“Jumping Into College Savings Plans” – Gimme Some Truth, Ep. 15

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A new episode of Gimme Some Truth is now live on iTunes and SoundCloud! This week, we take a look at the complex world of college savings plans. In recent years, the costs of college have changed drastically – so it only makes sense that how to pay for it has changed as well. Give it a listen, and don’t forget to subscribe!

Gimme Some Truth, Ep. 15 Transcription
[00:00:01] Welcome to Gimme Some Truth I’m Kevin Castro your podcast producer and your co-hosts are Clint Walkner and Nate Condon the co-owners and financial advisors at Walkner Condon financial advisors in Madison Wisconsin. This is a podcast series dedicated to eliminate some of the darkness around fees. Conflicts of interest and the motivation behind recommendations in the financial planning industry. Here are your hosts.

 

[00:00:38] (Intro Music).

 

[00:00:49] Welcome back.

 

[00:00:52] We’re going to delve into the topic of college savings plans and go into some of the more common 529 plans UTM made plans and taxable accounts. So with all of those sort of acronyms Nates Let’s jump right in.

 

[00:01:09] So normally people look at college savings as a you know how do I cover all four years with one of the tools in the toolbox and have it as kind of a one and done project from what we’ve seen that’s not in actuality how works most people are using multiple tools at different times based on a lot of different factors.

 

[00:01:31] Yeah I think the first thing that you need to start to determine is you know try to be somewhat realistic as far as what the college savings option that you may use so when we do our planning most times we don’t have somebody save all four years in one type of account as Nates alluding to.

 

[00:01:50] So are you all for your option or even all four years right.

 

[00:01:53] And so what we might look at is how much flexibility do you need and what type of institution may want to consider. So most people unless they have a real specific request will say OK we’ll get me to a four year public in-state school and maybe I’ll pick the large school in their area. So for us that’s the University of Wisconsin Madison. So you know they’ll take that as a cost and we’ll project that out and kind of see OK what is it going to take to do four years at that school and then we start to plan a strategy around that. So you know really they grew up in a private school atmosphere so they may have a specific school or they want to go private school so the saving plan gets a little bit different because in a private school or in specific out of state institutions it can get real expensive real fast.

 

[00:02:39] Yeah I think the key here is that we’re not jumping to the tool first without knowing what the job at hand is. I think we need to grow with the job at hand is first and then figure out what tools make the most sense so as Clint said if you’re if you’re looking for you know $40000 a year private school and it’s going to be four years of that that’s a huge amount of money that we need to save and maybe we’re going to use three different tools as opposed to one if it’s two years that cover the first two years at a state school and then the student is going to get loans for the remainder of it. OK we might be able to get away with one tool.

 

[00:03:12] What’s your favorite tool that you use. My toolbox. Yeah.

 

[00:03:18] My Grampa gave me a Dremel tool and I don’t know how to use it. But every time I turn it on it’s like all this is pretty cool. I don’t know what to do with it though. This is the last time you used it. I used it to try to cut Griffin wanted me to try to cut something that was plastic. So I’m like oh I could use a Dremel tool to try to do it.

 

[00:03:39] It didn’t really work out.

 

[00:03:43] I’m pretty sure it wasn’t the right tool for the job although I did make some damage to it so it did it didn’t it didn’t it didn’t work out.

 

[00:03:53] But it also didn’t make him happy either.

 

[00:03:57] Well I used a little like planer tool on. I was trying to fit. So I heard something from blindsight And of course we didn’t quite measure it properly. So we got close though. It was within millimeters so I had to take this this tool that was used for what it was like a wood planer tool and I use it in plastic and I just took it out and I just. She’s great at it basically for like 30 minutes and then we just shoehorn it in and it was great. So so I would say for most people though using the right tool for the right job works a little bit better for them.

 

[00:04:32] So that’s akin to you decided to use a credit card to pay for a semester tuition for your kid at college.

 

[00:04:37] So you got points why I was wrong and it worked and to paid it the bill got paid right. So in the end I guess it’s a solution. Probably not the best solution but free miles though free miles all you get out of it. That’s right.

 

[00:04:52] That’s right.

 

[00:04:54] So back to some college planning and savings. You know what’s let’s go into an account that’s that’s less common UDMA accounts. Some people use UDMA accounts which is uniform transfer to minors act accounts as a college savings vehicle so.

