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#211 - Maximizing 529 Plans: Tax Benefits and Best Practices (Part2)
Episode 21122nd November 2023 • Money Boss Parent • Anna Sergunina
00:00:00 00:30:47

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Today, we're picking up where we left off, continuing our quest to unlock the secrets of choosing a college savings plan for your little scholars.

In my previous episode I laid out the groundwork, with those initial steps you need to kickstart your college savings journey. If you missed it, don't fret; there's still time to go back and catch up.

This week I'm sharing the nitty-gritty details on how to select the ideal plan and supercharge your savings game with a few tips and tricks straight from my family's playbook.

Let's dive in and explore the possibilities.

Anna's Takeaways:

  • College savings plans with investment options (05:04)
  • Maximizing savings (08:59)
  • Saving for college (14:25)
  • Start Early (18:58)

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Money Boss Parents! Welcome to Anna's Money Boss Parent podcast, your go-to resource for mastering money management while raising a family. Join me as we explore practical tips, expert insights, and inspiring stories to help you achieve financial success and create a brighter future for your loved ones. Don't forget to subscribe, rate, and review the show to support our mission of empowering parents like you to take charge of their finances and build a prosperous life for their families. Let's thrive together on this incredible journey!

Links mentioned in this episode:

Best of 2023 College Savings Plans: https://www.savingforcollege.com/article/how-to-choose-the-best-529-plan-for-you

Bank Rate: https://www.bankrate.com/investing/best-529-plans/

  1. FREE GUIDE- Kid Money Boss: School isn’t teaching my son about Money. It’s up to us Parents. Here are 9 tools I am using to team my son, everything I never learned as a kid.

Transcripts

Anna Sergunina:

Hey money bosses Anna's here and welcome back to the money boss parent podcast, I am continuing our conversation about how do we pick the right college savings vehicles for our kids? What are some of the tax benefits and best practices, I talked about the initial steps you need to take and setting up a college savings plan for your family in Episode 210. So go back and listen to that that gets you kind of the first started into the process. And today, we're gonna dive into actually helping you choose the plan. How are you going to maximize your savings? And what are some of the tips and tricks I have up my sleeve and what I'm actually doing for my own family. So without further ado, let's get into it. Because I've got a lot of information to share with you today, you may want to grab a pen and a paper and start taking some notes. I looked up some interesting statistics on this topic, because I was just curious, but Americans have amassed $432 billion for educational expenses in 529 plans as of August 2023. And this amounts to around an average of $26,000 for an estimated 16 million families who are participating in 529 college savings plans. Now, it may sound like big numbers, but it's really only 29% of college saving parents use 529 college savings plans. So it's still like a very small percentage, not even a third of families were saving for college using these vehicles. We talked about the tax benefits and all of the other features that come with it. So go back to Episode 210. And listen to what and how it may benefit you. Also, if you want to send me a DM on Instagram, and I am at money boss parent award state, I can confirm for you if you state offers a tax deduction. So go to the Instagram and sent me a word just one word state at money boss parent, and I will confirm if your state gets a deduction because that's one of the decisions you're going to be making initially when you set up a plan because there's variety of plans and options. And also maybe if you have to make changes or you're moving around, then you can also figure out which type of plan you actually are going to be better off. So how do we select a plan based on some of this criteria? Now? Yes, the tax deductions on contributions is one of them. But it's not the only thing that drives this decision. In my opinion, when families looking at how do we make a decision, I'm gonna go through a long laundry list of some of the plans that get top ratings for lots of different reasons. But first, from for me, it really comes down to like a combination of things, low costs, and the costs associated with investments that you're going to have inside these 529 accounts. Because remember, at the end of the day, these are investment accounts. And if you listen to the episode 210, where I describe to you the difference between a savings plan where it's like a savings in an investment account versus a prepaid trust, where you actually don't get to choose your investments, you prepaid tuition in today's