RPF0138-529_Plans_Pt

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00:00:14.080 | - Today we continue our series on college planning

00:00:19.800 | with part one of the master class on 529 plans.

00:00:24.800 | (upbeat music)

00:00:28.000 | (upbeat music)

00:00:30.580 | Welcome to the Radical Personal Finance Podcast.

00:00:42.800 | My name is Joshua Sheets and today is Wednesday,

00:00:46.020 | January 21, 2015.

00:00:49.280 | Today we're gonna peel back the curtains

00:00:51.480 | on 529 plans, aka qualified tuition programs.

00:00:55.280 | Gonna give you all the information that you need

00:00:57.140 | to use and exploit this account for your own benefit

00:01:01.880 | and also help you to avoid the big mistakes.

00:01:04.280 | (upbeat music)

00:01:06.860 | So probably one of the accounts

00:01:14.440 | that I get the most questions about

00:01:16.000 | and as a financial planner,

00:01:18.000 | you have to be familiar with this account.

00:01:19.960 | It seems like everybody is using a 529 plan.

00:01:22.880 | And so today I'm gonna explain to you a lot

00:01:26.360 | and this is gonna be part one of a multi-part show.

00:01:29.160 | I think for this topic, unlike doing what I did

00:01:31.720 | with the Coverdell Educational Savings Account Show,

00:01:35.360 | which, by the way, you will want to listen to,

00:01:37.920 | if you haven't heard it before listening to this show,

00:01:40.960 | that show is episode 106.

00:01:43.520 | You can find it at RadicalPersonalFinance.com/106

00:01:47.360 | or just search the archives page on the website

00:01:50.180 | for Coverdell, C-O-V-E-R-D-E-L-L-S,

00:01:53.620 | C-O-V-E-R-D-E-L-L.

00:01:57.380 | So unlike what I did with that

00:01:58.820 | where I put everything into one episode,

00:02:00.700 | I'm gonna split this out into a multi-part series.

00:02:03.900 | And it's partly due to just me recognizing

00:02:08.900 | that many in the audience prefer the audio

00:02:12.580 | to be in more manageable chunks.

00:02:14.460 | So sometimes it is better to take a four-hour show

00:02:16.820 | and split it out into maybe three or two

00:02:19.620 | or three or four individual shows.

00:02:22.260 | But also due to the fact

00:02:23.540 | that there's some natural progression

00:02:25.860 | with the 529 accounts and the outline that I have

00:02:29.860 | that didn't exist with the Coverdell plans.

00:02:32.820 | Now those of you who are daily listeners

00:02:35.040 | listening to the show immediately as it comes out,

00:02:37.180 | you will notice that I missed yesterday's show.

00:02:39.580 | And the reason is I actually already recorded

00:02:43.100 | what you're hearing now, but I wasn't happy with it.

00:02:45.700 | And I recorded part one, it was about an hour,

00:02:48.100 | of an introduction to the show.

00:02:49.920 | And for I think the first time in the show's history,

00:02:52.500 | I decided to exercise my license of podcasting

00:02:55.200 | as compared to being on the radio to re-record that episode.

00:03:00.000 | I wasn't satisfied with it.

00:03:01.940 | It didn't flow quite as well as I thought it should.

00:03:05.660 | And so I've rearranged a few things in my outline today

00:03:07.700 | to make this show flow a little bit more smoothly

00:03:10.820 | and deliver a better resource for you.

00:03:15.100 | I'm increasingly aware of the need

00:03:19.280 | to make each and every show world class.

00:03:22.200 | I never know where a new listener's gonna come in

00:03:23.960 | and stumble into the show.

00:03:25.540 | And so I want each exposure

00:03:27.540 | to the Radical Personal Finance brand

00:03:29.260 | to be positive and excellent.

00:03:32.080 | So today we're gonna be actually re-recording

00:03:34.480 | part one of the show.

00:03:35.320 | Because I missed yesterday's show,

00:03:36.960 | today will be extended beyond what was planned

00:03:40.040 | for one day's show.

00:03:41.880 | As we begin our content,

00:03:44.440 | I want to ask you to stick with me through the content.

00:03:49.440 | The information that I'm delivering to you today

00:03:53.240 | in this series of shows

00:03:54.920 | is master's degree level information.

00:03:58.160 | It is not a watered down article

00:04:01.080 | that you can read easily at collegesavings.com.

00:04:04.640 | This is in depth information.

00:04:06.560 | And 529 accounts are in some ways deceptively simple,

00:04:13.320 | but extremely complicated.

00:04:14.720 | It's very simple for me to convey the basic points

00:04:18.360 | of how they work.

00:04:19.200 | I can do that in about 15 seconds

00:04:20.680 | and I'm gonna do that in just a moment.

00:04:22.540 | But the actual details of how to apply these accounts,

00:04:27.540 | it's not so simple.

00:04:30.880 | So one of the things that I would encourage you

00:04:35.180 | is stick with me.

00:04:36.020 | When I get into complex information,

00:04:38.200 | if you don't understand all of the words,

00:04:39.780 | if you don't understand all of the terms,

00:04:41.400 | just stay with it, even so.

00:04:43.800 | I had a mentor years ago

00:04:45.400 | who when I first began attending

00:04:47.200 | advanced financial planning courses and conferences,

00:04:50.120 | encouraged me to go,

00:04:51.920 | even if I didn't understand all of the information,

00:04:53.760 | and sometimes I just felt like I was swimming

00:04:55.800 | in a sea of words that didn't make any sense.

00:04:58.600 | I often go to the estate planning words,

00:05:02.360 | what is a defective grantor retained trust?

00:05:05.000 | What is a grantor trust versus a non-funded trust?

00:05:08.040 | What is a funded account versus a non-funded account?

00:05:11.360 | All these different words

00:05:12.480 | that if you don't have the background,

00:05:14.240 | you don't quite understand.

00:05:15.080 | But what my mentor encouraged me,

00:05:17.000 | he said, "This year you might understand

00:05:19.320 | "20% of the conference.

00:05:21.000 | "Next year you might understand 40%.

00:05:22.880 | "But in time, after a few years,

00:05:24.780 | "you'll start to understand all the terms."

00:05:26.560 | So even if you are a newbie to financial planning

00:05:30.020 | or you just stumbled across this show

00:05:31.800 | because you're trying to set up an account for your kids

00:05:34.160 | and try to figure out

00:05:35.120 | what's the best course of action for you,

00:05:37.200 | I ask you to stay with it and expand your knowledge.

00:05:41.880 | Over time, the understanding comes.

00:05:44.780 | Here's a quick outline of what you can expect

00:05:50.120 | as far as how the flow of these shows will go.

00:05:52.440 | Today I'm going to give you a brief overview

00:05:55.040 | of the 529 plans and explain how they work.

00:05:58.160 | I'm also going to outline for you

00:06:00.340 | who I think they're a good fit for

00:06:01.760 | and who I don't think they're a good fit for

00:06:03.300 | with some example financial planning scenarios.

00:06:06.240 | Then I'm gonna go into the history of the 529 plan,

00:06:08.800 | even up until current day proposed changes

00:06:12.920 | of the law for these accounts.

00:06:14.840 | And then I will be going through the major outline

00:06:18.880 | of some of the details of these plans

00:06:20.960 | based upon the IRS Publication 970's outline.

00:06:25.320 | That'll be it for,

00:06:26.320 | that's what I anticipate covering in today's show.

00:06:28.560 | On another show, we'll go into the details

00:06:32.560 | of prepaid tuition programs,

00:06:34.200 | all the things you need to know

00:06:35.280 | as you look to choose one of those.

00:06:38.760 | On a different show, we will go into the details

00:06:41.800 | of how to select among the savings programs

00:06:46.800 | and some of the details that you need to know

00:06:48.280 | as far as investment selection

00:06:49.560 | and some really applied advice for those.

00:06:52.580 | And then possibly in a fourth show,

00:06:55.700 | we will wrap up a lot of the details surrounding,

00:06:58.960 | we're gonna talk in detail about state income taxes,

00:07:01.060 | other ancillary programs that are connected

00:07:02.880 | to these in certain states,

00:07:04.360 | and some interesting planning uses of them

00:07:07.380 | and some interesting ways to exploit these

00:07:11.400 | for your own benefit and some things

00:07:12.860 | that were probably unintended

00:07:14.380 | that you can do with these accounts

00:07:16.520 | that I think will be helpful to you.

00:07:20.240 | But let's start with a bit of an overview

00:07:22.480 | and explain how these accounts work.

00:07:24.360 | So 529 plans, and you'll hear me refer to these accounts

00:07:28.440 | primarily as 529 plans.

00:07:30.800 | The IRS in the formal literature

00:07:33.760 | calls these qualified tuition programs.

00:07:36.860 | But the rules for a qualified tuition program

00:07:39.580 | are set down in section 529 of the Internal Revenue Code.

00:07:43.840 | So you'll usually hear these referred to as 529 plans.

00:07:46.840 | Since that's what's most common,

00:07:48.520 | that's what I use myself the most,

00:07:50.520 | but I do go back and forth.

00:07:51.960 | They're the same thing.

00:07:52.800 | Qualified tuition program equals a 529 plan.

00:07:56.040 | One misconception, however, that you will often hear

00:07:59.320 | and read if you're reading in mainstream financial press

00:08:02.360 | is in general, you will be left with the impression

00:08:05.480 | that a 529 plan applies only to some sort

00:08:10.360 | of savings program where you're setting aside money

00:08:13.660 | in a tax-advantaged way for the purpose of college savings.

00:08:17.080 | And you'll hear the prepaid tuition programs,

00:08:21.360 | so in my state, Florida, Florida prepaid is very popular,

00:08:24.660 | you'll hear the prepaid tuition programs

00:08:26.580 | referred to as something other than 529 plans.

00:08:29.240 | I think this is what the average consumer understands

00:08:32.000 | to be the difference, that you have

00:08:33.320 | a prepaid tuition program or you have a 529 plan.

00:08:36.480 | That is factually incorrect.

00:08:39.120 | These plans are both authorized and governed

00:08:42.240 | by exactly the same section of the Internal Revenue Code.

00:08:46.200 | And the rules, for the most part,

00:08:49.280 | apply to both ways of organizing them.

00:08:52.480 | So both of those types of ideas,

00:08:54.560 | the prepaid savings program and the prepaid,

00:08:57.240 | excuse me, just the savings program

00:08:59.400 | or the prepaid tuition program,

00:09:01.280 | both of those are 529 plans,

00:09:03.200 | both of them are qualified tuition programs.

00:09:05.120 | So hopefully that will help you to distinguish them

00:09:07.600 | as you're reading a little bit in popular literature,

00:09:10.160 | but recognize that usually they're gonna be talking about,

00:09:13.200 | when you read articles on 529 plans,

00:09:15.720 | they're talking about the prepaid savings programs.

00:09:18.960 | These plans are massively popular

00:09:20.920 | and it's a rare client that I've ever interacted with

00:09:25.480 | that was concerned with doing

00:09:28.280 | some prudent financial planning

00:09:30.440 | who did not have some sort of 529 plan established.

00:09:35.320 | And this is essentially the standard answer

00:09:37.840 | for most financial advisors with whom I have spoken

00:09:40.560 | or from whom I have learned what they propose to clients.

