The Optometry Money Podcast Ep. 156: Listener Q&A #2 – S Corp Salary, How Much Practice Cash to Keep, Buying Practice Real Estate, and More

Evon: [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.

And thank you so much for listening today. Really appreciate your time and your attention. And on today’s episode, we are diving into, listener Q&A. This will be our second listener Q&A episode.

I will try to provide as much information and answers to those questions as possible. But keep in mind, this is not personal financial advice. I know nothing about, the people asking these questions, this is just education.

I’m gonna try to keep it general, yet as helpful as possible. and before I dive into the questions, if you have questions you’d like to get answered on a future q and a episode, you can head on to optometrywealth.com/podcastquestion, [00:01:00] and I will throw a link to that in the show notes as well.

If you go there, you can submit your questions and I will get to them on our next episode. I’m gonna try to do this, once a month, at least if there’s enough questions coming in. If not, we’ll do it, a little less often. With that said, let’s dive into the questions here.

Do I Need to Pay Myself a Higher Wage in My Optometry Practice?

Evon: So question number one, my CPA says I need to pay myself a higher salary, though I’ve heard that I can save taxes with a lower salary. I’ve heard you talk about this on other episodes. How much do I really need to be paying myself?

Okay, so I am assuming through this question, this is a practice owner or

someone that’s, an independent contractor and their entities, their businesses are taxed as an S corporation. that’s my assumption here. So based on that assumption here, I would start by saying, you should lean on the guidance of your tax professional here and your own Advisors here.

what your CPA is probably talking about is that if you are an S corporation, if your business is taxed as an S [00:02:00] corporation. Then you have a requirement to pay yourself a quote unquote reasonable wage. And the reason for that is because if you think about the benefits of being taxed as S Corporations is that while your wages are subject to the normal Social Security and Medicare taxes.

social security up until a point, there’s a point where you’re no longer subject to those, but, but generally speaking,your wages are subject to those FICA taxes, but your profit and distributions are not. Whereas before, if you’re just taxed as a sole proprietorship or just as a partnership, all of that net income from self-employment is subject to self-employment taxes.

So you save roughly 15.3% generally speaking On the profit of the business when you’re choosing to be taxed as an S corporation. And of course the temptation then is to pay yourself little to no wages so that you save money on employment taxes.

the IRS says not so fast, you have a requirement to pay [00:03:00] yourself a reasonable wage. They wanna make sure that you are, they wanna make sure that wage is happening. And how do you know what is a quote unquote reasonable wage? number one, lean on your tax professional. they should be able to give you clear guidance on that.

another thing you can look at is the IRS website. So I will throw a link into the show notes on the IRS page for s corporation compensation.

Reasonable Wage Factors

Evon: And when they talk about reasonable compensation, they talk about, Hey, your practice has three sources of revenue.

There’s three things that contribute to generating the gross collected revenue in your practice. Number one, it’s. it’s your services to the practice, so your work as the owner in seeing patients and doing employee type work. number two, it’s services of all of the other employees that don’t own the practice.

And number three, it’s capital and equipment. And so the more your practice relies on you and your services in the business to generate that revenue, the heavier that required compensation’s gonna be. [00:04:00] On the other hand, I work with families, practice owners that, that see patients, one patient day or less.

While they do own the practice, they’re not the primary drivers of revenue in the practice. And so that can justify potentially, a lower required wage. So those are three important things to look at.

and then they provide some factors there. So training and experience, duties and responsibilities, time and effort devoted to the business, distribution history of the practice.payments to other employees, what comparable businesses pay for similar services and so on and so forth.

And so when you boil all these down, it really comes down to what would you pay someone else with similar experience To do the same work that you are doing in the practice as an employee. And there’s no define and there’s no absolute defined hard number.

it’s really a range and you should rely on your tax professional to, to give you that. But this is a requirement. Before you start to distribute dollars as distributions to yourself, you need to make sure you’re covering that reasonable wage.

