The Case For 529s - Expert Edition Episode 73
Today, we're talking about 529 savings plans and why they are great for saving for your kids' education. Many people worry about what happens if their kids don't go to college, but there's a lot more to 529 plans than you might think. They grow tax-free and can be used for many educational expenses. You can even start one before your child is born! Let's rethink how we save for education and make sure our kids start their adult lives without student loan debt.
Resource Mentioned: 529 Table by Invite Education
—-
Please join me here, and follow me on social media, Instagram, and Facebook.
Need help getting started on your path to financial freedom? Start Here
Join the Financially Intentional Community
Oh and please subscribe and leave a review on whatever app you're using to stream this podcast.
Get my book Smart Money
Subscribe & Review
Love this episode? Please subscribe and leave a review on your favorite podcast platform.
TRANSCRIPT:
Naseema: [00:00:00] Hey, Hey, Hey, what's up you guys happy Tuesday. I wanted to come on today and really make a case for 529 savings plans. Because every time, inevitably, when I talk about 529s and how much my kids have in their 529 account, people are like, Oh, but what if my kid doesn't go to college? And I want to have you guys think about 529s a little bit differently.
And I hate using this terminology. Think about it. Like rich people think about it. I don't know, think about it differently. Think about it in a way that you've never imagined thinking about it because Keep it real, we didn't have access to these things when we were younger. Our parents didn't know or couldn't afford these things.
I don't know anybody who has benefited from a 529 plan. Really personally that's in my, of my generation. I want to just talk about how we can look at it differently. First of all, let's define what a 529 plan and the way we look at it at is, it's a way to say for your kid's [00:01:00] education, The growth in it is tax deferred and the withdrawals are federal income tax free for any kind of education expenses that qualify.
It has to be qualified education expenses that these funds are used for, but the account and the money grows tax free and you take it out tax free. As far as who owns the accounts, adults control. The account for the benefit of the beneficiary in order for a child to be eligible for a 529 account the, they just need to have a social security number and they can be any age.
And we'll talk about, you can even start it for a child before they are brought into this world. I did for jury. We'll talk about that later. There's no contribution limit. But there can be a contribution. Cap which you can contribute up to $18,000 a person. So if you're a couple you can do $18,000 times two. What's that quick math? $36,000. [00:02:00] Without having a gift tax, but there's no real actual limit on 529s. In the way you invest in 529s is a little bit different because you can't just buy a straight up index plan or individual stock .
They're called either age based investments where they put your investments in a target date fund based on how old your kid is, or there's a preset group of investments. So what my kids are invest in. It looks similar to a total stock market index fund, except it's not called that because they can't be called that.
Within a 529, so that's what makes a 529 a little bit different. You can't just invest in individual stocks in it. And then withdrawals from a 529 can be taken out at any time. There's no federal tax on the withdrawals, including the earnings. If the money is used for. Qualify educational expenses there's also something called prepaid plans and that looks similar to 529 plans, but they're not exactly the same.
And I'm just [00:03:00] putting this out there for clarification, but they're only offered. And a few states, Florida, Maryland, Massachusetts, Michigan, Mississippi, Nevada, Pennsylvania, Texas and Washington. And you have to live in 1 of these states and your kids have to attend an in state university to benefit from that as to where a 529 is available in all states and the district of Columbia and is more flexible. Then prepaid tuition, because you can use it for a wider range of expenses. And also you for a 529, you don't have to pick a school. the thing about 529 is that some states offer special tax treatments to the residents if they invest in a 529. California is not 1 of those states.
Unfortunately. You can have additional tax advantages from a 529 such as benefits of like financial aid scholarship funds or other protections I'll put some links in the show notes about this Where you can find out more information about that if your state qualifies, [00:04:00] like I said, california doesn't have that exception And so you have tax advantages.
States like California have no 529 tax advantages. There are some states that you don't get You don't have to pay in temp tax on that money But you have to look at that mine in california again I don't have any tax benefits, I still feel like 529s are the way to go. And also there are certain states where you can and cannot use a 529 for k through 12 expenses california is not one of those states for example, nevada You can use Nevada, Utah and Arizona, Texas, Arkansas.
Those are some states where you can use your 529 money for K12 expenses. So that's just like a background about 529s what a 529 is, but really want you to re imagine it because the way that I look at my 529 is like a family bank. So for example, Naima in herself [00:05:00] has, my oldest daughter has a 529 and hers has the highest balance.