00:09:45.040 | This is basically the standard approach.

00:09:47.320 | If you wanna save for college,

00:09:48.640 | the financial advisor will most often

00:09:50.600 | recommend a 529 plan.

00:09:53.200 | 529 plans, they are relatively straightforward.

00:09:56.200 | They're relatively simple.

00:09:57.320 | They're easy.

00:09:58.200 | There are many options to choose among.

00:10:00.520 | The paperwork is fairly simple.

00:10:02.080 | So as an advisor, they're very simple for you

00:10:04.600 | to help a client set up.

00:10:07.520 | Now, whether or not they're the right approach or not,

00:10:10.200 | that's a very involved question.

00:10:12.920 | My personal opinion is,

00:10:15.680 | if I were in charge of giving advice

00:10:18.920 | on most financial plans,

00:10:20.560 | I would very rarely recommend to most people

00:10:23.880 | that they use a 529 plan.

00:10:26.280 | I think that the application,

00:10:28.200 | which I see most commonly,

00:10:30.280 | which is the idea that we're gonna set aside $150 a month

00:10:33.960 | into Johnny's 529 plan,

00:10:36.320 | or we're gonna set aside and we're gonna buy

00:10:38.440 | two years of tuition credits

00:10:39.960 | at our state university for Susie,

00:10:41.920 | and we're gonna go ahead and pay that off

00:10:43.400 | over the next 18 years.

00:10:45.440 | I believe that the application of that kind of application

00:10:48.120 | is, for most people, not a very good idea.

00:10:50.800 | And there are a number of reasons for that.

00:10:53.280 | One reason is simply that most people

00:10:57.360 | are flipping the order that they should be approaching

00:11:00.240 | their financial planning.

00:11:01.640 | I feel that it's far more important for most people

00:11:07.400 | to be focused on their own financial independence

00:11:10.120 | and their own retirement funding

00:11:12.640 | before they ever focus on college.

00:11:15.520 | There are many, many options and ways

00:11:20.760 | to approach college funding.

00:11:23.520 | There are many fewer options and ways

00:11:26.160 | to approach retirement funding.

00:11:28.560 | And yet most parents who establish a 529 account

00:11:31.000 | for their child are doing so

00:11:32.800 | because of this intense desire

00:11:34.600 | to help their children do better.

00:11:37.560 | And so they sacrifice their own future

00:11:40.520 | to help their children succeed as they perceive it to be.

00:11:43.760 | As they perceive the college degree,

00:11:47.400 | having that funded will be helpful

00:11:49.200 | for their child's success.

00:11:50.640 | Although I applaud the nobility of that motive,

00:11:54.640 | I think it's wrong and it's not a good motive.

00:11:57.960 | Far better to approach some of the other funding strategies

00:12:02.240 | that I've talked about and will continue to talk about.

00:12:04.480 | For example, far better for a parent, in my opinion,

00:12:08.360 | to focus on funding their retirement

00:12:10.520 | and then just simply stop funding their retirement

00:12:13.320 | during the years that their child is in college

00:12:15.280 | and contribute to the college education out of cash flow.

00:12:18.840 | For example, if somebody is putting money

00:12:20.680 | into a 401k and they're contributing,

00:12:23.240 | let's say they're maxing the account out

00:12:24.600 | at 17, 18,000 bucks a year,

00:12:26.840 | then well, let's just stop for four years,

00:12:30.160 | putting the $17,000 into that account

00:12:32.920 | and use that money to pay for the child's education.

00:12:35.840 | I would rather see that than to see the person

00:12:38.560 | putting all kinds of money into the 529 plan.

00:12:40.800 | And the reason is because we don't usually know

00:12:43.560 | what's gonna happen with college.

00:12:45.480 | This is the big blind spot that many people have

00:12:47.600 | is they perceive that college

00:12:50.080 | and the value of a college education

00:12:52.320 | is the same as it was in 1950.

00:12:54.600 | It's simply not.

00:12:56.200 | Today, there is no reason whatsoever

00:12:59.320 | that any child who wants to go to school

00:13:02.440 | and who is reasonably academically capable,

00:13:05.680 | enough that they should be going to more academic,

00:13:09.480 | through more academic study,

00:13:11.600 | you can do it with a part-time job

00:13:13.420 | and get a fully accredited degree.

00:13:15.380 | I'm gonna do an entire show on options for this,

00:13:17.580 | but you can get them as low as 4,000 bucks now

00:13:20.320 | for a full tuition cost for an accredited degree.

00:13:25.320 | There are proposals, which I'll comment on in just a moment,

00:13:27.800 | but President Obama even now is proposing

00:13:30.240 | to make the community college tuition to be completely free.

00:13:35.240 | In fact, let's go right there.

00:13:38.360 | That's the second thing, is the value,

00:13:40.780 | as perceived by the marketplace,

00:13:44.240 | the value that is being placed on a college tuition,

00:13:46.600 | I believe, is changing.

00:13:48.080 | Now, this is one where I can't prove it with statistics

00:13:51.160 | 'cause the statistics are backward-looking,

00:13:53.440 | but if you just open your eyes a little bit

00:13:55.320 | and look around in the press

00:13:56.480 | and just read about what you're reading about,

00:13:58.400 | and you see major companies, the leaders,

00:14:02.180 | walking away from the value of the college degree

00:14:05.360 | in their hiring practices, that should tell you something.

00:14:09.780 | I think you can get a good indication

00:14:11.240 | even of the value of a college degree

00:14:13.080 | as indicated by President Obama's proposal.

00:14:16.200 | When you make something free,

00:14:18.840 | it's because the value is either pretty low

00:14:20.760 | or it's gonna drive the value low.

00:14:23.160 | And community colleges have already been essentially free,

00:14:27.040 | so that value there is low,

00:14:28.560 | and as they are made free with a show of populist support,

00:14:33.040 | trying to gain support,

00:14:33.880 | well, we're gonna support low-income families to do that.

00:14:37.280 | I think that's probably a pretty good indication

00:14:40.220 | that the value of college is pretty much gone

00:14:43.260 | because as it stands right now,

00:14:45.340 | education is free

00:14:46.880 | and has been for a very long period now in human history.

00:14:53.100 | You can trot right down to the library

00:14:54.880 | and you can learn just about anything you need to learn.

00:14:57.600 | You can open up your phone,

00:14:59.260 | access a computer connection, an internet connection.

00:15:02.380 | If you don't have one, go to the library

00:15:03.800 | and use the free internet connection that's sitting there,

00:15:06.440 | and you can get all the education that you need.

00:15:08.940 | Now, the credentials are not free,

00:15:11.480 | but there are plenty of cheap ways to get those credentials,

00:15:14.360 | and the value of those credentials

00:15:16.620 | seems to be really dropping in the marketplace.

00:15:18.860 | That's my opinion.

00:15:19.700 | I can't prove it to you at the moment,

00:15:21.080 | but that's just simply my personal observation.

00:15:23.520 | I could be wrong.

00:15:24.460 | Again, most of the research indicates

00:15:26.480 | that investing in education still pays off in earning power,

00:15:30.100 | but I've not seen, anyway,

00:15:31.860 | you get into causation, correlation, that type of thing,

00:15:34.520 | which causes me to question that, and I'm not the only one.

00:15:37.520 | One of my major points with parents is just simply,

00:15:41.280 | how do you predict where things are gonna be in 15 years

00:15:46.280 | with the current rapid pace of change in our society?

00:15:50.800 | And change has always been rapid,

00:15:52.080 | but it certainly seems to be changing substantially.

00:15:55.360 | If you go back, if you have a young child,

00:15:58.480 | and you go back 15 years and think about

00:16:00.420 | what the world looked like in 2000,

00:16:02.720 | and compare that to what the difference

00:16:04.120 | between 1985 and 2000, there was a lot of change,

00:16:07.040 | and go back another 15 years,

00:16:08.440 | go from 1985 back to 1970, just compare the rate of change,

00:16:13.340 | the world of 2030 is going to be dramatically different,

00:16:17.400 | and one of those massive changes

00:16:19.820 | is going to be the structure of the schooling system.

00:16:22.980 | Now, just because Joshua has that opinion,

00:16:25.300 | which regular listeners know certainly is,

00:16:27.600 | certainly an opinion that I have,

00:16:29.040 | doesn't mean that you can't use this kind of account

00:16:31.780 | for your benefit, but I do like to point out

00:16:35.400 | and explain the limited benefit of this account

00:16:39.600 | for most people who are contributing.

00:16:41.760 | How it's not, it's just simply, it's not a panacea,

00:16:44.320 | it's not a magic cure-all.

00:16:46.720 | So let's get into how it works,

00:16:48.120 | and so ignore for a moment,

00:16:50.200 | well, the tuition credit programs, those are fairly simple,

00:16:54.160 | and basically you contract with

00:16:57.360 | either your state school system

00:16:58.680 | or an independent consortium of private colleges,

00:17:01.540 | which we'll go over, I'll tell you how to use

00:17:03.060 | the tuition credit to fund private universities,

00:17:06.720 | so if you came from a prestigious Ivy League school

00:17:11.300 | that's a private university of some kind,

00:17:13.280 | and you're sure that your son or daughter

00:17:15.600 | is going to attend that school,

00:17:16.560 | you can just go ahead and purchase

00:17:17.540 | those tuition credits today,

00:17:18.560 | and I'll explain that in a future show.

00:17:21.460 | But the tuition credits are fairly simple,

00:17:23.400 | you just pay the price that is negotiated

00:17:25.560 | by the state that is offering you the program.

00:17:28.960 | On the savings programs,

00:17:31.160 | the accounts in today's world function

00:17:34.760 | in some way similar to a Roth IRA.

00:17:37.640 | You fund the accounts with after-tax dollars,

00:17:40.100 | so you do not get any up-front deduction

00:17:43.000 | for putting money into this account.

00:17:45.360 | As the money stays in the account

00:17:47.320 | and grows, hopefully, with the performance

00:17:49.160 | of your investments, then that growth is tax-deferred,

00:17:54.160 | and when you take the money out

00:17:56.220 | and use it to pay for qualified education expenses,

00:18:00.900 | those funds come out tax-free,

00:18:03.080 | could be used to pay for that.

00:18:05.920 | Now, anytime you get into a tax benefit,

00:18:07.600 | or anytime you get into one of these accounts,

00:18:09.420 | you need to actually calculate for yourself

00:18:11.280 | what is the potential tax benefit.

00:18:15.540 | Very few people ever actually calculate

00:18:18.820 | what the potential tax benefits would be.

00:18:21.180 | And so let me use, in my own personal planning scenario,

00:18:25.080 | I have a one-year-old son,

00:18:27.200 | let me use him as an example

00:18:30.300 | of what we could or could not do.

00:18:33.860 | Let's assume for the moment that he's one year old,

00:18:37.920 | and we're gonna be saving for his college,

00:18:40.600 | and we're assuming he's gonna go to college

00:18:42.860 | at the standard age of 18.

00:18:45.280 | So that gives us a 17-year investment time horizon.

00:18:48.500 | Let's assume that we have calculated our budget,

00:18:51.280 | and we found that we can afford to allocate $100 a month

00:18:55.140 | for the savings toward his college tuition.