Beyond Minimum Salary

Evon: And, another thing I’ll link to in the show notes is an [00:05:00] episode I did on how to think about how much to pay yourself, because it’s not just reasonable wage, that requirement for an S corporation is the starting point, but then there’s other things that might push you to increase your wages. So for example, additional credit to towards social security, if you have artificially kept your wage too low over the years and you don’t really have much credit towards social security, especially as we’re getting older and closer to the point where we’re gonna use it.

we may want to increase our wage to account for that. the other thing is to make the most use outta your 401k plan, not only in terms of your employee contributions to retirement accounts, but also to maximize the profit sharing components of that. The wage is an important part of that. And so there are other factors to keep in mind when thinking about how much to pay yourself.

Okay. Next question.

How Much Cash Should I Keep in My Optometry Practice?

Evon: I feel like I have way too much in my practice bank accounts, but I’m nervous because I’m not sure what to do with it. How much cash should an Optometry practice actually keep on hand? This is a really great question. this is something we talk about a lot with clients and

I [00:06:00] think every bookkeeper, consultant, accountant is going to have their own spin on how much a practice owner should keep in the practice as a reasonable cash buffer. I think your intuition is right. We want to have a healthy amount of cash in the practice as well as well as a healthy amount of cash in the household.

But there is a point where we have too much cash in the business. We have too much cash that’s unproductive. We have too much cash that is still subject to the liability of the business. And there just becomes no reason to keep that much cash in there unless we are building up towards something specific.

a practice investments, a commercial property, a down payment for the commercial property, for example. But there is a point where we’re starting to say, okay, this is way too much cash. It’s simply unproductive. We don’t need to keep it under the liability of the business anymore. Let’s put it towards you.

So where is that point?

How Do I Calculate the Right Amount of Cash to Keep in My Optometry Practice?

Evon: I have adopted IDOC’s methodology on calculating this. I have no connection to IDOC but I like the way they reason through it. I think the formulas make senseand there’s really no [00:07:00] need to reinvent the wheel here. They have historically had two methods of determining this.

One is a leaner method, which is gonna lead to a lower amount of cash. One is a higher, so the leaner method is looking at one month’s average expenses minus owner’s compensation. So look at the last six months, what were the average expenses? Subtract out your own owner’s compensation. and that’s the starting point for determining what should the cash buffer in the practice be.

the second method is gonna be a little bit heavier. And so that’s two months average expenses minus cost of goods sold. And I think if you ask around, two months of expenses tends to be where things land. so I like those methods.

I think either of them can work. a lot of times practice owners tend to be a little more comfortable being a little heavier on the cash. And so method number two tends to be where we’re landing a lot of the time. And I think that’s fine. It makes sense.

It’s supported by formula. we can defend, and then that becomes our benchmark to say, Hey, are we, once a quarter, for example, are we above or below our cash buffer amount? If we are above it, okay, we have additional dollars [00:08:00] to distribute or put to use in some way.

and then we can go through our framework. what do we use that cash for? Okay, do we have enough set aside for taxes each quarter? If we do great. And we can go down our checklist to say, what should we do next with that cash?

But that cash buffer amount to then becomes our threshold. and IDOC has, if I can find it, I’m gonna put it in the show notes.

Stress Test Your Reserves

Evon: IDOC has a, a really good white paper that talks through, even in the worst case scenario, amount of cash we have in the practice can actually go further than we expect.

Or another way to say that is we actually need less of a cash buffer in the practice than we need to. And you think about the logic behind that is that, A business is not like your household. If something goes wrong, you lose income. your household still needs to cover all of its expenses.

You still need to have a place to live. You just need to cover food and clothing and utilities and all these basic necessities. Life doesn’t stop when things are happening around you. So you need to have a pretty healthy emergency fund or cash buffer in [00:09:00] the household.

But a business, you think about what can happen in your practice. Let’s say the worst case scenario, which in our recent memory was COVID. something like that happens. Your revenue’s declining. what can you do? in that scenario, your cost of goods is likely to go down as well.

maybe you’re selling some things online, but if patients stop coming in, you’re gonna, you’re not gonna be selling inventory, which means you’re not gonna be spending money to buy inventory. So that cost dwindles down. you can, if you absolutely need to furlough employees, so you can work around staffing costs.

you can start to strip away some of the non-fixed, non necessary expenses andstrip the practice down to the bone to at least keep it alive. and as long as you have an adequate Cash reserve in your household. you can also adjust your own compensation.

