Transcript:
Easan Arulanantham:
I want to help fund my grandchildren’s education. You know, what are my options? And you know, what are the pros and cons of each option?
Tom Vaughan:
Yeah, this is, you know, this is my 35th year and I have a different answer now than I used to have. Just based on personal experience. There are all these vehicles that you can save for somebody’s education. Right. And they’re great. Actually, my favorite vehicle, the one that seems to be the most popular right now is the 529. Yep. Right. So you, in some states actually get a write off for putting money in a 529. Not true in California, unfortunately. But every place it grows tax free, right. And you can buy any state’s 529 plans, every state has different 529 plans, some of them have multiple 529 plans. So you can go out and shop and find really good ones and what have you. So the problem is that, in order to really be effective in planning for college savings, you probably should start pretty young. Because the whole object is to let compounding growth happen over a long period of time. So that, you know, maybe you put in a certain dollar amount, but it’s worth a lot more, and the rest was just earnings, you gained it. If that child’s 16. And now you’re going to start saving for you know, college, nothing wrong with that, but the couple years, and maybe you could add on the other four years in total, they might be in college, but pretty short period of time for compounding.
So if you’re going to be starting early, here’s the catch. The catch is, you don’t know what they’re gonna do. I got a two year old or a three year old or a five year old, are they gonna go to college, or they’re gonna get, you know, some kind of scholarship, you know, my son got a golf scholarship. So that reduced the cost, I wouldn’t have said that was true when he was two or three, although he did start playing when he was three. So maybe but and then the last, you know, and so we’ve got these situations where I’ve had several clients who actually over saved, and they have quite a bit of money in 529 plans and other retirement plans. And the kids haven’t used it and went to a school that wasn’t that expensive, you know, that kind of thing. So it the the answer, in my opinion, now that I’ve been through this and watch this is to kind of split the difference, put money into a 529 Plan. Because you know, the reason again, is because you can’t get that money out without it being a college cost. There are some things you can transfer to other people in the family is the most flexible, you have the word college plans that I know of. But what if they don’t go to college or doesn’t cost that much, and you want to help them with the downpayment on a house. Instead, well, you got all this money in the 529, you’re gonna get killed on taxes, trying to take that out.
So maybe split the difference, set up a separate account, just a regular brokerage, taxable account, that, you know, kind of half and half 529 and regular account. And because you can still use the regular account for college, it’s not tax free growth, but it is capital gains growth, which is not bad. And then you have both. And if they go to college, you have both to use, if they don’t go to college, then you can really use that other one for something else. You can even use it for yourself, you know, maybe you end up remodeling, you know, some portion of your home or something, but you can also then, you know, help your kid get home or you know, whatever it is that you’re trying to accomplish there. So anyway, that’s just from personal experience, if you’re only going to save a small amount, and it’s going to definitely be below any cost of college than just do the 529 Yeah, right. But if you’re really trying to do it, then you know, you’re going to try to kind of maximize that. And I’ve seen a lot of families getting involved, you know, grandparents are putting money in and, you know, that’s it gets it’s awesome. I’m it’s everybody supporting these kids. And I think that’s fantastic. But the structure that needs to be thought about, you know, just just in case so you don’t end up with, you know, your kids are out of college, you got all this money if I had 29 You know, what do you do with it? Maybe you wait for your grandkids? Yeah. But you don’t know if that’s gonna happen, right. I mean, it’s, it’s, it’s interesting. It’s a good question.
Easan Arulanantham:
Yeah. And so like some of your other options are you have MMAs, which are a universal transfer to minor act. And you have Cordell accounts and like these Education Savings response, they’re called E bonds. And so these are some of your other options. Most of the times people recommend the 529 over these option is credentials and savings bonds. You can only save a limited amount and savings bonds don’t really pay As much as kind of being in the market, so if you’re going for a long term, those bonds kind of fall behind. And so the reason that people have kind of gone away for Artemis is, it’s the ownership. It when you look at age of majority, this asset transfers to the child. And so if it’s 18, then your child, you know, ends up with whatever money’s in that. So if you have $50,000, that could go to them, how they decide to do with what they do with it is their choice, you lose control. And so that’s the nice thing about 529 is you retain kind of that ownership of it, and you can control it. And so when it comes to, I guess, in later ages, you know, say your, maybe only your non athletic family, and you might qualify for needs for your, your college. And so, our five to eight nines are more beneficial because they count as your parents assets. So any asset that your child has 20% of it can be considered usable for a year of college. And so they would expect you to liquidate 20% of your assets for that year. And I’d be concerned what you can contribute. While a parent can only contribute five, I think about five 6%. I don’t know the exact but it’s in that range. And so that’s a much smaller and so 529 College, your parents assets. So if you’re trying to qualify for needs, you want to have a 529 versus an UTMA.
Tom Vaughan:
Yeah, I would say that most of the other, Artemis and all of these things, most of those that we see there in the practice, were established before the fight 29 came out. And so really, it’s just, you know, the fight Twain is kind of dominated because of all the flexibility. And they’ve actually continued to increase the flexibility. Beyond just college they’ve made, you know, you can spend it on more things like the laptop that you use in college, you can spend it on private school, you know, K through 12, private school. And so, you know, if you think your kid’s gonna go to really expensive high school, or something along those lines, you can start saving at a younger age for that, too. So they’re there, that’s interesting. I mean, that ownership piece is a big deal. You don’t want to put $50,000 into, you know, an account that your 18 or 21 year old, depending on the majority age of the plan is going to get, and, you know, you hoped that they’d spend it on college, but it could go to a Corvette. So you know, I don’t know, maybe that’s alright, too. But nonetheless, you know that that 529 Plan allows you to kind of control that, and redirect that money to somebody else, if they don’t go to college or redirected even to one of your other kids, which I think is really cool, because I have two kids, one who went to a UC school here and had scholarships, so it wasn’t super expensive. Another child that’s going to a small, you know, small private school, that’s, you know, more expensive and so, you know, I could redirect 529 assets towards the more expensive child. Which side just gives me some flexibility. You can’t do that with those other types of accounts.
Easan Arulanantham:
Yeah, as easily anyway, I think Congress is aware of that 520 Nights need to get better, to incentivize people to save. And so, you know, they realize that not everyone goes to college. And so there are certain trade schools, if you’re a crowded trade school, you can go, you can get that your five nines can pay for that. And those are worthwhile jobs for a lot of people.
Tom Vaughan:
Yeah, exactly. No, it’s a, it’s great actually, in tax free growth. We use a plan through called my 529. Through Utah, for example, is one of our favorites. I can get a hold of Vanguard funds inside of there and create nice portfolios, and the internal costs are reasonable, you got to watch out because some of the states are really expensive in terms of the internal costs. So you know, you got some selection there. It’s a great concept, and I enjoy working with those actually.
Easan Arulanantham:
Yeah, and another thing about five nines is instead of actually just having an investment account, if you’re, if you’re trusting that your kid will go to a certain school, you could prepay tuition, and so I know it’s very popular in Florida, you a lot of people end up going to Florida State or Florida University, because they have a really cheap prepaid tuition system. Yeah, it’s really worthwhile. Yeah.
Tom Vaughan:
Probably a lot of alumni hoping their kids go there. And it’s paid for so kind of self fulfilling prophecy, I suppose.