John Munley, College Funding Specialist
Despite being a successful foreign currency trader with a 27-year career on Wall Street, John Munley was still worried about paying for college, saving for retirement, and spending quality time with his family. This urged him to sign up as a financial planning client years ago.
As John’s financial planner guided him through obstacles and showed him the path to success, John discovered that he wanted to do the same for others.
When he was presented with the opportunity to leave Wall Street behind and start his journey as a financial planner, John co-founded wHealth Advisors, a New Jersey-based company that aims to provide the highest quality, objective financial planning to its clients.
John actively works as a College Funding Specialist, helping thousands of families find the best possible college fits for their students and demonstrating how to attend college for the least amount of money.
Questions Answered Today:
What is a 529 plan and what are its benefits?
A 529 plan is a popular way to save, invest and grow money for college. One of its most popular features is that it’s tax-free, which means that, as long as it’s used for qualified expenses, you never have to pay taxes on any withdrawals or growth from your 529 plan. Any growth and subsequent withdrawals are free from federal taxes and, in most states, they’re free from state taxes as well.
Aside from the fact that it’s tax-free, it’s also an investment, so you’re not just saving money but potentially growing it over time. Like other forms of investing, you can choose to invest your money aggressively or conservatively.
What are the cons of a 529 plan?
Because 529 plans are funded for a specific purpose, if the money is not used for that intended purpose, aside from taxes, account owners are liable to pay penalties, making it disadvantageous to be used for family emergencies or other costs outside of education. Hence, it’s important that:
- Your 529 plan doesn’t get overfunded
- You use your funds for qualifying educational expenses
- You meticulously track your expenses (to avoid over-withdrawing and keep proof to present during a possible audit)
What are considered ‘qualified educational expenses?’
To get the benefits of tax-free withdrawals from your 529 savings plan, you must spend the money on qualifying educational costs, such as:
- College expenses, which includes but are not limited to:
- Room and board (including Internet, electricity expenses, etc.)
- Rent and food money
However, 529 plans have evolved over the years. Some states now provisions that allow funding for additional educational expenses, such as:
- K-12 tuition costs (up to $4,000 for K-8 tuition and $10,000 for high school)
- College loans [Just recently added]
- Let’s say there is $20,000 left in the 529 plan, and the student graduates with a $27,000 loan. The money left in the 529 plan can be used to pay off the student loan. In states that allow this, the withdrawals will be taxable, but there will be no additional penalties.
VERY IMPORTANT: Make sure to keep records of these expenses to make sure they’re honored when audited.
How do I get started with a 529 plan?
When you want to set up a 529 account, the first thing to do is to check if your state offers tax benefits with 529 plan investments. If not, you can check with other states’ 529 plans, since you can invest in another state’s 529 plan as an alternative. Tax benefits, investment options, and fees vary per state, so make sure to pay attention to those.
Remember that you can use your 529 in any college in any state, regardless of the state where it was set up.
To learn more about 529 plans, plan options in your state, and which options you might want to consider, you can contact Brad Baldridge for expert guidance.
As a Certified Financial Planner, Brad has been helping families plan and save for college and invest in 529 savings plans for nearly 20 years. He can quickly answer your questions, point you in the right direction, and even serve as your 529 plan advisor if you’re in one of the states that he serves.
To get started, contact Brad now.
What happens once I set up a 529 plan account?
Once you decide to open a 529 plan account, you’ll need to decide on a few important things to start:
- Owner – one who has full control over the account, can change the beneficiary and successor, can use the money however they want
- Successor – one who controls the account if the owner is rendered incapacitated to do so
- Beneficiaries – the one who’ll use the fund for education expenses
- Investment options – these are usually age-based, which means:
- When your children are 0 to 5 years old, you might make more aggressive investments (e.g. stocks and bonds)
- When your children are closer to college age, you might make safer or more conservative investments (e.g. equities)
- How you want to fund your plan – usually it’s linked to a checking account, which can:
- Send monthly payments
- Send a lump-sum deposit
Money gifts can also go straight to a student’s 529 fund. John notes that money gifts that are not higher than $16,000 are tax-exempted. Any amount that’s higher (the maximum is $12,000,000) may be subjected to tax.
- How you want to withdraw funds
- Through the same checking account
- A check to directly send to colleges (easier for you, but may be harder to track)
- Important forms the schools will give you
- 1098-T – tells how much you’ve spent on tuition and other qualified expenses
- 1099-Q – tells how much you’ve already withdrawn from your 529 plan
Note: It’s always better to ask for the help of a financial adviser when going through the process of setting up a 529 account. Also, 529 plans have websites where you can find disclosures, so make sure to go through those.
If the beneficiary can’t use the 529 fund, what happens to the money?
There are several cases where a student might not need to use your 529 plan money. For example, your student might get a full-ride scholarship or might change plans and not go to college. There are many ways to deal with cases like these:
- In the case of a full-ride scholarship, you are allowed to withdraw the money with no penalties, but you need to pay the taxes.
