189 | 529s: The Ultimate Education Savings Account with Patricia Roberts and Jen Rupp

02 Nov 189 | 529s: The Ultimate Education Savings Account with Patricia Roberts and Jen Rupp

Welcome to episode 189 of Profit Boss® Radio! In this episode, we’re talking about saving for college and career training–and how to use 529 plans to make this daunting task more manageable.

There are a lot of reasons you might want to use a 529 plan. These plans allow Americans to save for higher education on a tax-advantaged basis. This means that as they grow in value, that growth isn’t taxed. So long as the money is withdrawn to pay for higher education in some form, you don’t owe tax on the value of the account either. This means more money for college, technical school, or a paid apprenticeship, as well as an added benefit that many people can take off their state tax obligations in a number of places.

Joining us to talk about 529 plans are Patricia Roberts and Hendershott Wealth Management’s very own, Jen Rupp. In the first half of this episode, you’ll meet Patricia, who’s the author of Route 529: A Parent’s Guide to Saving for College and Career Training with 529 Plans. You’ll then hear from Jen Rupp, who’s the head Cash Flow Coach in my coaching program, as well as an expert on 529 plans herself. 

If you’re ready to learn about some great ways to take the pain out of saving for college, this episode is jam-packed with information that will help you prepare to take the first steps.

Here’s what you’ll find out in this week’s episode of Profit Boss® Radio

• Why you can create a 529 plan in any state–and which states offer the greatest benefits for residents.
• How you can legally use funds in 529 accounts for expenses far beyond tuition, including apartment rent, certificates, and even computer equipment.
• Why you should still consider opening a 529 for your kids, even if you have no idea if they’re going to go to college (or they hit the jackpot and receive a full ride scholarship).
• How your employer can help you prepare for the costs of higher education.
• What it means to superfund a 529–and how to legally put as much as $150,000 in a single year into these accounts.
• The rules of the road for investing when it comes to 529s.

The Money Blueprint℠ for Business Owners

The Money Blueprint℠ is profit coaching that puts you in control of your business finances for good. No more Head-in-the-Sand Syndrome. No more fear, stress, or shame. Simply total confidence. Learn more here! 

Resources and Related Profit Boss® Content

• Patricia Roberts on LinkedIn 
• Jen Rupp at Hendershott Wealth Management 
• Route 529: A Parent’s Guide to Saving for College and Career Training with 529 Plans
• Gift of College
• FAFSA
• SavingForCollege.com

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Transcript

[INTERVIEW WITH PATRICIA]

Hilary Hendershott: Well, hello, profit boss. Welcome to this very special episode of Profit Boss Radio and my interview with Patricia Roberts, the author of Route 529: A Parent’s Guide to Saving for College and Career Training with 529 Plans. It’s a very long book on 529 plans, and I know a lot of you have a lot of questions, so I’m going to welcome Patricia to the show. Welcome. Thank you so much for being here. 

Patricia Roberts: Thank you for having me, Hilary. Very glad to be here. 

Hilary Hendershott: Tell us a little why advocating for 529 plans is so special to you. 

Patricia Roberts: Okay. Let me tell you a little bit about my financial backstory. I grew up in a family with lots of love and lots of encouragement, but very few financial resources and we had a single mom heading our household and four children, and I almost missed the opportunity to go to college as a result of financial resources. So, near and dear to my heart is attaining higher education. So, my mom insisted I go, even though my high school guidance counselor said, “You really can’t afford it. You probably should stick with your waitressing job,” which I had all during high school. 

Hilary Hendershott: Oh, how empowering. 

Patricia Roberts: How empowering, yes. Yes. So, I delivered my high school commencement speech and I was editor of the newspaper and had other leadership roles, I had this conflict in my mind about should I really be going? But my mom said, “Absolutely. Go.” So, I’m so glad I did. The pursuit of higher education has opened so many doors for me and really enabled me to come back empowered to help my family in very substantial ways. Had I just stuck with a job that was in the waitressing field, I would have never been able to assist my family the way I did. And I actually was able to eventually buy my mom and my brother, who has a developmental disability, a home to live in and to be able to move them out of the type of housing we had been in while I was growing up. So, I really am a fan of higher education. 

