Podcast Ep. 120 OD Guide to 529s and College Savings Podcast Transcript

[00:00:00] Hey, everybody. Welcome back to The Optometry Money Podcast. Where we’re helping ODS all over the country make better and better decisions around their money, their careers, and their practices. I am your host, Evon Mendrin Certified Financial Planner(TM) practitioner, and owner of Optometry Wealth Advisors. An independent financial planning firm just for optometrists nationwide.

[00:00:26] And thank you so much for listening. I am excited in today’s episode to dive into an optometrist’s guide to 529 plans and saving for college costs.

[00:00:37] And today we’re going to talk about why preparing for college costs matters, why it’s important. We’re going to talk about key saving strategies, like 529 plans, taxable investment accounts, and some other considerations. And some interesting planning ideas.

[00:00:49] Why is it important to plan for college? Avergage costs for college

[00:00:49] So with all that said, let’s go ahead and dive right in. So why prepare for college costs for our kids? Why is that something we should think about? Why is it something we should think about ahead of time and plan for ahead of time? Well, let’s talk about the reality of college costs and college. higher education. Can be an important goal for our kids. and it can be a pretty substantial life expense, especially over multiple years, over four years. And planning ahead can help to ease the burden of future cash flows to help you prepare ahead of time to save and invest ahead of time so that the cost isn’t as substantial. either on your own cashflow or on the requirement or the necessity to lean on student loans.

[00:01:35] If we look at, if we look at some of the data out there getting a four year college degree is still one of the best predictors of someone’s income or earning potential and capacity to build wealth. Although there are certainly a lot of income and job growth opportunities in trades. That’s certainly the case.

[00:01:53] I’ve seen that a lot lately. getting at least a four-year college degree can be a big boost in someone’s earning potential. Although we do have to say. mileage may vary depending on the degree you get, there can certainly be a major difference in return on the investment for college. depending on the, the degree that you’re going into.

[00:02:14] So that is certainly the case.

[00:02:16] And, the average cost of colleges can be substantial depending on the type of higher education you’re going for.so for example, when we look at the average in-state four year public college degrees. that might range around on average $10,000 per year, just for tuition.

[00:02:33] So not including room and board and miscellaneous costs, all that extra stuff in-state tuition might on average be around $10,000 per year. when we look at outer state public colleges, if we’re going to do an out-of-state university. That’s going to be higher on average, over $20,000 per year. And then private colleges can be even more, although that is the sticker cost, right?

[00:02:55] So that is the cost. Before student aid, before grants, different things like that. So from my understanding, especially for private colleges, the actual net cost that you’re going to incur can be substantially lower than the sticker cost that you see just looking at the data.

[00:03:11] and there has been a pretty substantial inflation impact over the years.

[00:03:15] So when we look at the long-term trend of inflation for college costs, That’s average, somewhere around 5 to 6% per year over the longterm. Although it has varied by the decades. So if you look back for example, I’ll include a link in the show notes to this fascinating site educationdata.org.

[00:03:34] But if you look back in the 1980s, for example, the average rate of inflation for college costs would have been about 9%. 1990s, over 6%. Two thousands over 7%, but then when you. When you look at the last 20 years. So for example, 2010s, that’s much closer to the, to the annual inflation rate. It’s about 3% in the 2010s. So inflation has seemed to come down in, in the last 20 years. although the longterm trend again has been on average five or 6% per year. Generally outpacing general inflation over time.

[00:04:09] College Goals are Very Personal to Each Family

[00:04:10] all that being said, College is a very personal goal. And I always say that to people that ask because each family. You your, you know, you, each family. Is going to have different thoughts, different experiences, different values around higher education or college. often, depending on your own experience with your own higher education, your own experience with college, your own experience taking on student loans, which every optometrist is going to be pretty much familiar with.your own experience is often going to impact your thoughts, your values around college. And, and your own experience with how you received help with college often translates to how you would like to pass on help to your own kids. I it’s very often I talk to a client as a couple, and both spouses sort of disagree on how much they would like to help their kids pay for college costs. and that’s okay. You know, each of them are impacted by their own what their parents did or their own experience, or just how they feel. And, and so there has to be often some compromise to figure out. What are we really aiming for?

[00:05:21] When I’m talking to a client when you say you want to help your kids for college? What does that really mean? W w to each of you, what are we really aiming for? And very often it varies. So it may be, Hey, we want to help with a hundred percent. Or we want to help with only undergraduate expenses and they’re on their own for graduate expenses or sometimes it’s, Hey, we want to have the funds to help, but we primarily want our kids to take on that responsibility on their own.