- Withdraw the money and pay the taxes and penalties. One of John’s clients did this in the past. They ended up paying $12,000 taxes and penalties for $80,000, with $68,000 leftover.
- Change beneficiaries – the rules for changing beneficiaries are very flexible. In fact, you’re allowed to transfer a 529 plan’s benefits to:
As long as you’re spending the 529 plan money on qualifying educational expenses, any withdrawals will still be tax-free if you change beneficiaries.
John notes that it’s best to start early so you have full control and view of how much exactly you want to spend. Starting early helps you fine-tune your funding and perfect it, most especially if you have multiple kids that use 529 funding for college.
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 a 529 product program description. These documents can be obtained from 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 is a Registered Representative, Securities offered through Cambridge Investment Research, Inc. a Broker/Dealer, Member FINRA / SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Baldridge College Solutions and Cambridge are not affiliated.
This communication is strictly intended for individuals residing in the states of California, Colorado, Florida, Georgia, Iowa, Illinois, Indiana, Maryland, Minnesota, Missouri, Montana, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Texas, Utah, Virginia, and Wisconsin. No offers may be made or accepted from any resident outside the specific states referenced.
Links and Resources
Helpful Articles and Resources
- Taming The High Cost Of College
- John Munley’s contact info:
- wHealth Advisors – Website
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Brad Baldridge 0:00
529 college savings plans and why you should consider them. Stay tuned.
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? Do 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, we have a great interview with John Munley where we talk about 529 plans and how they can fit into your overall college plan. As a matter of fact, John and I recorded four episodes. So we're going to cover a lot of material all about 529s. So in this first episode, we're gonna get into the basics of 529 plans, some of their key benefits, that type of thing, and why you should consider using them for your college plan. Now we're going to follow up with three other episodes. So part 2, we're going to cover college savings plan basics. In other words, we're gonna get into stocks and bonds and cash and different types of investment strategies that you can use, we're going to compare them to think very basic things like your 401ks and basic investing strategies. So this is really designed for the beginner that really needs to understand some of the basics as well as 529s. Now, if you have a lot of investing experience, perhaps you've been working your own IRAs and 401ks for the last 20 years, if you feel like you've got investing down, and you really just need to focus on how 529 plans are different, and how they might be helpful from a college savings perspective, then perhaps you could skip this next episode where we go over the basics, because that's something that you've already got under your belt. In the third episode, we're gonna get into some strategies that you can use and we're going to compare and contrast 529s with other vehicles that you might use. And often times, in planning, John and I will use more than one type of investments, we may use a 529 paired with something else like a Roth IRA. So we'll talk about some of those strategies. And then finally, the fourth episode, we're going to cover advanced 529 strategies. So we're gonna talk about using it as part of your estate planning, where I'm talking about how 529s and grandparents can work together, we're going to talk about using it as a part of your global strategy and integrating your 529 planning with the rest of your overall financial planning to get you further in your goals, not just for college, but retirement and other goals as well. Now, 529s are a pretty complicated topic, and we've got taxes are involved in investing and so forth. So you need to be careful and understand the pros and the cons for 529. And they have a lot of great benefits, but they also have some potential pitfalls and problems. At the very end of this episode, we're going to have all the disclosures that talk about all the different things you need to be looking into. So stay tuned for that. But in the meantime, very basically, what I'm trying to say is, this is not a recommendation, you really need to understand and perhaps work with professionals in order to make sure that this is the best option for you. As always, show notes are available at our website. So you can go to tamingthehighcostofcollege.com and look up the show and get all the information that we talked about as well as links to all the various resources. Alright, so let's go ahead and jump into the interview with John.
Today I'm talking with John Munley. He's the co-founder of wHealth Advisors. Welcome, John.
John Munley 3:44
Hi, Brad. And thank you for having me here today. It's great to be here.
Brad Baldridge 3:49
All right. So this is the first podcast you've been on, but we plan on doing a series so can you introduce yourself a little bit, as far as wHealth Advisors is and what it is that you do?
John Munley 4:01
Sure. So wHealth Advisors we are an IRA firm based in Red Bank, New Jersey. And what we do is we're comprehensive financial planners, but we have a specialized niche in college, late stage college funding. How I got into this is I have four daughters, who, basically in 2016, I have twin girls and they graduated high school, they were going to start college so I kind of dove into this being a financial planner, I dove into this whole college experience, figuring it can't be that difficult, and I realized all the different intricacies that are involved in it. And even somebody with my background. There were a lot of ways that kind of tripped you up. So I really wanted to understand the process and realize that there are a lot have different things that you have to know, it's a specialized experience. So I wanted to help other people and guide them through this process. And that's kind of how I came up with, again, working with people who have high school aged children and and trying to figure out how to pay for college.