00:18:59.340 | I can get in, I've gotten into in previous shows

00:19:01.860 | about how to actually calculate

00:19:03.660 | the amount needed for college.

00:19:04.860 | If you're interested in that,

00:19:05.820 | go back and listen to those shows.

00:19:08.360 | Specifically, that would be episode 101,

00:19:12.380 | which was entitled "How to Calculate

00:19:13.820 | "How Much You Need to Save for Your Kid's College."

00:19:16.400 | But for this illustration,

00:19:19.020 | we're not trying to hit its targeted amount,

00:19:22.300 | we've just decided we can save $100 a month.

00:19:24.900 | And this is a fairly normal approach

00:19:27.540 | among many people with whom I have worked.

00:19:29.900 | And let's assume that we're just going to put the money

00:19:31.980 | into an investment account,

00:19:34.140 | and let's assume that we're going to earn

00:19:35.940 | a nominal return after fees of 7%.

00:19:40.500 | So in our investment account

00:19:42.440 | that we're funding this account with.

00:19:44.020 | So we just pull out our little financial calculator,

00:19:45.940 | and you clear the registry, you hit 17,

00:19:49.220 | hit your little button to switch it to monthly,

00:19:52.660 | 'cause we're gonna make monthly contributions.

00:19:54.480 | So that comes out to be 204 periods,

00:19:57.360 | 204 months is how much we're gonna be investing for.

00:20:00.300 | Put 7% in, turn that into a monthly number,

00:20:02.720 | that's .58% interest compounded monthly,

00:20:06.280 | starting with $0 and $100 as our payment.

00:20:10.960 | And hit your future value button,

00:20:12.440 | and that'll tell you what the future value

00:20:13.680 | of this account would be.

00:20:14.920 | The future value in this scenario is $39,240.

00:20:19.800 | So if we calculate how much we've contributed

00:20:22.460 | to the account, we've invested for 204 months,

00:20:25.780 | so 204 times 100 equals $20,400.

00:20:30.780 | So our total contributions to the account are $20,400,

00:20:35.260 | and we have $39,240 in the account.

00:20:39.460 | For the sake of straightforward,

00:20:41.460 | easily understood verbal numbers,

00:20:43.900 | let me assume that's $40,000,

00:20:45.820 | and we've contributed $20,000 to the account.

00:20:48.880 | So we essentially have $20,000

00:20:50.900 | of capital gain in this account.

00:20:53.020 | What that means is that now I can use that money,

00:20:56.540 | and I can use it to pay for college expenses,

00:21:00.100 | and I will not have to pay the income tax

00:21:03.300 | on that $20,000 of gain.

00:21:05.060 | Well, how much is that income tax rate?

00:21:09.260 | I think it would be comparable to say,

00:21:12.300 | this would probably, if I weren't using

00:21:15.500 | a qualified college account for this type of investing,

00:21:19.720 | let's just assume I can do it at capital gains tax rates

00:21:22.940 | of say 20%.

00:21:25.700 | Current highest capital gains tax rate, 20%,

00:21:28.300 | ignoring the 3.8% Obamacare taxes.

00:21:31.180 | Let's just say 20%.

00:21:32.580 | So what would be the actual tax savings

00:21:35.220 | at a 20% rate on $20,000?

00:21:37.060 | The answer is $4,000.

00:21:38.980 | So by using this 529 account, this illustration,

00:21:42.700 | me saving for my one-year-old son,

00:21:45.220 | I would be able to save a total of $4,000 of tax.

00:21:49.720 | Is that substantial?

00:21:51.720 | Maybe, depending on your specific scenario.

00:21:57.400 | Tax planning, good tax planning is never one thing.

00:22:01.380 | People often ask, Joshua, what's the one thing you can do?

00:22:03.720 | There is no one thing.

00:22:04.980 | There are a lot of little things.

00:22:07.480 | And if you do enough little things over time,

00:22:11.820 | that accounts to be a massive amount of savings.

00:22:15.700 | For $4,000, it doesn't get me that excited,

00:22:18.860 | especially when I look and say,

00:22:20.660 | well, are there some ways to dramatically affect

00:22:22.680 | the overall cost of college

00:22:24.260 | that will have a much greater impact than $4,000?

00:22:28.760 | Could I get an extra $4,000 of financial aid for my student

00:22:33.760 | by not having the money saved?

00:22:36.160 | Seems to me that would be a pretty easy thing to do.

00:22:40.040 | So instead of having the money saved and having it counted,

00:22:42.720 | why don't I just take advantage

00:22:43.780 | of the financial aid programs?

00:22:45.140 | Couldn't I get some scholarship money

00:22:47.340 | to make up that difference

00:22:48.420 | and wouldn't that make a bigger difference?

00:22:50.640 | All of those things can be done.

00:22:52.220 | Just because you have money saved

00:22:53.740 | doesn't mean you can't get financial aid.

00:22:55.480 | Just because you get financial aid or have money saved

00:22:57.740 | doesn't mean you can't qualify for scholarships.

00:23:00.180 | My point is that $4,000,

00:23:02.380 | you have to look at it in terms of your scale and ask,

00:23:04.700 | is that a good assumption or not?

00:23:07.140 | Now, one challenge is that I use that 7% net of fees number

00:23:12.040 | for our investment return.

00:23:15.100 | What if it were higher?

00:23:16.340 | So what if instead of 7%, you could actually get 10%?

00:23:20.300 | Well, under this scenario, if you could get a 10% return,

00:23:23.140 | you would have $53,000 in the account

00:23:25.980 | at the time for college,

00:23:27.340 | which taking out the $20,000 of contributions

00:23:32.540 | would leave you with about $33,000 of gain.

00:23:35.260 | So now that would improve things.

00:23:38.020 | But here's the question.

00:23:39.500 | If you're actually investing for a medium-term goal,

00:23:44.980 | like college, which has a defined price tag,

00:23:49.980 | are you going to be comfortable

00:23:54.220 | with high volatility in that account?

00:23:56.780 | And how are you going to account for it as you get closer?

00:23:59.680 | My observation has been that

00:24:03.560 | it's a little harder to make this work.

00:24:06.600 | So unlike in retirement planning,

00:24:08.580 | where I can say to a retiree, listen,

00:24:11.640 | you're gonna be retired for a very long period of time.

00:24:13.980 | So even if you are in this year retiring,

00:24:17.420 | you still have a 30-year investment time horizon,

00:24:19.820 | and thus I can make a case for broader exposure

00:24:23.980 | to potentially higher returning asset classes,

00:24:27.300 | i.e. equities instead of bonds.

00:24:29.480 | It's hard for me to make that case here

00:24:32.740 | to somebody with college,

00:24:34.380 | because starting at the age of 14, excuse me, 13,

00:24:38.540 | we're five years out from the age of 18

00:24:40.500 | when we're gonna need college money.

00:24:43.280 | And even at our five-year time horizon,

00:24:47.040 | which is often where mentally you start to think about

00:24:49.700 | how do I shift a portfolio

00:24:51.140 | from potentially volatile investment assets

00:24:54.500 | over to a less volatile approach,

00:24:58.340 | you can start to think about it

00:24:59.180 | at the five-year time horizon,

00:25:01.880 | that still happens at the child's age 17,

00:25:04.020 | 'cause the most cash,

00:25:05.220 | like our cash flow needs are pretty much done at 22,

00:25:08.340 | unless the child needs to go to graduate school.

00:25:10.540 | So managing the portfolio for this purpose

00:25:12.660 | is a little bit tougher.

00:25:13.820 | Compare even that to my solution,

00:25:17.820 | such as one of my preferred solutions,

00:25:20.300 | such as funding a retirement account.

00:25:22.340 | If we're funding a retirement account,

00:25:24.480 | and let's say that we're planning to use

00:25:27.020 | the exception to tax penalties

00:25:30.740 | under the education exception

00:25:32.440 | to early distributions from an IRA,

00:25:35.900 | let's say we're gonna use that as a funding plan,

00:25:37.940 | or we're gonna use, hey, I'm contributing to my 401(k)

00:25:39.940 | and I'm just gonna stop or lower my contributions

00:25:42.780 | for these years while my child is in college

00:25:45.060 | to make up for the amounts that I'm putting in there.

00:25:47.460 | If you compare these two plans,

00:25:48.900 | at least in the retirement account,

00:25:50.540 | if the volatility is,

00:25:52.260 | we're in a period where the market is down

00:25:54.220 | and our investments are low in value,

00:25:58.500 | well, you've still got a long time horizon

00:25:59.900 | 'cause you just use the money later for college,

00:26:01.540 | excuse me, for retirement,

00:26:02.660 | and you can find, you can cash flow the need.

00:26:06.260 | Unlike in a 529 account,

00:26:07.660 | where if it's all designated for college,

00:26:10.220 | it's a little bit trickier

00:26:11.060 | to get the benefit of the money out.

00:26:13.140 | So because of this challenge of how do we do the,

00:26:16.400 | how do we actually calculate this stuff out,

00:26:18.980 | I think that 10% is certainly much higher number

00:26:22.580 | than I would ever use as a projection

00:26:24.980 | for a return on investments in a college account

00:26:27.620 | when we're managing a portfolio

00:26:28.860 | for this fixed period of time.

00:26:30.900 | 7% is probably a little bit aggressive,

00:26:32.660 | and I would guess that of many of the allocation plans

00:26:36.740 | that I have reviewed,

00:26:38.580 | maybe somewhere on the order of 4% or 5%

00:26:42.060 | would be much more appropriate

00:26:45.340 | as far as an expected return from a portfolio.

00:26:48.540 | Well, if we put 5% in instead of 7%,

00:26:51.940 | then our future value after 17 years of investing,

00:26:56.420 | oops, I did this wrong,

00:26:57.260 | 17, 5%, zero PV, $100 a month.

00:27:01.940 | Our future value after 17 years of investing now

00:27:04.940 | is $32,186.

00:27:07.860 | Pull out our $20,000 of contributions,

00:27:10.860 | and we have $12,000 of gain at a 20% tax rate.

00:27:14.980 | That means we're avoiding $2,437 of taxes.

00:27:18.420 | And I think this is what many people

00:27:21.380 | who are participating in 529 plans are facing.

00:27:24.180 | Now, again, this is anecdotal from my observations,

00:27:29.060 | but I think it's pretty accurate.

00:27:31.740 | I feel pretty good about this guess.

00:27:35.000 | I just don't really see the point.

00:27:37.400 | When there are so many other things that can be done,

00:27:42.320 | take my plan, one of my plans, skip college,

00:27:46.440 | stop wasting money on expensive private schools

00:27:50.640 | and expensive tutors,

00:27:51.520 | and stop wasting money

00:27:52.720 | for an expensive public school district.

00:27:54.760 | Pull your child out, put him in education at home,

00:27:58.840 | and plan to have, with a combination of CLEP tests,

00:28:01.960 | AP exams, and dual enrolled credit at a community college,

00:28:05.520 | which will be free soon enough,

00:28:07.160 | and is practically free now,

00:28:09.160 | have the four-year degree done by the age of 18,

00:28:11.440 | and forget about the college account.

