of
times people come to me mychild's 16 years old.
Should I start a 529 plan?
Yeah, I probably not.
You got two years.
Speaker 2 (10:25):
Yeah, it's kind of late.
Ship is sale.
Speaker 1 (10:29):
Yeah, you just cash roll that, you just, whatever
your contribution you were goingto make, I would say just put
it not.
You know you're going to beinvesting conservatively because
your horizon is two yearsbefore you're going to need the
money.
So it works far better, in myopinion, if you have that long
(10:49):
runway, start early.
The other times that it willwork is if you're already on
track with your own retirement,and you can speak to this as
well as I can.
Sometimes people get lopsidedand they want to, you know,
over-contribute to that 529 andpause on their own retirement.
I think that's, in my opinion,a mistake, because you can
(11:13):
always worst case scenario, youcan always get a loan for
college, you can't get a loanfor retirement.
So I want to make sure you'reon track with your own
retirement before the 529.
Speaker 2 (11:24):
And educational.
So the core part of myfinancial planning process, as
you know, is I address threecore areas Retirement, education
and survivorship for myaccumulators.
And in the educationalcomponent, that number tends to
surprise people from a cash flowperspective because it's
(11:45):
compressed Retirement we'resaving for 30 and 35 years.
It's like amortizing a mortgage.
Right, if you buy a house for$700,000 and you amortize it
over 30 years, the payment'sgoing to be much smaller than if
you get a 15-year mortgage andyou amort advertise it over 15.
So with college savings, usuallypeople aren't starting them at
(12:08):
age zero or one, it's usuallylike four or five and they're
like, oh man, I got to getsomething going.
And then guess what?
It's 13 years.
You got 13 years now, not 18.
And that pushes that number upbecause you lost out on
compounding interest.
So for the educationalcomponent, yes, get started as
(12:29):
fast as humanly possible.
There's no reason why, if youknow that you think you're going
to have a family let's sayyou're married in your 20s and
you're like, hey, between 25 and30, we're going to just travel
and have fun and enjoy beingnewlyweds and then we're going
to start a family at age 30.
There's no reason why you can'tstart a 529 plan at age 25,?
(12:54):
Well, without having a childfirst, you can absolutely start
a 529 plan in your own name andthen just change the beneficiary
late you know, down down theroad to get a jump on some of
that funding.
Now I know it's kind of a cart.
You know you put in the cartbefore the horse.
Now I don't see that too often,too often, but it is, it is.
(13:16):
So that's kind of like one ofthose strategies that people
don't really talk about all thatall that often.
You know it's cause.
You know you gotta, you have to.
There are several othercomponents to a financial plan
that you got to take care offirst.
But if I'm working with a youngcouple and they've got all the
boxes checked and they're saying, hey, you know what, we're on
(13:37):
track for our own retirement,we've got emergency savings,
we've got non-qualified moneythat we're putting away, we've
got our life insurance takencare of, contributing to stuff
at work, and they're reallyfeeling good and they're like
you know we're going to have afamily.
But you know, just anothercouple of years.
I may throw that out there as ahey, get a jump on the funding
(13:58):
Instead of spreading out thateducational funding over 18
years, now maybe you spread itout over 22 years.
And I absolutely love having atax advantage account earmarked,
just psychologically that youknow.
Hey, this is for college.
I've got 529 plans for both mygirls and I love looking at the
(14:22):
numbers and I know, hey, I'm setLike my girl's college, if I
don't do anything else, is setnow Like they're done.
It's funded Now.
Of course we still need to getsome the count on the investment
returns.
But from a psychologicalaccounting perspective it kind
of checks a big checkbox for meand it makes me feel good as a
(14:43):
parent.
Sure.
Speaker 1 (14:45):
Now let me ask you this share some clients.
Well, I'll ask you point blankhave you ever had a client with
a 529?
Well, you don't do 529 plansfor your clients, do you?
Speaker 2 (15:00):
No.
So here's what.
I don't sell them and I don'tsell 529 plans.
Speaker 1 (15:07):
What I do is I'll direct them to the state, to the
state plan.
Okay, same thing, it doesn'tmatter.
So have you ever seen it fromstart to finish?
No, someone started.
I have several times, becauseI'm old.
Speaker 2 (15:21):
Yeah, again, you're about 80 years old and you've
gone through that cycle aboutthree or four times.
Speaker 1 (15:28):
I was about to say three or four generations, yeah,
three great-great-grandchildren.
