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Episode 71: The Good, the Bad, and the Pretty Cool on 529s with Phillip Ramsey and Bryan Dewhurst
159 Plays5 years ago
We hate, (and we can’t stress this enough: hate!) college debt. We want to help you and your kids avoid it. But college is expensive. One avenue for college savings is through a 529. And while we don’t love an instrument that ties up your money so you can’t use it until sometime in the future, there are some secrets we’d like to share about how to leverage 529s as one part of your college planning.
In this episode, we dig into the nitty-gritty of 529s. The 529 rules and landscape have changed in the past few years, and some challenges and barriers that were in place before have been broken down. That’s great! We want to tell you about those and how you can get the most out of 529s. And what about funding your kids’ and grandkids’ education beyond the 529? We get into that too.
what you will learn in this episode:- The three legs of college planning
- Recent changes in 529s you should know about
- How parents AND grandparents can use 529s to help with college (and pre-college) planning
- The importance of researching your state’s specific 529 plan structure
- How to get the tax deduction on 529 education expenses
- Helping with a child’s college expenses without sacrificing your retirement savings
- Some very cool, Uncommon ways to use 529 money for college expenses
“Some recent changes to how 529s are managed and regulated mitigate many of the concerns we have had in the past about 529s.” – Bryan DewhurstCLICK TO TWEET“We had clients who wrote a check to the private school without putting it through a 529 first. We helped them get the money back and get the tax deduction through the 529.” – Phillip RamseyCLICK TO TWEET“Recent changes mean you can use a 529 plan not just for college, but for K-12 expenses as well.” – B
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Transcript
Introduction to The Uncommon Life Project
00:00:02
Speaker
Everyone dreams about living an uncommon life, but how we define that dream is very different for each of us. And for most, it's a lifelong pursuit. Welcome to the Uncommon Life Project podcast. We're going to introduce you to people who are living that life or enjoying the journey to get there. We're going to also give you some tools, tricks, and tips for starting or accelerating your own efforts to live an uncommon life.
00:00:27
Speaker
A life worth celebrating and savoring. Please welcome your hosts, Brian Dewhurst and Philip Ramsey. Hello and welcome everybody to another episode of the Uncommon Life Project where I'm your host, Philip Ramsey. And I am Brian Dewhurst. Thanks for tuning in for another episode.
529 Plans: Common Questions and Concerns
00:00:45
Speaker
And this one's going to be a fun one for Brian and I because a lot of times we're getting a lot of people asking about this, but 529s.
00:00:53
Speaker
What do we do? Do we use them? Do we utilize them? What is your thoughts? This is basically what Brian and I's talk is every time we hear this 529s and why we love them, why we don't love them, and the nitty gritty of the 529s and the college savings.
00:01:10
Speaker
College. Can't wait to get into it. And if you've listened to previous episodes of ours, you know that we had an episode with Jocelyn and she has this scholarship system. We absolutely love that kind of thought process and kind of system to thinking about 529 or thinking about college planning, college savings. But first and foremost, we really do want your child to go through college without going into debt. Do you agree, Brian?
00:01:38
Speaker
Yeah, absolutely. We are trying to, you know, when you look at college, debt is not an option. Let's just start the option.
00:01:50
Speaker
There's many ways to go about that. We call it kind of a three-legged stool. Let's talk about the three legs of college planning so we can just kind of recap kind of our thoughts on college. Yeah, we've kind of written, I think, several articles about this. You know, the three-legged stool comes from the old, you know, adage of retirement. Really, you had Social Security pension from work and then, you know, your own personal savings or retirement.
00:02:17
Speaker
you know, now that is morphed and we kind of use that to pivot into college planning. And the three main things are, you know, your own investments and savings, scholarships and grants, which, you know, you mentioned about our relationship with Jocelyn Pearson and the scholarship system. And then work, you know, the other four letter word other than debt. So, you know, having your child work,
00:02:41
Speaker
through college. That's kind of the three legs and then from there we can get in common. There's really two or three other strategies that we implore for our clients, but those are the three basic ones.
