529 Day: How to maximize college savings and tax benefits

Episode 1 May 26, 2022 00:14:41
529 Day: How to maximize college savings and tax benefits
Kassouf Podcast Network
529 Day: How to maximize college savings and tax benefits

May 26 2022 | 00:14:41


Hosted By

Tara Arrington

Show Notes

Kassouf Principal and Financial Planner Michelle Pike, CFP®, AEP® joins the Kassouf Podcast Network in honor of 529 Day, or National College Savings Day. Named for Section 529 of the Internal Revenue Code, a 529 Plan can help you save for your children's education while offering potential tax savings. 

The state of Alabama allows taxpayers to deduct up to $5,000 (single) and $10,000 (married filing jointly) of their contributions to a 529 Plan. Withdrawals for higher education expenses from the Alabama-sponsored plan are free from federal and Alabama state income tax. Plans and potential tax savings vary by state. Please consult your state's 529 Plan website for more information. 

Watch the video here: https://youtu.be/-76sThuTqsc

Alabama 529 Plan Website: https://www.collegecounts529.com/ 


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Episode Transcript

Tara 00:00:05 This is the Kassouf Podcast Network where your trusted advisors are at your fingertips are in your earbuds At Kassouf, we are in accounting and advisory firm with a team of specialists in a variety of industries, everything from cyber security to healthcare consulting, to everything in between I'm Tara Arrington. And I'm your host as an ex journalist turned marketing professional, I'm the non-expert who will be chatting with our experts, giving you all the tips and tricks you need to help your business succeed Today on the Kassouf Podcast Network, we are joined by principal and financial planner, Michelle Pike. Uh, Michelle works with, um, Kassouf and Kassouf wealth advisors, and she offers financial planning and wealth management services to a variety of clients. So welcome back to the podcast, Michelle. Michelle 00:00:57 Thanks Tara. Tara 00:00:58 So today we are gonna talk about, um, something called 5 29 day, which some people may not be familiar with 5 29 means what it sounds like it's May 29th and most people probably think, oh, started the summer season, but actually it's known as national college savings day. And why is 5 29 day known as that? What, what ties with that Michelle? Michelle 00:01:19 Well, 5 29 plans are the college savings vehicle that came into existence a couple decades ago. Um, and it's not actually just college savings. You can actually use 5 29 plans for, um, some private school tuition for K through 12 also, but it's an exciting day to think about saving for your kid's education or maybe even your grandkid's education. Tara 00:01:42 Right? So something that I know, um, you've told me about 5 29 plans is, you know, what's, you know, the value of actually taking advantage of this particular kind of plan versus just like putting money, you know, away in your, in your bottom drawer for your child's education is you actually have some tax savings, um, with this varying state by state. Is that right? Michelle 00:02:04 That's correct. There's a couple of different ways to save and I'll just kind of focus on Alabama as you put the money in a single person in Alabama can put, you can put in, um, a large amount of money, but we're just talking about the amount that you can deduct from your taxes. You can deduct $5,000 for your state taxes, if you're single and $10,000, if you're married finally jointly, if you put it into an Alabama 5 29 plan. So that's the key is to put it in the Alabama 5 29 plan. If you are I resident in Alabama, you can put it in any state's plan sponsored plan, but Alabama, um, is the one that you get a state to tax deduction. It's a little confusing, the way that different states sponsor 5 29 plans mm-hmm <affirmative>. And I think this is where people get kind of caught up a little bit. Michelle 00:02:55 Doesn't matter where you go to school. Mm-hmm <affirmative>, it doesn't matter where you live. Every state in this country sponsors a 5 29 plan. And the reason is, is to protect the taxability later when you take those withdrawals. So when you put the money into the 5 29 plan, you're able to get a tax deduction if you're an Alabama putting the Alabama plan. But the best part about the 5 29 plan is it's gonna grow tax free. And then when you withdraw it, it's gonna be federally tax free. And then if you're in the Alabama plan, it's gonna be state tax free. When you take those withdrawals, if they're for college education or a qualified K through 12 education. Tara 00:03:34 Right? And I think something that probably confuses people too in thinking like, oh, I'm putting it in this Alabama plan. They have to go to college in Alabama. It's probably people thinking about like the PAC program that doesn't exist anymore. Um, which was more like a pay kind of more like a payment plan than like the 5 29 plan, I guess. Right. Michelle 00:03:52 It was more of a prepaid plan. Mm-hmm <affirmative> so you, you can be in any state's plan and go to school wherever you want to. You really just want to pay attention if you're an Alabama resident to be in the Alabama plan. So you can get that state tax deduction when it goes in and you don't have to pay state tax when it comes out. Tara 00:04:09 Right. And something else, you know, I think people may think about like, oh, well, what if my child gets, um, gets a scholarship for their tuition, which is awesome. But, um, that's super Michelle 00:04:20 Awesome. That's what I'm hoping for from my daughters. Tara 00:04:22 <laugh> but, um, something