[00:05:47] We want them to learn from that experience to work. And if absolutely needed, then we’ll step in and help. So everyone’s each family’s thoughts around how they want to help their kids pay for college or whether they even feel their kids will go to college. It varies dramatically from one family to another. And of course the cost can vary dramatically based on the type and the route of higher education they’re going into.

[00:06:12] So as you hear other people’s experiences, just keep in mind.

[00:06:16] It really is only about what you feel is important in how you want to help your kids. And the availability of your own cashflow to do so.

[00:06:27] And the other thing about preparing for college costs is that it is highly uncertain. Especially when your kids are young, sometimes we’re thinking about this or talking about this when your kids are just born. You have no clue what your kid’s interests or skills will be 20 years from now, 18 years from now. you don’t know in reality, whether they’re going to go to college, whether they’ll enter a trade, rather, they’ll go into some other form of work or education. So there is always uncertainty when preparing for this college costs years down the road.

[00:07:04] Prioritize Your Own Retirement First

[00:07:04] And one last thing I’ll say about costs is just keep this consideration in mind. Prioritize your own. Planning and saving and investing for retirement and financial independence first. You can’t borrow for retirement. There are. Sort of in unlimited amounts of options to help someone cover education costs. But there are only so many ways in so many years. That you can prepare for your own financial independence.

[00:07:36] So, you know, just like putting on your own oxygen mask in the airplane first, before putting it on someone else. Make sure that you have an adequate savings rate first for yourself and for your own financial independence. Before. Diverting funds and resources to helping kids with college class.

[00:07:53] That that’s my only consideration that I’ll add. It is very common for parents and I respect this. It’s very common for parents to want to help their kids. As much as possible. Sometimes at the detriment of their own finances. And so I think a healthy boundary is just to make sure your own savings rate is adequate first. And then you can, you can tackle the next thing with your kids. So that’s sort of the reality around college costs.

[00:08:18] They, it can range dramatically. from one year, depending on the type of college or a higher education that you’re going into each family and potentially each spouse is going to have a different opinion of what that means to them.

[00:08:31] How to Pay for College Costs

[00:08:31] Let’s talk about the ways that you can pay for college. Well, I think this is a helpful framework to think about that. There’s, there’s essentially three ways. Number one, you can pay for college with past earnings and what that means is saving and investing over the years.

[00:08:47] And so when you get to college, you have this, this sort of nest egg to draw from and help to cover those college costs. The second way is current earnings, current cashflow, just out of your. practice cashflow or personal employment, cashflow, helping to cover those educational expenses. And then number three is future earnings, which is really your kids, the ability for your kids to take on student loans.

[00:09:10] Again, you as an optometrist are probably well familiar with that process. And so. That is the, the opportunity kids have to use their future earnings. Or I would add in the worst case scenarios, your future earnings. If you’re taking on a parent PLUS loan, ideally that’s not necessary. But certainly the student can take on federal student loans with all of the planning opportunities that federal student loans have and use future earnings to cover that education costs.

[00:09:40] Today we’re going to talk a lot about using past earnings. In other words, talk about how to save and invest in prepare for future college costs for your kids.

[00:09:50] Deep Dive into the 529 Savings Plan

[00:09:50] And let’s start with the 529 plan. And this is what most people think about. As they think about college savings for kids. so what is a 529 plan?

[00:09:59] Well, there’s, there’s actually two types of five twenty nine plans, both born out of. the code section 529 of the internal revenue code. And the first one is a college savings plan, which is what most people think about. It allows you to save and invest for future college costs. And the second one is a prepaid tuition plan, which is sort of your, your prepaying credits for future college costs.

[00:10:22] This sort of the, the return on that is the inflation rate of those costs over time. And I’m going to talk primarily about number one, the college savings plans, which is most people think about. a 529 college savings plans is a tax advantage account. Specifically for educational expenses. And federally for federal tax purposes, you don’t get any benefit for putting dollars into the account.

[00:10:47] It’s just after tax dollars. So you’re sort of building up basis and the account. But the dollars can be invested in the 529 account and it can grow and grow in that account tax-deferred. Meaning that all of the investment earnings interest dividends, capital gains. None of that winds up on your tax return each year just sort of stays within that 529 count bubble, just like an IRA or a 401k account. And then you can withdraw those funds, including the growth.