00:28:13.280 | Now, that's what I think makes a lot more sense

00:28:18.080 | for an average mainstream person.

00:28:20.240 | Is any of this analysis necessarily a problem

00:28:25.440 | of a 529 plan?

00:28:26.480 | No, and I'm gonna show you how a 529 plan

00:28:28.880 | could be incredibly useful.

00:28:30.960 | The point is not whether one account is better

00:28:35.120 | or what you should do.

00:28:36.680 | The point is to use that lens of scale

00:28:39.440 | that I've recently talked about,

00:28:41.320 | and think about how you could establish something

00:28:46.000 | that works for you.

00:28:47.180 | As a financial planner,

00:28:49.880 | there is a big difference in my need to plan.

00:28:53.080 | If I'm working with one client who says,

00:28:55.680 | "You know what, I've got an engineering degree

00:28:58.080 | "from a university that's near me,

00:28:59.860 | "Florida Atlantic University.

00:29:01.240 | "It's a perfectly good university.

00:29:04.000 | "It's a state of Florida school.

00:29:05.760 | "It's in Boca Raton, Florida,

00:29:07.020 | "which is relatively near where I live.

00:29:09.120 | "I've got a degree from there.

00:29:10.440 | "I think I had a great experience there,

00:29:13.240 | "and I wanna make sure that we just have

00:29:15.300 | "a little bit of money to pay for that,

00:29:16.940 | "and help our child to go there."

00:29:19.520 | That's a very different scenario,

00:29:21.640 | and get their undergraduate degree.

00:29:22.840 | That's very different than if a client comes to me

00:29:24.960 | and says, "I'm a graduate of a prestigious big-name school,

00:29:29.960 | "Harvard, Yale, Brown, Cornell,

00:29:32.960 | "some school with 150, $200,000 price tag.

00:29:36.280 | "And more importantly, I'm a big believer

00:29:39.060 | "in advanced education.

00:29:40.020 | "After all, I'm a doctor, I'm an attorney.

00:29:41.900 | "I'm a PhD in some arcane field,

00:29:45.960 | "and I wanna make sure that I have enough money

00:29:47.860 | "to send my child through medical school,

00:29:49.720 | "or through graduate school of some kind

00:29:52.820 | "at an expensive university,

00:29:54.600 | "so that they can build their social structure,

00:29:56.680 | "and make sure that they're involved

00:29:58.200 | "in the who's who of the decision makers of our country."

00:30:02.280 | That's a very different scenario.

00:30:04.200 | And so now, the advantages and disadvantages,

00:30:07.840 | what to do in one case versus what to do in another

00:30:11.440 | is gonna be very different.

00:30:12.800 | So those are the limitations that I see

00:30:16.080 | at the 529 account.

00:30:16.920 | Now let's talk about what are some ways

00:30:19.000 | that you could use the account,

00:30:20.920 | and how it could be much more useful.

00:30:23.400 | Well, one of the first things you could do

00:30:25.440 | is if you could increase the investment return.

00:30:28.680 | That could be useful.

00:30:30.680 | It's a little tough to do, though,

00:30:32.020 | because 529 accounts are relatively restricted

00:30:35.520 | on what they are invested in.

00:30:37.600 | They're either invested at whatever the state says,

00:30:40.320 | at a guaranteed return based upon the tuition credits

00:30:43.200 | that you buy, and you can calculate that,

00:30:45.400 | or they're invested with relatively mainstream mutual funds.

00:30:49.200 | And you're going to be subject

00:30:50.960 | to whatever the mainstream mutual fund returns are.

00:30:53.720 | It's not a problem.

00:30:55.120 | Might be perfectly great, or it might not be.

00:30:59.000 | You would have gotten hammered

00:31:00.040 | if you bought a mainstream mutual fund in 2000

00:31:03.160 | for your 10-year-old, your eight-year-old child,

00:31:08.160 | and then in 2010, needed to get the money out for college.

00:31:12.800 | That probably wouldn't have worked

00:31:14.480 | in most of those scenarios.

00:31:15.880 | So it's tough to influence rate of return,

00:31:20.400 | and unlike the Coverdell program where I talked about

00:31:22.520 | you could do some more aggressive types of investing,

00:31:26.680 | can't do that here.

00:31:27.640 | But you could extend the time horizon.

00:31:33.420 | And the other major key for 529 plans

00:31:37.400 | is you could front load it.

00:31:39.240 | Here would be the example.

00:31:42.560 | Let me use my $100 a month example,

00:31:45.760 | and we calculated that total I would be investing

00:31:48.440 | into that account $20,400 over 17 years

00:31:51.840 | to fund my one-year-old son's education.

00:31:55.480 | Let's say that instead of funding this at $100 a month,

00:31:59.600 | I choose today to write a check for $20,400

00:32:02.560 | into the account.

00:32:03.840 | What would be the value of the account

00:32:05.920 | at that same 7% interest in 17 years?

00:32:09.520 | Well, let's just plug it in our calculator.

00:32:11.280 | $20,400, change the sign, put it in as our present value.

00:32:15.000 | 17 years.

00:32:17.240 | Let's compound this monthly to make sure that's the same.

00:32:19.160 | So that's 204 periods, 7%, that's 0.58% per month,

00:32:24.040 | and zero payments into the account.

00:32:26.400 | Well, now my future value in this account is $66,825.

00:32:30.880 | All I've done here is change,

00:32:35.880 | and instead of putting $100 a month

00:32:37.520 | of periodic payments into the account, I front loaded it.

00:32:40.360 | So the full amount can be earning interest along the way.

00:32:43.800 | $66,825 compares to our previous number of $39,240.

00:32:48.800 | It's a big difference.

00:32:55.240 | That's an extra $27,585 of tax-free gain in the account

00:33:00.240 | simply because I front loaded it.

00:33:08.080 | And this is a huge advantage of the 529 plans.

00:33:11.280 | You can make contributions to these accounts

00:33:14.260 | up to the annual gift tax exclusion amounts.

00:33:18.080 | So in 2014 and in 2015, this number is $14,000 per person.

00:33:22.720 | The annual gift tax exclusion amount is the amount of money

00:33:25.400 | that any individual can give to another individual

00:33:28.180 | without paying gift tax on the amount.

00:33:30.720 | So anybody can give $14,000 to any other person

00:33:33.800 | for $14,000, and there's no tax on that transfer.

00:33:36.840 | There's no gift tax on the transfer.

00:33:39.080 | Whether or not there's income tax on the transfer

00:33:41.160 | will depend upon the assets that are actually transferred.

00:33:44.000 | It's a conversation for another day,

00:33:45.800 | whether they're appreciated assets

00:33:47.040 | or whether they're just cash assets or whatever they are.

00:33:49.380 | But just for now, assume that there's no tax on the transfer.

00:33:52.960 | The other nice thing is that you can do

00:33:55.000 | what is called split gifting,

00:33:56.320 | which means that if you're married,

00:33:57.600 | you and your spouse can both choose

00:33:59.320 | to make a gift contribution to any other person.

00:34:01.620 | So now you can give $28,000,

00:34:04.120 | and that's a fairly straightforward thing to do.

00:34:07.800 | In a 529 account, you can contribute up to five years

00:34:11.800 | of that amount into the account,

00:34:14.680 | and for technical purposes, it will be considered

00:34:18.080 | to have been given over five years,

00:34:19.720 | even though you gave it all in the first year,

00:34:21.860 | which means that let's assume now

00:34:24.280 | that my wife and I are somewhat wealthy

00:34:27.080 | and we're looking for intelligent things to do,

00:34:28.800 | and education and college and higher education

00:34:31.920 | is a big deal to us, and we want to set aside money

00:34:35.040 | for our grandchildren.

00:34:37.780 | Now, we don't have any grandchildren yet,

00:34:41.080 | but here's what's cool.

00:34:43.200 | That doesn't matter.

00:34:45.780 | We can make the beneficiary of the account ourselves,

00:34:48.060 | we can make the beneficiary of the account our children,

00:34:50.200 | and then we can just transition this

00:34:51.400 | to be our grandchildren.

00:34:53.000 | And we can put, for each individual beneficiary,

00:34:56.920 | we could put 28,000 times five,

00:34:58.880 | so $140,000 into that account right now.

00:35:04.880 | So, play a little game with me.

00:35:08.360 | Assume that I establish an account right now for my son,

00:35:13.360 | and I front load that with $140,000 of capital

00:35:18.280 | into the account.

00:35:19.240 | So I put in $140,000, that's the present value,

00:35:23.960 | let's put in 17 years for the number of years,

00:35:27.160 | let's do this monthly, let's put in our 7% interest

00:35:30.040 | compounded monthly, no future contributions.

00:35:33.040 | Now, with that amount put in, I've got $458,000

00:35:38.040 | established to fund my child's college.

00:35:43.400 | And all of that gain would be tax free.

00:35:48.700 | All of it, if used for higher education expenses.

00:35:54.520 | But this would be really cool.

00:35:56.800 | Let's say that instead of using that,

00:35:58.960 | although I could use that for my son's college,

00:36:00.800 | and I could calculate pooling out $200,000

00:36:03.760 | and then the balance staying in the account

00:36:05.200 | for a grandchild, it's a little hard to do,

00:36:06.920 | a little cumbersome over audio.

00:36:09.640 | But let's just assume that instead of doing this

00:36:11.900 | for 17 years, I do this for 17 years plus 25.

00:36:16.900 | Assume that my son gets married and has a child

00:36:20.640 | at 25 years old, so that gives me 42 years

00:36:23.040 | of investment time horizon.

00:36:24.520 | And I fund this account, $140,000 today,

00:36:29.120 | 42 years compounded monthly, 7% compounded monthly,

00:36:34.120 | zero dollars into the account.

00:36:36.320 | After 42 years, this account would have $2,625,000.

00:36:41.320 | 694.

00:36:43.960 | $2,625,694.27.

00:36:47.540 | That's pretty exciting when you consider the fact

00:36:50.480 | that I put in only $140,000 of capital up front.

00:36:54.520 | So my total gain in the account is $2,485,000,

00:36:59.520 | which if used for college education,

00:37:03.420 | is completely income tax free.

00:37:06.320 | That's pretty exciting.

00:37:08.980 | And what's cool about this is I don't have to go

00:37:12.960 | through the hassle of setting up an elaborate trust.

00:37:16.520 | I don't have to actually make a completed gift

00:37:19.800 | to the child.

00:37:22.440 | I can have full control over this money,

00:37:24.640 | I can change beneficiaries, so unlike setting up

00:37:27.280 | some sort of transfer with a custodial account

00:37:29.560 | such as a UTMA or a UGMA account,

00:37:32.360 | where that money, no matter what, is going to be transferred

00:37:35.480 | to the child at their age of majority,

00:37:39.200 | I can pull this money back.

00:37:40.680 | I can use it.

00:37:42.580 | In fact, if I don't like any of them,

00:37:44.000 | I can change it to be for me.

00:37:45.920 | And my wife and I, we might go and sign up

00:37:48.180 | for a four year university in Paris,

00:37:51.000 | and we might go and get French degrees in Paris

00:37:53.880 | and pay for it all out of this account,

00:37:55.600 | and consider that for four years of our retirement plans,

00:37:58.520 | and just pay for it with this account.