Hilary Hendershott: All right. So, you’re a champion of higher ed. I get it. I myself have two graduate degrees, so I’m clearly a fan. Let’s start at the top. Exactly what are 529 plans and how do they work? 

Patricia Roberts: Okay. Great question. So, 529 plans by way of background are named after Section 529 of the Internal Revenue Code. And these are plans that were created to enable Americans to save for higher education on a tax-advantaged basis. And what happens in these accounts is as they grow in value, so after dollars are contributed to them and they grow in value, that growth is not taxed along the way, unlike other forms of investment where the earnings are taxable. And in fact, as long as the value of the account is used for some form of higher education and we can talk about what those forms are when withdrawn, there is never tax owed on the value of these accounts. So, less tax means more money for college. And to make it even better, so that was at the federal level, that tax treatment, at the state level over 30 of the United States offer a tax credit or tax deduction for contributions to 529 accounts to incent the residents to save for higher education. And that’s an added benefit because people are able to take that amount off of their state tax obligations each year when contributing for these accounts. 

Hilary Hendershott: It is an added benefit, and my home state of California is not one of those states. So, being that I built a business in California, many of my financial planning clients, we used a 529 plan for them that was based out of West Virginia, and so they weren’t losing any benefits by leaving California. But I think what people need to understand is that each state in the Union is going to offer a 529 and then you get to choose based on whether your state is going to offer you tax benefits for saving in your state. You could very well work with a plan in any state. Isn’t that right? 

Patricia Roberts: That is exactly true. So, people are not tied to their state plan. Oftentimes, some people hear there’s a tax deduction or credit, they’re likely or inclined to go with the state plan. But what they need to know is they can invest in any plan throughout the United States, and they’re not tied to that. Some people choose to invest in the home state plan up to the value of that tax deduction and then to take advice and guidance, perhaps from a financial professional, and go with another plan in addition. But nobody is required to go with a particular state plan. It’s a good place to start to take a look at it but again, people can invest in any plan and many do. 

Hilary Hendershott: Okay. Perfect. And so, what states offer the best benefits for residents? Do you know? Do you happen to know? 

Patricia Roberts: Well, in my book, I list off in the back of it all of the states and what the various benefits are. There are states like Pennsylvania, for instance, the state in which I grew up, offers a $30,000 a year state tax deduction. And I believe it’s per beneficiary as well. And what’s interesting about Pennsylvania and a couple of other states, Pennsylvania is 15,000 for single filers, 30,000 for joint filers so a married couple filing jointly per beneficiary. That’s pretty generous. And in that state, you can invest in any 529 plan and take that deduction. You’re not required to invest only in the Pennsylvania’s plan. That’s pretty generous. States like Colorado have an unlimited tax deduction up to a contributor’s taxable income. I’d say that’s generous. South Carolina deduction of the full contribution amount, whatever that may be. And then it ranges from smaller amounts to larger amounts. But most of the states have, not most of them, 34 states have something, and it’s worth looking into if you happen to be in one of those states. 

Hilary Hendershott: All right. So, now I think one of the most misunderstood aspects of the 529 is what you can actually take money out of the 529 account and spend on. So, for example, it’s really not intuitive that you would be able to pay your student’s apartment rent while they’re in college, but in fact, you can. Can’t you? 

Patricia Roberts: That’s exactly correct. Yes. There’s a lot that’s not intuitive about these plans. First of all, calling them college savings plans really confuses people. First of all, they’re not just for college, and your audience should know that. They can be used for a wide range of educational experiences, including two-year colleges and universities, community colleges, for instance, four-year the more traditional ones, trade, technical, vocational school, graduate, and professional studies. Even certain registered apprenticeships can be covered from a 529 plan. And then when at these accredited institutions of higher learning, you can use the account for tuition and fees, room and board as long as you’re attending at least half-time, books and supplies, and even computers. And with respect to room and board, if you happen to be living off-campus, you can take up to the amount of the state that room and board costs from the university website and apply it to your child’s housing wherever they may be living. So, the room and board does not need to be on campus. It can be the child’s student living somewhere else as long as the amount you take out of your 529 doesn’t exceed the stated cost of room and board for that particular institute. 

