#210 – 529 College Savings Plan: Getting Started [Part 1]

Anna Sergunina: 00:00:02

Hey, money boss parents Anna Sergunina here, and we are in for another episode of the Money Boss Parent Podcast. Today I want to dive in into talking to you about college savings plans, and specifically 529 college savings plans. I know you probably heard these terms, one, you know, one way or the other. But I think it's time for us to spend some time discussing really, what these accounts are, how do they work for you to understand where do you begin? How much you should be saving? What are the benefits? As far as taxation goes, and whole bunch of other things to consider, when you actually thinking about, should you be picking this vehicle as a tool for you to save for future college costs? So without further ado, why don't we dive in, I think this is gonna take us quite some time. So make sure you sitting in the safe place and have a way to take notes. As I'm gonna go through each of the sections here it is quite detailed, and I'm gonna make sure I include the links for you in the show notes as well. So the first I want to help you understand the basics. What is a college savings plan? 529? What's the 529 number Interesting enough, it's actually a section or IRS code section that specifically addresses how these plans work. So that's all it is, right? No particular meaning around this number. However, these accounts are specifically designed to help you save for education related expenses, I'm going to expand that definition because traditionally, it's been only use to pay for college related expenses. And recently, we've had some tax loss changes that went in effect that expanded the use of these accounts for K through 12. Education, and there are some limits. And also some states have still to approve whether these funds can be used from these accounts. But for the purposes of our conversation today, I want you to think about them as vehicles to help us save for college, we do know, the cost of college is increasing, I saw a recent statistic. I think it was on smart asset that, you know, projected increase of tuition is about 8% per year. And it from here on on, it just keeps on increasing. So I think that's where having this conversation whether this is a vehicle that you should utilize, is really important. Now, personal story I have actually funny enough, when I started my career as a financial planner, I had a I call it a volunteer job, it was still a job which paid very little but it gave me a really great experience in understanding how these accounts work, what they provide, and also ability to to speak to parents. So I used to work for Maryland 529 college savings plan. And my job was to go out to elementary schools, and middle schools and actually attend to like Parent Teacher comp conferences or PTA meetings, and talk to parents about how these plans worked. And I specifically talked about Maryland plan because that's who paid me money. But it was fun because I get to interact with parents. And funny enough that I realized and I did it for a few years. Also a side note, I would also go to like state fairs. You know how, once a year, like a county will have a fair and so people come to the fair families usually to hang out and play on the rides and eat popcorn and all kinds of stuff. And then there I was, with my little table and a tablecloth and the little gift giveaway toys and little gadgets and brochures about how parents should start opening these accounts and start saving money. And I know that Maryland 529 college plan has two types and I'll talk to you a little bit about those two that like you could start with as little as $25 to begin the contribution so that was a fun job now i intimately got to understand what these accounts are how they benefit you. And now since my son is almost five it's it's something that you're and I started as soon as he was born now things evolved over the years. And I've seen many families utilize these particular vehicles for savings for college. I've seen clients who actually use those accounts and and close them once the funds were spent for the kids. So they've been a around for quite some time. Now, I want I mentioned something that I want to clarify for you. But there are different types of 529 college savings accounts. One is called prepaid tuition. And the other is typically referred to Education Savings Plan. Most of you probably have heard of just the traditional Education Savings Plan, that's the plan, that you can actually pick your own investments. And a lot of times you have options for like stocks and bonds or combination funds, or what they what they're referred to is age based enrollment funds. So for example, if your child goes to college in 2025, then most likely there was a fund that had that date set so that the allocation of investments, stocks to bonds, inside those accounts, would specifically be targeted for the date when they start their first year of college. So that's the typical one, the second one that's less known. And I haven't seen that many clients utilize that, but those who have actually, really tremendously benefited from it, because it's called prepaid tuition plan. And so basically, it's just like it sounds that allows you to pre pay or buy these credits or units, at the current price, and whatever that unit. So for example, when you look, let's use Maryland as an example, I'm not particularly stuck on it. But that's just a good good example, because I know it intimately. So Maryland has this type of a plan. Let's say you wanted to buy a semester of a community college or semester of a Maryland school tuition in today's dollars. Remember, I mentioned at the beginning that these costs for college are going up on average 8% a year. So you wanted to kind of get ahead of inflation, and buy like a semester or two where you can bike however many you want, you could buy the whole four years, you can actually do that, what's what's good about that is that you pay today's tuition, so whatever tuition is, this year, that's the fee you're paying. And from there, you can have a payment plan that allows you to make payments over time, and so forth. And so but you might be wondering, okay, well, I buy the tuition now. But what happens if my child decides to go into a different school? If it's not a Maryland school? Or if it's not any other state specific school? That's okay. What because these plans have a lot of flexibility of how you can use the money. And so what happens is Maryland has across all schools, state schools, or any state has specific number, right? Like what's the average tuition for college in that state. And so if you have prepaid for the tuition, and let's say your child decides to go to Harvard, I'm just gonna pick them expensive schools or Ivy League schools, then what they're going to do, this plan is going to give you the average of those tuition for that particular year. And then you're going to have to come up with a difference. So those of you who are really certain that your kids are probably going to be in state schools, or they're going to go to the school and in the state that you currently live on, you're projecting, you're going to be moving somewhere else,