Brad Baldridge 5:19
Right? Absolutely. And to go with that, we're gonna dive into 529s today, because you're a financial advisor, as am I and I spent a lot of time talking about 529s, especially when the subject of college comes up. So, why don't we do that? So let's start with the very beginning of what is a 529.
John Munley 5:44
And a 529 is basically if you think of it like a retirement account, it is a place that you can start to save for college for your children. But it has tax advantages that make it definitely worth considering. You invest your initial amount, and that can be one time lump sum, it could be a monthly contribution, and then that money grows tax free. And as long as you use it for qualified expenses. You never have to pay tax on that money. So that's why it's a great way, at least to save partial part of your money that you're going to use to help pay for college in a 529 plan.
Brad Baldridge 6:22
Right. So yeah, I mean, 529 is essentially a popular way for families to save for college. So you mentioned a couple of the benefits. So I think the number one reason people use 529 is tax benefits. And there's federal tax benefits and state tax benefits for some. But what are the basics there, we got the tax deferral, which means the money grows, we don't have to pay taxes as it's growing. And then we have to, I guess we don't have to, but if we take the money out for qualified expenses, then we avoid taxes at that point as well. So kind of the best of both worlds where once we invest the money, it grows, and we spend it on college without ever paying taxes on it.
John Munley 7:09
And that's anytime you can do that. It's a great thing.
Brad Baldridge 7:13
John Munley 7:15
That's why we like these.
Brad Baldridge 7:16
Right. And that's pretty rare. Another place I'm aware of it is the health savings account and the Roth IRA, where you get to spend money without paying taxes on it after it's grown.
John Munley 7:28
They both have low limits, where what's nice about the 529, and we'll get to in a little while, is you can put a lot more money towards that. And you can with a Roth or an HSA.
Brad Baldridge 7:39
Exactly right. So, again, all of the things we've been talking about is all because of the tax benefits. So I guess a couple of the other benefits of a 529 is you can choose how you're going to invest the money. So if you want to be an aggressive investor and put it in some form of stocks accounts and that type of thing, you certainly can do that. And I think that's appropriate, especially when your children are young. And often it's also appropriate when your children are older. But that's not the only choice is what other investment options are out there as far as the 529?
John Munley 8:13
In terms of inside five, most plans have an age-based investment option where they have the funds in there. And they basically are more aggressive when you have newborns, zero to two years, zero to five years. And as we get closer to college age, it becomes much more safe, so more towards fixed income and equities. And if you're not much of a do it yourself, and you just want to set it and forget it, that's one option to do this, because the plans will automatically just adjust what the allocation is based on the age of the beneficiary.
Brad Baldridge 8:50
Right? Absolutely. So and then they also have the very safe accounts that are some of them use like CDs or bank accounts of some sort. Some of them are just some form of guaranteed account. But we've got the whole gamut of choices anywhere from very conservative to aggressive. So that's all the good news. What's some of the bad news?
John Munley 9:15
Well, if you don't use it for college, there are taxes on the earnings and penalties that you may have to pay. So it's definitely something that you want to consider not over funding this because if you don't use it, you will come and pay the tax man and it will be a penalty. So while we said it's great investment, it grows tax free. It's one of the best things out there for paying for college. If you don't use it for college, you will pay the tax, man, and they'll also be additional penalties.
Brad Baldridge 9:48
Right? Absolutely. I think there's some additional challenges, you can lose money in a 529 especially if you choose the more aggressive options in a time when aggressive investing is not working out. So you think of the stock markets and bond markets and those types of things, they go up and down, and they can go both directions, just depending on how that works out. The other thing you need to keep track of all the paperwork around, yes, you get some tax benefits, but that also means you got to figure out how to put it on your taxes, so that you actually get the benefit.
John Munley 10:22
Yup, the schools, I was gonna say, the schools will give you a 1098T, which basically tells you what you've what you spent on tuition. And you'll get a 1099Q, what you withdrew from the 529 plan, and you need to keep track of how much room and board you paid how much in books you paid. Anything that goes under that qualified expense, you want to make sure you know exactly how much you use. Because if you take out more than if you withdraw more from the 529, when you spent, that's when you're going to be paying taxes on the amount that you've overwithdrew by.
Brad Baldridge 11:02
Right, absolutely. Alright, so let's get into a little bit more about... But before we get into that, let's briefly talk about where we can get more information about 529s. If we say, 'Oh, I think I like it, maybe go learn more,' there's certainly websites, every 529 has a website.
John Munley 11:23
And then there are some 529 plans that are better than others, just because they may have more investment options, they may have a lower fee. So what the first thing I think you want to consider is, in your own state, do you get a tax deduction for contributing to 529? If you don't, you don't only have to invest in 529 in your own state, you can use any of the 50 states' 529 plans. If you don't have a tax advantage in your state, it may be worthwhile to look outside the state and see if there are any plans that offer more investment options or lower fees.