Hilary Hendershott: And I think that was the really surprising part for me. So, let’s talk about how to configure the 529. So, the adult who opens the account will be the owner and then the child or future student will be the beneficiary. So, let’s talk about what do people need to understand about the implications of who owns the account.

Patricia Roberts: Well, first of all, they need to understand that you do not have to be the parent of the future student or beneficiary to open an account. Anyone can open an account for anyone else provided they have a Social Security number and reside in the United States or a resident alien. So, that’s the first thing. Parents typically open accounts for a future student. They can open them as early as when they realize they’re expecting or even years before that, and they can name themselves as the account beneficiary and then change it to the child once the child arrives once they have a Social Security number so you can start them early. Who else can open accounts and who typically does? Grandparents open accounts for grandchildren sometimes. Grandparents often like to help with the cost of higher education, and there are various ways to go. Some grandparents rather than contributing to the account owned by their adult child prefer to have an account in their own name for the grandchild. And that works particularly well where that has become a little complicated but it seems it’s going to be cleared up thanks to some changes to financial aid treatment was when the money came out of a grandparent-owned account and applied to a grandchild’s education, it could be deemed as unearned or untaxed income. And in a subsequent year of applying for financial aid, it could count against the students. 

So, grandparents were sometimes concerned about that and they strategized by maybe moving the money to their adult child’s account each calendar year, each year of the tuition being due, rather than dispersing it from their own. But I understand there are changes to FAFSA, that’s the free financial aid form that most people here use for financial aid, and in subsequent years that income from third-party accounts, including grandparents, is not going to count. I understand that’s the case going forward. 

Hilary Hendershott: Okay. But a 529 account titled to the parent counts as parental assets on the FAFSA. Yes?

Patricia Roberts: That’s exactly right, and that’s an important point. It counts as a parental asset. Unlike some other forms of saving for college where it counts as a child’s asset, this counts as a parental asset because the account owner with 529 plans always has full control of the account. So, it is fully up to that account owner whether and when to disburse any funds. So, yes, it counts as a parental asset, and as such, it counts only 5.64% toward the expected family contribution for that federal financial aid evaluation. So, if a parent has a $10,000 account for their child and the child is applying for financial aid up to $564 of that would count. So, that’s not a significant impact for federal financial aid purposes. That’s pretty minimal. It is possible, however, and I always like to disclose this that institutions themselves look at assets in different ways. So, based on where the child is going to school, it could be that they’ll evaluate that more significantly. But for federal purposes, we know the impact is minimal. 

Hilary Hendershott: Okay. And then if the account were owned by the grandparents, it wouldn’t count toward the expected family contribution on the FAFSA at all. Correct?

Patricia Roberts: It doesn’t count at all because it’s not owned by the child’s parents. It’s completely out of the vision. However, like I said, in the past, when disbursements came from those grandparent-owned accounts that could count as income in a subsequent year but we believe that is being corrected through FAFSA over the next year or so. Yes. 

Hilary Hendershott: Okay. Crossing fingers on that one. 

Patricia Roberts: Yes, absolutely. 

Hilary Hendershott: So, then the protestation I hear the most often when I say to people, “You really need to open a 529,” is, “Hilary, I don’t know that my kids are actually going to go to college. I don’t want to push them. They are free to manage their own lives, and I don’t want to over-save because if I put too much money in a 529, I have to pay a penalty when it comes out.” And I hear this so often and I have a whole explanation I roll into because I totally disagree. But let me hear your reaction to that. 

Patricia Roberts: Yeah. I think that’s a common comment that we hear from prospective account owners. They’re not sure the path the child is going to take. I would say one thing I always clarify is that these are not just for college and I believe in the world we live in that most young people, after graduating high school, will pursue some form of higher education. So, the first thing I say is I’d let people know that these can be used will be on college so for trade and technical schools, et cetera. I let them know there’s no time horizon on this account. You can keep that money in indefinitely. So, if your child’s finding themselves or they need a gap year or two, it’s fine to keep the money in the account. The other thing I say is that the account value can always or a portion of it be switched to a member of the family of that original beneficiary, and that definition under the IRS is pretty generous. It goes all the way to half-siblings, second cousins. The parent themselves can use the money if they need it for higher education. It goes all the way up to grandparents, and it can be saved for future grandchildren. So, if you don’t think your child is going to go, there’s money there. 