00:38:01.900 | So there are a lot of options,

00:38:03.200 | and that's where these 529 accounts really tend to shine.

00:38:06.800 | Again, nothing wrong with the account.

00:38:08.680 | The problem is how they're applied usually.

00:38:11.720 | I hope that's kind of a unique introduction

00:38:16.640 | to understand what you can do.

00:38:19.160 | And 529, since they were invented,

00:38:21.160 | have been a very useful tool for financial advisors.

00:38:24.880 | Very useful tool.

00:38:26.620 | They're unique.

00:38:28.200 | Now, where I'd like to go from here,

00:38:30.480 | one comment before we get into the history of the plan.

00:38:34.360 | It's unlikely, this is, 529, it's unlikely that you're gonna,

00:38:40.520 | this is another one of those examples

00:38:41.640 | of where it's tough to get great financial advice on it.

00:38:44.180 | If you wanna go out and ask a financial advisor

00:38:47.120 | just to handle your 529 account, good luck finding one.

00:38:50.280 | I personally would never have accepted this from a client,

00:38:54.320 | simply because there's not enough money

00:38:56.000 | to make any compensation where it's worth the responsibility

00:39:00.180 | that I would hold towards a client.

00:39:01.900 | So when I was practicing officially,

00:39:05.440 | then we would do 529 accounts,

00:39:08.040 | but as a service for clients who had other assets,

00:39:11.480 | or other services, or other planning needs,

00:39:13.360 | or other products with it.

00:39:14.760 | So if you listen to this show, or this series of shows,

00:39:17.360 | you'll probably have more knowledge about this

00:39:19.620 | than many financial advisors.

00:39:21.640 | So just recognize that, you're probably,

00:39:24.480 | this is one of those where you gotta do it yourself,

00:39:25.760 | and you gotta think through it yourself.

00:39:27.200 | It's not good business practice for a financial advisor

00:39:29.640 | to spend several hours going through these things

00:39:33.240 | when there's a total potential compensation of,

00:39:36.120 | if you're gonna do it $100 a month,

00:39:37.760 | might make $3 a month of compensation.

00:39:41.120 | You can't run a business that way.

00:39:43.080 | So hopefully that helps.

00:39:43.920 | Just listen, focus on this show,

00:39:45.240 | and then you'll figure out what you wanna do.

00:39:46.900 | If you have an advisor with whom you have other services,

00:39:50.720 | other products, other planning relationships,

00:39:53.400 | then go ahead and lean on that person for information here.

00:39:57.080 | But it's just tough to,

00:39:58.200 | it's tough to find a good advisor

00:40:00.480 | who's gonna work with you on this information.

00:40:02.160 | That's just the reality of the situation.

00:40:04.200 | Now, let's get into the history a little bit.

00:40:07.720 | And this history is important.

00:40:10.040 | I'm gonna take some time to go through this.

00:40:12.720 | Because it will give you some insight

00:40:15.720 | into how these types of things come to be.

00:40:18.800 | And you might be able to apply that insight

00:40:21.520 | to other areas of your financial planning.

00:40:24.320 | One question which I'm often asked is,

00:40:27.840 | "Joshua, are you concerned about the rules changing

00:40:31.680 | "on things like retirement accounts?"

00:40:34.520 | The fiscal situation that we face in the United States

00:40:37.240 | is that we're broke, practically bankrupt,

00:40:41.260 | but we won't admit it.

00:40:42.800 | And so our economic system just continues forward.

00:40:47.160 | And you have what purports to be a debate

00:40:50.560 | between the Democrat Party and the Republican Party,

00:40:53.920 | where in essence, the Democrat Party is supposedly known for

00:40:58.040 | we wanna raise taxes on the rich,

00:40:59.680 | and that's gonna fund the problems,

00:41:01.880 | that's gonna fund the government.

00:41:03.260 | And the Republican Party is supposedly known as

00:41:06.320 | we're gonna cut taxes on the rich and on everybody else,

00:41:09.880 | and that's gonna fund the economic situation.

00:41:13.680 | That's gonna fund the shortfalls.

00:41:17.200 | The reality is, is that although each party

00:41:20.480 | says that they're different,

00:41:21.960 | they both do exactly the same thing when push comes to shove

00:41:25.320 | and when during times of economic recession,

00:41:28.640 | economic hardship, then regardless,

00:41:31.200 | and you'll see this proven in this history

00:41:34.360 | that I'm gonna go over with you,

00:41:35.720 | you see that taxes are cut.

00:41:38.400 | And it happens under Democrat presidents

00:41:40.360 | and Democrat Congresses, or Democratic Congress,

00:41:43.720 | and it happens under Republican presidents

00:41:45.400 | or Republican Congress.

00:41:46.600 | And so you practically have two parties that are,

00:41:49.520 | in essence, exactly the same and do exactly the same thing,

00:41:52.800 | but their rhetoric has to satisfy a different interest group

00:41:57.000 | So one of the challenges of thinking through things

00:41:59.800 | like IRAs is when I look at the reality of

00:42:04.120 | the fiscal situation of this country,

00:42:09.040 | depending on which estimate you use,

00:42:13.080 | you'll get different estimates of how massive the problem is.

00:42:17.900 | Some estimates you read are that the US government

00:42:21.560 | has approximately $150 trillion in debt

00:42:24.640 | and unfunded liabilities, which includes the amount that

00:42:29.640 | the government is behind, the amount that's not funded

00:42:33.340 | to pay for the three big social programs,

00:42:36.160 | Medicare, Medicaid, and Social Security.

00:42:38.580 | Some estimates go as high as about $220 trillion.

00:42:42.640 | My source for that is Professor Lawrence Kotlikoff

00:42:45.440 | from Boston University.

00:42:46.560 | I've never found any reason to dispute his numbers,

00:42:49.840 | so I usually would just quote a $220 trillion problem.

00:42:53.700 | And so you look and say, how can that be solved?

00:42:57.120 | And I don't personally see any viable solution

00:43:01.920 | to how that's gonna be solved in the long run.

00:43:05.240 | But in the short run, who knows how long it can go on?

00:43:09.220 | That's the question.

00:43:10.640 | And the other question is, well, what changes are there?

00:43:14.020 | Well, tax-advantaged programs are referred to

00:43:16.980 | by tax wonks as expenditures, tax expenditures.

00:43:21.020 | So there's a listing, and these are constantly debated

00:43:23.660 | in Congress and in committees about,

00:43:26.760 | well, where are we gonna get the money from?

00:43:28.620 | And how are we gonna get the taxes to be raised?

00:43:31.940 | Tax expenditures, based upon my memory,

00:43:34.240 | I think they were popularized by, I forget the name,

00:43:37.160 | but the guy who was the Treasury Secretary in the late '60s.

00:43:40.360 | And he came up with the idea of,

00:43:42.320 | instead of funding something

00:43:44.080 | directly from the government coffers,

00:43:47.320 | why don't we just simply offer a tax incentive

00:43:49.440 | and a tax bonus, and that will incentivize people

00:43:52.160 | to take a certain course of action,

00:43:53.620 | which we have decided is in line with our national values.

00:43:58.360 | And so this is what you see.

00:43:59.920 | This has become, it's theoretically,

00:44:02.800 | and probably a much more efficient system.

00:44:06.000 | As an example, why do we, well,

00:44:08.360 | it's a much more efficient system.

00:44:10.640 | But it's also a system that in some ways

00:44:13.240 | is easier to account for or is easier not to account for.

00:44:16.460 | So you constantly see that the tax code is built

00:44:20.300 | to incentivize certain courses of action.

00:44:22.240 | So the powers that be have decided

00:44:24.980 | that it's in the best interest of this nation

00:44:27.160 | that people are homeowners.

00:44:28.720 | So therefore, the tax code incentivizes home ownership

00:44:33.360 | by giving a deduction for real estate mortgage interest

00:44:38.360 | on a primary residence.

00:44:40.360 | It gives a deduction for real estate property taxes.

00:44:43.800 | We've decided that it's in the best interest

00:44:45.540 | for employers to fund and provide health insurance

00:44:50.400 | for their employees.

00:44:51.280 | So it gives a deduction, a full deduction,

00:44:53.320 | for the costs and the contributions of employers

00:44:55.800 | to the health insurance payments.

00:44:58.080 | We've also decided that it's in the best interest

00:45:01.040 | of this nation that people save to fund a retirement.

00:45:05.960 | And so that's why tax schemes such as IRAs, 401(k) plans,

00:45:10.960 | pension plans, why these have the tax rules they have,

00:45:14.360 | Roth IRAs, et cetera.

00:45:16.420 | Now, it's tough for me to think through and figure out

00:45:19.540 | what would actually happen or could the rules change.

00:45:23.800 | I have a few disadvantages for my thinking.

00:45:26.640 | Number one is because of my relatively young age,

00:45:30.060 | I haven't been paying attention to how politics

00:45:32.740 | actually functions for really all that long.

00:45:36.360 | I probably started paying attention in my mid teens

00:45:38.680 | and now at almost 30, that only gives me a decade

00:45:40.760 | and a half of observation.

00:45:42.280 | In that decade and a half, I figured out that

00:45:46.320 | although the politicians say they do some things differently

00:45:49.760 | they don't actually do anything differently

00:45:51.400 | when it actually comes down to it.

00:45:53.880 | But when I look at the political reality,

00:45:56.320 | I do see that the, I guess the voting power of the populace

00:46:01.320 | I think still has power.

00:46:03.480 | And when you look at things like tax changes,

00:46:06.040 | Congress still has to approve of certain things.

00:46:09.560 | And that's as it should be.

00:46:11.820 | So I look at it with a political reality

00:46:15.240 | and it's very difficult for me to conceive

00:46:18.160 | that people are, most people have 401ks,

00:46:23.160 | most people have IRAs and in the US system

00:46:25.800 | you're promised a certain benefit.

00:46:27.760 | Now would the population just simply give up that benefit

00:46:31.200 | and allow for a tax increase without

00:46:33.120 | raising a ruckus about it?

00:46:36.320 | I don't know.

00:46:37.200 | That one's hard for me to know.

00:46:39.460 | And so one of my research projects

00:46:41.200 | that I've been trying to do is trying to get a handle

00:46:43.160 | on that question.

00:46:44.360 | I still don't have a handle on the question.

00:46:45.960 | I was surprised at how little outrage there was last year

00:46:49.600 | when President Obama in his budget proposal

00:46:52.840 | proposed taxing IRA accounts over a certain amount.

00:46:56.160 | Now that hasn't come to fruition.

00:46:58.640 | Still gotta get through Congress and same thing.

00:47:00.520 | But I was surprised how little outrage there was.

00:47:03.200 | And I've wondered if maybe that weren't a bit of a

00:47:07.120 | precursor, something I need to pay attention to.

00:47:08.920 | It's very difficult for me to know how to answer

00:47:10.200 | that question at this point.

00:47:12.080 | But that's the reason why I'm going to the history here

00:47:14.440 | of the 529 accounts.

00:47:15.960 | Because I never had time when I was a practicing

00:47:18.340 | financial planner, excuse me, I never made time

00:47:20.360 | when I was a practicing financial planner

00:47:21.880 | to go through and try to figure out some of the history

00:47:23.980 | of these types of accounts to figure out how in the future

00:47:26.400 | context things could change.