So that gives the practice a little more breathing room and Even in the worst case scenario, the cash you have on hand can go further than we anticipate. and so that’s how I would look at it. I would use one of those two methods. Think about what you’re [00:10:00] comfortable with, and then go from there.

and then again, that’s number then. Is our threshold. If we have more than that’s additional dollars that we need to put to use productively in some way. and there is a list of steps that I would follow with the clients to see what to do next with it.

but that’s where I would start. Okay, next question.

Are My Student Loans Really Discharged?

Evon: I just got an email from the Department of Ed that my student loans are eligible for discharge. Is this real? What do I need to do? Okay, I don’t know, what email you got, so I’m only guessing here. But, there was a round of student loan cancellations that happened recently over the last couple weeks, and so it very well may be legitimate.

And so if that’s the case, you probably hit 25 years, I’m assuming, on IBR, and if that’s the case, congratulations. What should you do next? first thing you’d wanna look at is when did you actually hit that last payment to qualify for discharge?

For, qualify for loan forgiveness. If it was in 2025, you may be eligible for tax free loan forgiveness. If it’s in 2026, unfortunately, starting 2026 and beyond. [00:11:00] That cancellation, that forgiveness is taxable income again. And so you wanna know specifically when you qualified for that. and then you want to game plan from there, right?

if you need to think about taxes, you’d want to run tax projections with your professionals, are you gonna need to enter into a payment plan? Things like that. But, but assuming this is legitimate, which it very well may be because there was a recent round of discharges.

Congratulations, You did the work. Now you’re there. next question.

Should I Buy My Optometry Practice Real Estate?

Evon: The owner of the building my practice is in, is planning to sell it soon. I’m debating whether to offer to buy it. Is owning real estate really that much better or will it just be another headache? So this is a great question.

it’s highly dependent on the situation, but here are some things to think about as you go through that, and preferably talk through it with your own Advisors, your own professionals. And so when you think about leasing versus zoning, in either case your practice is going to be paying money for its location, in either case, there’s going to be an occupancy cost. when you pay the lease, obviously the dollars are simply exiting your practice and you’re not gonna see them again. if you own the [00:12:00] building, on the other hand, you’re still gonna have that occupancy costs, but you redirect those dollars back into your life through that commercial real estate. so on the one hand there is logic to saying if you’re gonna be paying the expense anyways, you might as well own the building.

You might as well have control over the infrastructure that your practice operates in. it’s not unusual to see that the building is actually worth more, than the practice when it’s time to exit.

What Are the Benefits and Drawbacks of Owning the Commercial Real Estate of Your Optometry Practice?

Evon: and there are some tax benefits that go along with that. Specifically, usually what’s happening is that your practice is paying a lease to a separate entity like an LLC, that you own that owns the real estate. And so the practice is making that lease payment. That’s a deductible business expense of the practice. And then on the real estate side, you’re benefiting from depreciation. and it’s possible, talk to your tax professional about this. It may be possible to group your commercial property together with your business for tax purposes which may allow you to use that depreciation to offset your other active [00:13:00] income like business profit and the wage you’re paying yourself.

Whereas by default, real estate losses tend to be passive, meaning by default, you can’t use those losses to offset all of your other income unless there’s certain caveats, there’s certain doorways that are open. And so this is one of those potential doorways that you wanna talk to your Advisors about in the year you buy it.

And in addition to that, there may be opportunities to make other tax planning decisions. So for example, it may be beneficial to do something called a cost segregation study that may allow you to accelerate. much of that depreciation into the current year.

so there are certainly benefits to owning the practice real estate. And if you want to in retirement, this is another asset that you can own and continue to rent and continue to lease out, continue to Earn an income.

and there are a lot of ways to divest yourself of it down the road. you can sell it out right, you can 1031, exchange it into other real estate investments and there are even other, more, I would say advanced or complex ways to manage the capital gains there.

And So there are definitely benefits to owning the real estate. Now that being [00:14:00] said, there are also some drawbacks. Number one, you have to have the cash. generally speaking, you have to have the cash for the down payments. you should probably anticipate 10 to 20% of that cost outside of certain, loan offerings from certain banks.

so you have to know that you have the cash to do that and that it’s not gonna use up all of your cash reserves either in the practice or in your household. if you’re going to buy this real estate, it’s just gonna leave you without cash elsewhere.