Brad Baldridge 12:01
Absolutely. So every state offers a plan. Just about I think Wyoming might be the one state that doesn't. And
John Munley 12:09
See, I learned something, awesome.
Brad Baldridge 12:12
And you don't have to use this your own state's plan, if you don't want to, you can use any 529 plan no matter where you live. And but you might get some additional benefits if you use the states that you pay taxes, and if you use one of their plans. So that's the big advantage. But sometimes we'll see people that some states don't offer mentioned benefits. So it doesn't matter which plan you take. But you can use any plan in any state and spend that money in any college in any state. So a lot of people get confused and say, 'Well, I gotta use this in my home state', or something like that, which is not true. So that might be being confused with the other type of 529, which is a prepaid plan. And those have a lot more restrictions. And that's not at all what we're talking about here. So prepaid plans is a topic for a different day. These are just the general 529s where you can invest and grow your money for college and then spend that in any state that you choose to go to college.
John Munley 13:17
And I know Brad, before this, we were kind of looking. The one thing is to find out information on these plans, you go to specific date, state, and they're called all different topics. So we saw a plan description, investor handbook, program disclosure statements. So it's going to be hidden somewhere on the bottom of the website. So if you want to go through and see all the investment options, and all the regulations and disclosure statements, you're able to find that there.
Brad Baldridge 13:44
Right, exactly. So just like other forms of investing, you know, all the disclosures and information is in some form of document that has various names, you could go get them at the website. They're not necessarily all that easy to find. That's the 50 to 100 page document with amendments and all kinds of gobbledygook. But it also has sections like this is your tax benefits. And this is how it works. And here's your investment choices. And here's the pros and the cons. And here's the penalties. And here's the expenses and all the different pieces that you need to understand. And of course, in many cases, your there's going to be information on the website itself, where maybe it's not quite so densely presented, and you can just look up average expenses on various investments and that type of thing. All right, so let's jump into qualified expenses. That's a key topic when it comes to 529s in order to keep your tax free status, you have to spend the money on what's called qualified expenses. So what are the qualified expenses?
John Munley 14:55
And each qualified expenses have different limitations on what you can spend, but there's for college basically three categories are college, high school, K through 12 tuition costs, and paying back student loans, which is something that was just recently introduced. So with college won't cover the qualified expenses college travel, no, but you have tuition, room and board, books, computers, anything like that is a qualified tuition.
Brad Baldridge 15:25
John Munley 15:26
And one thing to keep, and I know this from my own experience is if you have children or students now in college and they're living off campus, the rent that you're paying, and the food money that you are giving them does count towards a qualified expense, you just need to keep good records of that. So know what the lease is what you're paying in rent. Also, if you're giving your child's money for food, that is a qualified expense, that's a great way to use a 529. But again, if the tax man comes and asks you for receipts, you're going to want to have those so that you're able to justify using the 529 money for that.
Brad Baldridge 16:07
Right, exactly. So room and board covers your typical meals, your rent, but also some of your expenses if you have to pay for the internet at the location, or the water or heat or whatever it is all those things. And again, it would be the student share. So if you get two or three roommates, then it's just the part that your students actually paying.
John Munley 16:29
Yep. So like you mentioned early, Brad, in this when we first started, it's very important to keep records on this on these things, especially if you're going to use 529 money up to the limit of what you can in terms of qualified expenses.
Brad Baldridge 16:42
Right, absolutely. Now, they've added a few things that weren't always part of a 529. So about five years ago, I think it might have been they added high school and grade school tuition. So there's no room and board and that type of thing involved. But it's up to $10,000 for high school tuition. So if you're paying some sort of tuition for a private school, or I guess maybe some states, there might be schools where it's a public school, but you still pay tuition, I've not heard of that. But I guess it's possible, or great, or up to 4000, for K through 8. So high school, it's 10000, 4000 is the limit for K through 8th grade. And that's the amount that you can take out. Most states are now following those rules. And they get because every state has their plan, and every state has their own opinions on whether their state tax rules are going to follow federal tax rules. Some states may not allow some of these other deductions that are not directly college. And then the last one is you can take money out to pay back student loans up to $10,000 per beneficiary. And this one is very new, so a lot of states are still trying to decide if they're going to go along with it. So I've seen a couple states, just recently that do not allow paying back loans as far as avoiding taxes for the state taxes. So you're gonna avoid taxes federally, but you may have to add it back in when it's time to pay your state taxes.
John Munley 18:18
Now, and this is great in terms of if you do have leftover money in a 529 plan. And let's say your student did borrow for college, so they took the Federal Student Aid loan, they borrowed the 5500, freshman year 6500, sophomore years 7500 junior and senior year for a total of 27,000. Now they're coming out of college, they have this $27,000 debt. If you have 20,000 leftover in a 529 plan, you can take 10,000 of that and pay down part of that student loan debt, which is which is great. It's a great way to use some of that leftover 529 money if you have it.