[00:11:19] And as long as you’re withdrawing them for qualified educational expenses, those withdraws are tax-free. So you get all of those years of compounding. And as long as it’s used appropriately, all of that compounding growth is tax-free.

[00:11:34] How to Invest in a 529 Plan

[00:11:34] And each state is going to administer their own 529 plan. And you can choose the investments within the 529 plan.

[00:11:44] Very often each plan is going to have a fund lineup. So you can choose between all of the individual funds that they offer similar to a 401k plan. They’ll often have target date type funds too, so you can sort of match up your. Expected college dates with the investment mix in there.

[00:12:01] And once you select that mix, there are some things to take into account.

[00:12:05] So you can, for example, only change the current investment investment mix twice per calendar year.or without incurring tax issues, or you can change beneficiaries. That’s, that’s one way to get around that as well. so you can’t constantly trade or switch investments back and forth. These aren’t active investment management or trading platforms. secondly, the plans themselves may rebalance automatically on the beneficiary’s birthday. And those don’t count against that twice per year limit. So you can usually ch.

[00:12:41] And, you know, the investment lineup is going to depend on the states or the providers.

[00:12:45] So some states have a 529 plans that are provided by a fund company. So for example, it may be Vanguard. It may be American funds. And you’re going to be limited to that fund companies lineup. other plans, for example, Utah’s 529 plan have a, a broader, list of investment options you can choose from.

[00:13:04] So, you know, which options are available, just depends on the plan you’re using.

[00:13:08] How to Appropriately Use 529 Account Funds

[00:13:08] And so let’s talk more about the appropriate uses of those funds. Again, these are for qualified educational expenses, right? So what does that mean? Well, you can use them to cover tuition. room and board.

[00:13:19] If you’re enrolled, at least half-time. Books, computers, supplies and other qualified costs for college or graduate school. And that’s after accounting for expenses paid for by grants and tax free scholarships. tuition discounts, things like that. So you can’t take out, you can’t take out funds tax-free that have already been paid for by something else, right?

[00:13:44] There’s no double-dipping with these educational benefits.

[00:13:47] And those dollars can be sent to the beneficiary of the 529 account or directly to the school. And there has recently been an expansion of use for the funds. Right? So traditionally it’s used for college costs. but the, the 2017 Tax Cuts and Jobs Act expanded that to K through 12 expenses as well. Up to $10,000 per year.

[00:14:10] You can use it also for trade schools.

[00:14:12] So programs or trade school programs that are provided by institutions receiving federal Title 4 student aid you can use 529 account funds for those trade school programs. And I’m going to throw in a federal school lookup tool into the show notes. So you can look up different trade school programs and see if they qualify. And thanks to the original Secure Act. You can also use them to pay for student loans specifically up to $10,000, per beneficiary of lifetime qualified student loan debt. So. there is some additional flexibility there that you can use outside of just that traditional undergrad or graduate school, college costs.

[00:14:51] State Tax Benefits and Quirks

[00:14:51] And there are often, and that’s from a federal tax standpoint, there are often state tax benefits as well. some states offer deductions or credits for your contributions to 529 accounts. Although, not all states, for example, California surprise surprise does not. But certainly if you’re living in a state that does qualify, you do want to check into that, talk to your tax professional financial advisor and keep that in mind.

[00:15:15] the other quirk about certain states is that not all states conform to federal tax rules. When in regards to things like using 529 accounts for K through 12 expenses.

[00:15:26] So if you’re going to use it for K through 12 expenses, make sure that your state is going to conform to federal tax, tax laws. or just be aware of the tax consequences of doing so. So there are some benefits and some quirks potentially, depending on the state you live in.

[00:15:42] How do you pick which 529 plan to use?

[00:15:42] So, how do you pick which states to use for your 529 account?

[00:15:46] Well, the first benefit, well, the first consideration obviously should be the state tax benefit. If your state has a tax benefit for using that. You do want to be mindful of that And probably go with your state to take advantage of that. And you do want to be mindful of the deadlines for making that contribution, whether it’s by the end of the calendar or tax year or before filing the tax return.

[00:16:09] So keep that in mind. So number one is whether your state offers a state tax benefit. The second layer of consideration. So let’s say that your state doesn’t have a state tax benefit. Like California, well, you can use any state’s plan. So then you can just take a look at the expenses of state plans and the investment options within those plans and match those to your preferences.