Anna Sergunina: 00:08:23

that's where these might be beneficial. Now, on the other side, the savings, education savings plans, those are the ones that you can pick investments and actually grow them at a much different rate. Right, because and right, there's risk and return with those because you exposing those to stock market fluctuation, bond market fluctuations and things like that. So it really is a preference of what your risk tolerance is. But I do know that those actually exist across the board. One of the biggest known benefits of 529 plans are tax benefits, flexibility of how you can use them, and portability. So let's talk about each of these features, tax benefits, depending on which state you live in, and right now, and I double checked it this morning. As of now, there are about 30 states that offer tax deductions on the contributions that you are going to make. Now for those of you who are on Instagram, you want to if you want me to confirm for you what if your state offers a deduction on the contributions that you're going to make? Send me a word state, and I will personally look up that information. So DM me word states, and I'll look up the information for your state and I will confirm how much deduction you actually are going to get on the contributions that you're making. And whether your state you know all together has those benefits because is one, this is sort of the first benefit, because the second layer to this tax benefits in the 529 college savings plans is that your contributions, if if let's say you lived in a state that didn't offer a deduction like California, because I live in California, I know that fairly well, then, not to worry, because the second layer of benefits, when it comes to taxes is that your contributions to all the savings, so you're going to make a growing tax free if these monies were used for qualified education expenses, and there's a long list of all what those expenses are, but that's probably your biggest benefit that you want to focus on. Yes, it helps if you get a deduction for contributions that you made in your state offers that. But I wouldn't be just disappointed if you're in California, just like me, and you never got a deduction for the contributions you made. So again, on Instagram, DM me word state, and I am at money boss parent. And I'm happy to confirm for you what those benefits are for tax deductions, and whether your state offers it. So if you, for example, live in Maryland, and I've got a look up with Maryland contributions levels are, but I think it's about $4,000. If I'm not mistaking, then let's say you contribute $4,000 to either prepaid tuition plan, or you have the savings plan. That's how much you can deduct on your state income taxes. So it's not a federal deduction, it's a state income tax deduction. And still, your account is going to grow tax free. And you can use it for all qualified education expenses. And now I mentioned flexibility, as well, because let's say we go back to that example, where your child doesn't doesn't decide to go to the state school that you were thinking right, or they get accepted somewhere else in a different statement, necessarily an expensive Ivy League school. And that's okay, the flexibility of for you to use the funds from the 529 college plan exists across the board. Now, that's where the savings accounts or savings plans are more popular than prepaid tuition because of this feature, you can just take whatever the funds, you have an ad account and apply those dollars for the tuition that you need to pay in a different state school in a different state. Even in a different country. Actually Interesting enough, there's a laundry list of schools internationally that you can use your 520 $9 to pay for the tuition. And the last one I mentioned was ease of use. So they are fairly easy to set up. It's like just like any other investment accounts, a lot of major custodians offer 529 college savings plans, I'll cover in the next episode, some of the some of the most popular, and what I would suggest for you to explore. But just for right now, know that there are options. Now, I want you to kind of think about this for a little bit. But as you get started, it's probably really helpful for you in your significant other you sit down as a family to think about what are your goals? Like? What are your expectations? Like it shouldn't be just because this account sounds so good, and it's the money grows tax free for college and the college so expensive and all of that stuff? What how does this like really fit into context of the overall financial plan? Will you be able to consistently save? Or do you have maybe for example funds right now, and you want to make a one larger contribution at the beginning and later on, you know, maybe add more I've had clients where they've like overfunded these accounts at the beginning when the kids were young. And then you know, they didn't have to make any more contributions because they just let the funds ride and they grew and they had enough it's it's a bit of a guessing game. I'm not gonna lie about that, or something, you know, making some assumptions because you don't know where your child is gonna go to school. You can assume and a lot of times like I've seen families, you're in I had a completely different experience. You already had a full full scholarship for room and board and tuition. I had to you know, pay out of pocket borrow money, you had student loans and my family contributed so like, depending what your background is and what your view of whether this is a vehicle for you and should you be funding it to the fullest? Really depends. So as you think this through I want you to kind of agree on that first because the next step is you agree that Okay, we're ready to do this. And you know, the the best part that I've learned when I volunteered for Maryland 529 college plan is that this is a conversation to Have a as a family when you have a newborn, when I was talking to parents who had kids in like elementary school, it's like you kind of like 5678 years late into the game, then I get it, you know, you have to figure this out how it fits into your finances. But it's like, as you're as you're trying to fit, one more savings thing you have to do in order to achieve your goals. I feel like if you start earlier, it just, it's just goes so much longer for you. Because you have time, that's the real advantage. You have time, and you're able to save a little bit over time and grow your funds. As as your child grows, so, and because we're guessing so far in advance, I feel like that's just an easier, easier pill to swallow, if you will, in your overall budget. i If you're again, find me on Instagram, I'm at money boss parents, and message me words towards Vanguard college, I will send you a calculator. I love Vanguards calculator, because it allows you to really, like create a mini college plan is as a side note, I actually use this quite a bit for when I create college savings plans for my clients. The great part about this calculator, and there are millions of them on out on internet. But I like this one is because it's simple. It allows you to kind of like put some projections and change. Like maybe your starters starting to save or maybe you stopping or maybe you have like external accounts. So it's it's really robust, easy to use. And it's like a good starting tool. Because you can you can pick a school, if you know what the school is like you can actually look up a specific school, you can select whether it's a community college or a four year university. So it's a really neat and easy tool. So send me a DM, Vanguard College, and I'm happy to share that calculator with you. So that you can start to figure out what that looks like. But just just in I want to I don't want to throw any numbers on the podcast right now. Because I want you to kind of get a basic start and just look up a little bit and understand how this will fit into your family. And then we can get into the specifics of all of that. So the only thing to mention on on this episode would be these plans. And just because not every state offers a 529 plan. Sometimes you'll hear words that they describe them as state specific or state sponsored or out of state plans, which is fine. It doesn't really matter which of these you pick now if you were to go for the the plan in your state. And even when I lived in Maryland, I was still more of a favor this has been after I worked for them. So no hard feelings Maryland 529 plan, you have to look at what fees you are actually paying. Because what is a 529 college savings plan, it's an investment account.