 

[00:05:12] Nate what are some of the parameters around that. Well UDMA accounting is kind of the official legal name for it but most people understand those to be what we refer to as custodial accounts so youth savings accounts or investment accounts for kids or even back when they used to have the banks and credit unions had a little like you know cartoon squirrel account for the kids when they were five years old. Those are all examples of you Timmy. Those are all custodial account. We have one person of the age of majority that’s the kind of controller of the account and then we have the miner listed on the account as well. One hugely important distinction there is that the miner does own the assets. So when we put money in there it is the child’s assets and needs to be used for the child’s best interest.

 

[00:06:05] That’s right. And when the child turns 21 that becomes their asset. So no matter what the parent wants to do with that money it does not matter because it’s now the child’s assets so if they want to take that money and put it all in red in the Wynn Casino they can do that. And if they want to buy that nice sports car. Kevin Do people still like marrows because that was like the big car the car.

 

[00:06:29] I mean it’s a really easy just for the price at this point. Not necessarily for the cool factor in 2017. OK maybe it’s. Is it still Mustang then.

 

[00:06:42] Is that the muscle car or the cool muscle car that somebody will get to your cars the the a hybrid with the bigger engine. That’s what it is. That’s today’s muscle car. No no Prius with the big engine is today’s muscle car.

 

[00:06:57] There you go. I’ll stick to what I call brain power the brain. So I wanted a golf cart. I’d

 

[00:07:05] buy a golf cart. It’s a lot cheaper. All right. Moving on. UDMA accounts become the child’s asset at the age of majority. They’re 21 now. The advantage these accounts that they’re extremely flexible so you can use it for any reason and the taxation of the account as long as it doesn’t get to be too much interest income.

 

[00:07:25] It is the child’s tax rate so basically zero. You know while there are eight or 10 years old they’re not going to pay any taxes on those accounts later on if they do get bigger. You know it can shift the parent’s tax rate so they can be abused as tax sheltered accounts but you know if you have a little bit of money in there it’s fine. The huge disadvantage to that is that it is the child’s asset for financial aid purposes. If you have a chance of getting financial aid and you build up these UTM accounts and make them rather large it could work against you from a financial aid perspective. So that’s something to definitely keep in mind and that’s one of the reasons why these accounts are used just a fraction of the time so most people say I want to start a you know kids savings account. That’s great if you want to start that even if you want to invest it. But I would probably recommend for most people to keep these accounts small because of the fact that it will work against them for financial aid. It is not in their control. And you know the tax benefits are nice but not you get better tax benefits and other accounts that can be a good boy.

 

[00:08:30] Cohen What is secondary kind of account for college money. It’s

 

[00:08:34] definitely not the first choice when we’re talking to clients on how to how to save you know kind of the bulk of their college savings money should should not in our opinion find its way into you TMH account.

 

[00:08:46] That’s just a 529 accounts Kintaro 529 accounts work well 529 accounts if you’re familiar with Roth IRAs They’re are very similar to Roth IRAs. So basically what happens in those accounts is you fund it with after tax proceeds. And so you know just some of you paid taxes on before and then you can fund the money in and you can put rather large lump sums in here. We can go after the gift tax limits so we can put in a lot of money into these accounts. Tens of thousands of dollars can go into these accounts without any sort of problem with gift taxes. And you want to work with a qualified tax attorney and work with your financial adviser to determine how much you can do if you’re going to put in a rather large lump sum. But it is a situation where you may be able to put in a lot of money into it and then the money grows tax deferred. So we never get a tax bill along the way when we have the money in these accounts and when we take the money out as long as it’s used for college or college related expenses and there’s a broad definition that you want to check out on that but you know you get that money tax free. So essentially we’ve put money in after tax grows tax deferred and as long as it’s used for college it’s tax free. So it’s very similar to the Roth and that purpose you know the Roth IRA as age 59 and a half rules self-seeded with this as college related rules associated with it.

 

[00:10:08] So the confusion or some of the confusion I’ve had 29 accounts come into play with the the kind of the structure of how they work.