But if people are completely reluctant and they really think their child will probably pursue no form of higher education definitely is a valid concern. I do want to say what the penalty is, is you won’t have been paying tax on the account value as it grew. So, certainly, if you don’t use the money for some form of education, you will need to pay that tax that you hadn’t previously paid only on the earnings, though, only on the earnings of the account. 

Hilary Hendershott: There is the part I think people don’t understand is it’s not a penalty. Uncle Sam is simply taking back the tax that you would have paid anyway in an alternate scenario where you didn’t have the 529 account. It doesn’t bring you below zero. Instead, it brings you sort of back to zero in terms of tax savings. 

Patricia Roberts: That’s true. There is a federal penalty. However, that’s 10% on the earnings only. Unless you’re withdrawing the money because your child has received a scholarship or is attending a military academy, you don’t need it because they’ve got other funding or, God forbid, your child becomes disabled or is deceased. So, there is a federal penalty beyond those scenarios of 10% but only on the earnings. So, if you’ve contributed 10,000 and it’s now worth 11, it’s going to be 10% on that $1,000 for having tied up that money for a purpose that you’re now not pursuing. But again, there are many other ways to use this money for many other individuals. So, I think people should keep an open mind. There’s no one way to save for college, but given the tax advantages, I think this is a great way to at least save in part. 

Hilary Hendershott: I agree. So, is it ever too early or too late to start planning for higher education expenses? 

Patricia Roberts: In terms of being too early, I’d say no. I mean, you know from your own experience that time is valuable. To investors, the more time they have, the better. As I said, people can open an account before their child even arrives. They can name themselves as beneficiary. What I do want to remind people is they do need to change it to their child when the child arrives with their Social Security number. And to be sure, if you’re not working with a financial advisor and you’ve gone it alone, make sure you change that investment option as well. Because if you, the parent, are in an age-based option and you’re 35 years old, the allocation is going to be very different for this infant that has just arrived. So, if they do name it for themselves, they want to go early, just make sure when they switch it they make sure that it’s an appropriate investment based on the age now, the new age of the new beneficiary. So, that’s in terms of starting too early. 

Starting too late, I’d also say no. I mean, we hear from parents who hadn’t, for whatever reason, saved anything along the way, and now the kids are in high school. I try to remind them that they’ve got a number of years ahead of them. Say the child’s 9th or 10th grade. They’ve got three or four years up until college, and they certainly have the time that they’re in college as well to continue saving. I think it’s good to open an account and to invite others to contribute. So, even if you’re at late-stage, I would say get the account open. Do what you can, maybe in terms of cutting corners or reexamining your lifestyle to see where you can cut back and contribute to this but then also invite friends and family. People don’t know what to do for your children, for birthdays and holidays I bet. I know in my own life people are always scrambling to try to figure out what does he want? What size is he? What does he need? What would you approve of? People very likely may be inclined to contribute to an account if you let them know that you’ve opened it. So, I would say, get it open, do what you can, invite others to contribute. So, not too late. 

Hilary Hendershott: So, what do you think is the perfect ecosystem of savings accounts to arrive at first day of freshman year with? Is a 529 sufficient? Or do parents need to think about other savings vehicles? 

Patricia Roberts: That’s a hard question. I mean, I really think it’s based on families’ particular circumstances. I mean, some families are eligible for the American opportunity, tax credit, and other things like that so they might want to consider that. Others perhaps are inclined to save in other vehicles. They prefer something that’s stable value or FDIC insured. They don’t want any market risk so those people might have a different combination. I think 529 plans, it’s what I know best and it’s what I’ve personally used for my own son. I think they’re a great way to go but I think any combination, the important thing is that people are saving somehow for this high cost of higher education given just how much it could be. 

Hilary Hendershott: Yeah. The bills tend to get pretty high. And then last question, what role can employers play in growing the balances of 529 accounts? 