You’re putting yourself in a bit of a compromising position. So that’s number one. secondly, there are costs to owning real estate. There are maintenance costs, there are property taxes, there’s insurance costs. things will break eventually, and you’ll have to pay for that. There’s going to be potentially build out costs if you’re going to be, if you’re gonna be leasing it to other tenants.

so there are additional costs and there are additional headaches that you have to think about now that you own the building, and you may not want to deal with those headaches. and the lastly, it may not make sense financially. it may be just simply too expensive to buy the property where it just doesn’t make sense depending on where you’re at in the country.

Does the Commercial Space Fit The Needs of Your Optometry Practice?

Evon: and I think you should look at it through two different lenses. Number one is the [00:15:00] business lens. Is your location appropriate for the practice long term? is it large enough to handle the amounts of exam lanes and staff in the optical that you want, including the growth that you’re anticipating?

As long as you’re gonna be in it, is the location where you want it to be, the demographics around you, where you want it to be? Is there enough parking? Is it. is there visibility? so does the location make sense for the business itself? That’s the primary driver for me. If it doesn’t make sense for the business, it doesn’t make sense to own.

Does the Commercial Property Make Financial Sense as an Investment?

Evon: And that leads me to lens number two, assuming it makes sense from a business perspective.

Does it make sense from an investment perspective? ’cause it is an investment property. So does the cost make sense or is it too costly? Is it falling apart where you’re gonna have to make a lot of investment to make it worth it?

are you likely to get tenants down the road if you’re no longer gonna be in it?

so then you can look at it from the perspective of you’re buying an asset, does it make sense to do that.and it may not make sense, right? You don’t wanna own real estate just to say you own real estate, or just because [00:16:00] everyone says you should, it does need to make sense for the business and financially as an investment. And if you’re in a location where there just aren’t good places to own, there just aren’t properties coming up for sale that fit your practice then it just may not make sense to own. there are other avenues to take. You could potentially buy land and then build the location you want.

I would talk to people that have gone through that and make sure that makes sense for you, but that’s how I would look through it, through the lens of the practice itself. Does it make sense from a business standpoint and then separately, does it make sense financially as an asset, as an investment to purchase?

and then talk with your professionals, right? Talk with your CPA talk with an attorney that can tell, talk to you about how to title it again, very often you’re not gonna wanna own that in the practice entity. You’re gonna wanna own it in a separate entity and then talk with your financial advisor about how this all fits in with a larger financial picture here.

Does it make sense from a cashflow perspective, if you’re taking on additional debt,does that fit within your cashflow picture in terms of the practice financials and in terms of your household? Okay, next question.

Is Too Much of My Net Worth Tied Up in My Optometry Practice?

Evon: I feel like a lot of my finances are tied up in my practice [00:17:00] and in my house.

Should I be concerned? Is this bad? Should I take out a mortgage? this is very common, especially earlier on in the first half of your career as you’re building your practice. your practice is your primary investment early on, and then you own a house very often. And so those things just naturally tend to take up, most of your net worth.

And this is something we actually track with clients too, as a measure of the health of your net worth. How much of your net worth is in different buckets. So things that are liquid, like cash and taxable investment accounts, things that are tax advantaged.

So like retirement accounts, 401Ks, IRAs. Practice equity or practice value, and then real estate equity. And as you get more towards retirement, you’d like to have some balance there because if your net worth is so concentrated in your practice, as you are getting closer and closer to being financially independent to wanting to retire, that doesn’t leave you with much optionality.

If you have to get some particular range of values out of the business in order to make retirement feasible, that could limit you on the type of sellers you’re [00:18:00] gonna have to sell to. You don’t really have the flexibility to exit that practice on your own terms.

and in the worst cases, you may have to continue working in the practice in order to make, in order to make the finances work. And yes, you do want to see a balance over time.

but you don’t have to do anything drastic. for example, should I take out a mortgage in order to take equity outta my house, and balance out my net worth? I don’t very often think that makes sense.

because you’re taking out debt in order to invest basically. that, that’s essentially what’s happening. and so just ask yourself, would you do this? If you just opened a taxable investment account, would you borrow, would you take margin in order to invest?