 

[00:10:15] So the 529 just refers to the legislation that created the accounts. Each state has their own 529 plans. That’s one thing a lot of people are not aware of is that there’s not one single 529 plan there’s actually you know 50 different plans is actually even more than that. But fallen river marketing names and so that’s where it gets a little confusing confusing. God’s plan is known as advanced Illinois plan is one bright start to start I believe. Yep. Virginia’s plan is college America so they’ll have driven marketing name to work it lends to some confusion.

 

[00:10:52] But the kind of the crux of the accounts is that they all function the same way you can use any state’s plan that you want your child can go to college in any state or the beneficiary should say the account does not be your child can go to college in any state as long as the money is used for college or college related expenses.

 

[00:11:08] That’s really what matters. That’s exactly right. And you know basically an investment company works with the state of the state to select the investment company that they want to administer the plan. And then inside of there it may be just those funds inside of the plan or it may be a multiple fund managers inside of the plan for the investment choices so because there’s a lot of difference in choices out there you want to be careful about who you select as the investment manager. And you also want to make sure that you educate yourself on whether your state has a state tax break in your contributions so Wisconsin has a small state tax break that they allow if you use the state’s plan so you have to use at best or tomorrow tomorrow scholar which are the two plans in the state. One’s advisers sold one is direct sold. And if you use those you’ll get a small state tax break up to a certain amount. That you can put in. So you want to check that for your state and see whether you’re giving that up if you go to different states plan.

 

[00:12:02] It’s also important to understand that these are investments so this is not like a glorified savings account. This is an actual investment account we’re using actual market investments you know mutual funds. We can lose money you know that was a really bad situation. So instead of Oregon I think rate during 0 8 and 0 9 where their 529 plan got way out of control with some of the bond investments in way over aggressive and some of those investments and people lost you know some money there. So be aware that this is still a market investment we can still lose money in these accounts and so we need to still understand that timeframe is crucially important risk tolerance is crucially important. And ultimately you know how much growth are you targeting is really important as well.

 

[00:12:46] Yeah time frame is key here because you know we don’t have a 30 year timeframe on some of these as somebody might have for their retirement. You know if your child is 10 years old they’re going to start attending school and probably seven to eight years. So it’s a situation where you want to be mindful of that when we’re picking out investments and the way that the accounts work you know some people say well I want to open a joint 529. You can have one account owner you name a successor owner so husband or wife. In many cases will be no one will be the owner one will be the successor owner and the child is actually the beneficiary.

 

[00:13:22] And we generally recommend that for every child every child should have their own account. And the reason for that is that the ages of the children are different. And so unless they’re twins and so you want to have different risk tolerance for those two because if there’s a three year disparity in their ages their risk tolerance might be markedly different as they approach college.

 

[00:13:45] You know we also need a Social Security number for the child so we have some people that are expecting their first child and want to open the account at that point. They want to open it. You know right if the child born until we have the social security number we can’t open the account. So it’s one thing to be aware of the other and to be aware of is that anybody can contribute. So if grandparents or other relatives or friends want to contribute to the account as long as they make the check payable to the right institution they can make contributions as well.

 

[00:14:12] Yeah there’s some nuances in the law too. I mean in many cases you can exclude these assets from financial aid calculations and so there are some nice benefits to these accounts.

 

[00:14:21] Aside from just the tax benefit and you know further more on that you just want to make sure that you know you’re utilizing the accounts in the right way if there’s money left over there you can also have some options there you can transfer it to another beneficiary if you desire you can transfer it to yourself as the account owner and just have it delay and defer indefinitely or you can catch the money out. And what are the penalties if you catch the money out.

 

[00:14:47] Forget the money. You will have to pay tax on the gains. You’ll also pay a 10 percent excise penalty on the gains as well. Again that’s under the caveat that we cash the money out with out using it for college or college related expenses so that’s really the litmus test on these accounts so there is taxation there’s a small penalty if we don’t use it for college related expenses. But if we can prove that we did then that money comes out tax and penalty free.

 

[00:15:11] That’s exactly right. It’s very powerful that way you know. And the account owner is the one that actually has possession of the asset so when the child turns 21 they can’t just take that money away and do whatever they want with it. So that protection inside of that counts really important for parents because if they need the money for themselves they can take the money back if they hit a financial road bump for themselves or the child just decides that they don’t want to go to college. Well that’s fine. They can keep the money back for themselves or they can change the beneficiary. So it’s an extremely flexible type of an account. Kevin did you have student loans.