Patricia Roberts: Yes. Many people do not realize there is an important role that employers can play in helping families prepare for this high cost of higher education. I think according to the Society for Human Resource Management, as of 2019, about 11% of employers were offering 529 plans in the workplace. In terms of financial education for financial wellness purposes, they were educating employees about 529 plans. About 2% of those were matching contributions. But there’s a growing number who are beginning to get interested in not only providing the valuable education but in matching contributions. And how they do it is to offer payroll deduction to 529 plans and there are ways of doing that. You can either do it with one particular 529 plan if all of your employees are in a particular state and you feel comfortable doing it, or you can use a platform such as the firm I work for, Gift of College. It’s really product-agnostic. Employees themselves decide on the 529 plan and contributions come direct from their pay. What the employer can do when they set up something like that is they can begin to match or contribute to the accounts, and they decide for themselves what amount that would be and what criteria it is for their employees to be able to participate. 

We have clients who are contributing anything from $100, just $100 to get employees started as an incentive to employers. Now, we have one that’s doing over $5,000 a year for their employees. It really ranges. There’s really a number of different ways employers can go, and whatever amount they can contribute really helps employees. 

Hilary Hendershott: Perfect. Tell us a little bit about Gift of College. 

Patricia Roberts: Yes. So, the firm I work for is called Gift of College. Our website is GiftofCollege.com and we offer two things. One, in retail, we offer gift cards that can be contributed into 529 college savings accounts or student loan accounts. And these start at $25 and go up to $500. They’re also available on our website. And people like to give them because they have an assurance of where the money’s going, rather than just giving a check perhaps for a child’s baby shower. So, that’s one thing. The other thing is we have this employer platform, through which we encourage exactly what we talked about. Employers consider contributing to 529 plans, offering that valuable education, and contributing to them. And also, our platform helps employers who choose to, to help employees pay down student loan debt. We think both angles are important. Help the employees, if you can, who are encumbered by student loan debt. 

There’s a change in the U.S. with regard to employers being able to contribute $5,250 a year tax-free to help their employees. That’s for the next five years through January 1, 2026 or to help employees save for college. Now, there’s not a tax benefit currently to the employee or employer when helping with that, so the employer contribution would be taxable income to the employee, but it’s still worth it. My firm allows us to receive $1,000 a year for our contributions are matched to our 529 accounts, and I sure appreciate that. Yes, I do have to pay tax on that $1,000 but I’d rather have $600 or $700 extra in my son’s account than not. 

Hilary Hendershott: I don’t tend to turn down free money. 

Patricia Roberts: Absolutely not. I hope more and more employers will help with this, and I try to help them to realize that it’s women and persons of color who are most adversely impacted by student loan debt. So, to the extent firms are looking into diversity, equity, and inclusion issues, this is one that actually it helps everybody but it’s particularly helpful for those who are really weighed down by student loan debt. And when you’re weighed down by student loan debt, you’re unlikely to be saving as much as you probably should for higher education and retirement, and you probably are somewhat stressed out. So, I think the employers could really help in this regard, and I hope more and more do. 

Hilary Hendershott: Well, it’s a competitive environment to retain and keep good employees with you, so it’s a great benefit. I’m sure people just think of that as something their employers are doing for them. That’s something they wouldn’t necessarily do for themselves. And so, it’s a win-win is the word I’m looking for. So, sounds great. And where can people find out more about Gift of College? 

Patricia Roberts: GiftofCollege.com. 

Hilary Hendershott: Pretty simple. Okay. We’ll include the link in the notes for today’s episode. And, Patricia, I want to thank you for coming on Profit Boss Radio. 

Patricia Roberts: Thank you so much, Hilary. Thanks for your interest and thanks for educating your audience about this important topic. 

Hilary Hendershott: Oh, it’s very important. We always need more education, so thanks for coming. 

[INTERVIEW WITH JEN]

Hilary Hendershott: Well, hello, profit boss. Welcome to the second half of our showcase on educational funding through the 529 account. I have with me today, Jen Rupp, who is on my team. She works for me. She’s a 529 expert and after the last interview, we had some additional technical details about the 529 that we really wanted you to know and so I invited Jen to come talk about this thing that she’s super passionate about, and I want you to get to know her. She’s the head cash flow coach in my coaching program so many of you already know her voice. Jen, welcome to Profit Boss Radio. 

