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Education Savings: It's Not All 529 Plans | Series 5.2
Episode 220th September 2021 • Enjoy More 30s: Family Finance • Joseph P. Okaly
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529 Plans seem to be the default but definitely not the only option out there.

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Transcripts

Voiceover Audio:

Welcome to the EnjoyMore30s Family Finance

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podcast. The only podcast dedicated to making life more

Voiceover Audio:

enjoyable for young families by hitting on the financial topics

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that tend to weigh on us, stress us out, and distract our focus

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from simply enjoying life.

Joseph Okaly:

Hello and welcome as always to the EnjoyMore30s

Joseph Okaly:

Family Finance podcast. We're here as always, to try to help

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you make sense of some of these money issues so that you can

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spend more time in your life without anxiety, more time in

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your life actually enjoying your family and the things that

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matter most to you. So today, we're on the second episode of

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Your Money Mindset For Kids series. As always, if you like

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what you're hearing, please make sure to subscribe, follow us on

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Apple podcasts wherever you listen. Clicking that star,

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leaving the review, it really helps us reach the other

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millions of other young families out there just like you. Last

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week, we discussed what savings bonds are likely costing you,

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the opportunity that you're giving up or missing by not

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having that money instead in someplace where it could grow to

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a much higher value for your children's future, potentially.

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So if you did not listen to last week's episode, please make sure

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to check that out.

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Today's episode though, is titled Education Savings - It Is

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Not All 529 Plans, where we're going to cover the various types

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of accounts that you can use to save for your children. 529

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plans for education are the default that people seem to hear

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about, you've probably heard the term 529 plan, but it's not by

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any means the only option or even the best option for what

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you may be wanting to accomplish yourself for your children. This

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overall I find to be a very similar situation to when I was

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looking for colleges. I heard about Ivy League schools, I

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heard about those schools that I may have seen on TV with sports

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but what school is actually right for me. There is no right

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or wrong per se. I needed one that would be the best fit for

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the things that I was actually looking for, though, right? I

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toured different schools and I wound up really, really liking

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the College of New Jersey, or how it's known around these

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parts as TCNJ. What was the most important to me, though, when it

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came to a school was that it was reasonably close to home. So for

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me, that meant a couple of hours worth of driving, I didn't want

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to go out to California or Arizona or anything like that. I

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wanted it to have a somewhat higher bar to entry that I had

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to reach a certain mark to really be able to get in. A good

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business school program, of course, and a smaller community

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campus type of feel. I didn't want to go to a school that had

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you know, 50,000 people in it. If I was wanting to be far away

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from home, though, if I wanted to major in I don't know

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robotics or cooking, or go to a really large school, TCNJ

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wouldn't have been a fit for me at all, nevermind the best fit.

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So when you're looking at saving for your kids, you need to

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really first organize what is most important to you, just like

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I had to do when I was picking my college and probably exactly

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the same thing that you did when you were picking yours. The two

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main trade offs that you're going to have to choose between

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when you're thinking about 'what do I want to be able to provide

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for my child', are flexibility and tax free growth. So the goal

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for today's episode is for you to walk away and say, 'Hey, I

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really would like more flexibility when I'm saving for

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my kids', or 'Hey, I'd really like more tax free growth that's

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specific for them go into college'. One of those two

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things is what I want you to be able to walk away from today's

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episode having more clarity within your mind.

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Now let's start with the tax free growth because that sounds

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like the no brainer answer, right? I want tax free growth.

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Who wouldn't want tax free growth? If you use a 529 plan,

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that's where the tax free growth comes into play if, and here

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comes the trade off, if it is used for qualified college

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expenses, so tuition, books, room and board, all that kind of

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stuff is covered. However, let's say now that Jimmy gets a full

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ride to school though, and so you decide to pull money out of

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that 529 plan to buy him a car. All of that growth that's built

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up is no longer tax free. And not only is it not tax free, but

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that now causes an extra 10% penalty on all of that growth

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because you did not use it specifically for school. The 529

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is built specifically for school. They have some

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flexibility in that you can change the beneficiary. So if

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Jimmy doesn't need the money, because he's so smart and got a

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full ride, he could change the beneficiary to his brother

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Johnny, and use the funds for his education instead. So

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basically, if you would say, 'Hey, I'm really confident that

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my kid is going to college, I'm confident that it's gonna be

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expensive, and then I'm going to want to pay for it', then a 529

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plan could very very well be a great fit for what you're trying

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to accomplish.