Brad Baldridge 18:55
Right, exactly. And just to be clear, you can do that without paying taxes on it, you could take the next $10,000 and apply it to loans as well, you just have to realize that you may have to pay taxes and penalties in order to make that piece. So it's always important to understand that this is your money, you can do whatever you want with it. There just might be some tax consequences. So they're not saying you can't have it. They're just saying if you take it for the wrong reasons, we're going to hit you with some penalties. So in a dire emergency, I gotta have the surgery no matter what, and you want to use your college money, you can do that. It's just again, they have tax consequences.
John Munley 19:33
Brad Baldridge 19:34
All right. So let's talk a little bit about you know, when I say you and that type of thing, so what we're really talking about is owners and you know, so that's the other next piece of it is a 529 plan has an owner, typically that's the parent that owns it for a beneficiary and typically that's a student. And then we have what's called the successor owner and that's somebody that will take over for the owner if the owner should pass away or otherwise be incapacitated. So oftentimes that might be the other parent, you know, so mom owns it for the benefit of little Johnny and little Susie. So you might have two accounts. And dad is the successor owner should something happen to mom. But we can also have grandma and grandpa owns this for the benefit of a grandchild. Or mom and dad owned this for the benefit of mom and dad. But the owners are always the ones that are in control. And they can actually change who the successor owners and the beneficiaries are, again, it's your money, you have control. And because you're the owner, you control all different things like changing things, how it's invested, if and when the money is withdrawn and actually spent on college. So I think this is an important thing when it comes to divorced and separated families and blended families and that type of thing. A lot of times, I've been in a few situations where the ownership was never really discussed as part of the divorce because they said, 'Well, that's money for college.' That's not, we're not dividing that per se, because it's really the kids' money for their college, we're just going to keep it intact. And it'll be there for college. What was neglected to talk about, though, is, whoever owns it is the person that gets to control it, and decide when and if it's used and how its invested. And could even theoretically, decide to take it out, pay the penalties and walk away with it. So that's why understanding the owners is important, again, because the technically does not belong to the beneficiary, and they don't have much recourse in a typical 529. As far as well, someone, my parents set aside this money for me, and then they decided to take it back. It's like, yeah, they can do that. It's their money.
John Munley 22:00
And we'll talk about this in another episode, I believe, but it's people get confused with 529 in a custodial account, say, well, it's both of my child's name. So it's all his money. And it's not in a custodial account, once they turn the age of majority, which in some states is usually 18 or 21. That's their money. So you're no longer the owner, they're the owner, they can use it for whatever they want. Again, with the 529s, it's your money. So you don't, it's just to, it's for the benefit for. And another thing we'll talk about later on is strategic ways to make sure who's the owner for financial aid purposes that could come into play in terms of helping families get financial aid.
Brad Baldridge 22:44
Yes, absolutely. Yeah. So let's talk a little bit more about the withdrawal process. So I think they're the owners obviously get to decide when to take the money out. from a tax perspective, there's what we would call qualified withdrawals, which we already mentioned, which are, again, tuition, room and board books, a computer, that type of thing, non qualified, which would be, I'm gonna take out the money and go to Vegas with it, or I'm going to take out the money and pay off a car with it, or I'm gonna take out the money and give it to my kid and they're going to buy an airplane ticket, again, because travel doesn't count. So that would be non qualified as well. Then there's a withdrawal that's kind of falls in between, it's either qualified or non qualified. And that would be if you take money out for things like scholarships. So there's a provision in the 529 that allows you to take money out up to the amount of a scholarship that your student receives. And then you do not have to pay penalties on that withdrawal. But you would have to pay taxes. And that purpose, I think, is that that Catch 22 that some parents are worried about of well, what if I save a big pile of money for college for my student and then they somehow land the full ride or something, and then they don't need the money. What do I do then? So this is there are withdrawals where you can take out up to the cost of a scholarship, and what there's one around the tax credits as well. But again, it's just kind of a safety valve that allows families that veteran that situation say, 'Well, if they got $100,000 with scholarships in their career, well, then we can take out $100,000 and avoid penalties.' So if we did have that big pile of money for the expensive school, and it turned out, the expensive school gave us a big scholarship while we have a safety valve and that allows us to take it out. Of course, we would also have the option of doing other things with like changing beneficiaries and stuff that we can get into here as well.
John Munley 24:55
Then I had a situation where I had a client and they had saved and 529 money for private schools. So private schools run anywhere from 60 to 70 to 80,000 a year. So they'd saved a good amount for college and 529, again, with the assumption that they were going to be paying 60,000 a year for college, that an only child, they ended up going to a state school so that tuition was only 30,000. So they had about 80,000 leftover in their 529 account. Again, only child didn't want to save it to put it towards a grandchild down the road. Their kid wasn't gonna go to grad school. So it's like, right, we have 80,000. And there's about $30,000 of taxable earnings that they would have to pay on plus a penalty. And at the end, we decided to take this money, you weren't even thinking about, this wasn't your money. This was going to college. So we ended up paying the tax paying the penalty, and they ended up getting out of that 80,000, $68,000 that they didn't think they would have. So yes, you kind of stumped that they lost that 12,000 in taxes and penalties. But it was money that they never thought they were going to have anyway. So it was kind of like, 'Alright, now we have this money, what are we going to do with it? So you're able to do different things.' As Brad said, maybe buy a car, maybe go to Vegas, I'm not sure what they do. But it is your money. And if it does get overfunded, there are ways to get it, you do have to pay it. But again, we kind of looked at it as this was set aside for college, we weren't even budgeting anything for your lifestyle with it. And all of a sudden, you get to use it.