00:02:52
Speaker
Right, and so a lot of people, here's the reason why I think that Brian and I inherently have a tough time with 529s. It's the same reason why we have a tough time with 401ks. It's because you're locking your money up for basically one use, and you don't have access to your money until a future date. And for this uncommon path, you need access to capital as quick as possible. You don't want any penalties for anything that you put your money into.
00:03:21
Speaker
Therefore, there is a loophole that we would say we have been utilizing often and a lot lately for 529s and people that have never really thought about it or were pushing them into something. And let's just talk about the whole strategy because I think it's really exciting.
Enhanced Flexibility of 529 Plans
00:03:39
Speaker
And I think a lot of people, especially in this day and age, thinking about
00:03:43
Speaker
Hey, my kids have to wear a mask during school. Hey, we're going to go to a private school. And that kind of route of, hey, we're going to start kind of deviating from the public school. We're going to go to a private school. What do we do? How do we do this wisely? This is a strategy for those people who are doing it. And so three years ago was it that they changed the law for the 529s and you can now use it for undergraduate.
00:04:07
Speaker
Yeah, they made they made a couple changes actually that I wanted to highlight today in this podcast that make the 529 I think and you think a lot more flexible and fluid and so they mitigated a couple things that were really why we weren't very keen on this.
00:04:24
Speaker
But I definitely think the 529 is a great thing for a lot of families. And I think too, the other thing is we're speaking to grandparents too. And I think when you look biblically, you know, the grandparents investing for the kids takes a lot of pressure off the parents, you know, and now that as parents, you know, we're almost 40. I don't want to say that, but it's true. You know, when you look at the pressure of health insurance now that we largely have to pay out of pocket,
00:04:51
Speaker
saving for our own retirement because you know a lot of companies don't have pensions and then also saving for our kids. There's just a lot of financial pressure on parents right now, especially in COVID. And so when grandparents can save and take some of that pressure off, it's really powerful. Further, most grandparents don't have any tax deductions left because the tax code has been geared down. So beyond the standard deduction,
00:05:16
Speaker
you know, most grandparents aren't getting a tax deduction. And so this is a way for grandparents to get a state tax deduction. And again, I think I want to caveat one other thing and we'll dive into the specifics here, but we are talking mainly about the state of Iowa's plan. Now each state has their own plan. There's not like a federal 529 plan. There's state specific plans. So in large part today, we're talking about the state of Iowa. And so you need to look, if you're in a different state,
00:05:42
Speaker
look at the benefits and the state plans that you have access to within your state. Because there is quite a bit of nuance and difference between state plans. Right. Good point and good caveat and good kind of asterisk there. Because if you live in Virginia, you need to look at the Virginia
00:05:59
Speaker
529 plans. So if you're in Iowa and you get a Florida 529 plan, you don't get the tax deduction for Iowa. So it's very important that you look, like Brian said, at your state's guidelines and state 529s, but invest in the state that you're in. Then normally you get a tax deduction, but again, do the research. So, okay. All right. So the main thing that changed
00:06:27
Speaker
is you can use the 529 now, K through 12. It used to only be college, college or university qualified expenses. Now you can go kindergarten through 12, which ropes in private school.
00:06:41
Speaker
That was a massive shift. You already mentioned it. We're having lots of clients that are saying, I'm going to put my son or daughter in private school for everything that's going on, not to get political, but lots of people are doing this. You can use the 529 to pay for those private schools.
00:07:04
Speaker
Right. Even state income tax deduction if you run the money through 529. Right. So let's just talk about specific examples. So we had a client call us and said, well, we made the switch over to private school. We just wrote a check for, what was it, nine grand? I believe it was nine grand. I think it was 10, but yeah, somewhere in there, nine or 10. Nine or 10.
00:07:24
Speaker
And Brian and I immediately were like, well, did you put it in the 529 first? And they were like, well, no, they never told us to. We just wrote the check. And so immediately we were like, we need to call the school and see if we can get that money back. We need to put it in the 529 for Iowa and get the tax deduction for them. And how many days do you actually have to keep it in the 529 for you to get that deduction?