[00:16:29] Ultimately you’ll just want to take a look to see what’s out there and find a plan that makes the most sense for you.

[00:16:34] Can You Change 529 Providers?

[00:16:34] What about changing 529 plans? Can you change from one provider to the next?

[00:16:38] Well, yes, but there’s a limit. you’re limited to one rollover from one 529. Plan to another state’s 529 plan every 12 months. If you’re doing it for the same beneficiary. So if you’re moving it from Florida to California or whatever it is, you can do only one of those rollovers tax-free. For every 12 month period for that beneficiary.

[00:17:02] But you can get around this by naming a different beneficiary at the new receiving 529 accounts. So if you absolutely need to. That’s one way around it. And keep in mind if your state has a tax benefit and you’re rolling it out of that state’s plan. Some states will recapture, Will claw back, those tax benefits.

[00:17:22] So you’ll want to keep that in mind as well.

[00:17:23] What if you Withdraw 529 Funds for Non-Qualified Expenses?

[00:17:23] what if you use it for non-qualified expenses? Right? So what if you just allow it to grow over the years and you just decided to withdraw those funds for something else that doesn’t count as one of those qualified expenses. Well, the earnings portion is subject to not only income tax, but also a 10% penalty. So there is some penalties involved there. Your basis though?

[00:17:48] The, your owned contributions come out Tax-free.. So you do want to keep that in mind. it’s important to keep track of that basis, especially if you’re moving it from one plan to another, they don’t always track. So sometimes you have to contact the old provider and have them send it to the new provider. but you do want to keep track of those contributions that you make.

[00:18:10] Exclusion to the 10% Penalty for Scholarships

[00:18:10] And there is also a, an exclusion for scholarships.

[00:18:13] So if your child receives a tax-free scholarship, the penalty is waived for withdrawals. Equal to that scholarship amount. Though keep in mind, earnings are still taxable.

[00:18:23] Are There Contribution Limits to 529 Plans?

[00:18:23] What about contribution limits? Well, what are the interesting things about 529 plans is that there are no annual contribution limits. however, you’re sort of limited by the annual gift tax exclusion. And what I mean by that is that your contributions in excess of the annual gift tax exclusion amount may require filing a gift tax return in that year. So, for example, in 2024, the annual gift tax exclusion. per donor.

[00:18:54] So per person gifting per recipient. Is $18,000 and that’s doubled for married couples. So if each spouse is doing that, or, or gifts from one spouse can be elected to be split. Make sure you’re talking to your tax pro about that, but so it’s $18,000 per donor, per recipient.

[00:19:15] The Special 5-Year Lump Sum Contribution

[00:19:15] So there are some limitations based on this annual gift tax exclusion however, there’s a special feature that allows you to bunch. Five years worth of contributions into one year.

[00:19:27] So the IRS allows you to make one lump sum contribution worth five years of the gift tax annual exclusion and spread that gift over the next five years.

[00:19:39] So for example, in 2024, it’s 18,000, you can make a lump sum contribution of 90,000. And you can spread that out over the next five years. of course let your tax pro know the plans of your contribution so that it can be reported properly on a gift tax return. And that’s both, if you’re splitting gifts with your husband and wife, As well as doing this lump sum, but it’s, it’s a nice feature that allows you to sort of. Overly fund this initially And get as much of that compounding growth as you can earlier on.

[00:20:12] Maximum Account Balances For Each 529 Plan

[00:20:12] And while there aren’t technically annual contribution limits, there are limits to the maximum account balances in each plan. Which very considerably state by state. Right? So there’s no one federal law. It’s more so about the rules from state by state plan. And I’m going to add some links into the show notes about this, but for example, when you, when you get to this maximum balance, usually that means he can’t add more contributions. Though the balances can continue to be invested in, continue to grow.

[00:20:43] So for example, in California, the maximum account balance is 529,000. With a nice nod to the 529 there. Uh, while Georgia and Mississippi have a much lower limit, it’s about $235,000. So you want to check in the state that you’re going. Ultimately I’ve never seen a 529 plan get to the limit, but those are things you want to take into consideration.

[00:21:06] And there’s also no age where distributions have to happen. So for example, with pretax retirement accounts. Once you get into your seventies, there’s an age where you have to start required minimum distributions. Well, 529 accounts you don’t have that. I mean, they can literally grow. Forever.

[00:21:21] And also anyone can contribute to the account.