I don’t think that’s a good prudent starting point, especially where interest rates are right now. there was a time during COVID where interest rates were. One to 3%, and there were some situations where that actually made sense. Right now. I I don’t think that’s a great starting point.

Build Balance With Cash Flow

Evon: I think the best case scenario for you is just to use the cash flow that your practice is creating more efficiently. So in terms of increasing your savings [00:19:00] rate, building up your reserves in the practice, building up your reserves in the household to an appropriate level, and then use a healthy savings rate to invest in other assets, taxable brokerage accounts, your 401k in the practice.

IRAs Start to build up that balance over time.

If you use your cash flow effectively. if you are increasing your savings rate to a healthy percentage, That balance will come given enough time.

That said, I don’t know your specific situation. if I took a look at your finances under the hood, I might have different or more specific recommendations, but, but generally speaking, I wouldn’t rush to do anything drastic.

I would focus on first reinvesting into your practice as much as you need to.

That is your first and primary investment. and then using the cashflow that it produces really effectively building a healthy savings rate and investing in other assets and using it to build up other investments and build balance your net worth. Okay,

next question.

How to I Improve the Value of My Optometry Practice Leading Up to Retirement?

Evon: I am 10 years out for money to sell. I’m not sure who I would sell to or how that would look. What should I be doing now to make my practice more valuable and attractive to another OD Okay. This is a [00:20:00] great question and I think a conversation with a practice consultant makes a lot of sense. I, there’s someone in mind that I want to have A, a future podcast episode about this specific question. So that’s an episode I have in mind for the near future, but a good practice consultant will look into the innards, the guts of your practice and look for opportunities to either maintain or to improve that valuation. Based on your timeline, when you went to exit and how you went to exit, which is really important.

That’s something I would think a lot about. How would you like to ideally exit your practice? Is it to, one or more of the associates that currently work there? Is it to another associate buyer? Is it the size of a practice where you’re trying to get the maximum dollar out of it?

And sell to a larger buyer. What does that most ideal exit look like to you? and who would you like that transition to be with? That said, from a purely financial perspective, what are some things to think about?

if you think about what any value of any business or asset is based on that valuation is based on, is based primarily on earnings. it’s, yes, the equity of the [00:21:00] business, the assets in the business, but primarily it’s based on earnings. That’s what any valuation theory or formula is gonna be based on.

What is the future earnings and cash flow that this practice is going to produce? And it’s not only based on the amounts of earnings and cashflow, but the risk associated with that. How certain or uncertain are those future earnings and the lower the amount of earnings or the more risky it is that those earnings continue in the future.

The lower that valuation’s gonna be, the lower the price is gonna be, the higher the amount of earnings and cash flow, and the more stable and predictable those earnings are gonna be continuing into the future, the higher the valuation’s gonna be, the higher the price is gonna be. And usually when buyers are doing due diligence, they’re looking at the most recently two to three years of fin of financials and tax returns. So they’re basing the future predictability of earnings based on the most recent history. But, but those are the things you’re thinking about.

What are the future earnings and cashflow gonna be? And that’s gonna justify the [00:22:00] price. and so think about in your practice, what can you do to impact positively those earnings?

It’s gonna be collecting and increasing gross revenue and managing accounts, receivables, and then it’s gonna be managing expenses.

And so look at your own practice and say, what can we do in my own business to either increase revenue and collections or to better manage expenses or increase earnings?

And part of that could be branding. Continue to maintain the reputation and the brand of the practice in your local community that you’re gonna be serving. think about whether the brand is really the selling doctor and if the selling doctor’s gonna leave, the patients will disappear with it.

think about the people and processes in the practice. So do you have skilled and trained staff, cross-trained staff that drive the operations of the practice and are going to be continuing even after you sell the practice and the new buyer takes over?

That’s really important. if all the staff’s gonna be leaving as soon as you exit, that adds a whole lot of uncertainty to those, the revenue and earnings continuing on in the future.

so that’s really important. Are they working on well established processes or is everything in your head as the [00:23:00] seller? That’s really important. Can you make the business less and less reliant on you and your brain and more and more reliant on the team and the processes there?