00:07:46
Speaker
Yeah, we called it. So we weren't off base. It's seven days. Seven days. So they had to keep it in the 529 plan for seven days, then write the same check back over to the school and they got the Iowa state tax deduction that year. It ended up saving them what it was it like 900 or a thousand. Yeah, roughly estimating, you know, based on their income in bracket about 900 to 1200 bucks. So if you think about over there, you know, they have
00:08:15
Speaker
three or four kids. If you do that over 10 years even, you're talking about easily 10 to 12 grand in savings of money you're going to spend anyways. You can see how now the 529 plans for Brian and I start getting a little bit like, oh yeah, that's valid.
00:08:32
Speaker
If we can just put them in there for seven days and then get $1,000 deduction, we're doing that. Right. The other major change that they made, and this is more of a first world problem than anything, but it's kind of a big deal, I think, just for simplicity's sake. Let's say you just have one child.
00:08:55
Speaker
Before, if you wanted to max out for that child, max out for the state tax deduction, the dad would have to open an account and put in the maximum amount. Then the mom would have to open a separate account and put in the maximum amount, even for the same child, same family.
00:09:12
Speaker
Not advantageous. It's just complicated. Think if you had three to four children and you wanted to max out because they're going to private school, I mean, you'd have to open six to eight accounts. I mean, it's just insane. So they changed that. And now where a married couple can open one account for the benefit of the child and they just doubled the amount that the couple can put in. So you only have to open one account.
00:09:39
Speaker
per child that I know it sounds like a first world problem, but from a simplicity stake sake There's a big it was just really helpful From just managing these things and so I thought those two changes were really a huge step forward for the state of Iowa 529 plan for sure
00:09:57
Speaker
So I think that's really the, the strategy where, and, and Brian and I would also say like, if you need a place to get a deduction, we don't mind 529s at all. Like chances are you're rolling in cashflow. You need a place to find, uh, taxed advantage things. 529s are great, especially for college, right? Like, okay, that sounds good because at the end of the day, we'll probably need to lean on some of that. But for those people who are going for K through 12 in private school,
00:10:27
Speaker
You can use those five twenty nines keep them in there for seven days and you get that deduction for the state of i want pretty powerful.
00:10:36
Speaker
Yeah, it's very powerful. And there's another part of the program here in Iowa, it's called YouGift, I believe. And it's where you can give, like, you can give your mom, let's say, you know, it'd be you or I doing this for our children, I could give my mom and dad a code. And if they want to give, you know, one of my children a Christmas gift into their 529, they just input this code and it drops the money in, let's just say, my account.
00:10:58
Speaker
The downside is for my parents, they don't get that state tax deduction for that contribution. So it's more geared for the birthday holiday money, I think, $25, $50 from aunt and uncle or grandma. But if you're a grandparent,
00:11:13
Speaker
or any related, you don't even need to be related, but if you care about a child and you want to put away more serious type money, $1,000, $2,000, $3,000, $5,000, you really probably should be opening your own 529 for the benefit of that child to receive the state income tax deduction, especially if you're living in Iowa.
Balancing Education Savings and Retirement
00:11:34
Speaker
Right. Back to this, the grandparents can fund a 529 for your kids. I feel like a lot of parents right now are starting to get themselves out of the college debt thing and they tell themselves, we're not going to make our kids go through that. Right. So they sacrifice and do what they have to do to save for these 529s and try to make sure that their kids get out of debt and have enough money, but they sacrifice
00:11:59
Speaker
their future for it. And we've seen many times over where at the end of the rainbow, man, if I wouldn't have saved my 529 or I just heard about this story the other day where the dad ended up taking some money out of his retirement to fund his daughter's college experience and is still working today. And he was like, that was the silliest thing I've ever done. But I think there's obviously great intention behind it.
00:12:26
Speaker
But there is an opportunity where the parents and student and child have an opportunity to think differently about college and doing it together in open communications and trying to figure out strategies together shoulder to shoulder. There is a great opportunity to be able to think about college and debt a little bit different.