No, I have seen where Irecommended the FOB 29 plan,
either in-state version oradvisor-driven, it doesn't
matter.
We started the FOB 29 plan someas early as an infant, a birth
less than one years old.
Most of the time it's three,four, that's years old.
(15:51):
That's when they start to click.
And we did the planning ofprojections of how much to fund
each month for each child.
Then we got to answer thequestion do you want to fully
fund, do you want a partial fund?
And I've seen it all over theplace, even fully funded.
I've seen this thing work wherethey're calling each semester
(16:13):
for the distribution and hey, wegot tuition coming up.
We need to take a distributionto pay for it, tax-free,
penalty-free.
So I've seen the success ofsomebody actually going to
college.
I've seen somebody where theydropped out of college.
They went for a couple of years, made the distributions, they
(16:37):
dropped out and did somethingelse.
There's money left over.
I've seen it where they did notgo to college and the parent
has funded some portion, maybenot fully.
Hey, man, I've been plunkingdollars down for you to go to
college.
I thought you were going to doit when you were three years old
(16:57):
.
And then here's this money leftover.
Um, so in those situations I'veseen it where, hey, sally
didn't go, but john is two yearsaway.
Let's change the beneficiaryfrom sally to john all right.
Speaker 2 (17:13):
so let me pause for a second.
Let me ask you a couplequestions.
So in your process becauseyou've been through the process
from, essentially, inception ofthe plan to distribution of the
plan, so when you started, whatis your process for monitoring
(17:36):
the projected values and howdoes that change over the years?
Speaker 1 (17:42):
Okay, I think I understand what you're saying.
So in the early years-.
Speaker 2 (17:46):
You're like I don't know what this kid is going to
be, I don't know where they wantto go.
I don't know, I don't know.
Like, how do you even oh, oh,this is what we want to fund.
Speaker 1 (17:54):
That's up to the client.
So I ask that do you, is it?
Is it your desire to fully fundtheir college education?
Yes, all right, let's talkabout the numbers right now it's
do you if they're in state andwe have no idea.
But we got to start withsomething.
(18:14):
So I'm in North Carolina.
Let's say they go to ChapelHill, it's about 28 grand a year
.
If you go to Duke, it's like ahundred grand a year.
But anyway we start there andsay, all right, based on this
projection we're going to haveto do let's say it's at birth,
maybe it's 350 a month.
Okay, if they're doing monthlycontributions, some of them say,
(18:39):
yes, it is my strong desire tofully fund it, and the reason is
they just came out of asituation where they're saddled
with student loan.
They've got a successful career, though I don't want that to
happen to them.
Others say, nope, I want tomaybe halfway fund it or even a
quarter funded.
I want them to have some skinin the game to fund this or no,
(19:05):
I can't afford to fully fund it.
So that's what we base theprojections Investment wise.
In the beginning.
If we've got a long runway,we're 100% aggressive and it's
almost.
You could do target date fundsif you wanted to.
I don't recommend them.
(19:26):
But periodically we're going toscale back as they're getting
closer.
We don't want it to be 100percent stock and they're 17
years old.
Speaker 2 (19:37):
Yeah, what my question is on the funding.
So you start out and you'relike hey age, I don't know if
they're going to go to ChapelHill or they're going to go to
community college.
So you arrive at you.
How do you arrive at picking anamount to fund?
Speaker 1 (19:53):
I asked them, and I start with the in-state tuition.
Speaker 2 (19:57):
We have to start somewhere, so you start with the
in-state tuition right, I startwith the in-state tuition Four
year full room and boardin-state tuition, which is what
you did, about 27,000 a year.
Now 27, 28.
Yeah, so if you're right now,if you're a parent and your kid
is getting ready to go to aNorth Carolina four year in
(20:18):
state, like away room and board,you're looking at about one
hundred and five thousand bucksright now.
Right, like that's that's,they're starting today.
That's not 15 years ofinflation.
Right, that's today, that'sthere.
Speaker 1 (20:34):
Well, the software that I use does that projection
for me.
But to your point, I've alsohad people midstream.
We're changing our minds alittle bit.
Now they're the parent, maybein their 40s versus early 30s.
The parent may be in their 40sversus early 30s and that decade
(20:57):
has given them experience tothink differently.
I think the wisest thing I'mspeaking as the parent would be
let's do two years of technicalschool, community college, get
our credits and transfer.
And Keith, can you run thenumbers?