I know you've mentioned, but you can, you don't have to use it just for tuition, right? Cuz it can go for your books or some housing expenses. Correct? Michelle 00:04:32 That's exactly right. Yes. So books, equipment, room, and board. And even if your child, I mean, I know most of our kids go freshman year, they live in the dorm and then after that they're too cool for the dorm mm-hmm <affirmative> so you wanna move into your apartment so you can actually use that 5 29 plan for the exact amount that the school has stated that room and board costs mm-hmm <affirmative> so if your child's gonna go to Alabama roll tide, then um, you're gonna look up, um, how much would it cost if they were in the dorm mm-hmm <affirmative> so let's say that's $10,000. So then if it's $10,000 that it's stated on the website, that that's how much it costs. You can take that $10,000 and apply it to apartment mm-hmm <affirmative>. So if your apartment costs 12,000, then you just can use 10, if it's less, um, you use the lesser amount. So mm-hmm, <affirmative>, that's one thing that a lot of people don't realize you can, you can pay for an apartment off campus, as long as you stay under the amount mm-hmm <affirmative> that the, the school is gonna charge you for a Tara 00:05:29 Dorm. Yeah, I, that that's, I didn't know that either. That's awesome. Yeah, because like you said, freshman year in dorms are pretty cool. But after that, I mean, come on, you know, Michelle 00:05:38 I don't know, but you did mention scholarships. So that's one thing that people, um, are also have a concern about. And one thing I hope that my daughters have is scholarships. So we're not punished th those of us parents or grandparents that have put money into that 5 29 plan. If our child gets a scholarship, you can take that money out, um, of the 5 29 plan that you put in. You only pay tax if there's any earnings on it, but there's no penalty. Mm-hmm <affirmative> so really you're, you're not much worse off than if you had just saved it, um, on your own, you know, mm-hmm <affirmative> you still pay tax on the earnings, but you're only gonna take pay it when it comes out, as opposed to you've been saving it, you know, in an investment account, you're paying taxes every year mm-hmm <affirmative> so you're really not punished. So I wouldn't stop you, um, from saving for college in a 5 29 plan account for fear of scholarships. Mm-hmm <affirmative> so, Tara 00:06:30 And it doesn't like your savings in a 5 29 plan. It doesn't matter how old the children are when you start doing that. Michelle 00:06:38 No, earlier the better, we all know how much cost I look, I just looked it up this morning. So speaking of Alabama, the cost, this next year's gonna be about $30,000. And I looked up Vanderbilt, which is a, a private school, you know, nearby. I know a lot of kids think about going to, and it's $76,000. Mm-hmm <affirmative> this year to go to school, they're all in room and board, right? So yes, the earlier the better you can start a 5 29 plan whenever, um, you can start it for your grandkids, start it for your own kids. Mm-hmm <affirmative> I know we have some for, um, our kids and then when we get gifts or, um, you know, random holidays that the, the grandparents wanna give us $50 or a hundred dollars, we go ahead and just deposit that right into their 5 29 plan, cuz we don't need any more junk at our house. So I would rather put it towards college. So mm-hmm <affirmative> anybody can make a contribution into your child's 5 29 plan. Tara 00:07:34 Mm-hmm <affirmative> that's awesome. So I guess, um, you know, when you, when it's, when you're ready to start doing it, do doing the 5 29 plan, like do, do you do to work with a professional for help or is it something most people can kind of figure out on their own? Or what do you think? Michelle 00:07:52 I think a professional can help you, um, decide how much to save, cuz that's you don't want to overfund you don't wanna put too much into these accounts. Mm-hmm <affirmative> so a professional is gonna help you kind of lay out what your goals are. Not every parent wants to fully pay for college. And I understand that mm-hmm <affirmative>, you know, I worked a little bit in college and some other parents want their kids to have a little skin in the game. So mm-hmm, <affirmative>, you know, there's some balancing that you need to do about how much you wanna save and thinking about, you know, private school, public school. So I think professionals really are helpful in that goal setting of how much can you afford to save? You know, we don't wanna sacrifice our own retirement for our kids college education. So there's a lot to balance, but when it comes down to the actual mechanics of setting up a 5 29 plan, you can use a professional to help you. Michelle 00:08:41 Or for example, Alabama's website, um, college counts five 20 nine.com mm-hmm <affirmative> is very user friendly. You just go in the, the parent becomes the owner, you name the beneficiary. Um, you're able to pick an investment. And this is the great thing about 5 29 plans is that most 5 29 plans have aged based investment decisions. Mm-hmm <affirmative> so my child that is now 16, when I opened up her account, when she was born, it was very aggressive. It was based cuz she was zero years old mm-hmm <affirmative> so it was pretty much a hundred percent in the stock market. And now as I look at it and now she's 16 and two years from college, it is primarily in cash and bonds of fixed income mm-hmm <affirmative> so they call it age space because it's moving, following your child's age, through their life and becoming more