#241 – Which is Better for College Savings? 529 Plans vs. Roth IRAs & Real Estate

Anna Sergunina: 00:00:01

Hey, money boss, parents Anna is here and welcome back to the Money Boss Parent Podcast. Today I want to chat with you about alternative options. So you might want to consider when saving for your kids, education, college education, we always talk a lot about 529 college savings plans. And as much as I personally love them, I personally contribute and save, they have lots of tax benefits, there's flexibility and lots of lots of benefits. I think it's worth our time to consider other options to give families, more opportunities, more flexibility, and more variety as how they actually invest in save for this big expense that we all as parents are going to face one day. So today, I want to talk about alternatives, such as using your Roth IRAs, and potentially looking at real estate as a vehicle to fund your kids education. I knew I have sort of two groups of clients in my practice where real estate and real estate comes up there like their ears are perked up. And they're like, Okay, let's talk about that. And their other clients are like, okay, that's not for me. So wherever you might fall on this spectrum, today, just hear me out, I want to show you some different alternatives so that you can utilize on the top, or maybe instead of using the 529 college savings plan. Now, it is still the popular choice because it offers tax deferred growth. And I love that, right, because we don't want to pay taxes, and we want to minimize the amount of taxes were going to pay on growth. And if we investing and saving for a very long time, there's going to be substantial gains, right in the future. Also, you get benefits for contributions. If your state for example, not all the states allow for deductions. So there's there's benefits as you go back and look at all of this high contributions limits. That's one attractive feature of a 529 plan, because you don't have smaller limits in terms of what you can contribute. So you can actually really pre load 529 college savings plan at the very beginning and let it just grow. Now, there are some drawbacks, okay, it isn't a perfect vehicle. But it's gotten better over time. Number one consideration is that it does have impact on financial aid. So if you think that your family potentially will be eligible for for financial aid, we really need to think about who owns this 529 college savings account. Because if it's owned by the actual student, then it's going to be there's something called Student Aid index s ai. And that's a specific formula that is calculated when you are applying for college aid. When you are filling out applications and you complete what's known a FAFSA, it's a typical form, every family fills out when kids are starting college and every year in college, and one of the measure measuring sticks there, they they call a student aid index. And so there's an assessment of your assets, right. And then there's also assessment of your income. So depending on what they're looking at, or what kind of assets they're assessing, this index gives us a guidance of like how much these accounts that are specifically talking about a 529 will be impacted, you know, in this sport and this formula in this calculation for you. So if the 529 is owned by a dependent student, or a parent, it is counted at 5.64%. So it potentially could reduce the eligibility for financial aid. If that count is owned by grandparents, and this has been kind of like that loophole. It is not even part of that calculation. So if you have options, and one of the interesting things I learned just recently that and I'm not sure if you knew that, but you can always change because 529 accounts are owned by parents, even though they're, you know, dedicated and earmarked for college education for your kids. They are your own accounts. They're not your kids accounts. Kids are only the beneficiaries because first of all, they're minors. Second of all, it's your account. So you can always change the ownership of that account. And one of the loopholes and what I've learned actually is that there is no loopback on the time of one owner worship of this account changed. So well you could do is, if you're starting to see a little bit, you know, clear on the horizon, that maybe your family will be eligible for financial aid, maybe potentially putting your your parents right, or grandparents of the kids, or going to college as owners of these accounts so that they are removed from all of these calculations, they're going to be down on FAFSA, and you potentially could qualify for more financial aid. I didn't know that this was available, I knew you could change the beneficiaries. But this is interesting, interesting thing, especially for those who are kinda like on the border, and have been saving for so long. Now, just because you change the beneficiary account doesn't mean that account goes away. Grandparents can also just send the money to college, and it doesn't impact any of that. So anyway, I don't want to get too far off the topic, because we can have a whole other episode just talking about that. But I just want to highlight that for you. So second drawback is usage, right? What can we use it for? And we know it's all for qualified educational expenses. So it isn't for you to go to, you know, Italy or Hawaii in the summer. But if you wish to do that with your family, you can totally do that. Be prepared to pay income taxes on the gain, and a 10% penalty. I don't know about you, but I'm not interested in that. So specifically, think about all the savings you're doing it is intended for education. Also, one of the interesting things that happened earlier in 2023 was one of the laws that changed about what to do with the 529 funds for families that for example, if kids got scholarships, or would they overfunded it. And so now starting in 2020, for parents who have leftover money isn't the 529 accounts can now open Roth IRAs, for their kids, and transfer up to $35,000. But the one caveat there is that the accounts have to be open for 15 years. So it's, is it a drawback, I think it's a really interesting door that many families can go through and still kind of shoot for those big benefits. So just keep that in mind as we're now going to shift gears and explore how, for example, a Roth IRA could help you or be an

