investing

Brad Baldridge 0:00
Advanced planning for 529s, getting grandparents and others involved. Stay tuned.

Presenter 0:06
You have kids, they grow up, and before you know it, it's time to plan for college. Where do you start? How much is it going to cost? Will you qualify for financial aid? Should you be looking into scholarships? When will you be able to retire? What about student loans? The list of questions is never ending. The good news is all the answers are right here. Welcome to the Taming the High Cost of College podcast. Here is your host, certified financial planner, Brad Baldridge.

Brad Baldridge 0:36
Hello and welcome to Taming the High Cost of College. I'm your host Brad Baldridge. Today is the final chapter in the 529 planning that we're doing with John Munley. Today we're going to talk a little bit about grandparents and how they might be involved. We'll talk a little bit about legacy planning, how families could use 529s for multi generational planning. Then we'll get into the final ideas and some of the advanced planning that some families might consider as they work with 529s. As always, show notes are available at our website at tamingthehighcostofcollege.com. Let's go ahead and jump into the interview.

All right, we're back today for our fourth episode on 529s. As always, we've got John here. So welcome.

John Munley 1:20
Thank you, Brad, and how are you today?

Brad Baldridge 1:22
I am doing fantastic. So this is our last installment, we're going to talk about some of the advanced strategies around 529s. And again, some things that a lot of people probably have not thought of, or haven't fully taken advantage of. The thing is even a lot of advisors out there aren't pushing things as far as they could, as far as running things rights the limits and making sure they get all the breaks they can every which way they possibly can here. So I guess that being said, some of these strategies will work really well, but not all of them. So you really need to understand your situation. And figure out if what you're, you know, again, sometimes having a lot of tax breaks when you don't pay much in taxes as an example, isn't that great of a benefit compared to what you might do in some other way. But I wanted to just cover a few of the things that we do quite often with people or give you some examples. But the first topic I want to talk about is cycling. So cycling is where a general concept is that we try and maximize the amount of money that we put through the 529. Because for many cases, you get tax deductions for adding money to a 529. Therefore, the more you add, the more deductions you get. And a relatively simple example would be, and I think you mentioned this as well, but you have a situation where you have $20,000, you happen to have a college kid and a bill for $20,000. So you're about to pay the bill. And you're saying well wait a minute, if I put this into the 529 and then pay the bill next week, out of the 529, I will have contributed to the 529 so now we'll get some tax deductions. I think that's something that you mentioned that's working well and some of the states where you have some clients. Can you speak to that a little bit?

John Munley 3:12
Sure. I'm in my home state of New Jersey, up until this year 2022, they never gave you any deduction off of your state income tax for contributions to 529s, they just switched this year, which as long as your AGI is below $200,000, you can take up to a $20,000 deduction for 529 contributions. So a lot of my clients have kids who are going to either private school, high schools, K through 12, or in college, and they were just that have college savings in a taxable account because, you know, they never got a deduction for the 529. So they're like, alright, we're gonna save some money in a taxable account. Now, what we have them do is have them make that contribution to a New Jersey 529 plan, they get that deduction up to 20,000. And then they just pay that bill from the 529 rather than the taxable account. And here in New Jersey, we're about six and a half percent income tax. So for every $10,000, you're saving $650 on your tax return. That's real money. You know, when it comes to, when you look at the price bills for college and even private high schools, what the tuition rates are.