[00:21:24] You can open one and contribute for yourself or for your kids. as well as anyone else in the family, aunts, uncles, parents, grandparents, as birthday gifts, these make for a fun birthday gifts a fun gift there for the holidays.

[00:21:37] Estate Planning Considerations

[00:21:37] And it also adds some interesting estate planning considerations. Because the 529 plans are one of the few ways that you can gift and get assets out of your taxable estate. If estate taxes are an issue that you’re going to need to deal with. While still controlling the funds.

[00:21:55] Typically when you have a completed gift, you aren’t able to maintain control over those funds and still count them out of your taxable state and a 529 plan is one of those where cases where you can do that. Though, if you are doing that front load lump sum contribution, there are some quirks there.

[00:22:13] Keep in mind that that if you pass away within those five years, You can only remove from your taxable estate the years that have passed since making that gift. So for example, if you do that lump sum and then die in year two. Well, you can only remove two years of those con of that contribution from your taxable estate, but interesting estate planning considerations here,

[00:22:34] one other thing is at death, it moves on to a successor owner. And it continues to enjoy those same ongoing tax benefits.To contrast when you look at, for example, a retirement account, like an IRA, a pre-tax IRA. Or even like an HSA, there are, not always favorable rules. When those accounts pass onto someone, a specialist, someone that’s not your spouse. But with a 529 plan. At your passing, it moves on to a successor owner and it continues to enjoy those tax deferred or tax-free.

[00:23:07] compounding benefits. But it is important. Something you want to keep in mind is as you are reviewing your state plan, as you are reviewing your beneficiaries. Make sure that you are, hopefully your plan allows for this, make sure you are naming secondary successor owners. So that next person that goes to as in the owner at your death. As well as third or tertiary successor owners.

[00:23:29] So there’s a plan in place in case something happens to you or that second person in line. So those are some of the uses and benefits.

[00:23:35] Flexibilities For Ownership and Beneficiaries

[00:23:35] Let’s talk about ownership and beneficiaries because there can be a substantial amount of flexibility. And who can own a 529 plan and who can be the beneficiary?

[00:23:45] And let’s talk about owner beneficiary and what those means.

[00:23:48] So an owner is the one that opens and controls the 529 account. The beneficiary is the one that received the funds for their educational expenses. And anyone can open an account, parents, grandparents, others can open accounts and named themselves or family members as beneficiaries. And you can even open one for yourself before your kids are born and switched beneficiaries at that point.

[00:24:15] Rules For Changing 529 Plan Beneficiaries

[00:24:15] And beneficiaries can be changed.

[00:24:17] There’s there’s a lot of flexibility there. among family members and there’s the IRS gives some specifics around who exactly is a family member. So that’s your spouse. that’s your child or the spouse of your child. brothers, so siblings, which includes your brother, sister, step sibling stepbrother, stepsister, or any of the spouses of a sibling or step sibling. parents.

[00:24:42] So mother, father, step parents as well, or the ancestor of either.your nephews and nieces can also be named as beneficiaries, aunts or uncles can be named the beneficiaries. son-in-laws daughter-in-laws father-in-law’s mother-in-laws or the spouses of any of them. or the first cousin, sorry, second cousins. You’re you’re one step too far removed.

[00:25:05] So while there is a lot of flexibility to change beneficiaries there, there’s sort of a certain list in terms of who actually is a family member. And it’s pretty much down the line above generations, down generations. And, and cousins, nieces, nephews, uncles, aunts. So there’s, there’s a lot of flexibility there.

[00:25:22] What If You Name A Non-Family Member as Beneficiary?

[00:25:22] And what happens if you name someone as a beneficiary?

[00:25:24] Who’s not one of these family members. Well, it’s treated as a distribution of the 529 plan. And so it’s going to have ordinary income tax as well as well as that 10% penalty on the internet. So you generally want to avoid that if he can’t. And we talked a little bit about estate planning. There are some potential gift or transfer tax issues to consider when changing beneficiaries. So, for example, you can switch beneficiaries to one of those eligible family members of the same generation as the current beneficiary without any gift tax consequences.

[00:26:00] So that’s, that’s pretty easy, easy to do. On the other hand, if you are changing beneficiaries and the new beneficiary. Is one or more generations below the current beneficiary. Then while there’s not going to be any income tax issues, the value of the assets transferred to the new beneficiary is treated as a taxable gift.

