ENCORE: College savings tips and 529 Day

Episode 13 May 18, 2023 00:14:41
ENCORE: College savings tips and 529 Day
Kassouf Podcast Network
ENCORE: College savings tips and 529 Day

May 18 2023 | 00:14:41

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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. 

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

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Episode Transcript

Speaker 1 00:00:05 This is the kaso Podcast network where your trusted advisors are at your fingertips, are in your earbuds. At Kassouf, we are an accounting and advisory firm with a team of specialists in a variety of industries. Everything from cybersecurity to healthcare consulting, to everything in between. I'm Tara Arrington and I'm your host. As an ex-journalist turn 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 kause 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. Thanks, Speaker 2 00:00:57 Tara. Speaker 1 00:00:58 So today we're 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? Speaker 2 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 kids' education or maybe even your grandkids education. Speaker 1 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? Speaker 2 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, filing 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. Speaker 2 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 put in 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. Speaker 1 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. It was Speaker 2 00:03:52 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. Speaker 1 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, super awesome. Speaker 2 00:04:20 That's what I'm hoping for from my daughters. Speaker 1 00:04:22 Oh, <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 oth some housing expenses, correct? Speaker 2 00:04:31 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 dorm. Speaker 1 00:05:29 Yeah. I that, that's, I didn't know that either. That's awesome. Because like you said, freshman year dorms are pretty cool, but after that, I mean, come on, you know, Speaker 2 00:05:38 I don't know, but you did mention scholarships, so that's one thing that people, um, or 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 if 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, Speaker 1 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. Speaker 2 00:06:37 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 is 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 anymore junk at our house <laugh>. So I would rather put it towards college, so mm-hmm. <affirmative>, anybody can make a contribution into your child's 5 29 plan. Mm-hmm Speaker 1 00:07:34 <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 you, do you need 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? Speaker 2 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 mm-hmm <affirmative> 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 mm-hmm. <affirmative>, you know, we don't wanna sacrifice our own retirement for our kids' college education. Speaker 2 00:08:33 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. Or for example, Alabama's website, um, is 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. Speaker 2 00:09:28 Mm-hmm. <affirmative>. So they call it age based because it's moving, following your child's age through their life and becoming more conservative the closer they get to college. 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 too. 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. Speaker 1 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 fig figure it out and that, that would be pretty tough I would imagine. Speaker 2 00:10:18 Right? Well I think tougher not you get emotionally, you know, emotionally to add to it. Cause I Speaker 1 00:10:23 Oh for sure. Yeah. Speaker 2 00:10:24 I know as a 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 that. Speaker 1 00:10:35 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? Speaker 2 00:10:44 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 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 five, $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. Speaker 2 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. Speaker 2 00:12:33 You know? Mm-hmm. <affirmative> something more fun, <laugh>, you know, with, with some of their 5 29 plan money mm-hmm. <affirmative> 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. Speaker 1 00:13:05 And then, um, 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, right? Speaker 2 00:13:15 Yes. Any accredited universities. Okay. So, Speaker 1 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 Speaker 2 00:13:27 Yes. <laugh> 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 a advantageous to take loans. Um, the interest rates are lower and then we save the 5 29 plan for, you know, a 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. Speaker 1 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? Speaker 2 00:14:06 No, I'm happy 5 29 day to you. Speaker 1 00:14:09 That's right. Happy 5 29 day to you. Thanks for tuning in. All right. Thank you for tuning in to the kaso podcast Network. Resources for today's episode are linked in the episode notes. Thank you to our producer Russ Dorsey and for Kause for powering this podcast. Be sure to stay up to date on new episodes and more information about today's episode by following at kaso Co. Until next time, thanks for tuning in.

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