Anna Sergunina: 00:07:22

alternative to a 529 college savings plan. Alright, so Roth, IRAs, Roth IRAs are actually intended to be used for retirement, it is a specific type of account, where you contribute a certain amount, and we'll talk about limits every year of funds to be used in retirement. Now, what's beautiful about Roth IRA is that it is tax free, if you it kind of acts like a 529 plan, where you contribute money to it, and you pay taxes up front. And so all the gains, once you contribute and invest all the gains, and growth in that account will never be taxed. So it's one of the favorite types of accounts for a lot of my clients. Because of that feature, so resembles 529 account. However, there are some drawbacks. So first, just remember that it grows tax free, and we don't have to worry about paying taxes on it at any point. It could be used for retirement. So it is probably interesting for parents who are like, Okay, I'm not sure, you know, maybe my child will qualify for scholarships, maybe I have an athlete, and there will be a full ride offer, you know, to go to any school, you know, whatever might be the situation. So it's kind of like you're not missing out on the fact that you're saving for your retirement, but you also have this door that you can open to fund college costs. Okay, so it has this dual purpose. Interesting fact too. It has no impact on your FAFSA assets, because contributions are not counted as, as anything on the FAFSA application. So it is really good because when they're when the FAFSA is assessing what a family has, you know, the because in general retirement accounts are not part of that. So I love that a lot about the Roth IRA. Now, drawbacks, one of the biggest drawbacks of the Roth IRA, is that is compared to 529 plan is that it has a limit on annual contributions. If you are under 50 years old and 2024, it is $6,500. If you're over 50, you have $7,000 that you can put into this account. Now, I think for a lot of you it may not be sufficient for college alone, yet, you know, your own retirement. So I think that's going to be the biggest kind of question for a lot of families. And then of course, the one that I think a lot about is the retirement savings impact if you use your Roth IRA funds for education and All the other costs, then it's going to deplete your retirement savings. So it's kind of like this balance that you need to establish and be okay with. However, if you wanted to do sort of a formula where you put some money in the Roth IRA, and then some are majority in the 529, you can totally do that 101, or the point here to remember is that you have to be 59 and a half, to be able to take funds out of your Roth IRA, without any kind of penalty. So I don't know how families can talk kind of time, this will you be 59 and a half, when you can start going to college, maybe for some of you. And that works out great. But until then, maybe this this vehicle is good, if it's used primarily for retirement savings, but it's an option for you. All right, another big category or another type of an asset, that could really be considered as an investment for college or a vehicle that accumulates funds for college is real estate. And it's a such a big category. And I love real estate, by the way, it is something that's interesting to me, I love, you know, it's tangible, it's, there's lots of things you can do aside from just owning a home, right and, and looking at this asset class as a vehicle and asset class all of it together as as a strategy where maybe potentially right not only you can if you buy a property and let's for this purpose today just to simplify things, because real estate, we didn't go into weeds here too. But simply to simplify things, let's talk about maybe just an example where you buy a property, a home or condo, whatever it is, right, I don't want to get into the specifics of that I just want to talk strategy first, that potentially could not only grow in value, but it could also provide rental income for you that in the future can be used to pay for college related expenses. For example, let's say you buy a property that is in in town and like all the stars aligned, it happens that it's in town, where your child goes to college, it could also provide a housing opportunity, right? Not only income, but also a housing opportunity. So benefits are, you know, quite long here on this list. And I feel like this is more sophisticated type of approach, because you have to come up with a lot more money in order to buy the property right. And it's a lot more involved and hands on type of an investment versus opening a 529 college account or, you know, a Roth IRA. So, but here are some things to think about. If you own a property right, it can provide continuous income, rental income can color call college expenses, and I mentioned it also could provide that opportunity for for housing, now maybe the property is not in the same town where your child goes to college, that college and that's okay too, it still could be an option for that appreciation, right? We all love real estate, because over time it goes up in value and so, you can look at that as a as something that not only gives you income but also gives you equity like this point here is I was I was recently just kind of coming across this idea quite a bit and renting in variations of renting because you can have rental income if you just rent it out for you know not normal month to month you can have short term rentals on this property and I have a ton of clients who do in the you know Airbnb type of rentals, which could provide a higher income right versus like, you know, a steady sort of rent payment if somebody just lives there full time. But this idea okay just just an idea but also kind of feel like it falls in this real estate bucket is something called Air Airbnb arbitrage. And so if you Google for that, you will find lots of interesting stories and articles. But this is actually not even owning a piece of property, where you rent a home. You set up your Airbnb kind of platform, and you do the short term rentals, which really actually more falls into the income category of you generating income from a property you don't own that can be used to pay for college related expenses. i The more I think about this, and I feel like maybe we should talk at length about how this kind of idea can you know open doors for a lot of things. You don't have to start Airbnb, Airbnb arbitrage kind of project when your kids are five. But let's say you've been saving for a while and then you come to realize that your child got accepted to the most expensive university in the world you like okay, what do I do? How do I kind of pull this off? Have This, my friends could be like that key. It is definitely involved. I mean, let's just backtrack. Real Estate, in general, is a very hands on type of an investment. It's a project, it's not set it and forget it. So if that already kind of turns on turns off your interest, then I would kind of step away. Now, I don't want you to get distracted with the fact that okay, and but we own our home. And I get that homeownership is not an investment, it's a home ownership. So I want you to kind of put that aside, because if you're thinking you had that, well, we've been paying down our mortgage, and by the time kids go to college, have another 10 years or so, or whatever your timeline is, the mortgage will be less, we'll have all this equity. I love that. But I want you to think about the fact that if you borrow against that equity, right, unless you want to downsize and sell your home, you're gonna have to pay it back. So I don't view it as an investment, if it's a property right, or a piece of real estate, that does not provide income for you. Now, drawbacks of real estate, in general, obviously, it requires a lot of time, it's a lot of efforts, a lot of cost, right. And of course, if you want to get involved with a property management company, and all of that stuff, I have clients who love it, and that's totally great. But I want you to think about is there is there a way for us and our family to use this type of idea to fund college, college education and other goals too. Now, real estate can be volatile real estate takes time to buy, sell. So it involves a lot of like, Mark,