conservative, the closer they get to college. Michelle 00:09:38 Yeah. So because it's set up like that, you really don't need to know anything about investing mm-hmm <affirmative> um, to open a 5 29 plan. You just put your child's age in mm-hmm <affirmative> and pick age space. I mean they have other options to target funds or you can pick individual investing, but if you are not that familiar or you just myself included don't wanna be emotionally attached as the stock market's going up and down mm-hmm <affirmative>, you know, I'm just allowing it the, the plan to pick the investments and base it on her age. Mm-hmm <affirmative> so it's very user user friendly. Tara 00:10:10 Yeah. That's very nice. I mean, as opposed to, you know, if you were just trying to do it on your own and figure it out and that, that would be pretty tough, I would imagine. Michelle 00:10:18 Right. Well, I think tough or not, you get emotionally, you know, emotionally to add to it cause Tara 00:10:23 Oh, for sure. Michelle 00:10:24 I know as the stock market's gone down and my daughter's getting older, I'm more and more tempted to, to make changes, but I'm just gonna stay my course mm-hmm <affirmative> so that's what a professional also helps you do. Just kind of stay the course on Tara 00:10:35 That, right? For sure. Well, anything else you think about, um, 5 29 plans or college savings in general that you think is helpful to know? Michelle 00:10:45 Um, some things that we just mentioned, um, um, earlier the couple new rules that came out in the last few years are, and just to be aware of, they allow you now to take out $10,000 in the lifetime of you, um, for a student loan. So if you get to the end of your 5 29 plan mm-hmm <affirmative> and the end end of your college, you get to the end of your college career and you still have money left mm-hmm <affirmative> um, you, and you took out some student loans along the way, or a family member took out student loans, you can apply $10,000, take out $10,000 outta your 5 29 plan and pay off a student loan. Okay. And the other thing is that tuition for K through 12, if you have a private, um, private school that you're paying for mm-hmm <affirmative> um, we have a lot of clients that do that, that have kids in a private elementary school. Michelle 00:11:35 And so they make that as a couple, you know, in Alabama you can contribute $10,000 mm-hmm <affirmative> to get the state tax deduction and then they use that money to then they take the money out and pay for the private school. They get that tax deduction mm-hmm <affirmative> so it's a neat, there's a couple little planning techniques that once I sit down with clients kind of going through some withdrawal strategies or contribution strategies for different situations that, that are pretty helpful in the law. Mm-hmm <affirmative> something else we didn't mention is that you can easily transfer the money. So let's say, um, your first child is finished with college and they still have that money left mm-hmm <affirmative> and you have a second child. You can easily transfer that money into another beneficiary's name, as long as they're in the same family mm-hmm <affirmative> so, or I could, I still tease my kids if they don't use their college, all their college money, I'm gonna go back and get, get another degree, you know, mm-hmm, <affirmative> something more fun, you know, with, with some of their 5 29 plan money. So it's not lost and I've even seen, um, people take it and their kids have not used it and still have some money left. And so then they've transferred it down to the next generation for then their grandkids mm-hmm <affirmative> so you can keep transferring it to other family members mm-hmm <affirmative> so I think that's a nice, nice benefit of these plans or your niece and nephew that didn't, you know, mm-hmm, <affirmative>, their parents didn't save as much, so you're able to, to help them out. Right. Tara 00:13:05 And then, um, it, I know we've been talking about college, but I mean your 5 29 plan money could also go to graduate school or medical school or anything like that as well, Michelle 00:13:15 Right? Yes. Any accredited university. Okay. So, Tara 00:13:19 So you know, if you're gonna have a child in college for a while yes. Um, you know, they're going one of those graduate routes, maybe, maybe put a little bit more in Michelle 00:13:27 Yes. Yes. There's definitely some strategies that we can, can help people with about thinking about when to use the money, how much to save, to get there taking cuz sometimes it's advantageous to take loans. Um, if the interest rates are lower and then we save the 5 29 plan for, you know, graduate degree or, you know, mm-hmm, <affirmative>, everybody's a little bit different, but there's some cool planning that you can do. Mm-hmm <affirmative> um, with the 5 29 plans. Tara 00:13:55 Well, awesome. Well thank you so much, Michelle. This has been very helpful and I'm sure it'll be very helpful to a lot of folks as they're preparing their savings journey, as you said, it's never too soon to start. Is it Michelle 00:14:06 No on happy 5, 29 day to you? Tara 00:14:09 That's right. Happy 5 29 day to you. Thanks for tuning in. All Michelle 00:14:12 Right. Tara 00:14:15 Thank you for tuning in to the Kassouf Podcast Network. Resources for today's episode are linked in the episode notes. Thank you to our producer Russ Dorsey and for Kassouf for powering this podcast. Be sure to stay up to date on new episodes and more information about today's episode by following Kassouf. Until next time. Thanks for tuning in.

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