Brad Baldridge 4:28
Right, absolutely. So I guess that's an important thing to realize is every state has their own rules as far as how their taxes work, and how the deductions work. So you need to be careful because like here in Wisconsin, we have a per beneficiary limit. So it's 3500 or so. And I can't, I'd have to look up the exact number. And it changes every year because it started at 3000. And then they've been indexing it for inflation for the last 7,8,9 years. So every year it changes so I have a hard time keeping track of it. But so for many Wisconsin families, it makes sense to contribute up to that limit for each of the children, instead of laying it all in one account. Other states, it doesn't matter as much that you have multiple accounts, because it's per tax return, it's how the limits apply. So that, it doesn't no matter if you put it all on one account, or you put it in five accounts, it's per tax return. But here in Wisconsin, we might even add parents as beneficiaries where we might have three children each with an account, and then parents, each have an account. So now we were able to put in, 15, 16, 17,000 per year and still deduct the entire contribution on our state taxes. Versus if we put that all into one account, all at one time, we would only be able to deduct the 3500, the current limit, and then it would carry forward. That's another benefit that some states have and some states don't is whether or not you can carry the benefit forward. Here in Wisconsin, we can. So now, even if you're going to put in a large sum, we've had that situation where maybe you put in $50,000 as a lump sum, all at once, you get to deduct the accounts this year, next year, and the year after that all because of that $50,000 contribution and because of the various carry forward. So working with your accountant or someone that really understands how your taxes work, and making sure you don't break any rules. Another caution is some states out there have what's called a net contribution rule, which says if you put money in and take money out at this in the same year, they they're actually going to give you a benefit based on the net. So you put in 20,000 and take out 10, then your contribution for tax purposes and tax benefits is only 10,000. Because they netted out the amount that you took out in that same year. So now we might need to alternate years or do other creative things in order to not get tripped up by some of these rules.

John Munley 7:04
And that's a great point, Brad that you bring up is you really have to know what your state rule is, because every state is going to have a different way on how much you can deduct it and how you treat that deduction and the timing of it all. So I'd love to give a blanket statement here and say this is how it works. But it really does matter where you live and what your individual state plan is.

Brad Baldridge 7:26
Right, and every year a state or two make some changes. So again, your state may do it the same way for 10 years and then change at some point or not change at all, it just depends. But certainly, as advisors, where we're working in many, many states, it seems like every year, there's something new to learn, because some states somewhere, changes their tax rules around the deductions or even just changes the tax rules around whether or not you have an income tax, and how much in what the rate of the income taxes and some of those things.

John Munley 8:00
And at the end of the day, we really, we can't lower what a college is going to charge for tuition, room and board. But what we can do is hopefully, based on where you live, create some tax breaks. So at least you'll save a little bit of money, not a lot compared to what the cost of college is. But any little bit that you can save is definitely valuable.

Brad Baldridge 8:22
Absolutely. All right. Well, let's change gears a little bit. Let's talk a little bit about grandparents, why limit the fund to just mom and dad?

John Munley 8:30
Anybody can have, own a 529 account and have whoever they want as a beneficiary and whatever funds they use goes towards that beneficiary. So grandparents can definitely own 529 plans, there's a new law that just passed this beginning in 2024, and I won't go into the whole financial aid component of it, but grandparents that own 529, if they paid out of that 529 within the student's first two years of college, that counted as untaxed income for the student and could decrease their financial aid package. So we'd always tell if you had a grandparents account, wait till the last two years of college to pay for that. But with this new rule change, you grandparents can use that money anytime they want to pay for their grandchild or their child's, anybody's college that they want to, on top of that, because in the grandparents' name and not in the parents' name, it doesn't count against you for financial aid purposes, because they only look at parents assets, not what grandparents own. So those are two of the benefits of having it in grandparents name, but I know Brad had discussed this before and Brad had some great points about what could be a disadvantage of having parents basically gift money to grandparents and having grandparents keep it in their name.

Brad Baldridge 9:59
Right absolutely. So, yeah, I certainly believe that if grandparents are going to take their own money and set up, you know, college accounts for their grandchildren, or great grandchildren, or whatever it might be, they certainly can do that. And then they have control of the money, and it's still their money, and they get the tax benefits. And they can then spend the money where they want to, with these new rule changes around financial aid, there might be some advantages to having parents take the money that they've saved for college and shifted over to grandparents. Now, the challenge there is, you are, in fact, gifting the money to the grandparent, and now you no longer have control of it. And theoretically, grandma, and grandpa could take the money and go to Hawaii, or do whatever else they want with the money. Or sometimes it might be out of their control, if they ended up needing nursing home care. Or if they were in a car wreck or something and they were sued for a million dollars, there's a potential that that money could be tapped. And you could lose it. Again, because it's at risk, because it's in the grandparents' name and not the parents' name. Now, obviously, if it's in the parents name, the parents could lose it under those same circumstances. And there are protections. So I don't want to scare you and say, well, there's you know, there are a lot of protections for 529s, but it varies by state. So again, you need to understand the bankruptcy rules, you need to understand the Medicare and Medicaid rules, and then ultimately, things like lawsuits and those types of things. If you're going to be doing that, and especially if it's larger sums of money. In addition to that, sometimes grandparents really don't want to deal with it, right. And if you're giving relatively small amounts, you know, here's $400, for your birthday, I'd like to put it in a 529. But now I have to open an account and go through all left bet fun, can I just put it in the 529 that mom and dad already own for you. And in some states, you actually can do that. And the parents could take the benefit for it still, so they could take the tax deduction even though they put it into a 529 that they don't even own, though, there's a lot of planning around that I think we're seeing a lot more multi generation planning, as college is getting more and more expensive, and grandparents tend to be later in life and have more money than they can spend in some situations and are trying to figure out well, how can I use this money wisely? I think I see a lot of grandparents are saying well, let me help with college. Whether it's... Often it's not enough to move the needle terribly. But even 10,000 or $20,000 can be make a big difference for a typical student. And then I've had a few grandparents that are saying, big numbers, let's, you know, 100,000 per grandchild, so that they can cover a full state school, most likely, when they need the money. And the other thoughts are on grandparents?