Is there a large and diverse patient base?

Is your equipment and infrastructure up to date, or if a seller’s going to have to take over and then invest a lot of money into updating equipment or the office or anything else. If there’s a large investment right away that’s going to impact to sale value as well.

The lease in terms of occupancy, do you own the building or do you have a lease? And is that lease friendly to a sale? I’ve heard of too many stories where the lease was really the thing that held up or ended up destroying, a transaction.

And then in general, think about , how you can manage the business and present it as a relatively low risk investment to this potential buyer. put yourself in the buyer’s shoes. That optometrist is probably dealing with, student loans, probably dealing with. Family and lifestyle expenses.

they’re taking on what they perceive to be a, probably a [00:24:00] high risk by buying and owning a practice. Maybe they’ve never done that before. They’re concerned about that practice debt. So how can you not only create a practice that’s relatively real risk in a machine that’s running, but you can also present it to that buyer as well.

And part of that’s having clean, accurate. It timely financial statements, having data in the practice that can validate all of these wonderful things you’re saying about the business. and then talking with that owner about the cash flow situation on the other side of that purchase. They may be concerned about the risk of taking on that practice loan. Okay. then show them What I would do as an advisor if I were talking with an owner, with a potential buyer about this, is show them the other side of that transaction.

What does their cash flow and in income look like once they’re an owner? And very often, hopefully we’re looking at a raise, right? We’re looking at improved cash flow from actually owning the practice. it comes with all the headaches. it does come with all the responsibilities of owning [00:25:00] the business, but we should see cash flow improve on the other side of that.

and so generally speaking, those are some things you’re gonna wanna think about. A phrase I’m gonna steal from Nathan Hayes of IDOC is that what’s good for the future of the practice is good for the practice now. Or something like that.

Very often, those improvements, those things you’re gonna do for the future of the practice to prepare it for a future sale, a future transaction, are going to benefit the practice today. And very often you might see that after making those improvements in the business, you just simply enjoy owning the practice more your ownership experience is improved and you may want to just hang on and continue to enjoy the ride.

Should I Take More Time Off From My Optometry Practice As I Prepare to Sell?

Evon: And the last thing I’ll say is that if you are a single doctor practice, there is a temptation as you’re getting closer to wanting to exit that you want to spend more time with the family.

You want to spend more time outta the practice. So you start to cut down your patient days, see less patients in the practice, just keep in mind that the value of your business is tied to earnings. So if you are lowering the collected revenue and thus the earnings of that business in the years leading [00:26:00] up to wanting to sale, you are likely lowering the value of that business as well.

A buyer is not going to buy on opportunity. Yes, that buyer may have the opportunity to increase patient days and increase collected revenue,but you’re not showing them a practice that’s currently doing that.

so if you want to spend less days in your practice and your primary goal is to maintain the valuation of that practice, you may wanna think about bringing in associate doctors so that there’s still a full-time schedule and regular revenue coming in. Now hiring an associate brings with it its own sets of risks and responsibilities,

but do keep that in mind. Now, on the other hand, if you’ve already done a really good job building up other assets out of the practice, and you’re not fully reliant on that practice in order to be financially independent.

And in light of that, you still want to bring down your schedule and you’re okay with the impact of that on your valuation, then that’s perfectly fine. that’s a decision that you’ve earned the right to make by making really good financial decisions along the way.

And that’s where [00:27:00] Personal financial planning and retirement planning. the work that I do with optometrists cannot be separated from business planning. they are joined together and if you are doing really good financial and retirement planning, in addition to your business planning, it gives you a whole lot more flexibility when it comes time to exit,to exit on your terms and to build that ownership lifestyle that you want.

So hopefully that was helpful a lot. I know a lot of those thoughts were general,ultimately, I would suggest talking with a consultant and leaning on your own Advisors to dig into the financials with you to, and to go through your own retirement and financial planning with you to see what’s actually necessary and then what you can do to improve that in the business.

Okay. One last question here.

Am I Putting Too Much Money in my Kids’ 529 Plans?