00:47:29.660 | But now in preparation for shows like this, I can do that.

00:47:32.040 | So let me give you the history of how

00:47:34.200 | these accounts came to be.

00:47:36.160 | They, unlike most programs, these accounts were actually

00:47:39.360 | begun at a state level, specifically with the state

00:47:42.280 | of Michigan.

00:47:43.840 | And Michigan in, was it late, no, during the 80s,

00:47:48.840 | Michigan had an idea to try to help control

00:47:55.040 | the costs of tuition.

00:47:56.720 | And from the periods of the 70s and the 80s,

00:47:59.140 | there were massive increases in the cost

00:48:01.880 | of college tuition.

00:48:02.900 | You can fact check me, but going off of memory,

00:48:06.040 | I think for that period, the annual increase in the price

00:48:09.080 | of college tuition was about somewhere around 9%

00:48:11.840 | for much of those two decades.

00:48:14.120 | So the state of Michigan came up with a plan

00:48:17.160 | to create a prepaid tuition program.

00:48:20.440 | And essentially their idea was to establish a fund

00:48:23.860 | into which the residents of that state could pay money

00:48:27.840 | at a fixed rate in exchange for a promise that the fund

00:48:31.680 | would pay for the tuition at a Michigan government run

00:48:34.920 | college or university.

00:48:38.380 | So this would have been pretty attractive

00:48:40.400 | because it allowed you to control a cost of,

00:48:45.400 | to rein in a no for a fixed cost today,

00:48:47.840 | something that is an unsure, it's unsure how much

00:48:50.840 | the price is gonna increase in the future.

00:48:52.700 | Which incidentally, make sure you connect the dots

00:48:54.600 | between that and the alpha strategy,

00:48:57.240 | which I've spoken about on this show,

00:48:58.680 | which is in essence, one way to control the increasing

00:49:02.160 | cost of certain items, especially items that are heavily

00:49:05.220 | subject to inflation, is simply to purchase the item.

00:49:08.600 | And the benefit of doing it this way is you lock in,

00:49:12.960 | you lock it in for a known cost,

00:49:15.040 | and because you have a need for the item,

00:49:17.880 | no matter what the future increase or decrease might be,

00:49:22.700 | you actually have, you still need it.

00:49:27.480 | So even if the benefit, even if inflation doesn't go away

00:49:31.000 | so much, you still need the item.

00:49:32.360 | And so you've got a guaranteed floor on your need,

00:49:35.400 | on your plan, that didn't come out quite as clearly

00:49:39.040 | as I was intending.

00:49:40.000 | In essence, what I'm saying is that your downside

00:49:43.120 | is limited.

00:49:43.960 | If you need socks and you calculate that I need a certain,

00:49:47.720 | you know, I need three pairs of socks every year,

00:49:50.360 | and you decide to buy five years worth of socks,

00:49:52.760 | you know that you're gonna need the socks,

00:49:54.200 | and you go ahead and buy them today,

00:49:56.160 | you can't possibly lose because you've gotten a fixed price

00:49:59.680 | for something that you need.

00:50:01.040 | Now, even if socks go down in price,

00:50:04.320 | you still have the socks.

00:50:06.640 | Gonna move on 'cause it's coming out in a clumsy way,

00:50:09.040 | and I'm not able to articulate it better at the moment.

00:50:11.600 | So this is what the Michigan, the state of Michigan

00:50:13.800 | tried to accomplish with their Michigan Education Trust.

00:50:17.220 | What was unsure at that time was how

00:50:21.800 | the taxation would work.

00:50:23.720 | There's an interesting court case,

00:50:25.000 | which I'll post a brief to in the show notes.

00:50:30.000 | But this court case has, it was state of Michigan,

00:50:33.160 | it's Michigan Education Trust

00:50:34.560 | versus the United States of America.

00:50:36.460 | And this court case has the details and the facts

00:50:39.160 | of the factual background of this trust fund.

00:50:42.080 | So before actually opening the fund

00:50:44.960 | and accepting applications,

00:50:47.040 | the Michigan Education Trust did ask

00:50:50.000 | for a private letter ruling from the IRS

00:50:52.720 | as to whether the accrued investment income

00:50:55.320 | would be exempt from federal taxation.

00:51:00.480 | It wasn't clear in the tax code at that time.

00:51:03.240 | So the IRS issued a private letter ruling,

00:51:06.220 | and their decision in that private letter ruling

00:51:09.360 | was that the Michigan Education Trust

00:51:12.160 | was created as a corporation,

00:51:14.200 | and that therefore its income

00:51:17.200 | was subject to federal taxation.

00:51:20.080 | So the way it would have worked

00:51:21.360 | is that the purchasers of the contract

00:51:24.600 | were not going to be taxed on the accruing value

00:51:27.720 | of the contract until the funds were actually

00:51:30.840 | distributed to them or refunded to them

00:51:33.280 | if they didn't use them.

00:51:34.820 | But that the trust fund would pay tax

00:51:38.280 | on the growth of the investments.

00:51:41.360 | So they would pay annually the tax

00:51:43.100 | on the growth of the funds.

00:51:44.460 | So the trust opened for business,

00:51:47.560 | and it worked exactly like that.

00:51:49.140 | The individual signed up, about 55,000 people

00:51:52.360 | immediately signed up for the program,

00:51:53.940 | and the trust paid each year federal income tax

00:51:57.080 | on its investment earnings.

00:51:58.960 | But in May of 1990, the trust sued the IRS

00:52:03.600 | seeking a refund of their payments.

00:52:07.920 | And they argued that the income was not,

00:52:11.920 | we should not have been subject to federal taxation,

00:52:14.840 | and they requested a refund of all of the tax payments

00:52:17.100 | plus interest from the time of date of inception

00:52:20.840 | up until the lawsuit.

00:52:23.000 | And then in July of 1992,

00:52:25.480 | the district court found in favor of the IRS,

00:52:28.720 | said it was subject to federal taxation.

00:52:31.160 | The trust appealed it, and then ultimately,

00:52:34.200 | the court actually reversed the district court's summary

00:52:37.320 | and found that the Michigan Education Trust

00:52:40.540 | was a state agency.

00:52:42.200 | And as a state agency, as compared to a corporation,

00:52:46.560 | its investment income was not subject to federal taxation.

00:52:50.840 | And ultimately, there was another lawsuit filed

00:52:52.680 | about the timing of the refund from the IRS,

00:52:55.960 | and ultimately, all the money was returned

00:52:59.360 | to the educational trust.

00:53:00.960 | So this was fought in court.

00:53:03.840 | Well, a lot of other states were watching this,

00:53:06.780 | and so Congress decided this is a pretty good idea.

00:53:09.240 | And so they went ahead and clarified it

00:53:10.820 | by passing new legislation.

00:53:12.760 | And that new legislation became Section 529.

00:53:17.760 | And this legislation authorized

00:53:20.560 | the qualified tuition programs,

00:53:22.340 | qualified state tuition programs.

00:53:24.520 | And it was passed as part of

00:53:26.080 | the Small Business Jobs Protection Act of 1996.

00:53:31.080 | And essentially, it allowed tax exemption

00:53:36.700 | to state-run programs if they qualified,

00:53:41.520 | and the tax deferral on the undistributed earnings

00:53:44.960 | from the account.

00:53:46.760 | That fit into the,

00:53:49.880 | so that fit in, and Section 529 was passed as,

00:53:54.380 | also, excuse me, I'm not sure which part was in

00:53:56.980 | the Small Business Jobs Protection Act of 1996,

00:53:59.620 | and then the Taxpayer Relief Act of 1997.

00:54:02.220 | So the Clinton administration brought in

00:54:04.420 | Section 529 and the Taxpayer Relief Act.

00:54:07.260 | And it made a number of other changes

00:54:09.720 | associated with education.

00:54:12.140 | But one change is in that bill,

00:54:16.620 | there was a suggestion to make the distribution

00:54:19.220 | from 529 accounts tax-free, not simply tax-deferred.

00:54:23.660 | Bill Clinton vetoed that.

00:54:26.420 | So the way this worked at that time

00:54:29.360 | was that you put money into it,

00:54:33.360 | the investment earnings were tax-deferred

00:54:35.960 | until distribution, but at distribution, taxes were due.

00:54:40.960 | So it was much like, for example,

00:54:43.600 | annuity taxation today is very similar.

00:54:45.920 | You put it in, there's no deduction on the front end.

00:54:49.120 | The money can grow, there's tax deferral

00:54:51.660 | all the way through as the money grows,

00:54:54.000 | and then at distribution, the tax is due.

00:54:56.900 | The proposal was to make the growth completely tax-free.

00:55:01.500 | Bill Clinton vetoed that.

00:55:03.300 | In 2001, however, Congress passed the Economic Growth

00:55:07.980 | and Tax Relief Reconciliation Act, known as EGTRA,

00:55:11.960 | and that was signed into law by President George W. Bush.

00:55:15.660 | And what EGTRA did was it allowed all of the distributions

00:55:20.660 | from these accounts to be excluded from income

00:55:25.560 | when they were used for a qualified

00:55:27.340 | higher education expenses.

00:55:28.560 | There were a number of other changes as well.

00:55:31.020 | For example, this expanded the access

00:55:33.860 | for special needs beneficiaries.

00:55:35.820 | It made these plans available for private institutions

00:55:40.320 | as well as public institutions,

00:55:42.060 | and there were some other changes as well.

00:55:44.460 | But the primary one was it made these tax-free.

00:55:47.640 | However, all of the proposals in that law

00:55:51.300 | were scheduled to sunset, and they were scheduled

00:55:54.220 | to sunset on December 31, 2010,

00:55:57.780 | and it was scheduled to revert back

00:55:59.900 | to how it was prior to that 2001 law.

00:56:04.900 | In the Pension Protection Act of 2006,

00:56:10.020 | there was a provision that made all of those changes

00:56:12.900 | to Section 529 from EGTRA in 2001 permanent,

00:56:17.900 | including the tax-free treatment

00:56:19.620 | for qualified distributions.

00:56:21.260 | So that's how it stands today.

00:56:23.800 | Since that time, I mean, these plans have grown massively,

00:56:28.260 | and that's a huge difference as far as tax-free

00:56:30.580 | versus simply tax-deferred.

00:56:32.180 | And so these plans have grown massively,

00:56:35.140 | and they're very, very popular, very, very popular today.

00:56:39.000 | Now, the challenge is that in the most recent

00:56:42.160 | budget proposal from President Obama,

00:56:44.580 | this is one of the proposals that is on the table,

00:56:48.820 | that he is proposing in his budget to change.

00:56:51.560 | I personally had been waiting until

00:56:54.720 | the State of the Union address to review

00:56:58.480 | some of his recent proposals,

00:57:00.880 | and I reviewed the transcript,

00:57:02.320 | and I didn't see anything about this,

00:57:03.600 | but then in researching it further after

00:57:06.080 | and with the help of a listener on the Facebook page,

00:57:09.680 | it was on my research list, but I just, I crowdsourced.

00:57:13.280 | And I was able to dig some stuff out of the budget,

00:57:16.080 | which they'd leak at a Friday night before a holiday weekend.