dollars. So when we're discussing which plan is the best to choose for you, it is referring to the plans that allow you to be your own investment manager and pick investments based on your time horizon, risk tolerance, and so forth. So for that cost is very important, because the last fees you pay to someone else on those investments, the more money is going to be left over in your own account. So that's number one. So costs are important to meet good benefits. If we do get to have tax deductions. That's great to remember all the money that goes into 529 college savings accounts are growing tax free if used for qualified education expenses. And then last but not least, like this this plan have a proven track record a track record for the investment performance, like so how is it doing compared to its peers, okay, because you don't want to pick a plan that has all the other things and investment options or performance has not been that great. Now, you kind of see how I sort of put them an order where the performance is really driven by how the market fluctuates, how certain investments are performing and so forth and how much risk you take. So therefore leading with What the cost of these investments is the first best step in my opinion. So here are a few options that you may want to consider Ohio 529 college plan, it's called College advantage, and it offers the diversity of investment options. You can also pick FDIC backed accounts. So this is like if you want to have CDs, they also have Vanguard funds, which are Vanguard is known to be the leader in low, low cost funds, and also DFA, those are more complex, but also inexpensive index options for you, too, to make choices, and this plan offers both in state and out of state accounts. So you don't have to live in Ohio. And for those of you who do you actually get that state deduction of $4,000 that I was talking about previously, per beneficiary. So it's like you have two kids and you live in Ohio, like each, you know, gets $4,000. So that's, that's a great opportunity right there. Now, New York has a plan called New York 529. Direct plan. And it's also a great option because it's available to New York residents. And then those are a state. Now, because New York has high income tax for the state, just like California, they offer quite generous state deductions. So it's $5,000 for single person $10,000 for joint filers. And, again, that does help reduce your your taxes overall, I also love New York because it has Vanguard funds. And because of you know, the Vanguard being low cost provider for for those options, Wisconsin 529 plan, add best ED v s t also available to residents of any other states. And it's really, it has really great investment options as well, what I also like in a lot of these plans to have something called age based options, you may be familiar with this concept of like a target date retirement fund. And because it's become wildly popular in our 401k, or like retirement accounts, you basically, if you want to retire, let's say in 2050, so you select an investment option that has that date attached to it. So it works exactly the same for college, college selected funds, because you, for example, would pick a fund age based, that would correspond to the date when your child is going to start college. So like let's say, Liam is going to start college and 2037. So an age based fund for me would be you know, whatever, whatever company Vanguard 2037, fidelity 2037, because inside of that fund, you only select one investment, you get the the right mix of stocks to bonds. And over time, as we get closer to that date, when when your child starts college, it gets adjusted, and becomes more conservative and conservative, because what you don't want to end up happening is when you select it sort of when the kids are younger, you probably want to be more aggressive with your selections of risk and what you know what you invest in, in order for the funds to grow. But what you don't want to find yourself in is, you know, next year you have to pay tuition bill. And we're having a bad time on the market like where we are now. And you know, all of a sudden new balance drops like 15 or 20%. So you kind of want to balance that age space options allow you to do that a lot more passively. So I love that option about you know, any of the plans that offer but Wisconsin, particularly West Virginia has smart 529 Direct college savings plan. It also but the the one feature of that is that it's only available to the residents of that state, but they do to do as well have low cost fees and target date options. The college plan that I selected for Liam when he started is actually called my 529. And it's associated or attached to Utah. And I the reason I selected it is because it had a an option for Vanguard funds. And I wanted to make sure now again, this was five years ago, almost five years ago when I opened it because I really did it like I think as soon as I had his social security number.