However all that money is going to get pulled together. So currently right now, and it's just because I just, Haven't done it is i'm gonna pull their 529s into one account. So it's gonna be a hundred thousand dollars shortly So naima has about seventy five thousand dollars in her 529 Aya has about thirty thousand dollars in her 529 and zuri has a couple hundred dollars in her 529 But what i'm actually gonna do is just make a mackleroy 529 plan What happens is is that?
Whoever is the closest to going to college will be the beneficiary at that time. Naima will be named the beneficiary of that account. But if she doesn't use that money now, Aya can be the beneficiary of that account. If she doesn't use any of that money, or there's money left over now, Zuri can be the beneficiary of that account.
Say for example, I had some. Student loans, I can make myself the [00:06:00] beneficiary of that account and you can use up to $50,000 of a 529 to pay down student loans, tax and penalty free. We can change the beneficiary at any time. The benefit of that money being in 1 account is obviously compound interest.
The more money that you have in 1 account, the faster is able to. Compound, so it doesn't make sense to have them as separate accounts when I can just change the beneficiary at any time. So that's what I look at it as. And then even if baby Jerry doesn't use that money, I will be a rich auntie or cousin that can give some educational funds free, or I'll just have a bank of money that I could access that has grown over the year.
Say, I have a crazy emergency. That I don't have any other sorts of way of getting money from, which is, there's a whole list of places I can get money from in an emergency, but I can take that money out for a 10 percent penalty and it's grown tax free. Worst case scenario, if I'm not using it for a qualified expense, so there's that [00:07:00] that's how I choose to look at a 529 plan.
And I just want to say this the big reason why I want to make sure my daughters have access to this money and keep in mind. They also have their brokerage account they also have their Retirement account is that I don't want my kids to have to have student loan debt. Okay, like student loan debt Put me in a position where I started out at a deficit and I don't want my kids to start out as zero Especially I Really don't want them to start out in a deficit and I just want them to go into the workforce into the adult world How to even playing field to their colleagues or a little bit ahead so that their money can go a lot further than my money did so anyway, so other things you can use 529 account for our apprenticeships homeschooling expenses I talked about the repayment of $10,000 in student loans.
If your kid [00:08:00] does get scholarships for college, that amount can be taken out from the 529 plan tax and penalty free. So you just put that back in your pockets. As of a couple of years ago, $35,000 dollars of that can be rolled over into an IRA. So I think the kid has to have the account for at least 13 years, which would be the case for my kids.
At 18, my plan is to roll $35,000 dollars out of their 529. Into their Roth IRA and that alone will grow in retirement to six figures. If not a million dollars and just, like I said, I just look at it as my family bank. So tell me you guys do you have 529 set up? Do you did this, Conversation change your perception of a 529.
how do you feel about saving for your kids college? And I just want to throw this out here. A lot of people that I hear have opposition to 529 and are asked what if my kids don't go to [00:09:00] college? Most of those people have gone to college. Most of them have taken on some kind of debt. So I think it's interesting, but also I know that the.
Workforce has changed drastically and the expectations of just going to college blindly have changed. I don't expect that for my kids blindly oh, they're going to go to college. It's not an option. I don't expect that from them if they want to go to college or not. I just want to have this available for them.
And the 1st time I set up my 529 plan, I was meeting with Hillary Hendershot who was advising me at that time as a financial advisor. And she is you just want to have something. The goal is to have at least 100, 000 dollars. For each kid by the time they go to college and I think that that's a sound rule, but I think like for me, what works better now, because I got hella kids is having this bank, but I want to know what you guys are doing for your kids.
I want to know how you're investing for them, or if you learn something new about a 529 and you're willing to open them up for your kids. Please let me know in the comments [00:10:00] until next time guys.
Hey there I’m Naseema
My dream is for everyone to know that financial independence is attainable with a little intentionality. Learn how I can help you finally break the cycle of living paycheck to paycheck.
Join the Facebook Community
Join the Financially Intentional community and get access to resources to guide you on the path to Financial Freedom.
Watch these Videos To Learn How to…
Keep Listening
Here are some more episodes you may enjoy…
Our guest shares how he lost everything—his properties, business, and even his personal relationships—during the financial crisis. But that wasn’t the end of his story.