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The other option I mentioned though, of the two main trade

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offs is flexibility. Here if you open up an account, let's say in

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your name, but earmark it for your children, then you maintain

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full flexibility of the funds. The account doesn't grow tax

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free. So again, the trade offs, but you can use it for literally

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anything without penalty. Again, Jimmy gets a full ride example,

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you can pull the money and buy him that car without any

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penalties. He can use that money for a down payment on his first

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home, getting married, and whatever it may be. This account

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also can invest in anything. So it's more flexible from that

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standpoint as 529 plans have specific 529 plan funds and

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assets that you have to use. Now notice in my example, I said

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it'll stay in your name, putting the funds in your name instead

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of the child's name. And now there's a point to why I said

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that. There is something you can do, you may have heard of an

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UTMA or an UGMA account. But here are the funds now you're

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legally giving to your child. And so when they turn what they

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call the age of majority, which is usually 21, depending on the

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state you're in, they have full access to that money

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technically. Now, I'm not sure about you, you can think back

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I'm 35 now. If I think back to when I was 21, I wasn't, let's

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say as responsible, as I am today at 21. So it's certainly

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an option but I would definitely tell you to think about that

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route and think if you want your 21 year old or whatever they may

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be to have full access to a large chunk of money. Now, if

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you're asking me what I personally would like the best

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so 'Hey, Joe, what are you doing for your kids', especially if

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you have younger kids like me, so I have a five year old or

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excuse me, an almost five year old and an almost two year old

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as of the recording of this episode. To me, the flexibility

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could be helpful, as I'm really not sure what college is going

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to look like or cost 15 years from now. The 529s also allow

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for a lump sum contribution, equal to five years of the

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gifting limit. So I could take $15,000, which is the annual

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gifting limit times five, so $75,000 in total, and I could

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mass fund a 529 plan for my daughter Avery's last 10 years

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before college hits. So Avery turns, you know, 8 or 10, or

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whatever may be I could take $75,000, throw it into the 529

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plan and if that say doubles to 150, then I have all of that

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growth now at that point forward, which is all tax free.

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So you still have an opportunity if you start flexible to go the

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529 route when your kids get a little bit older, if you feel

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like you have more certainty on what the road ahead is going to

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do.

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Lastly, you don't have to pick one or the other. If you're not

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comfortable with either of the options 100%. If you don't say

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'I really connect with being flexible', or 'I really connect

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with just going all out and providing max funding for

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college'. You can put some funds in each bucket, but certainly

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have a discussion with your spouse and what is most

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important to you both. Is it flexibility or maximizing that

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tax free going all out for college approach. And again

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there's no right or wrong. It's the correct tool for what you

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are most wanting to accomplish.

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So thanks for tuning in today. And please make sure to join us

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for next week's episode. It's called School Doesn't Teach

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Money, It's On You, where we're going to cover just how little

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school prepares your children for managing their finances, and

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what you as the parent can do to change that. So out of all the

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episodes this season, I think that this one is super, super

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important. So make sure to check in next week.

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Overall, if you are able to implement what we covered, like

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we always say, that's just wonderful. That's why I'm doing

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this. That's why I'm putting out this information. You have less

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to worry about than before, you can focus more on enjoying life.

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If though you're wanting help with these things, or you have

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questions that I didn't cover in the episode, please make sure to

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reach out to me. Check out the Ask Joe section on the show's

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website at www.EnjoyMore30s.com, that's EnjoyMore30s.com. So

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until next week. Thanks for joining me today and I look

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forward to connecting with you again soon.

Voiceover Audio:

The conversations on this show are

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Joe's opinions and provided for general information purposes

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only. They do not constitute accounting, legal, tax or other

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professional advice for your specific situation. You should

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always seek appropriate advice from a financial advisor,

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accountant, lawyer or other professional before acting upon

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any content or information found here first. Joe is affiliated

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with New Horizons Wealth Management LLC, a branch office

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of TFS Securities, Inc., and TFS Advisory Services an SEC

Voiceover Audio:

registered Investment Advisor member FINRA/SIPC.

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