(21:17):
If we stop right now, becausecommunity college is far less
and sometimes we can say you'refully funded right now with
growth if we're only going to dotwo years.
So it's all over the place.
As far as we got to start withwhat the parent actually is
looking for and, just like anyfinancial plan, it's dynamic and
(21:39):
it's going to change.
Speaker 2 (21:41):
Right.
So you're adjusting fundingalong the way and from what I've
experienced as well because Iactually just had one of my
longest tenured clients They'vebeen with me about 14, 15 years
they had 529 plans already I'vejust been helping monitoring the
funding levels along the wayand he said to me he's like
(22:04):
we're getting ready to go,ironically, to Chapel Hill and
he's like you nailed it.
You absolutely nailed thefunding level, the projections,
yeah, the projections, and Ilook back and we've adjusted it
probably every two years basedon the returns.
So, on the returns that theyget, some years the returns were
(22:26):
good and also some years theydidn't make contributions that
they thought they were going tobe able to make.
So you adjust based on theclient's budget.
Thought they were going to beable to make, so you adjust
based on the client's budget.
Some years they were reallyflush with cash because of
bonuses and things just wentwell, and other years they
(22:47):
didn't have what they thoughtthey were going to have.
But as we got closer and closer,it was like the pressure kind
of is on more and luckily we hada nice tailwind for the last
decade with returns which reallyhelped lift the accounts up,
and then we also slowly startedlocking into the FDIC money
market account to remove anymarket fluctuation.
(23:08):
And they just kind of aboutthree or four years ago there
was a real good run and theyjust kind of topped up, topped
up the account and I used themoney market rate.
I said, hey, listen, you knowyou're just about there.
We had outperformance becauseof the market, let's lock it in.
And that was it.
We just kind of took the riskoff the table.
(23:30):
It was beautiful.
Speaker 1 (23:32):
Have you ever had a client that regretted taking out
a 529 plan?
Speaker 2 (23:42):
no, I the only.
I have had one instance, andthese are very, very wealthy
people where grandparents, way,I mean we're talking about a
hundred million dollar net worthpeople, the, the, the upper
(24:07):
generation.
My clients were the parents ofthe children and the
grandparents maximum funded.
I don't remember the name, Ithink it was like a there's a
there's a cap on five, 29 plansand I think back then it was
like maybe 260, 200.
(24:27):
It's like in the three hundredsnow, but the grandparents
maximum maximum funded each ofthe three grandchildren with
like 200 and some odd thousanddollars.
This is about a decade ago andthe kids never, the kids didn't
use those, uh, those funds andthe parents were a little bit,
(24:51):
they were, um, they they werestruggled to get the money out
on and use it for the For theirkids post college.
They were.
Just there was way too much.
I mean I think there was almosta million dollars there and it
(25:12):
was too too much money and Ithink that was that was a bit
excessive A little, because theyall went to public, they all
went to in-state public schoolsthey didn't go to.
Had the three kids gone toprivate institutions, they would
(25:32):
have been right on with thefunding Right.
I just want to clear somethingup about the maximum
contribution institutions, theywould have been right on with
the funding, right.
Speaker 1 (25:36):
I just want to clear something up about the maximum
contribution.
That varies from state to state.
There's not one for federal, sosome in-state plans not
colleges, but in-state planshave their own.
Some could be $235,000, couldbe $590,000.
But yeah, I could see wherethat would be somewhat of a
(25:59):
regret.
I haven't had any with regrets.
I've had some with money leftover, not millions.
And those that had money leftover.
This is my advice.
Okay, you're a parent, youfunded the college, they're out
of college, there's money leftover.
What do we do?
(26:21):
Here's my advice, or things toconsider.
I should say If there's anotherchild that's going through
college at the time, or maybethey're in high school, you can
change the beneficiary to themand let them use it.
That's one.
If there's not, consider thenew Roth contribution with that
money left over and I've donethat several times, even though
(26:44):
it's brand new where we just gofrom that custodian, the 529
plan.
It's a Roth contribution.
They've got to have earnedincome of at least what you're
putting into it up to thecontribution limit, which is
$7,000.
And cumulatively you can onlydo $35,000.
And you've had to have it openfor 15 years.
(27:06):
So that's something with themoney left over.
Another thing, and this is myregret, I had 529 plans on all
three of my children.
They're now adults and only oneand a half of them went to
college, if you understand whatthat means.
And I had money left over.
(27:28):
It wasn't a ton of money, okay,but it wasn't chump change.