00:12:48
Speaker
But using all your assets, maybe college grandparents can start helping fund that college. That's a huge help. I wanted to talk about kind of a specific case we just went through. We had a client who's got twins.
00:13:04
Speaker
the twins are going into college and they're, you know, have that kind of panic moment about how are we gonna pay for this all again? We've saved money, but just walking through like the order which, you know, freshman year, what account are we using to pay for this? Well, they were in the situation where the grandparents had put away, I would say a pretty significant amount of money for each of the children. And we kind of just walked them through lining up like, okay, the parents have put away X, the grandparents have put away Y,
00:13:30
Speaker
You know, the kids are working, they got some scholarships. So we kind of just mapped all that out. We have, you know, software eMoney is what we use. It's kind of like the 800 pound gorilla in our industry or the Rolls Royce, if you will, for financial planning. But we can map all those out in the sequence of which, you know, the accounts are going to be spent first. And oftentimes we put the grandparents money first because, you know, it's really that's what it was there for. They want to help their, you know, grandchildren.
00:13:59
Speaker
out and it's good to just use it and so we typically put that money up first you know if there's money needed for the first semester let's spend down the grandparents money first and let the parents money be extended out and grow and protect that amount just because typically you know the parents may need that money more than the grandparents would you know in theory and so that's typically how we do it and then the other cool thing
00:14:29
Speaker
And this is kind of an uncommon strategy that we've done, is when the parent buys like a rental property in the college town and their child is helping, you know, get renters into the house and all of that, you can use the grandparents 529 to pay rent back to yourself. Each university has like an average rent that you can deduct through a 529 or take out as a qualified expense.
00:14:54
Speaker
and you can take that money out of a grandparent's 529, pay yourself rent. So that's stuff that we've done with other clients and utilizing this kind of multi-generational money and how to get it to flow more efficiently and tax advantaged.
Scholarships: Value and Career Impact
00:15:09
Speaker
Right? No, these are all good strategies and things that we love to come along our clients with and help them with just a plan moving forward. Like I think that's where that client that you were talking about, those clients, they are just super excited and excited. I mean, as excited as you can be to take your two twins to college. Obviously there's some...
00:15:30
Speaker
There's some scaredness there's obviously some different things and new stuff cause some anxiety but man they're super excited about their finances going into college and so to be able to walk alongside people and just help them with solutions and even out of the box solutions for them it's rewarding in and of itself so.
00:15:49
Speaker
Yeah, I think the other thing we wanted to touch on with this and I guess like why we try to focus more on the work or the scholarship process is because when you put money into a 529 and I'm not discouraging that because it's a wonderful gift. It's discipline to save that money. You're trying to benefit your child or grandchild. We're not trying to disparage that.
00:16:13
Speaker
We've seen a lot of families probably put too much money in the 529 and they don't have the kids or grandkids to spend it all. And so now you have this lump sum of money that is kind of trapped like we need it another child or something or we got to wait 10 years for a grandchild or something like that.
00:16:33
Speaker
And I don't know if that's the best use of the money. It's not bad from a legacy standpoint. I get that, you know, saving for college. But in large part, when you give this money or, you know, tuition is paid out of a 529, in large part from what we've seen, the student doesn't really understand it. They haven't learned anything from that happening. Now, if they have to apply for a scholarship four years in a row and they win $5,000, they earn that money.
00:17:00
Speaker
and they put in the work to get that money. And a large part, the 529, there's nothing earned, you know, unless you develop some sort of contract, Hey, we'll pay this. If you pay this or we're going to pay half, you pay half. That's kind of what my parents did. Um, but yeah, like trying to get your student or child or grandchild to enter into maybe picking the investments or understanding or looking at their statements as they grow up to make this money more tangible, make them appreciate it more.
00:17:28
Speaker
Uh, and we've all known those kids that just everything was paid for in college and they just partied and didn't appreciate it. That wasn't Brian and I for the record. Right. But, and I'm not saying those kids turn out bad or whatever. I'm just, you know, I don't know if that's the path forward for most families though. Well, let's just like talk through that. Cause I think it's a really good thing. So let's say you are an employer and you are interviewing two people.