John Munley 12:57
And we kind of just touched on it. I think they're both pros and cons. I definitely think if grandparents want to save and help their kids, it's they should open that 529, put their own money in to get the tax break, use it for the students beneficiary and they can pay, parents say 'Hey, can you contribute $10,000 this year for college?' They can pay right directly to the school from the 529. So to your point, Brad, if parents want to not hold those assets, want to give money to grandparents to set up a 529, that's kind of again, there, you have to weigh the pros and cons of each individual situation.

Brad Baldridge 13:38
Right, exactly. And again, I think sometimes grandparents might be a little concerned they will What if I'm not around by the time college rolls around for my grandkids, or even great grandkids. And again, we talked about that much earlier, but grandparents can list a successor owner to the account. So grandma and grandpa can own it while they're capable of doing that. And then they can have either the next generation so the parents of the student could then take over as owners, or sometimes it makes sense to skip a generation and go directly to the grandkids depending on how old they are. And how much money and you know the situation in that in the family there were generation skipping, sometimes works and sometimes doesn't. You really need to understand the rules there. And again, as the dollars get bigger, the more you need to have someone that understands generation skipping and estate planning and all that be involved because you don't you want to make sure you don't inadvertently run afoul of gift tax and other rules that can be very expensive mistakes.

John Munley 14:46
No and just, I'll finish this up with my own personal experience before I got into this whole realm of financial planning and 529 plans. I have older kids to graduate from college, one that's in college and another one on the way, but my parents would each year for birthdays contribute towards their college fund. But what they did is basically wrote a check to me, and then we put it in a taxable account, in hindsight would have been much better for them to open their account, they would get a tax break, it would be in their names. And then when my kids were ready for college, rather than me having to go to the taxable accounts, sell this out, to have to pay income tax of capital gains tax on it, because again, a 529 grows tax free, it just would have been better for them to directly open the 529 plan, put my kids as a beneficiary and be there to pay for college as it went along.

Brad Baldridge 15:39
Right, exactly. So there's a lot of different planning around that. And the other, I guess, wildcard to pay attention to is there's also a little bit of what I would call family politics involved. Where, again, sometimes grandmas and grandpas, or aunts and uncles are helping, but they might have some strings attached to that help where it's like, well, I'll help you if you go to these schools or those schools, but not that school, or whatever it might be, right? Common one would be, you know, grandma, or grandpa say, well, I really want my grandkids to go to my alma mater. So if they go there, boy, will I be generous. But if they're gonna go to the competition, then now maybe not so much, right. So again, there's often times of, you know, I think, as parents understanding and talking with grandparents, especially if you know that there is some money set aside, having an idea of how much it is, and if there are strings attached, or when you can have the money. And that type of thing is an important part of the puzzle. Because, as we mentioned, depending on where the rules are, currently, grandparent money doesn't count as an asset, but it could count as income when it comes out and pays the bills in the future, it might be neither an asset, nor an income. So now there might be some additional benefits to having grandma and grandpa hold on to their money. Again, it's the control issues and some of the other issues that also come into play.