Brad Baldridge 26:40
Yeah, so when it comes to leftovers, as we mentioned, you can change beneficiaries. So you're allowed to change beneficiaries within the family of the existing beneficiary. So you can change it to brothers and sisters, parents, and children of that beneficiary, cousins, nieces and nephews. So there's lots of ways that you can change beneficiaries. For many families with multiple kids, I often recommend that parents consider 529 as just a big lump sum for college doesn't matter who the beneficiary on the account is, especially when it all came from mom and dad, if you're setting up a specific savings account for some reason, and maybe the students putting their own money in it, or all their birthday gifts are going into it well, then you probably want to keep it separate. But many times I'll have parents that are saying, 'Well, we're putting in 2000 a month for college, over the next eight years, because we've got three kids that we're going to have to deal with. Whose account do we put it in?' Well, it doesn't matter, because we can always change it from one student to another. Sometimes you'll get a two out of three students go to an expensive school and one goes to a lower cost. And then you can shift the money around. And we'll talk more about strategies as as we get into the next couple episodes, but there's a lot we can do there as well.
John Munley 28:05
And Brad, that happened in my family some like I said, my twins went to college, they graduated in 2021. One had her 529 plan, we used it all, one had leftovers, we've rolled it into the one who's now a sophomore in college, she'll probably have leftover money, so it'll get rolled down into my youngest child. So it's a nice way that you don't have to earmark, who the child is for it just keeps getting rolled over. And hopefully, you've planned it well enough that you use it to the penny for the last child.
Brad Baldridge 28:37
Right, exactly. And I think it's important to understand too, that as your income and wealth grow, the more important 529 is or the more beneficial 529s become. Because if you can avoid state and federal income taxes, or at least federal income taxes, depending on your state that can add up, as your income climbs that can be you know, up in the 30%, maybe up to 40 to 45%, and the highest earners and avoiding those taxes has a huge benefit to the point where you might get more aggressive with these types of accounts. And then the end if you had if you have a $3 million estate, or whatever your net worth between all your stuff, and there happens to be $30,000 529s, I don't think that's the end of the world, you can just leave it there and wait and see what might happen. Again, because it might be grandkids it might be one of your existing children going on to grad school. It might be mom and dad wanting to go back to school where you can use that money. So and then for others it's it is where we really don't want to have any leftovers, which then you just want to be more careful as you're putting the money in. And this is something I work with families a lot as well where you kind of say, 'Alright, well, where are we now? Well, we've got $100,000 in our 529s but we've still have three kids, and nobody's gone to college yet. So between all three of them, we could easily spend that and a lot more. Let's go ahead and keep saving.' And then a few years later, you know, now we have 95,000 because we've added money and taken money out and so forth. But we're starting to wind it down. You're one kids graduated one kid has one year left, and one kid has two years left. And by that time, you pretty much know what it's going to cost. I mean, once you're in college, and you've kind of have a couple of years of history, you can say, well, year over year, we know what it's going to be. And you can say, well, if things continue as they are, we're going to need 100,000 based on our projections, and we already have 95,000. If you're worried about having leftovers within maybe you slow down or stop, and don't push it right to the very limit, and maybe you're 5000 short, and you actually pay that out of pocket, just to avoid leftovers. And other people would keep going and say well, if I have 5000, leftover, or 10, or 20, I can always pull whatever's left over and cover the student loans. You know, I can say, got 8000 leftover, well divide that by three, and each of the kids can then apply that to whatever student loans they have.
John Munley 31:20
And I think, yep, and I think the key to what you're talking about Brad is start early, you can fine tune later on as you're approaching college or in cars. But it's never too early to start with that 529 plan, starting funding it. So baby's born, open that up, start funding it. And again, as they get closer towards that college age, you can start fine tuning it into the amount Do we still need to contribute? Or do we stop? Or do we put more towards your younger child? Things like that.
Brad Baldridge 31:51
Right? Absolutely. And then we have. So that's leftovers, I guess the talk a little bit more about investment options. So mentioned earlier, we kind of went through them pretty quickly. But let's talk a little more detail as far as what it typically is available, what does it look like in a 529.