00:57:21.080 | Nothing suspicious about that.

00:57:24.160 | Political games.

00:57:25.360 | Anyway, so the proposal is to go back to that 2001 number.

00:57:29.280 | Here are the actual numbers of what happened, though,

00:57:31.320 | when that tax law changed,

00:57:33.760 | is according to the College Savings Network,

00:57:38.760 | in 2001, assets in 529 plans were $13 billion.

00:57:44.560 | In 2002, they doubled to $26 billion.

00:57:48.840 | And presently, as things stand today,

00:57:52.120 | there are approximately $245 billion in these 529 plans.

00:57:58.240 | Now, and then there's an average balance

00:58:02.000 | of about $21,000 in the plans

00:58:04.040 | with about 12 million accounts open.

00:58:06.120 | Now, the interesting thing to me

00:58:07.600 | is just simply the proposals and the changes.

00:58:10.720 | Now, certainly this is not law.

00:58:12.800 | It has to go through a period of time.

00:58:14.440 | If it does, we'll see.

00:58:15.600 | Who knows what happens?

00:58:16.880 | But it's certainly not something that is,

00:58:19.700 | it's certainly not something that,

00:58:23.140 | it's not out of the realm of possibility.

00:58:26.680 | What I don't understand is why this is part

00:58:29.000 | of Obama's agenda with all of the other focus on education.

00:58:34.000 | You would think, I would think,

00:58:36.600 | that this would be a pretty safe one.

00:58:39.840 | After all, he's trying to cut costs all over the place.

00:58:42.280 | So I don't personally get why this is a part of his agenda.

00:58:45.320 | I tried to research some of the liberal approaches to see,

00:58:50.660 | and the best I was able to find

00:58:51.960 | was Slate Magazine has an article.

00:58:54.120 | The headline was "Obama Wants to Tax College Savings Accounts

00:58:56.680 | "and It's a Great Idea."

00:58:58.520 | And the author of this article is,

00:59:00.760 | cites data from the Government Accountability Office,

00:59:04.000 | which says that a majority of people who participate,

00:59:09.000 | 47% of families that participate in 529 plans

00:59:13.720 | are covered out educational savings accounts,

00:59:15.960 | earn in excess of $150,000 a year.

00:59:18.960 | I hate this cherry pick stuff.

00:59:21.280 | Of course they do, 'cause who else can afford

00:59:23.280 | to set aside money and is actually gonna take the time

00:59:26.920 | to plan for college accounts?

00:59:30.000 | Do you expect a single mom earning,

00:59:33.600 | or a single dad earning $50,000 a year

00:59:36.780 | to have the excess cash flow to tuck aside 15,000 bucks

00:59:39.820 | in a 529 account?

00:59:41.880 | People don't plan, and there's no reason for it.

00:59:44.800 | When there's tons of free money for college,

00:59:46.160 | why should you save for it?

00:59:47.100 | Anyway, I'm trying not to go into the politics of it,

00:59:50.400 | but it, I don't know,

00:59:51.520 | it doesn't make a lot of sense to me why that is.

00:59:53.240 | But the biggest thing about it is,

00:59:55.400 | it's an illustration of how you have to be careful

01:00:00.340 | with these accounts.

01:00:02.640 | And it,

01:00:04.240 | I try to stay out of the politics,

01:00:08.880 | but it is increasingly frustrating to me

01:00:11.320 | to have to deal with this stuff.

01:00:12.760 | And it's always the same.

01:00:14.880 | But if I could find another,

01:00:17.720 | I think about sometimes

01:00:18.720 | of going to other tax jurisdictions,

01:00:20.040 | if I could just make a law and keep it,

01:00:23.360 | and get rid of all the deductions,

01:00:25.400 | get rid of all the credits,

01:00:26.280 | get rid of all the accounts,

01:00:27.320 | and just pass a straight up tax of a certain amount

01:00:31.680 | and base it on income.

01:00:33.840 | And then,

01:00:34.720 | whatever.

01:00:37.560 | I don't, it's just, it's difficult to plan.

01:00:41.080 | 'Cause how do I as a financial planner tell people,

01:00:43.080 | here's what you should do?

01:00:44.040 | If this goes back, there's not a chance in the world

01:00:46.600 | I would ever recommend a 529 plan again.

01:00:48.680 | It's a waste of time.

01:00:49.520 | And the reason it's a waste of time

01:00:51.040 | is because even just under this,

01:00:53.320 | under the Obama proposal,

01:00:54.720 | according to what I've read on it,

01:00:56.520 | I looked at the budget, but it was unclear,

01:00:59.100 | but he wants to go back,

01:01:00.720 | he wants to be taxed as ordinary income.

01:01:02.400 | Well, in that situation,

01:01:03.320 | why would you ever put post-tax dollars in,

01:01:05.840 | defer it, and then pick up those dollars

01:01:07.960 | as ordinary income?

01:01:09.800 | It doesn't make any sense at all to me.

01:01:12.840 | But welcome to our modern world.

01:01:16.040 | And, (laughs)

01:01:18.040 | welcome to our modern world.

01:01:19.000 | So that's a little bit of the history

01:01:20.300 | of the 529 plans.

01:01:21.800 | Where things are gonna go,

01:01:22.720 | at the moment, the law is as it is.

01:01:26.040 | Is Congress likely, are they ever likely to do anything?

01:01:28.560 | I don't think so.

01:01:29.400 | The best thing that can happen at this stage is,

01:01:31.520 | and hopefully this will happen for the next two years,

01:01:33.820 | is you just have massive gridlock,

01:01:35.300 | and then Congress can do nothing

01:01:36.640 | and we can get on with our lives.

01:01:39.200 | But we'll see, who knows?

01:01:40.720 | These things, you gotta keep an eye on it.

01:01:43.100 | And again, you gotta do it in terms of scale.

01:01:45.260 | Would I lock up my money for $100 a month

01:01:48.200 | and run the risk of that,

01:01:49.960 | and have the money tied up in this 529 account with that?

01:01:52.800 | There's not a chance in the world under this scenario.

01:01:55.980 | Now, would I consider using this account

01:01:59.280 | as part of a comprehensive plan if I were more affluent?

01:02:02.560 | Might, I might.

01:02:05.440 | That's my best shot at it.

01:02:06.740 | Prior to this budget proposal,

01:02:09.360 | I was a much bigger fan,

01:02:11.100 | because when you can get a law that's set

01:02:13.240 | and it's not scheduled to sunset,

01:02:14.840 | that gives you some ability to plan.

01:02:18.760 | But now these things are back on the table,

01:02:20.720 | it's certainly frustrating.

01:02:22.540 | That is what I wanted to cover

01:02:26.200 | as far as the history and the introduction.

01:02:27.800 | The next stage in my outline here

01:02:29.520 | is we're gonna go through the detailed rules,

01:02:31.360 | and so that you understand how these rules work.

01:02:35.840 | And this is gonna answer

01:02:36.680 | what expenses can you pay, all of that.

01:02:38.720 | This is actually where I stopped yesterday,

01:02:43.060 | but I'm gonna continue on

01:02:44.160 | since I didn't release the show yesterday.

01:02:45.440 | I'm gonna cover here what the IRS publication 970,

01:02:50.440 | which is their publication on education,

01:02:54.080 | tax benefits for education, has to say about this.

01:02:57.400 | And it's actually remarkably short.

01:02:59.380 | In this publication, there's only four pages

01:03:01.640 | of information on the qualified tuition programs.

01:03:04.440 | Of the actual legislation, if you wanna go and read it,

01:03:07.080 | it's remarkably short as the internal revenue code goes.

01:03:12.000 | I've got it printed out here in my notes.

01:03:13.520 | It's six pages, and a lot of it is double-spaced.

01:03:16.160 | So there's not a lot to it.

01:03:17.960 | The major challenge with 529 plans is the application,

01:03:21.200 | and especially the nuance with state income tax deductions.

01:03:26.200 | So let's boogie through just some big picture details,

01:03:29.520 | and then we'll get to the application in another show.

01:03:32.280 | I've explained enough of the details

01:03:36.320 | that I don't need to go through all of them again.

01:03:41.280 | But I do need to give you a few specific scenarios.

01:03:46.280 | The first thing we need to do is define

01:03:50.760 | what are qualified education expenses.

01:03:53.880 | So the money that comes out of these accounts

01:03:56.400 | comes out under current law tax-free

01:03:58.620 | if used for a qualified education expenses.

01:04:01.720 | And here's the definition.

01:04:03.020 | Qualified education expenses are expenses

01:04:06.960 | that are related to enrollment or attendance

01:04:11.320 | at an eligible education institution.

01:04:14.780 | And for the purposes of a qualified tuition plan,

01:04:19.520 | this is an eligible educational institution.

01:04:22.540 | Is any college, university, vocational school,

01:04:26.840 | or other post-secondary educational institution

01:04:30.600 | eligible to participate in a student aid program

01:04:33.580 | administered by the United States Department of Education?

01:04:37.080 | It includes virtually all accredited, public,

01:04:40.860 | non-profit, and proprietary,

01:04:43.600 | meaning privately owned, profit-making,

01:04:45.920 | post-secondary institutions.

01:04:48.960 | Now this is a very interesting definition

01:04:50.560 | because it brings up one of the unique wrinkles

01:04:52.420 | of a 529 plan.

01:04:54.400 | And one of those wrinkles is how do we get out,

01:04:57.360 | how do we use the money?

01:04:59.320 | There is a method where you can actually

01:05:02.820 | use this money for yourself.

01:05:04.940 | And you can use it for expenses that are associated

01:05:07.980 | at an eligible educational institution.

01:05:10.580 | But that definition, which includes programs

01:05:14.300 | that are administered by the US,

01:05:15.620 | that accept student aid programs

01:05:17.020 | administered by the US Department of Education,

01:05:19.260 | opens up kind of a unique option.

01:05:21.620 | This appeals to me and it might appeal to some of you

01:05:23.900 | who are interested in things like global travel,

01:05:26.180 | perpetual travel, that type of thing.

01:05:28.940 | I knew about this potential loophole

01:05:31.560 | and I mentioned it on a previous show

01:05:33.040 | and then I realized I hadn't gone and looked up the list.

01:05:37.040 | And so then a listener named Benjamin

01:05:40.880 | commented on a recent show where I had mentioned it,

01:05:43.320 | which was episode 118, where during a Q&A show,

01:05:47.200 | I talked about using a 529 account

01:05:50.320 | to go ahead and pay for tuition

01:05:54.840 | at a university in a foreign country.

01:05:57.600 | And pay for tuition and room and board.

01:06:00.000 | So this would be something that would appeal

01:06:02.680 | to somebody like me, is I love to learn

01:06:06.480 | and I would love to study at a foreign institution.

01:06:09.240 | And so Benjamin found me the list of eligible schools

01:06:13.200 | that are eligible in other countries.

01:06:15.040 | And there are tons of these.

01:06:16.560 | So in Australia, there are 22 different universities.

01:06:20.040 | Here's one in Austria, here's one in Bulgaria.

01:06:23.680 | There are about a gazillion in Canada that are covered,

01:06:26.560 | well, gazillion is 71.