John Munley 17:10
Right, that's another great point that you just made with parents should have, they should have a conversation with their parents about, hey, are you contributing to college, how much? Because that really will help dictate what kind of schools that the student can look for based on an affordability amount. So having that information, a year or two in advance really does help with the college search and a college selection and what schools you're going to look at, because it gives you, alright, this is a number that we can afford to go to a school, what schools are in that price range.

Brad Baldridge 17:41
Right, absolutely. And then if we take this grandparent, great grandparent thing to the next level, now we can start looking at it more of a legacy planning where I've seen situations where families are putting in more than they know that their grandkids could ever use, or at least projected depending on rates of return to that type of thing, with the intention of kind of building this snowball that will then roll downhill where grandkids can use what they need to pay for college and whatever they don't need will continue to grow for great grandparents, great grandkids, and then the great grandkids will use what they need. And then hopefully it can continue to grow for the next generation. You know, so getting that snowball started, and again, I would be careful in that, it's really hard to know where things are going to be two and three and four generations down the line. But it might be a good thing to do for the next few generations, as a way to take advantage of the rules. And there are limits to how much can be in a 529. So you can't, you know, per beneficiary rules where you can't have multi-millions in one account, you may have to divide it among multiple accounts in order to make that work as well. But again, there's a lot of planning around some of these ideas. And if they fit in your situation, I think it's something that you could explore. All right, well, let's jump into one more concept. I think this has a little bit to do with the psychology of investing for some people. And I run into this quite often where some people can think what I would say as globally can they kind of think of oh, this is all our money and we'll just do the best things at the right times with our money and not worry about what it's for specifically. And other people have a very, they essentially have either actual envelopes where I put money in this envelope for this and that envelope for that, which again, is kind of an old concept back when we dealt in cash where you save up for Christmas by putting $10 week into the Christmas fund or whatever it was. Now for a lot of people, colleges, there's benefits to saying well, that's college money, I can't tap that for a vacation or some of these other things. But occasionally, it hinders you when you are looking at the college money must be kept separate from the money I'm saving for a car. And that has to be kept separate from the vacation fund, or the long term savings fund or whatever it might be. Because when we run into situations where, oh, if we could, if we had another $10,000, right now, we could slip that into a 529 and then we could take that out in a year or two and get additional tax benefits. But unfortunately, we don't have 10,000 because we can't take the money that's for a car and borrow it, so to speak. Whereas if you can think globally, it's like, okay, well, it's all my money, I'll just pay for the car when we get there with the money I didn't spend on college, because I prepaid it now. So if you can think globally, and kind of not get too worried about this bucket is exactly for this, in this bucket is exactly for that, it allows for a little more creativity sometimes around how you invest, and again, around how you might take advantage of tax breaks and other things.

John Munley 21:01
Yeah, and I think it's, it's important one to understand the resources you have that you can use to pay for college, because in the last 10 or 11 years, we've seen an equity market that just has gone up every year. So your 529 plan should have been increasing every year. For 2022, we've seen a negative return on the stock market, I'm sure most people's 529 plans are down. Ideally, you don't want to ever sell equities in a down market. So let's say in your plans, you basically had, hey, I'm going to take 20,000, you have an $80,000 529 plan, and I'm going to take 20,000 freshman, sophomore, junior and senior year but now, the markets down, it's only worth 65,000. Do you have somewhere to take, get that first year is 20,000 and give this account time to grow back over the next two or three years? So it really is important to take an inventory of where your liquid assets are, and different ways that you can find different things that are going to happen in your life.