John Munley 32:12
So a 529 isn't that much different than in terms of options that you would see in 401k. So basically 529 plans will have different funds, depending who the state owner is, and who's managing the fund. And you're able to basically go two different ways with it, you can build your own, using the funds that are within that plan, you can build your own asset allocation. So again, if you want to be 100%, equities all the way through as you're investing, you're able to invest, if you want to be conservative and only have 20% equities, you can do that. So you're able to individually create your own portfolio and asset allocation within the investment options that are available to you. Right, the other thing they have is an age based an age based is basically and you have to be careful with these, because every different fund manager looks at age, aggressiveness aggressiveness differently. So, one fund, Brad, where you are in Wisconsin, or I am in New Jersey, your allocation, depending on an age is could be different than where mine is. But how age based works is portfolios tend to be more aggressive when the kids are younger. And as they're getting closer to college age, they will become less aggressive. So let's say again, zero to three, it's 100% equities. As you're going age two to five, maybe it goes to 90%. So on so on. And when you hit that junior and senior year, you may only be 20% equities. Again, that will vary depending on the plan.
Brad Baldridge 33:51
Right. And I've seen a few plans where they actually have age based aggressive and age based conservative so they even have, and again, it's the fund managers opinion of what someone with a 15 year old should be invested in. And sometimes they offer two choices, you can be the aggressive choice or the conservative choice for your particular age.
John Munley 34:12
Brad Baldridge 34:13
So, but then again just to clarify, when we talk about equities and that kind of stuff. Realistically, what we're talking about is mutual funds. 529 plans are generally under the hood somewhere, there's typically a mutual fund company, popular ones are like Vanguard and TIAA-CREF, and Fidelity and so forth. Same people, by the way that probably are involved in your 401k at work. So that's why they might look very similar but they're all mutual funds. You can't take your 529 and say, 'Well, I'm gonna put it all on Facebook or on Google,' or something like that. It is, again, just aggressive portfolios, or, and then some of them will have things like a small company stack or a large company stack or S&P 500 would be a very common one where you can choose that particular fund. And then a lot of them will have various portfolios. So that'd be aggressive portfolio, where they lay it out for you. So they, they think that aggressive portfolio should be this much US stock, this much international stock, this much large company, this much small company, that type of thing. So, they may have a portfolio that within it has three, five, ten, mutual funds, that they've kind of selected for you, very similar to your 401k, where you might have the exact same options, right, where you can go pick, XYZ small company mutual fund, or you can say, I just want to take the aggressive portfolio. And the managers there have said, well, the aggressive portfolio is 10%, this and 8% that, and 12% this, and they built an aggressive portfolio that provides some additional diversification as well.
John Munley 35:58
Again, similar to your target date funds that you will find in a 401k, their retirement their 2030, 2035, 2040, the longer you have for retirement, the more aggressive it's going to be similar with the 529 plans.
Brad Baldridge 36:13
Right? So let's just actually talk about the mechanics. If I say, well, I want to go set up a 529. How do we actually do that?
John Munley 36:22
Well, I think the first thing to do is you check your state and see does your state give you some kind of tax benefit from investing in that plan? If it does, definitely want to consider it and look into it. I know here in New Jersey, it's 10,000 per individual, 20,000 total, as long as your AGI is below 20,000. I think New Jersey is actually one of the few states that has an AGI limit on if you can take the deduction, neighboring state where I have a lot of clients in New York, it's $10,000. That's it's capped at $10,000, no income limit. But I think first you want to check out and see if your state does have that tax deduction. If it doesn't, then I think you can open your search to 529 plans across the country. But the process is basically once you decide on a 529 plan, there's the application. So you're the owner of who's the beneficiary, they'll ask you questions, you'll fill out the form, you'll fill out your investment options, and then they'll basically say, when you open this, how do you want to contribute? And there's different ways that you can contribute to the 529 plans? Brad, I'm sure you've had experience with different clients they've funded in different ways.
Brad Baldridge 37:33
Yeah, and I think it's important that I guess that is this decide, right, you're gonna pick these, the owner and the beneficiary, that kind of stuff. But I guess even a decision before that might be, am I going to do this myself, or am I going to go to a financial advisor, because many states offer programs that are essentially designed for an advisor to be involved, and many of them also have a direct to consumer where you just go to a website, typically and set up your account online. And then you're kind of in charge, and you get to do it all or again, having an advisor. So I work with families where we do both, just depending on on what makes sense. And then as part of that process, you're just gonna be linking it up. So typically, to have like a checking account, so you set up the account, you link it to a checking account. And then you can set up, you can automate it, you can do one time deposits. So you can say 200, a month is going to go into Johnny's and 300 a month is going to go into Susie's. And it's going to go into this investment choice. And it'll keep going until you stop it or change it. And then what people don't realize as well is you can use that same checking account to get your money back. So when it's time for college, and you're saying, well, now I need $5,000 to contribute towards tuition, you can go to the 529 company, or to your advisor, depending on how it's set up and say, hey, I need the 5000 for college. And oftentimes in a week, they'll put that money back into the checking account that's linked to the account. And then from there, you can spend it for college by setting... Oftentimes, because the idea of writing checks has kind of gone away. Now you just go to the college's website and have them draft your checking account or you do a bill pay of support. And so it's all electronic. Now if you want it to be you can go old school the checks, but it's getting harder. They're wanting people to do that a lot less than they used to let's put it that way.