Evon: We have 529 plans for our kids, but I’m worried about overfunding them. I don’t wanna put too much into them and be stuck with it. What happens if they don’t use all the money for school? Now? This is a great question. one thing I’ll say is that I have truly never seen a really, actually [00:28:00] Overfunded 529 Plan. I just haven’t,I know we’re concerned about that. I know there’s limitations and restrictions on what you can do with 529 plans. I just have not seen a situation where the 529 plan is so far overfunded that the funds are just wasted and never used.

that being said, this is a good question to think through because there are several ways to save for kids, you can go into a 529 plan to save specifically for higher education.

you can use a taxable investment accounts. With full flexibility like there’s. there’s other ways to invest too. but specifically for 529 plans, what I’ll say is that firstly, there’s more flexibility than is often believed.

529 Flexibility and Escape Hatches

Evon: First of all, there’s flexibility of who can be the beneficiary of the 529 plan, because even if one of your children. has gone to school and they’ve paid for all for all the expenses, and you still have 529 plan dollars left over well you can change the beneficiary to either another one of your children or another immediate family member, grandchildren, sisters, brothers.

there’s a [00:29:00] circle around you of family that you can change that beneficiary too, and you can even make it into sort of this legacy 529 plan that goes from your children and then their grandchildren and so on and so forth. And so there’s flexibility of who can actually use the funds.

and then there’s flexibility of what the funds can be used for. So in terms of higher education, it can be used for tuition and fees, it can be used for room and board. If they’re living off campus, it’s up to a certain level, but it can be used for a room and board, books and supplies, computers, even potentially internet.

it can also be used for K through 12 tuition and expenses. And, it used to be up to $10,000.the recent One Big Beautiful Bill Act extended that, increased that amount from 2026 and beyond. So

It can be used up to a certain amount per year for K through 12 tuition expenses. And it can be tuition, it can be books, curriculum, potentially tutoring, potentially fees

for testing.

So even before college, it can be used. now, a couple caveats there. Number one, you get the most out of these really tax advantaged accounts when you allow [00:30:00] them to be invested, for a longer period of time.

You just get the biggest bang outta your buck for them when you’re investing in them towards college. the second thing is that even if you can use the funds for K through 12 from a federal tax standpoint without tax or penalty, your states may see it differently.

So check with your tax professional on how your state would handle those distributions.

Some other things that can be used for is that as of last year’s, One Big Beautiful Bill Act, credentialing expenses are now eligible expenses for 529 plans.

and there’s also certain trade and apprenticeship expenses as well. So there’s quite a bit of flexibility of what it can be used for. Even student loans. student loans are another example. You can use it to repay up to $10,000 of student loan principal amount per borrower.

And then lastly, there are opportunities for Roth IRA rollovers. If the account has been open for at least 15 years. and the funds have been in the account for at least five years. You can roll over portions of that 529 plan into a Roth IRA in the name of the beneficiary.[00:31:00]

Now, there are some limits to it. You can only do it up to the IRA contribution maximum in those years each year, and there’s a $35,000 lifetime amount per beneficiary. But that’s an additional escape hatch that you can use. If you find yourself with extra dollars in the 529 plan, and if you exhaust that, like if you’ve.

if you have exhausted all educational opportunities, if you’ve exhausted your Roth IRA rollover opportunities, you can simply withdraw the funds and just take it yourself. Yes, there are taxes on growth and penalty on the growth, but in the worst case scenario, you have all of these years of tax deferred growth.

I don’t think that’s the worst case that can happen, So you do have a lot of flexibility there in terms of who can use it and how the funds can be used. There is an additional escape hatch with the Roth IRAs.

And if you are still overly concerned about that, you can balance your investments for your kids, so you can balance part of it going into a 529 plan, part of it going into, for example, a taxable investment account in your [00:32:00] name, but set aside for your kids or a, a custodial accounts in the name of your kid.

I’ll throw a link in the show notes to a recent episode I did on Trump accounts. But in that episode I also talk about other investment opportunities that you can do for the future of your kids. So I’ll throw a link to that in the show notes as well.

Wrap Up and Next Steps

Evon: And with that, we’re gonna wrap up this episode.

I really appreciate everyone submitting questions. Again, if you want your questions answered, head on to the link in the show notes. , And appreciate your time.

Have a great weekend. We’ll catch you on the next episode. In the meantime, take care. [00:33:00]