[00:26:22] So I do have to keep in mind the annual gift tax exclusion. And there is some uncertainty around who is actually the donor. Who’s the one giving the gift, right? Who actually needs to keep in mind the gift tax exclusion. Is it you, the owner? Is it the old, the beneficiary. Well, when we look at, some, some proposed regulations from the IRS, there there’s some hints there that we can take away. And it does seem based on the information we have, that it’s the old beneficiary. That would likely be treated as giving the gift to the next beneficiary. So some interesting gift tax or transfer tax quirks there. from a federal and potentially state that you want to keep in mind when changing beneficiaries down the line.

[00:27:05] Can You Change Ownership of a 529 Account?

[00:27:05] What about changing ownership?

[00:27:07] Right. So we talked about V beneficiary. What about changing ownership of the 529 account? Well, different plans or states are going to have different policies regarding change of ownership. Although most three going to allow you to change ownership. And it doesn’t need to be a family member.

[00:27:22] Like it would need to be for beneficiary. And in terms of these gift taxes or transfer tax issues. what we’ve seen guidance on consequences for the beneficiaries for changing beneficiaries. There really doesn’t appear to be any guidance or reference or issues in terms of income tax consequences of changing. Ownership. And from my understanding, it simply depends on understanding how the specific 529 account you’re using or the state plan you’re using. Views ownership changes.

[00:27:54] It’s quite possible that the plan you’re using processes the ownership change without reporting any distributions to the IRS within a 1099. And it’s not going to be challenged, although others might. so you kind of needs to know the plan you’re using, but there doesn’t appear to be the same. federal tax issues in terms of changing ownership. As it would be when changing beneficiaries, it’s primarily about understanding the plan that you’re using and how they’re going to see that.

[00:28:19] And so all that being said, 529 plans are a really cool tool to use, to invest for future college costs potentially over decades, especially if you have multiple kids. You can open one for all of your kids and simply change beneficiaries as needed. You can open one up for each beneficiary and put in a certain amount for them.

[00:28:38] And that might even make it easier to figure out how much to contribute for each child, because each child is going to be a different age. There’s a different timeline to figure out, how long it’s going to need to be invested until they have to pay for college. And so you can kind of do some math to figure out what is the most appropriate. Amount of, contributions to put in each kid’s 529 account.

[00:29:00] 529-to-Roth IRA Rollover Option

[00:29:00] So we talked about some of the flexibilities of 529 accounts to use for all sorts of college costs, including tuition. Room and board computers, software, things like that. we talked about. The ability to use it for many trade school programs. For K through 12, at least from a federal tax standpoint for a up to $10,000 of student loans.

[00:29:22] And recently the Secure Act 2.0 has allowed us to transfer funds from a 529 account to a Roth IRA account in the name of the beneficiary.

[00:29:33] And so this is a really interesting, really useful, I would say escape hatch, for funds that are unused extra funds for college costs. And, that lack of flexibility can weigh on the minds of people sometimes. And so I think this is a helpful way to use extra funds. There are some Strings attached.

[00:29:50] So the big restriction is that you can only roll up to $35,000 over a lifetime. Per beneficiary into a Roth IRA. So you can’t do more than that.the accounts, the 529 account has to be at least 15 years old. you can only transfer contributions or earnings that are older than five years.

[00:30:11] So you can’t do it in one year. And then rolled over the next year. They have to wait at least five years. And then for the beneficiary, the beneficiary has to have earned income. And it can only be made up to the annual IRA contribution limit in that year minus what’s been contributed to the IRAs in the year already.

[00:30:30] So essentially it’s replacing the IRA contributions for that beneficiary in those years. And there’s also some uncertainty around how these timelines are impacted or reset potentially if you change the beneficiary of a 529 plan. So I think it’s a really useful escape hatch.

[00:30:49] If there’s extra funds there, I think it should help bring some pieces of mind if people are concerned about over-funding 529 plans, but it does have plenty of strings attached.

[00:30:58] FAFSA Considerations for 529 Accounts

[00:30:58] There are also FAFSA considerations. So if you are, going to be looking at, student aid or grants based on the, the FAFSA application. there are going to be some considerations of how your 529 account balances. Impact your students or your kids eligibility for those.

[00:31:15] And it’s going to depend on who owns the 529, 529 plan owned by the parent. Is going to impact that calculation a lot more than a grandparent 529 account.

[00:31:26] So the who owns that account is actually going to impact that quite a bit.