Anna Sergunina: 00:16:40

I call call that market risks. Right now we're in an environment where mortgage rates are high interest rates are high in general. So if you liked the strategy, like okay, I love it, I can kind of see the timeline how it will put together for me. But buying something right now may not be the most time smart kind of decisions. But you're you know, at the same time your timeline is running away because your kids are getting older. So I you know, just think about that in context of all the other pieces that you have in your financial plan. So, if I had to sort of conclude for today, I don't dismiss 529 plan, I still want to talk about it, I still think it's a great vehicle, what I do want to highlight for you is that you do not have to save 100% of all of the college cost that you may think you will need to you know, you know, in order to cover expenses for your kids in the 529 college plan, I want you to have alternatives. And if you have resources, right and want to start, I think you should consider definitely looking at Roth IRA, and real estate, by any means piques your interest, or you want to learn a little bit more about the Airbnb arbitrage opportunity, I highly suggest that you look at this from a lens of like, how will this work for us? Do I have time for all of it? And do I have financial resources? So that is all I have for you, my friends today? I'm going to continue exploring this topic because there's a couple more alternatives that I want to cover with you. And just to kind of give you ideas and pique your interest in having some diversification to your savings. Because I mean, a lot of times clients are like, Okay, I have these sort of standard accounts and stare at things. What else can I do? So I'm giving you some of this what else today? Let me know what you think. Let me know what you are doing as an alternative. Maybe I haven't covered it yet. Or maybe I just need to see what what creative minds are out there on this podcast. Thanks so much for tuning in. By the way, if you found this useful, please make sure that you are subscribed. So next time when an episode is released. You're going to be notified shared with a friend I would love for you to do that. And then the last but not least, remember you are the bosses of your own money.