Jen Rupp: Thank you so much. I’m glad to be back. 

Hilary Hendershott: So, Jen, most people know that you’re allowed to contribute $15,000 a year to the 529, but let’s talk about this super cool thing called superfunding. What is superfunding to 529? 

Jen Rupp: Yeah. So, like you said, we can all give each other $15,000 per year tax-free. And that’s a really big deal because the gift tax is 45% and the giver owes the tax, not the receiver. So, I can give you, Hilary, $15,000 this year without having to include that amount on my tax return or pay any tax on it. And the same goes for contributing to a 529. So, you can contribute $15,000 each year and not include that on your tax return. But let’s assume you just had a windfall of a large amount of money and you want to put that into your kid’s 529 account and so this is the concept called superfunding. So, you can superfund the 529 by depositing up to five years’ worth of that $15,000 tax-free gift so $75,000 into the 529 in one year tax-free. And that’s, of course, assuming no other gifts to that kid that year. And then if you’re married, the amount you can contribute to the 529 doubles, so it’s actually $150,000 in one year. And then, of course, you just want to make sure that your tax person knows about what you did, so you can file the correct tax forms. 

Hilary Hendershott: Yeah. And we’ve had some wealth management clients do a superfund, and then their plan is to basically not contribute to the account again. If you do it 10 or 15 years before your child starts school, that can actually be sufficient to pay for college because they’re going to have investment earnings in the account, which we’ll talk more about in a minute. Okay. So, one of the biggest protests we get to the idea of a 529 is that people aren’t sure their kid will actually go to college and use what they put in the 529. And people know there’s a penalty to pull funds out if you don’t use them. So, they say, “Hm, I don’t want to paint them in a box. I don’t know if they’re going to use the funds, so I think I’ll just not use the 529.” So, talk a little bit about why our advice to people, in this case, is to generally just go ahead and fund the account anyway because the penalty to pull the money out of the 529 isn’t nearly as painful as people think. 

Jen Rupp: Yeah, absolutely. So, of course, the primary benefit to the 529 is that you put money in that you’ve already paid taxes on, you invest those dollars, and then when you withdraw the money, you don’t pay taxes on the gains as long as those are used to pay for qualified education expenses. So, the list of qualified education expenses has really grown over the years. And if you want, you can just google a list of qualified 529 expenses if you’re curious. But a few of those expenses are, of course, tuition, required books and supplies, computers, internet access, but also room and board, which can include and does include paying rent on an apartment if you live off-campus. It’s not associated with the school. And that’s, of course, as long as you’re enrolled at the school at least part-time. And then there are limits on the allowance based on what the school reports as the cost of attendance numbers. But this can also include rent that’s paid in summer months. So, if you have to sign a lease for 12 months and you’re only in school for nine, the 529 can cover it up to all 12 of those months as long as you’re enrolled in school. 

And then if you’re studying abroad and that program’s approved for credit through your school in the States, you can also use the 529 funds to pay for the room and board costs while you’re abroad. And then recently up to $10,000 of student loan repayment was allowed. So, that’s over the lifetime per student and that came into law with the SECURE Act. And then with the Tax Cuts and Jobs Act, which was signed into law in December of 2017, you’re now allowed to use up to 10,000 per year of your 529 to pay for education or tuition expenses for elementary and secondary schools. A couple of things it doesn’t cover are transportation and travel costs. So, if you do study abroad, your flights… 

Hilary Hendershott: You can’t pay for your first class tickets?

Jen Rupp: You cannot. If your kid goes to school across the country, your 529 can’t pay for airplane tickets back and forth, unfortunately, and it also does not include the cost of health insurance. But if you do withdraw funds from the 529 without a corresponding qualified education expense, say your child doesn’t go to college or you saved too much and they’re now done with education costs, you can take out the money you put in without any taxes or penalties, and then you pay income tax and a 10% penalty only on the gains, which is like you said earlier, just another word for investment earnings. So, we’ll get into some numbers here. Let’s say you invested $50,000 into your 529. It grew to $75,000. So, now you have $25,000 of earnings. And then let’s say you withdrew all of that $75,000 and didn’t use it to pay for education costs. So, you’re going to pay a 10% tax on the $25,000 of gains, which is only $2,500. And then let’s say you’re in the 22% income tax bracket, that $25,000 is going to cost an additional 5,500 in federal taxes. So, you’re still walking away with $67,000 when you put in $50,000. 