[00:31:29] And then there are also some creative planning considerations with 529 accounts. So, for example, if you’re getting too, if your kids are getting to college age, Even if you’re paying for those expenses out of pocket. If your state has a state tax benefit to contributing. You might want to open up a 529 account first in that student’s name. Contribute to that first and then simply withdraw from that account to pay for those educational expenses.

[00:31:57] So if there’s a state tax benefit, you want to make sure you’re taking advantage of that.

[00:32:02] If you can.

[00:32:02] The other one of the consideration I think is interesting is a dynasty 529 account. And due to the flexibility of ownership changes, seemingly without tax issues. and, and the flexibility of being able to change beneficiaries within family members. with some tax considerations involved. If you have the financial means it’s possible to overfund a 529 account over the years. And then strategically named that beneficiary and who the owner is, especially the successor owners. And especially that first beneficiary. And then create sort of a dynasty 529 plan that passes on to future generations. And can provide college funds and, and, help provide for college costs for multiple generations down the line. So there’s some interesting planning opportunities with that, of course, with several tax and planning considerations in mind. And keeping in mind the potential future for Congress to change laws around that. But, you know, if you feel like that’s something that’s important to you and you have the means to do that, that’s something that might be. It’s something to talk to your own tax and financial and, and estate planning professionals about to see if that makes sense for you. So those are the 529 accounts.

[00:33:18] And the earlier you can start to use a 529 account the better. because the biggest benefit to that is that compounding growth, right, is the ability to invest and allow those funds to grow without that tax costs drag for decades, the, especially if you have multiple children or if it’s one of those multiple generation. Planning that long-term compounding is really where the shake that that comes in.

[00:33:42] Using a Taxable Investment Account as a Supplement for College Savings

[00:33:42] Although what often comes up, even knowing the flexibilities we talked about is, it’s sort of the concern that what if your kids don’t go to college or what if your kids don’t go to one of those trade schools where you can use the 529 account? Or what, if you want to use funds, you want to invest for the future of your kids. But what you want to use funds for other things, for example, maybe you don’t want to pay for college, but you want to help them pay for a down payment on a house or something like that.

[00:34:12] You know what, if you want to help them in other ways, outside of higher education. Well, this is where a taxable investment account comes in. For those parents that either have other goals in mind or are concerned about the, sort of the, the lack of flexibility of a 529 account. I think a taxable brokerage account can make sense and be a good supplement to a 529 account. There’s greater flexibility for non-college expenses. Basically you can put as much into it as you want. You can invest it. And, and you can use the funds, however you’d want. What you’re giving up is the, the, the tax-free growth when the, within the account. So. There, there are those tax considerations to keep in mind because. any investments in those taxable brokerage accounts are going to kick off income.

[00:34:56] So interests, dividends. capital gains. And all of that income is going to show up on your tax return in the year they happen. And so while we can invest pretty tax efficiently over the years, that is going to be a drag on the performance over time.

[00:35:11] Should The Parents Own the Account or Use an UTMA Account?

[00:35:11] And one of the other questions that comes up is who should own the brokerage account. Whose name should it be titled in? Should it be owned in the name of the parents where you have control over it. You, you’re able to invest it and use the funds as you wish, or should it be an UTMA, or an UGMA, account? Which is a custodial account in your kid’s name. And as soon as your kids reach the age of majority, it becomes their account.

[00:35:39] It becomes their funds. They take on ownership of it, right? So you are making a completed gifts, your kids. While they’re minors. And as soon as they reach your state’s agent majority, they control those funds. So what makes the most sense? Well, It does depend on what your ultimate goal is. I do see a lot of times parents are concerned about, the ability of their kids to essentially use the funds.

[00:36:03] However they’d want. At the age of majority, especially if you were trying to save specifically for certain purposes, Like college or a future house down payment or something like that. And especially if you’re unsure about how your kids will handle finances at that age in their life. I do often see the case where simply having the parents own the taxable brokerage account, or if you have a living trust involved in your estate planning. titled under the living trust or it could be a joint brokerage account. It’s simply having the parents own it and control it.

[00:36:35] And then as the kids are getting to college age or in adults, The parents can simply gift, you know, simply give, give dollars to the kids as needed. And, you know, they can, at that point, keep in mind annual gift tax exclusions, but also keep in mind that, that, sending dollars directly to the. to, to the college, to pay for those educational costs don’t count against that annual gift tax exclusion.

[00:36:59] So for those reasons, I do often see it, the case that parents simply will want to hold onto those assets themselves. And then just help kids using those assets down the road. Although if you specifically want to have an account. And have your kids take ownership of it. Then that’s where these UTMA accounts can make sense.