Wasn't a ton of money Okay, butit was, it wasn't chump change.
Um, I, I did change abeneficiary on one and
eventually cashed out and paidthe Piper.
I regret just keeping thosethings alive, and this is why, a
(27:55):
little over two years ago, Ibecame a grandfather.
If I would have kept thosethings alive, I could have then
transferred the beneficiary tomy grandchild.
The amount of money that wasgoing to go in there, yeah, it
would have pretty much fullyfunded and she would have been
(28:15):
okay, close to it anyway, closeto it anyway, close to it and
whatever.
I didn't think my 22 year oldat that time was going to have a
baby.
You know you don't think ofthat.
Yeah, I would say keep thatthing alive there.
To my knowledge, there's notreally a limit of how long I've
heard 35 years or something likethat to keep it alive, or you?
(28:36):
I mean you can keep changingbeneficiaries for the
grandchildren, if you know, ifyou're a parent or even a
grandparent.
Um, I re.
I really regret that, becauseas soon as my grandchild was
born, I opened up a 529 and I'mfunding.
Speaker 2 (28:54):
Well, one thing here's one thing that I you know
how I counsel clients and Itell my girls is we've got money
set aside for college, for thefamily.
So, yes, I show them theaccounts.
This is money set aside foryour college, because I also
want to encourage them to go tocollege.
To go to college and knowingthat it's it's funded, I think
(29:19):
instill is helping, instill asense of responsibility to take
responsibility for your, youracademics.
So I talked to them about that.
But I don't tell them it's yourmoney, I tell them it's the
family's money.
So, the family has put moneyaside for your education and,
whatever it's going to be, we'regoing to take care of it.
(29:41):
We're, we're, we're gonna, youknow, we're gonna, we're gonna
fund it.
There may be some money leftover, there may not be money
left over, but I don't want themthinking that they're entitled
to that money.
If it is, if there's anythingleft over, because the way that
I I look at it is that it is, Iwant, want it there, uh,
generationally, um, either frommy grand, either from my
(30:02):
grandchildren, um, uh, or Idon't know who else it could be,
but for my, for mygrandchildren, um, when it, when
it comes up, or maybe, um,maybe a niece or a nephew.
You know, help out a niece or anephew because you, that's an
easy beneficiary change to um tomake and that's and that's a
(30:26):
huge, that is a tremendous um,familial, generational wealth
creation tool, because you'vegot the compounding interest is
working for you on your side.
And if that's $25,000 or$50,000, because I put $10,000
(30:52):
in and maybe it's grown to$30,000, it only cost me $10,000
, where it would have cost thebeneficiary not only 30, but if
they have to borrow and then payinterest when they come out of
college that could cost them$50,000.
And then when you layer on theopportunity cost of hey, if I
(31:13):
didn't have a student loan and Ididn't have to repay the debt
and I could have immediatelycome out of college and started
investing that money, now you'retalking about a difference of
hundreds of thousands of dollarswith my one initial investment
of $10,000.
And that's real generationalimpact.
I'm not going to bore you withall the numbers, but I've laid
(31:34):
out an example that I use withclients and a 50, just a $50,000
investment could turn intogenerationally, over 50 years,
the difference of almost amillion and a half dollars
because of the opportunity costsof investing and the negative
interest that they would havehad on the loan payments to go.
(31:54):
So if you're fortunate enough Iknow not everybody is in the
position, but if you'refortunate enough where you know
you have the extra money and youcan set it aside, I absolutely
love 529 plans for just thisreason, for creating familial
generational wealth, and becausewe all know, yeah, there's
(32:16):
different philosophies on oncollege, on education now, but I
think we can all agree thateducation is a good thing.
Nobody will disagree.
I know education isn't foreverybody, because there are
just some people that aren'thardwired to go to college and
get a degree or, you know,become an expert, or you know a
(32:40):
technician, or you know anattorney, a doctor, a lawyer, an
engineer, a teacher.
You know, not everybody'shardwired like that.
There are definitely vocationalpeople that are hardwired and
learn differently and arehappier doing different things
and there's no shame in that and529 plans can be funded for
those as well, those technicalcertificates.
(33:02):
But I think we can all agreethat education in general it's a
good thing, the more educationthat you have, and it will help
you in life and as a patriarchof a family, I can't see how
that could be a bad thing inorder to fund that Love it.
Speaker 1 (33:24):
I want to end with this.
We're not going to get in deep.
There are other alternatives.
You could simply have a taxablebrokerage account.