Anna Sergunina:

Then I was like okay, ready to go. And I opened an account. By the way side note you can start a 529 college savings plan. Even before you have a child let's say you're pregnant right now or planning to have kids because later on when you do have a social security for your child, you can change who the beneficiary is and that's how that's how these accounts are actually technically, they're not kids accounts. They are account loans that are owned by parents and kids are going to be put on on that account as beneficiary. And because kids never owned these accounts as they can't, they're minors, that's where you have that flexibility if you want to just kind of start an early savings plan and interesting, I had a client, probably before Liam was born, younger family who was planning to have kids, they actually opened a 529 college plan, like I think two years or so, before they had their first child, and they've gotten like crazy bonuses and had extra savings. So they front loaded with contributions, those accounts. And so is not typical for a family for sure. But it's an option. So that you can you can make those selections. Now, you also would, if you just Google, you would be you would find lots of other options for where you can get the 529 plan started. So like custodians, or broker circle brokers like Charles Schwab, fidelity, Merrill Lynch to D AmeriTrade, they all offer 529 plans. And there's, you know, all of them are on the list of providers that have low expenses for their investments. Some of them like for example, fidelity actually manages plans for State for states like Arizona, Connecticut, Delaware, Massachusetts. So some of them are attached to a state to like the my 529 plan. It's called My 520 nine.com is actually manages plan for Utah. So if you're Utah resident, you get some extra benefits, but it didn't really matter to me. And it really was more for because in California, we do not get a state deduction for contributions. And we do have a plan in California, it's actually called California Scholarshare 529. And it has a decent options like it has to craft funds, T Rowe Price, and some age based options, but I, I opted out of that at a time because they did not have Vanguard funds. So that was kind of like the rationale for me to go through. Through these options. I will share with you again, if you sent me a direct message on Instagram at money boss, parent, Ward state that I can check for you to help you kind of make a decision on which plan is the best. And should you go for like the tax deduction or kind of do the route, take the route that I that I want. Next, I kind of want to focus on how do you maximize savings. Now, it's astonishing to me by you know what numbers we're looking at when we actually calculate the you know, how much you should be saving. And so for example, we are on track to save a target to be saving $1,000 a month. And that would allow us over time, but they time Liam is 18 to have enough money to send him to like, you know, a private school that in today's dollars costs like 65 to $70,000. Now, because investments will grow. I'm hoping they will grow faster than the actual cost of college, we should have enough. But there could be a chance, right? And this is why we'll talk in a minute to like, how do you actually know and stay on track with these investments, because it's not just like, Oh, I've got a 529 account and I'm saving X amount of dollars, right? You have to look at your budget, you also have to come back to it and see. And that's why I'm stressing to you that making a decision about what investments you choose, will will make a lot of a lot of difference right over the over the years. And it's like to think personally, I thought we had like 18 years when we started. What are five years almost flown by so No, before I blink, it'll it'll be here. So it's like extra cautious with these decisions. Okay, so I want to talk about, like, how do you maximize your savings, obviously, if you can, your budget can afford and your family has enough space in your financial financial resources, then maybe you can set up regular monthly contributions. I think that's kind of the easiest way to stomach this. If you kind of you know, ramping up. I have families who make lump sum contribution. So if your paycheck is uneven, and maybe you want to just kind of like once you get a bonus once a year, you want to sort of throw a lump sum, you can totally do that. Also, like I've had, and not a lot of you know, not a lot of family members are interested in that. But that could be something that you throw out there when holidays creep up or when birthdays or bat mitzvah says that hey, we don't really need any toys, because I know that all of you have plenty of toys in the house for kids to play with. If we are saving for college, and you can request that they actually give you money that you can yourself, then then put, in addition to that, now, you know, you will think, Well, somebody's gonna give me $50 For a kid's birthday party, that's okay, right over time, every little bit counts, I know that a lot of families have got grandparents who are just as equally excited and contribute extra funds. So there could be creative ways to do that. One thing to remind you about, there are limits as to how much you can put in into these accounts. And so far, so like, there's the deduction part. But then there's limits, because we kind of cross into the area where you have to file additional tax forms. So in 2023, IRS treats contributions toward 529 college savings plan as a gift, like it's on the forms that we fill out on a tax return, it's called a gift for tax purposes. And so individuals in 2023, and the this limits increase teeny bit every year. So we have up to $17,000 to contribute to that account. So like your each year, and I, if we were to choose to do that can put $17,000 without having to file this gift tax form. Now, some families say, Well, you know, we have the resources, and we want to maybe front load, or make a large lump sum, you can still do that. And there are limits per state as well. But usually, there's a rule of five years like you can put up to five years in advance into this account, and then you not make you cannot make any more contributions for five years. And then you can reconvene after that and kind of reevaluate what makes sense. So I think what would really help you first is, once you've selected your plan is, is to figure out what is like, what is the actual number that you're targeting, right, deciding, I mean, this will deciding on what school you want your child to go to, will allow you to kind of work backwards, if it's a state school, versus if it's at a state if you want to be more conservative. I mean, this, this could be another five episodes on this podcast when we're talking about those decisions. But that would be like one one major allocation once you know, what are you going to actually save. And I know a lot of parents get tripped up on this, because it's like you don't you may have ideas about especially when you have little kids, right? Like I have no idea what Liam might be interested in and what school I want him to go to your and I again, also like there's some of this mental upbringing from, you know, from each of us, we come from different backgrounds, how you know, how our schooling, when to help parents contributed what we had to do, it's the same in your family. So you may have different opinions, but start somewhere like I think a safe assumption is that if you save for a state school tuition, if you want to just focus on that, okay, we can have our family can afford to sit to save our state tuition. That's like a starting point. Because from there, there's lots of other options and opportunities. So don't kind of get tripped up because you can decide whether it's a private school or you know what, whether your budget can afford it, just start with something. And if you want to kind of like a middle marker, I would I would be really comfortable if you're had the option to do something like that. Now, in these accounts, over time, what really makes a difference is, it's not just the minutiae of you putting money in that account, we want the money to be growing, we want the money to be invested. So there's a couple of things that we should pay attention to one is something called investment allocation. Now, this is a investment terminology here, but it really simply means what's the recipe of that account? And I mentioned a little bit about this when I was describing the age based portfolios, which are sort of the simplest way to understand how much time do you have until you're going to need the money, right? And for all of us, that time starts when they start the first year in college, if you have 10 years to go, that's how much time you actually have. And so also the second layer to that would be what's your risk tolerance?