Brad Baldridge 22:04
Right, absolutely. And that's where when I'm talking with people, sometimes they might have, say $100,000 already set aside for college and college is a year away. And they're saying, okay, well, we've got to cover, we got to state schools 25,000 a year, we have the 100,000, we're there, we really don't want to take any sort of risk and and have it go down because if it goes down, then again, we don't have a lot of other resources. You know, I would hate to cancel college because we took a risk with money that we didn't have any way to recoup the losses. And other people are in a different financial situation where it's like, okay, well, I got 100,000 for college, if I invest it, and it goes down, I don't want that to happen, of course, but if it were to happen, I've got 50,000 reserves over here and 10,000 reserves over there and other money here and other money there. And I can borrow money. And I've got a lot of different ways that I can cover that short term downturn, and still not have to cancel college, I mean, if you're gonna say, well, college is canceled, because my account went down, then maybe you shouldn't be taking any sort of risk with it. Other people are on that other end of that spectrum where they're willing to swing for the fences, again, ultimately, because the tax benefits or tax free growth are fantastic. But in order for the tax free growth to mean much, you actually have to get some growth, in order to get some growth, then usually you have to take some risk. And you know, if you're taking risks to get growth, sometimes it doesn't work out and you get downturns instead. But again, for many people across, two or three kids over 5, 10, 15 years of college, there's a lot of ways that you can maneuver things so that you're not necessarily taking that full loss and yours There's ways to recover and ways to, again, you'll still get the downturn, but there might be a way to reinvest money elsewhere so that when the markets come back, or if the markets come back, you're made whole again. All right. So I think that covers it for the advanced 529 plans, there's certainly other things that people can do that are a little more fringe, and we're not going to get into them here. But there are a lot of great strategies around 529 planning. And if this is your first episode just a reminder that we do have 529 information for four episodes starting from the basics and beginners all the way through these advanced strategies. So go back and catch the the whole show or the whole four podcast series so you can kind of learn it all so to speak. And I really do appreciate you John, being my guest for these four episodes. Can you one more time tell people who you are and how they can reach you.

John Munley 24:50
Sure. And thank you very much for the invitation for this, Brad, I had a great time over these last sessions discussing 529s and hopefully, people listening to this are able to pick up some more 529 education from these podcasts. Again, my name is John Munley, I have a financial planning firm based in Red Bank, New Jersey. And really work with families with college planning, whether they have a newborn or two or five year old, how to start saving for college, then once they're in high school and get closer to those college ages, we really kind of dive into not only how to fund college, but how to lower college costs. So you're not paying the sticker price. And again, thank you for listening to the podcasts.

Brad Baldridge 25:37
Alright, well, we'll put all your information in the show notes as well. So if people can go to tamingthehigh costofcollege.com, and find the shows where John's the guest, and there will be his contact information as well. That's all we have on 529s. I hope you enjoyed it. And we'll see you next week.

All right, there you have it. Four episodes on 529 and 529 planning. Hopefully, you've gained enough that you can get out there and get to work on your 529s. If you need additional help or have other questions, please feel free to reach out to John or myself, we'd be happy to answer any questions you might have. Again, as always, show notes are available at tamingthehighcostof college.com. And there's lots of other free resources there as well, including the College Money Report that can help you understand how much aid your family might receive. Cost of Colleges by State, which will help you understand the prices that many states charge for both their in-state and out-of-state and private schools, and how all that works. And if you have any further questions, like I said, feel free to reach out. That's all that we have for this week. We'll talk to you again next week.

Presenter 26:46
Thank you for listening to the Taming the High Cost of College podcast. Now it's time for you to take action. Head to tamingthehighcostofcollege.com for show notes, bonus content, and to leave feedback for Brad. The next step on your college journey starts now.

Brad Baldridge 27:04
Disclosures. The information provided to you today is for educational purposes only. It is not intended to be specific recommendations or advice. Please consult with a qualified professional before acting on any of this material. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principle. 529 College Savings Plan disclosures. Investors should carefully consider investment objectives, risks, charges and expenses. This information and other important information are contained in the fund prospectuses, summary prospectuses and the 529 product program description. These documents can be obtained from a financial professional or directly from the plans website. Please read them carefully before investing. Depending on your state of residence, there may be an in state plan that offers tax and other benefits, which may include financial aid, scholarship funds, and protection from creditors. Before investing in any state's 529 plan, investors should consult a tax professional. If withdrawals from 529 plans are used for purposes other than qualified education, the withdrawal could be subject to a 10% federal tax penalty, state penalties, federal income tax, and state income tax. Brad Baldridge's disclosures. Brad Baldridge is a registered representative with Cambridge Investment Research. Securities are offered through Cambridge Investment Research Incorporated, a broker dealer and member of FINRA and SIPC. Brad Baldridge is also an investment advisor representative with Cambridge Investment Research Advisors, a registered investment advisor. Baldridge Wealth Management and Baldridge College Solutions are affiliated. Cambridge and the Baldridge companies are not affiliated. The registered brand's location is at 10521 West Leighton Avenue, Suite 200, Greenfield Wisconsin, 53228.

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