You could have an UTMA account,but you have less control of
that because the child gets thatmoney where they go to college
or not, at usually age 21.
But for 529 plans, my opinion,I think they're the king.
(33:48):
If it's for college funding,they're the king.
And now, with all the lessrestrictions on it, the ways you
can maneuver.
In the event the child doesn'tgo to college, in the event
there's money left over, as wetalked about.
So my take absolutely worth it,but only if it fits in your
(34:11):
overall financial plan.
Speaker 2 (34:14):
Yeah, I'll give you Keith who paid.
If, let's say, you had leftovermoney in a 529 plan and you
took the withdrawal, who paysthe tax?
Speaker 1 (34:25):
Yes, this represents a great tax planning strategy
distribution direct to thebeneficiary, even though maybe
the parent's the owner.
If it's paid directly to thebeneficiary, the child, whatever
(34:48):
age, is responsible for thetaxes and the penalty on it, not
the owner.
Again, if it's paid direct tothe beneficiary, the custodian
can do that.
So here's the planning strategy.
Imagine this I'm 22 years old,I graduated college.
(35:09):
There's money left over in the529 plan that mom and dad did or
you never went or you neverwent, it doesn't matter.
Let's just pick a figure.
Let's say there's 25 grand inthere.
Okay, all right, we're going topay the 25 grand to the child
that's added to their ordinaryincome tax.
Well, let's say they don't havea job or they're very low
(35:32):
income earners and they're in avery, very low income tax
bracket, maybe a 0% tax bracket,which, if they are, if they're
single, you know it's it's gottabe like, uh, under 10 or 12,000
or something like that Plusyour plus, your, plus your
standard standard exemption.
(35:54):
Your standard deduction maybearound 12, 13,000.
There's a way that they wouldnot pay federal income tax.
Or if you stretched out over acouple of years maybe do one in
December and then one in Januaryto empty it out.
That takes a lot of taxstrategy on that.
So get with your tax advisor,cpa and all that good stuff,
(36:17):
cover, cover your basis on that.
But to your point, there is away that you can pull money out
distribution.
Possibly it's got to be paiddirect to the beneficiary and
possibly avoid income tax, butno 10%.
It depends on your income taxbracket for the beneficiary.
Speaker 2 (36:40):
Listen.
The point that I'm trying tomake here is that if you have
parents that are in a 37%federal bracket and there's
leftover money, the parentsdon't necessarily have to get
clipped at the highest federalrate.
It could be 10%, 12%, 5% at thekids rate.
The key is who the custodianmakes the distribution payable
(37:04):
to, and that's going to dictatewhat the 1099Q, whose name, is
responsible for the taxes on thenon-qualified distribution.
That's it, seacrest, out.
Speaker 1 (37:21):
All right.
And again, that's a lot of taxstrategy.
And again, yes, I think a 529plan is absolutely worth it if
it fits into your financial plan.
Seek financial help on that.
But yeah, we love it.
I think we covered our bases,as you said.
(37:41):
Seacrest out, ruffalo, good tosee you.
That's it for Unsolicited fortoday.
Thanks for listening.
Be sure to subscribe ordownload or follow.
Give us a rating.
We need more than six followersto listen to this thing.
See ya Later Hard work reallydoes come in payoff Every day
(38:03):
working.
We don't really need no daysoff.
Speaker 3 (38:05):
Remember to subscribe to the podcast to hear more
information to help you pursueyour financial goals.
Securities and advisoryservices offered through LPL
Financial, a registeredinvestment advisor Member, finra
slash SIPC.
The options voiced in thismaterial are for general
information only and are notintended to provide specific
advice or recommendations forany individual.
(38:26):
All performance referenced ishistorical and is no guarantee
of future results.
All indices are unmanaged andmay not be invested into
directly.
This information is notintended to be a substitute for
individualized legal advice.
We suggest that you discussyour specific situation with a
qualified attorney.
This information is notintended to be a substitute for
specific, individualized taxadvice.
(38:48):
Please seek a professional taxadvisor.
Speaker 1 (38:51):
Prior to investing in a 529 plan, investors should
consider whether the investor'sor designated beneficiary's home
state offers any state tax orother state benefits, such as
financial aid, scholarship fundsand protection from creditors
that are only available forinvestments in such state's
(39:13):
qualified tuition program.
Withdrawals used for qualifiedexpenses are federally tax-free.
Tax treatment at the statelevel may vary.
Please consult with your taxadvisor before investing.
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