Hilary Hendershott: Okay. So, it cost you $7,000. The tax cost you $7,000 in this example. 

Jen Rupp: Exactly. So, let’s say you had invested those funds in a brokerage account instead of putting it in the 529 and you sold that $25,000 of gains, then you would pay capital gains tax of either 15% or 20% on those gains. So, the tax would be between $3,750 and $5,000. So, you’re slightly worse off having overcontributed to the 529, but not by much. So, certainly don’t contribute to a 529 if you’re not relatively confident that the funds will be used for education, but the penalty, if you’re wrong, isn’t that severe. 

Hilary Hendershott: Yeah. So, sometimes what we do is we recommend that people save sort of like a base amount like 80% or 90% of their education cost estimate into the 529 and then the remainder in an after-tax account. That’s one way to sort of solve for that problem. 

Jen Rupp: Right. And then you can use those costs in the after-tax account to pay for the travel. 

Hilary Hendershott: Your first-class tickets.

Jen Rupp: You know, we also get the question a lot, “Well, what if my kids get a full-ride scholarship?” Every parent’s dream. You can withdraw up to the amount of the scholarship tax-free from the 529. So, the same goes for if your child becomes unfortunately incapacitated or attends a U.S. military academy, you can withdraw dollar-for-dollar and avoid taxes or penalties on the gains. And then you can also change the beneficiary on the account one time per year and use it for your other children. 

Hilary Hendershott: Great. So, lots of options there. Let’s talk about investing in 529s. Of course, with the usual caveats, nobody listening should go invest in any specific fund or product based on this podcast. You need to consult with an expert who knows you and your situation and who works for you. But that said, Jen, what are the rules of the road for investing when it comes to 529s? 

Jen Rupp: So, the IRS has their hands in 529s and they govern the types of available investments in 529s, too. So, you can’t invest directly in a stock ETF or mutual fund like you can in your other investment accounts but you can select an investment portfolio that is a combination of mutual funds and may look like a mutual fund in your other investment accounts, but just slightly different. And most plans offer what are called age-based investment options, which just means that as your child gets older and closer to college age, the portfolio gets more conservative. So, you’re taking less risk as you approach the time of needing to use the funds to pay for college. And then the IRS also regulates how often you can change the investments in your 529 to twice per year. So, it’s really important to choose a portfolio that will help you reach your college savings goals while maintaining a level of risk you can really live with and then you definitely want your kid’s college money to be in an account when it’s time to pay for college. 

Hilary Hendershott: Yeah. That’s the sort of worst outcome, right? You take the time and be responsible enough to save for education costs but then if you forget to lower the risk in the portfolio as your child approaches college age and there’s a downturn in the market, you could be in a situation where the money that should be there isn’t there. So, you do have to be careful about that. 

Jen Rupp: Exactly. And then I’ll also mention there’s a really great website called SavingForCollege.com where you can view your state’s 529 options. It’ll show the investment options, fees, and then any tax benefits that may be available to you when you make that contribution. 

Hilary Hendershott: Great. Thanks for coming on the show, Jen. That was awesome. 

Jen Rupp: Yeah. Thanks for having me. 

Hilary Hendershott: And I think there was a bit of technical talk in that and I think it was necessary just to give people a sense of like the details of the 529. But if it’s not clear at this point, both Jen and I are huge fans of the 529. There really is not an alternative vehicle for saving for education costs that’s in any way better. It’s the clear winner. So, we’re big fans of the 529 and using it appropriately to save for your child’s education expenses that you wish to pay for. Do you agree, Jen? 

Jen Rupp: Absolutely. 

Hilary Hendershott: All right. 

[END]

Disclaimer

Hendershott Wealth Management, LLC and Profit Boss® Radio do not make specific investment recommendations on Profit Boss® Radio or in any public media. Any specific mentions of funds or investments are strictly for illustrative purposes only and should not be taken as investment advice or acted upon by individual investors. The opinions expressed in this episode are those of Hilary Hendershott, CFP®, MBA.