00:17:53
Speaker
Right, to college, get straight out of college. And the whole thing, chicken or the egg first, right? Well, you have no experience, I don't wanna hire you, whatever. So let's just say these two people are pretty much the same, same GPA, go into the same college, I don't know, whatever. One of them says, yep, I don't have any debt, my parents saved, I'm good, like I can't wait to live life, and blah, blah, blah. The next kid comes and says, I got scholarships through the whole thing, they actually paid me to go to college,
00:18:21
Speaker
my parents didn't pay a dime and I figured out how to like get the money out of other people are asking people on how to system and process. Who do you hire? Right. I mean, hands down that kid that showed like an uncommon approach, you know, showed adversity, showed discipline. Yeah. Yeah. Like that's the kid. Like, so
00:18:43
Speaker
It's almost like that's your best education you could probably get is helping your kid figure out this process and system. It's just a really cool thing. And then after college, how they can use that story to land that job, because I'm telling you right now, it's a no brainer for me.
00:19:00
Speaker
So I think it's kind of a fun way to think about that. And I'm not saying there's not gifts. The other guy probably has amazing gifts, but there is something that comes from the hard work and discipline of figuring this out and going through the process. It's just not a lot of people do it. So, right.
00:19:17
Speaker
Okay. Anything else you think we should cover on the 529s? You know, I think that's good. And if you ever have any questions, we're always just a
Engagement and Further Information
00:19:26
Speaker
phone call away. Go to our website, www.uncommonwealth.com. And then you can schedule your 15 minute call with us. It's pretty much plastered all over that thing. We are more than welcome to answer any questions you have or just kind of point in the right direction. Again, this is state specific. And so we really do need to work with
00:19:45
Speaker
uh, somebody in your state to make sure that you can get the, the state deduction. Can't even get a federal deduction, but the state deduction normally you can get. So I'll give a plug for the state of Iowa plant. We actually like don't get paid on this. Um, so I'm not doing that to promote us, but there's really only two companies, the state of Iowa is partnered with. If you go to the website, college savings, Iowa.com, it has all the information, tax benefits, how you sign up, you can just sign up and open an account right there. Um,
00:20:16
Speaker
But it is a good program, you know, and it has a state tax benefit and Iowa has pretty high state income taxes. Honestly, if you look relatively compared to the rest of the states in the United States, it's kind of high, right? It can be a great planning tool and they've made it much more flexible in the last two to three years. We identified those things and it could be a really good fit for you as a parent or you as a grandparent or
00:20:40
Speaker
you know, other relative or concerned person. So I'll close with this because I want to go back to the client that we had. So they called the school that they just paid nine or $10,000. The school wired the money back. They set it into a 529 for seven days and then they sent it back to the school.
00:20:58
Speaker
That's awesome. I know. So you can do that kind of stuff. And it's surprising to Brian and I that the people at that private school were not shouting this from the rooftops. Like, hey, is this coming from a 529? No. Do this. Right. So there's just not a lot of people who are thinking that way. And so hopefully this is a tool to do so. And again, share this with your friends that have kids at private school, maybe not thinking about this, and you just gave them $1,000.
00:21:22
Speaker
or whatever. You just saved them some money. Yeah, for sure. Definitely tax benefit. And yeah, if you are listening and you are part of a private school, K through 12, this is a huge benefit to the people at your school and the families that are sending their kids there. And I mean, I went to private high school and it would have been amazing for my parents to be able to get some sort of state income tax deduction for my tuition in high school. So I think this is a great thing.
00:21:48
Speaker
If you're going to do that and send your kids to private school, you should definitely be getting the benefit. Right. Well, thank you so much for listening. You've been listening to the Uncommon Life Project. I've been your host, Phillip Ramsey. And I'm Brian Dewhurst. Until next time, be in common. Thanks.
00:22:02
Speaker
That's all for this episode of The Uncommon Life Project, brought to you by Uncommon Wealth Partners. Be sure to visit uncommonwealth.com to learn more about our services. Don't miss an episode as we introduce you to inspiring people who are actively pursuing an uncommon life.