 

[00:15:43] I did for all four years. Yes. OK.

 

[00:15:48] It’s actually becoming quite the norm now.

 

[00:15:50] The whole idea of parents paying for all four years. Room for the whole nine yards is not necessarily as popular as it was 10 15 20 years ago. And I think that that isn’t possible anymore.

 

[00:16:01] That’s expensive now. It’s much more expensive than I used to be in school. I mean it was expensive but now it’s just it’s going up at a rate of about 6 percent compounded each year which is incredible. I mean I mean every 12 years it’s doubling in cost. It’s unsustainable.

 

[00:16:16] But in my four years E.W. that tuition went up I think six grand between when I was a freshmen and when I graduated.

 

[00:16:23] So that doesn’t mean that we should take under reskin we should try to hit home runs with our college savings money but it does mean that you know your traditional bank or credit union CD or savings account is not going to get the job done when it comes to fighting a 6 percent inflation battle.

 

[00:16:39] Yeah I mean even if it starts to flatten out a bit you’re still well above the normal rate of inflation. So you’ve got a plan for that sort of expense. I mean and the nice part about 529 is is that people that are choosing a little bit more nontraditional paths so you know most of the time when I went to school and everything everyone just went to for your institution and you stayed the entire time at a place that you went to you but a lot of people are going into you know two year schools really to save the money. You know a lot of people are going to Madison College around here for two years they get automatic acceptance in the UW if they fulfill certain parameters and then they just go into Manison having a whole load of credits being able to get out in four years at a significantly lower cost. So we’re starting to see some of these students who participate in these particularly when they have to take on student loans. So it’s very good for parents to sit down with their children and they go through a budget things like that. Remember I got into Wake Forest and my parents said that’s great you got to wake forest. But you know this is how much you’re going to have to pay. And I kind of looked at and said ok well and sounds great.

 

[00:17:42] And I think it was like $40000 a year for us was a very nice school but it was not for me.

 

[00:17:48] So I ended up going to Madison you have a little conversations that people are having or should have for sure because the cost is now to a point where you know it’s not just all right you can have student loans for four or five years and pay him off and move on with your life. I mean it’s. We’re talking about numbers of commas in them and it gets you gets real big real fast.

 

[00:18:08] Yeah if you I mean if you go into it and get into a bad financial situation literally some people can never get out of student loan debt. If they structure it in certain ways so you’ve got to be very mindful of that that your four years doesn’t become a 40 year problem for your finances so you’ve got to be really realistic in how you approach that. And you know I think sometimes as parents we want to do everything for our children. But if we focus too much on the four years and forget about our own retirement you know we’ve seen people blow up their retirements just because they wanted to send their kids to the right school and I don’t know. I mean to me that seems foolhardy but you know I think parents get into a mindset where they just kind of throw that out the window and they just say that that Jane or Joe can go wherever they want and I don’t know if that’s the best course of action for them.

 

[00:18:57] Yeah that’s a it’s a level of planning that has to be done in concert with retirement planning because it absolutely has the power as Clint alluded to to have a pretty negative effect on or on a retirement plan. And the other way to look at it. It’s a component. Now that’s that’s not a just throw $50 a month into college mining account and we’ll be good to go. It’s a pretty pretty large part of the overall holistic financial planning that we do.

 

[00:19:29] Yeah. So I tend to see more people going towards a dual solution and that is that they’re using 529 plans for a portion of what they need in college and then they’ll fund a taxable account whether that’s a trust account or whether that’s a joint account. Enough on that account kind of for the eye on it might be used for college it might be used for retirement but we want it liquid and flexible and the downside of these accounts is they do get taxed every single year at the higher tax rate at the parents tax rate and it’s not a college related account at all. But usually we use that as well as the 529 plans to do some planning because we do need some flexibility in the future. And if your child’s two years old then you’ve got 16 years to go you have no idea about what college is going to look like. I mean it might be markedly different than it is today. So I think we need to keep that in the back of our mind and do kind of a dual planning approach and have a flexible plan as well.