Anna Sergunina: 00:18:19

And if we're going for the investment account, not the prepaid type of account, then we really need to be paying attention to what kind of fees we're paying for those investments. So this is where this concept of state sponsored or out of state plans really comes to mind. So and I wouldn't even have you be confused about this, I would really look at what kind of fees, what kind of fund options exist for it for the 529 plan in my state, others inexpensive, I'm looking for index funds, I'm looking for exchange traded funds if they exist, or those target date funds that I mentioned age based, that are not going to cost you a ton because one of the predictor of future performance of an investment is the kind of fees you pay. And the last piece up fees you pay, the more you're gonna keep in your actual account altogether. Where this has also come comes in in the decision for you to make whether you stay with the state sponsored plan right at the state. If the State offers the plan that you could choose or you go elsewhere. Like for example in California, we do not have a plan or a deduction that's going to benefit us on our taxes although we should and if the state of California is hearing me they should probably considered because we pay a hell of a taxes here in California. So I specifically chose to go and picked a plan outside of our state because because I wasn't getting a deduction. I wanted to have a plan that had the least the least fees for the investment options. Because the timeline is long, I started when Liam was just born, and then wanted to make sure that we weren't spending too much in fees on these investments. So granted that all the options are the same across the board for the plans, it's really about what are we paying on an annual basis to own those investments. So think about that, look at the state specific option that you have, and compare, if that's going to make any difference for you, for for those of you parents who have kids that are a little bit older, let's say your kids are, like 1215, then you're still considering that maybe this is a good option, are you adding what one of these plans to your stack of investments, I would really also look at this a little bit differently, because you may not really need to have a whole lot of deductions right now, because you really are so close to starting to use these funds. And maybe you have a larger balance, these plans have some portability, which, you know, if you move from state to state, you can take your 529 plan with you. But I would really look at again, if you're bringing like a larger balance 529 plan into a new state, or into rolling over into a new 529 account, I would look at what the fees are first because you know, the larger the balance, the more the fees that you're going to pay. So your homework from today's conversation and we're gonna have another episode, because I've got to cover a few more things with you. And I also want to share some of the like the top plans that I've researched and I like and we can dive a little bit deeper on how you know what should you be saving in general to kind of get this started you know, regardless what your budget can afford, and so forth. So that's for the next episode, but for right now I want you to to think about what are your goals as a family discuss between all of you what kind of college you might be interested in saving for and then also look up the just like go to that college look up what the annual tuition it is today, so that you can get it get a good idea like because I don't want you to be having this rosy picture that like things going to be okay. They will be okay as long as you have a plan for it. So that's it my friends, I'll have all of the links I mentioned in in the shownotes as well and connect with me on Instagram I am at money boss parent, and if you've got a minute before you close out for today's conversation, please leave us a review of really appreciate you tuning in. I really appreciate you giving us comments and feedback. It goes to say that you value this information and you like to hang out and I very much appreciate your comments, feedback and support. So until next time, you are the bosses of your own money.