Anna Sergunina:

Well, how much are you willing to lose or gain right it because market will fluctuate when you invest in these accounts, you usually invest in markets like the stock market, the bond market, some fun some options have real estate market. So it's it's really like that combination, they most of these plans, have an option for you to take a short quiz that can help you decide like here's my risk tolerance profile and I'm going to select these options because it's not enough to just say I want low cost funds like Vanguard, I want you know, more passive index funds versus oak I'm interested in companies that invest in socially responsible investments or No, I just want to be really conservative with my money. And I want to put it in, in CDs, for example, or something like a savings type of an account. So it really comes down to how much I would suggest for you to think about how much time you have. And you know, one thing is, the more time you have, the more risk you should be willing to take because you have time to recoup and grow your money. And to this is why looking at the investment plan, and the options that exist for that plan is really crucial at the beginning, because you will have all of those answers kind of checked off for you once you make a selection. So one thing I wanted to mention too, again, I'm on Instagram a lot and I would love for you to connect and chat with me there many boss parent sent me word college, and I will share with you one of the tools I love to use with clients. It's a really nifty calculator from the Vanguard site that allows you to kind of really get clear on like, Okay, here's how much money you need to be saving if you had a particular school in mind. So you will be able to figure out what you actually needing to do. So if you have a five year old, like I do, almost five year old, then you need to save X amount of dollars. So sent me word College, and I'm happy to share that calculator with you. Because I think it's kinda like the first first thing, one of the first things to do is to get that out of the way. And lastly, I want to just share just a few tips and best practices of once you get that started and, you know, select your plan, pick the investments, know what your target is for savings, some some of the ideas, how do you sort of stay on track with with this? I haven't quite gotten to that yet. But I think now that Liam is starting to be more interested in in finances, and asking questions about money was started the savings jars, I'm gonna start to introduce this concept of college and saving for it. But I think this is maybe for kids that are a little bit older, where you can actually involve them and explain to them, here's what's happening. Here's what mom and dad are doing. Here's, you know why we're doing it. So like involving them in the process, I think is really important because they they should be learning this as they go that hopefully will help them shape their decisions about you know, what they want to do and how all of this comes together. I think it also teaches financial responsibility, right? If we're taking these steps. As a family, I want to have I want to be upfront, I want to be open book, I want to be talking about these things because I maybe that's just my background, where I come from, but I there's nothing to be ashamed of. There's nothing to be hiding. And so that's why I'm talking to you and encouraging you to start doing these things as soon as you actually can. And at the same time, like avoiding mistakes. And I mentioned to you like this, this is an investment. This is the one of the biggest investments you're going to make in your life, right aside from saving for your own retirement. And so I just feel like just starting an account, putting some money in it and not really paying attention to it is not a good strategy. Like, I want you to be coming back to it to it at least once a year, rethinking and still kind of asking the question, Where are we still on track. And we're still thinking that our child is going to, you know, go to a state school where we are or like if you get closer, right, like once you have teenagers, you really are paying more attention. Not that they're older, what kind of humans are they? What are they interested in? And if you have to make adjustments to these, I've had clients this is interesting, actually fact too. I've had clients who, over time, right, because they started early, they were consistent, contributed every time or every time they could, they were able to like front and pre fund these accounts even before their kids turn 18. So I mean, I've seen how awesome that is to be to be like ready and check off that box even before you actually have to use those accounts. So I highly suggest to make this one of the things that you review once a year on your financial statements or balance sheet. And keep asking questions as a family if that's the target we still have on our on our books. And if we still have the budget in options to do that. And don't forget to ask those grandparents for four or 529 college money because I promise you, they don't need twice as much as we think or as much as they want him. So that's it my friends. There's a lot more to talk about when it comes to these accounts. Since I want you to start, I want you to start somewhere, we will have more discussions, I promise you there's, there's more to cover, but just start just start somewhere, if you haven't yet, it's going to over time, it's going to become sort of a second habit and one of the extra things that you saving, and it feels good, it really does feel good. Once you look back now that I have almost five years under my belt as a mom, it feels good knowing that I'm taking the right steps. And don't beat yourself up. If you haven't started yet. And your kids are older. That's okay, just start now, I know that for sure. And some of it is from my pep talk who used to give to parent groups and at fairs that I did for in my early career from Maryland 529 college plan, I kind of missed those conversations. I think I get them now. So many years later, but that's just how life goes. I appreciate you tuning in. If you have 30 seconds of your time, I would really be grateful if you left us a review subscribed and shared with the friends. Because without you I couldn't be doing this. There's no point of doing this. And I very much appreciate hearing from you. Getting your thoughts and feedback. Also, let me know if there are topics you want me to cover on this podcast because it's always it's always something that comes from listeners like yourself that make my day excited and even, you know, even planning this podcast for next year would be awesome too. So thanks so much for tuning in. And remember You are the bosses of your own money.

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