 

[00:20:22] Even if it isn’t as tax efficient just because of the situation of you know we might all be all going to online colleges at that time at a fraction of the cost that we have today or might be going to these institutions that are ungodly expensive and will be paying for them in that way too. So I think some flexibility you’re planning makes sense.

 

[00:20:39] Yeah it goes back to where we kind of open the house with which is you know it’s not us it’s not a single track anymore you know we’re using multiple tracks and we have to be mindful that you know they all have different attributes and so the use of 5:29 along with taxable account along with some debt along with even getting into the area of using home equity and some things like that for people to keep these options open because you know for years Madison is what 80 between 80 and $85000 for four years. Now it just seems so expensive. So a lot.

 

[00:21:15] It’s I can attest that it is it’s a great value though Kevin isn’t it.

 

[00:21:23] I mean it sounds ridiculous but compared to a lot of other places it really is like Madison is I think it is actually one of the best value rated schools which is insane to think about for $80000. But you’ll get some other places and it’s even double triple that so.

 

[00:21:39] That’s exactly right. Now think about what it takes to get going to Michigan these days. I think it’s what is $60000 a year right now. They’ve got to decide between 50 and 60 somewhere in there. It’s pretty easy. Yeah. Yeah. So Plus I’d rather be a badger than a wolverine anyways right. I mean I think matters are just really mean.

 

[00:21:56] I think it’s pretty equal though between the two animals. Yeah. That’s actually that would be an interesting Badger versus a wolverine I think would be a very interesting fight.

 

[00:22:05] And if somebody knows that a boiler maker is maybe that would beat both of them I don’t know what a boiler maker is do you order boilermaker Hoosier boilermaker Buckeye.

 

[00:22:14] I mean come on.

 

[00:22:15] Well let me guess. Think about that. That’s just like a plant. So that’s that’s true. Shut down. What about a scarlet Knight. That’s true. A new one.

 

[00:22:27] Right yeah. Well you know I mean wildcat that the reason the league is unified there you to get Wolverine Wildcat badguy Hawkeye you can get away fast than you have a go for it and it should just be a squirrel.

 

[00:22:44] Come on a fighting squirrel though.

 

[00:22:50] I mean what maybe a rabid one.

 

[00:22:53] We have no big tied by us at all here. Really badgers sorry everybody else. The big Ted I guess that’s listening to this. Yeah. That is true. Yeah. We we we do some some Homer bias here. Sorry. We hate your schools fine. We’re better than you. Yes not apologizing sorry. I can be. That’s OK. We’re going to wrap this elite tire shape mail you and maybe we’ll get some hate mail. There you go. And you know a bunch of people in Madison love us now. So true it’s good. It’s true. Go Badgers out in Wisconsin right.

 

[00:23:28] You can expect all of this and more if you come in for college planning meeting with Glenn and I. We will run me all of the appropriate numbers and give you a much better look than than what you have right now. So please feel free to him and come on and see us.

 

[00:23:42] We’ll go through all the details for your specific situation. We look forward to talking to you soon.

 

[00:23:57] (Outro Music).

 

[00:24:19] Advisory services are offered through Walkner Condon financial advisors LLC a registered investment advisor in the states of Wisconsin and Texas Clint Walkner and Nate Condon are investment advisor representatives of Walkner Condon Kevin Castros an office manager and marketing specialist for Walkner COndon financial advisors. He’s not registered and his participation in this podcast is limited to unregister activities and will not be providing any advice investment related nor should any comments he makes be construed as giving investment advice insurance products and services are offered through WC Insurance Services LLC. Walkner Condon financial advisors LLC and WC Insurance Services LLC are affiliated companies. Content should not be viewed as an offer to buy or sell any of the securities mentioned or as legal or tax advice. You should always consult an attorney or tax professional regarding your specific legal or tax situation. Walkner Condon financial advisers LLC is not engaged in the practice of law. Whenever you invest you are at risk of loss of principle as the market does fluctuate. Past performance is not indicative of future results. Purchases are subject to suitability. This requires a review of an investor’s objective risk tolerance and time horizons. Investing always involves risk and possible loss of capital. Long term care estate planning insurance products and tax advice are not offered through Walkner Condon financial advisors LLC Walkner Condon works on a best efforts basis does not promise or guarantee any results. Past performance does not represent future results. Please see Walkner Condon dot com for additional disclosures.

 

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