[00:37:18] And so those are, I think, two really helpful ways to start to invest even as soon as. even before your kids are born, but you know, especially as soon as your kids are born and have a social security number. These are ways that you can invest even little amounts over time. And see that compounding growth over 18 years, plus.. And give yourself quite an amount of dollars to help towards those costs. Depending on what your goals are and what your family’s values are and feelings towards higher education. And so that’s using past income, right?

[00:37:52] Using past income to save and invest.

[00:37:54] Using Current Cash Flow Out of Pocket

[00:37:54] Current cashflow obviously is just using your current in the moment income to help pay for those college costs. I’ve seen some families get creative with that.

[00:38:01] So maybe you’ve purchased a rental property, that your kids can live in or manage and you can rent out other spaces and different things like that. So that’s a creative way to help build current cashflow to be for those, those college costs. But, you know, using current cashflow is just using dollars out of pocket and that’s perfectly fine too. Maybe you haven’t had the cashflow over the years to save for kids’ college. Maybe you’ve been focused on your cold start practice or, you know, really building up your practices that you’ve been building up or building up your current assets or your own savings.

[00:38:34] Right. Whatever it is. And maybe you don’t have the cashflow until your kids are adults. And they’re starting to get into college. You can use this, use your current cashflow to help as much as he can.

[00:38:45] Using Kids’ Future Cash Flow – Student Loans

[00:38:45] And then lastly, your kids can use their own future earnings, future cashflow and that’s student loans. You’re optometrist you’re all very familiar. I am helping optometrist all the time with student loan planning. Your kids have the opportunity to take out federal student loans. Preferably to help with. Educational costs. Including graduate school. There are also private student loans as well, although you would prefer to avoid those.

[00:39:09] Typically those are going to be, not always, but often less flexible in terms of the protections and rules and, often higher interest rates. But that’s also a way that students can help pay for those expenses as well. And. You’re probably going to have mixed feelings around that.

[00:39:25] You know, you might be, perfectly comfortable with your kids doing that because you are perfectly comfortable doing that with your own optometry school expenses. sometimes the families I talked to have had a bad experience with federal loans, or just sort of frustrated by the amount, That they’ve had to take out.

[00:39:42] And so they felt differently about it. but that’s, that’s certainly one way that your kids can pay for their college costs as well. And you know, certainly being smart about the colleges you go to the programs you’re going into. In-state versus out-of-state knowing the degree you’re going into and the earnings potential in that degree, being smart about which colleges your kids are going to go to goes, it goes a. A really long way to controlling those costs, but hopefully this was helpful for you to figure out how you can help your kids plan for these future costs.

[00:40:16] And potentially a really tax advantaged way or in a way that gives you a whole lot of flexibility.

[00:40:21] And of course, all of this really depends on your personal situation. What makes sense for your family. So please talk to your own financial and tax advisors and where it makes sense, your own estate planning attorneys. Use the tools that make sense for your family, because it just doesn’t matter.

[00:40:37] What other people think it’s really about getting to the bottom of what’s important to you. And what matters to you and your family. So, I’ll put all the links to these resources that I mentioned in the show notes, which you can find. At the education hub on my website, www.optometrywealth.Com. And while you’re there, you can feel free to check out all the other resources, articles, podcasts, episodes we’ve done, whatever topic you’re thinking about.

[00:41:02] I’m sure there’s a podcast episode on it. If not, let me know if you have any questions or future topics, please let me know at podcast@optometrywealth.Com. you can also send us a text.

[00:41:14] So if you pull up the show notes in the app that you’re using to listen to this, there should be a link at the top that allows you to text messages to me. I can’t respond. It’s a one-way text but it allows me to get your questions and thoughts, and I can add those to future episodes.

[00:41:28] And of course, if you’re looking to work with a financial planner that helps optometrist like you and families, like you navigate these important decisions and more. Reach out.

[00:41:37] You can go to my website, you can schedule a no commitment introductory call,

[00:41:41] and we can talk about all of the fun financial topics on your mind. And what that really appreciate your time. If you’ve enjoyed the podcast, please leave a review. It’s helpful for me to get your feedback on what you like, what you don’t like. And also helps to get this podcast in the hands of other optometrists and hopefully provide more helpful education and content to the Optometry profession as a whole, we will catch you on the next episode, in the meantime, take care.