John Munley 39:41
I was gonna say how I've done it is in these plans. There's the you know, you can go right into it and it'll basically say, how do you want to check distributed to the owner, which would be to myself to the beneficiary, which would be the mic out or directly to the school directly, the school is kind of easy just they know the address, you plug it in, once you plug in your student's ID, and you can just put the amount you want, and there's the 529 plan will directly send that to the college, so you don't have to worry about getting a check from them and then going and pay the college. So sometimes that definitely seems you want some paperwork to have a 529 plan, send it directly to the school.
Brad Baldridge 40:25
Right? I think the Catch 22 there is that depending on if you can log into the school or not as a parent, now you got to make sure that it actually happened. And so for those that aren't aware, again, schools run everything electronically now. So there's a portal of some sort that your student has access to typically. And they can now often send a request where you can add a parent, so the parent gets their own username and password. And it can be linked to the students account. And then the parent could go in and see whatever the student allows the parent to see. Usually they parents can get into the billing section and see if again, because most of the time the parents are billing, so the college makes it as easy as possible for mom and dad to see the bill and pay the bill. They're not fools, of course. But and then you may have access to grades, you may have access to course schedules and that kind of stuff.
John Munley 41:19
Nope, I just have access to the bill. I have access too, so nothing else
Brad Baldridge 41:25
In your situation. Again, sometimes it's up to the student to turn that on and off if they want to. And other colleges just decided that these are the things parents can see. And these are the things students can see. And, you know, so that's just kind of generally the process. All right, any other thoughts, major things that we need to touch out on the 529 at this point?
John Munley 41:47
Yeah, I was gonna say and this won't affect most people now because the gift tax rolls up at like $12 million per person. But if you give a gift of more than $16,000, you're supposed to fill out a gift tax, you don't owe taxes, but he's supposed to fill out a form with the IRS. So basically, any contributions up to 16,000 is a gift, you don't have to worry about that. So if you have a mother and father you can, you can contribute 32,000 to 529 in a given year, and not worry about having to fill out a gift tax. There is a five year election rules so you can overfunded in one time with 80,000 if it's one person, so if it's a husband and wife, you can put 160,000 in and that gets split out over five years, it's a little bit more complicated and technical that we probably want to go into, especially again, with a gift tax roll up at 12 million, it's not going to really affect many people, but just something to be aware of if you are in that situation.
Brad Baldridge 42:45
Right, exactly. And that's where people get confused around the gift tax rules as recipients of gifts generally never pay taxes, it's the donor or their estate that may have to pay taxes. And oftentimes, that's not the case, either, unless, again, you have multi-millions at this case, so that that limit really is not about paying taxes, it's about having to fill out paperwork, to prove that you don't need to pay taxes. So once you've crossed that $16,000 line, you're gonna fill out a tax return a gift tax return, the net result for most of us is going to be no taxes do. But you have to, technically you're supposed to fill out the form and document that back because you can give up to $11 million in your lifetime or whatever the big number is. But if you're wealthy, and you happen to already have given away that $11 million. Now, once you give more than 16,000, then you're going to have to figure out how to pay the taxes on that. And again, for most of us, that'd be a good problem to have. But most of us just aren't going to deal with it other than maybe having to do a little bit of paperwork. All right, well, let's wrap it up here as that's, I think covers 520 nines, again, we didn't cover everything we actually plan on doing things and you know, having more coming episodes here where we're gonna get into some strategies, and we'll have one for beginners, one for a couple advanced strategy or basic strategies, and then advanced strategy. So we've got a lot more coming. But we're gonna wrap it up here for now. Thanks, John.
John Munley 44:19
Thank you again, Brad. Really appreciate it.
Brad Baldridge 44:22
All right, so there you go. 529s part one is complete, we've got three more parts coming. Again, the very basics are coming next. Some of you may want to skip that if you're more than capable of handling, investing and some of the basics you can move on and skip for some of you are overwhelmed a little bit and that's the purpose of the next one where we will cover a little more detail as far as just basic investing strategies in stocks versus bonds and that type of information that people need to understand as part of 529s. Again, as always, show notes are available at tamingthehighcostofcollege.com. We also have a free newsletter at lots of other great resources. So go to the website and check it out. That's all we have for today. Stay tuned for the disclosures.
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Brad Baldridge 46:01
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 principal. 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 a 529 product program description. These documents can be obtained from 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 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 Baldrigge companies are not affiliated. The registered brands' location is at 10521 West Leighton Avenue Suite 200 Greenfield, Wisconsin, 53228
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