01:06:29.360 | There's one in China, Costa Rica,

01:06:31.360 | five in Czech Republic, Denmark,

01:06:33.880 | three, Dominica, one, Dominican Republic, five,

01:06:37.520 | Egypt, one, England, a bunch.

01:06:39.700 | So there's all these different universities,

01:06:41.340 | Oxford University, France, there are,

01:06:44.360 | looks like a total of nine universities

01:06:47.360 | which are eligible for the US,

01:06:49.900 | for US federal financial aid.

01:06:54.680 | So what that means is, remember in the previous

01:06:56.520 | Coverdell Educational Savings Account show,

01:06:58.320 | I talked about how easy it is to get the money

01:07:00.880 | out of the ESA and just put it into a 529.

01:07:03.920 | With a 529 plan, there's no restriction on age.

01:07:07.680 | So the money can sit here for a very long period of time.

01:07:10.960 | And you can make yourself the beneficiary of it.

01:07:13.480 | And I personally would thoroughly enjoy

01:07:15.760 | going and enrolling at the

01:07:18.520 | Institut d'Etudes Politiques de Paris in France,

01:07:23.640 | or the American University of Paris,

01:07:27.480 | or American Graduate School in Paris,

01:07:29.520 | and live and study in France,

01:07:31.220 | and use these tax-deferred 529 dollars

01:07:34.600 | to pay for my room and board,

01:07:35.880 | and I could find room and board on campus

01:07:37.960 | for me and my wife, and pay for our tuition

01:07:41.920 | to study at business school in Paris,

01:07:43.560 | or study at language school,

01:07:44.800 | or go to Israel, or Italy, or Lebanon.

01:07:47.680 | All kinds of universities here.

01:07:49.880 | And so this is a good way to think in advance

01:07:52.660 | about how do I use one of these tax-deferred accounts

01:07:55.400 | in a creative and unique way to fund

01:07:57.640 | what I'm trying to accomplish.

01:07:59.760 | Now the key is the expenses.

01:08:01.580 | What are the qualified expenses?

01:08:03.200 | Let me go through that.

01:08:04.360 | Just like there was with the

01:08:07.360 | Coverdell Educational Savings Accounts,

01:08:09.520 | some of the expenses that are covered

01:08:11.240 | must be required by the institution,

01:08:14.080 | and then some of them must simply be

01:08:16.000 | incurred by the student.

01:08:17.720 | So the expenses that must be required

01:08:22.280 | by the institution to be eligible

01:08:24.180 | as a qualified educational expense

01:08:26.180 | include tuition and fees, books, supplies, and equipment.

01:08:31.020 | So anything that's written on your syllabus

01:08:36.220 | for your college class that requires

01:08:38.660 | these specific books, these specific supplies,

01:08:42.540 | and this specific equipment,

01:08:45.240 | that's required and that's an eligible expense,

01:08:48.140 | and/or tuition and fees.

01:08:52.240 | It's important because one of the things

01:08:54.320 | that people ask a lot of times

01:08:55.420 | is what are covered expenses?

01:08:56.780 | I had a recent question on a Friday Q&A show

01:08:59.660 | from a listener, and he was asking a question.

01:09:01.500 | He'd gone to and outfitted his son,

01:09:04.660 | I think it was his son, at an apartment,

01:09:06.900 | and he bought an office chair for his son's apartment,

01:09:09.580 | and he asked is that an eligible expense?

01:09:11.740 | The answer is no.

01:09:13.300 | Only supplies and equipment that are required

01:09:16.580 | by the eligible institution.

01:09:19.060 | And because it's an off-campus apartment,

01:09:21.540 | then that's certainly not part of the expenses

01:09:25.660 | that are required by the university.

01:09:28.600 | Now, if an office chair were included

01:09:30.680 | as part of the on-campus apartment,

01:09:32.320 | as part of the furnishing of an on-campus apartment,

01:09:34.560 | that would be covered, which we'll get to in just a second.

01:09:36.720 | This is that little notice about special needs,

01:09:39.600 | and so these expenses are appropriate

01:09:43.720 | for special needs clients.

01:09:47.680 | Expenses for special needs services,

01:09:49.440 | which are needed by a special needs beneficiary,

01:09:51.800 | must be incurred in connection with enrollment

01:09:55.200 | or attendance at an eligible educational institution.

01:09:58.560 | So the difference between required

01:10:00.560 | and connection is important.

01:10:02.520 | So if you are or if you have a special needs beneficiary,

01:10:06.340 | any expenses that, for special needs services,

01:10:10.160 | that are incurred in connection with their enrollment

01:10:12.920 | or attendance at a university is eligible.

01:10:16.440 | So that could be a little bit broader as an example.

01:10:19.640 | In my mind, although you certainly cannot deduct

01:10:22.520 | commuting expenses, or you cannot pay for commuting expenses

01:10:27.520 | for a non-special needs student out of this account,

01:10:31.560 | because it's not required by the institution,

01:10:34.980 | I think that if there were special needs

01:10:37.360 | transportation services that were needed

01:10:40.520 | to get your special needs beneficiary

01:10:42.140 | from your house to that university,

01:10:43.860 | that would be an eligible expense.

01:10:45.680 | So you can use a 529 account to allow you

01:10:48.200 | to purchase those services with tax-free dollars.

01:10:51.720 | Now, as far as room and board, let me read you this.

01:10:55.240 | Expenses for room and board must be incurred

01:10:57.800 | by students who are enrolled at least half-time.

01:11:01.720 | The expense for room and board qualifies

01:11:04.400 | only to the extent that it is not more

01:11:06.720 | than the greater of the following two amounts.

01:11:08.960 | The allowance for room and board,

01:11:10.680 | as determined by the eligible educational institution

01:11:13.480 | that was included in the cost of attendance

01:11:15.280 | for federal financial aid purposes

01:11:17.200 | for a particular academic period

01:11:19.480 | and living arrangement of the student.

01:11:21.320 | Or B, the actual amount charged

01:11:23.560 | if the student is residing in housing owned or operated

01:11:26.880 | by the eligible educational institution.

01:11:29.960 | So for a mainstream US student,

01:11:32.680 | what this says is A, to pay for room and board expenses

01:11:36.160 | out of this account, you need to be enrolled

01:11:38.460 | at least half-time, whatever the definition of half-time is

01:11:41.800 | for that university, at least half-time.

01:11:44.360 | You can't be taking one class per semester

01:11:46.840 | and expect to pay for your room and board.

01:11:48.900 | You could pay for the one class in tuition and fees

01:11:51.320 | and book supplies and equipment out of this account,

01:11:53.320 | but you can't pay for room and board expenses

01:11:55.280 | with only one class.

01:11:56.680 | But if you are at least half-time,

01:11:58.560 | then room and board is an allowable expense

01:12:03.560 | which can be paid for tax-free out of this account.

01:12:07.560 | Well, up to how much?

01:12:09.120 | Well, it can be up to the amount that the student is paying

01:12:13.440 | if they're living in housing which is owned or operated

01:12:16.880 | by the college or university, no matter how much.

01:12:21.880 | So there's no cap there.

01:12:24.280 | Or if living off campus in other housing arrangements,

01:12:29.280 | then it can be as much as the institution includes

01:12:34.000 | in their cost of attendance for a particular academic period

01:12:37.600 | and living arrangement of the student.

01:12:38.800 | So if the university calculates and says $10,000 per year

01:12:42.680 | is what we think a student will need to pay

01:12:44.580 | for accommodation, then a student can cover up to $10,000,

01:12:49.160 | excuse me, $10,000 per year is what we require

01:12:51.820 | and estimate for federal financial aid purposes

01:12:54.720 | as part of our costs.

01:12:56.480 | Then the student in this scenario can live off campus

01:12:59.560 | and if their expenses are $12,000,

01:13:02.400 | they can pay for up to $10,000

01:13:04.960 | as a qualified educational expense out of the 529 plan.

01:13:08.600 | Now, I would imagine that for some of you,

01:13:12.260 | especially those of you who are involved

01:13:14.880 | in real estate investing, there might be some ideas

01:13:17.580 | going off in your head when thinking about that.

01:13:20.040 | And for the rest of you, there are now.

01:13:24.760 | So the fact that you can save money on a 529 account,

01:13:28.600 | grow that money tax-free,

01:13:31.720 | and then take the money out of the account

01:13:34.200 | and use it to pay for room and board expenses

01:13:37.160 | up to a certain amount, that's unique.

01:13:41.320 | And there are some planning opportunities there

01:13:43.220 | for some of you.

01:13:44.340 | So whether that just simply means your child,

01:13:47.180 | again, is living in an apartment,

01:13:50.340 | is just simply paying rent,

01:13:51.340 | as long as it falls underneath those amounts

01:13:54.820 | that are established by the institution,

01:13:56.900 | which the nice thing about that is

01:13:57.740 | that we're gonna be regionally based.

01:13:59.880 | So if your child is paying rent in New York City

01:14:04.540 | or is paying rent in Biloxi,

01:14:06.740 | then there's a little bit of a difference there

01:14:08.380 | as far as what those costs are gonna be.

01:14:11.320 | That's useful.

01:14:13.200 | Could you buy a house and have your child rent from you

01:14:18.200 | and pay for the rental cost out of the 529

01:14:22.080 | out of his or her 529 account?

01:14:24.280 | Yes.

01:14:25.120 | You have to follow that through

01:14:26.940 | and do everything properly, but you can.

01:14:29.600 | Can your child buy a house and pay for the expenses,

01:14:34.600 | pay for the mortgage and the interest costs

01:14:37.140 | and the taxes and the insurance out of the 529 account?

01:14:40.780 | Yes.

01:14:42.560 | You have to follow the rules,

01:14:44.520 | but there are some planning opportunities here.

01:14:46.820 | You've gotta figure out what's worth it to you,

01:14:49.320 | and here's where the challenge is

01:14:50.700 | with all of these kinds of ideas.

01:14:52.860 | Sometimes an idea is pretty cool,

01:14:54.920 | and sometimes it's like, man, this is a total waste.

01:14:58.320 | I like to think in terms of the ideal scenario.

01:15:01.600 | So I like to think in terms of

01:15:03.020 | how could I use this account,

01:15:04.240 | tuck the money aside, okay, my child is enrolled,

01:15:06.980 | half time, at least half time,

01:15:09.000 | and then they're gonna do that while they're,

01:15:10.900 | to go ahead and finish off the university degree

01:15:14.480 | or need for education,

01:15:16.560 | but they're doing it while they're building a business.

01:15:20.440 | They're going to school half time

01:15:21.400 | while they're building a business on the side,

01:15:22.880 | and they're studying something

01:15:23.920 | that they're very interested in,

01:15:25.480 | and they're going ahead and using these 529 money,

01:15:28.400 | which has grown over time, tax-free,

01:15:31.120 | to pay for their mortgage and get them established

01:15:33.400 | with their first house,

01:15:34.860 | and that's a good way of transferring the money.

01:15:37.080 | That can certainly work,

01:15:38.680 | and you can take it from here and go,

01:15:40.620 | maybe I'll come back and I'll talk about

01:15:41.920 | some more of these ideas.

01:15:42.760 | I'm gonna do a whole show on some of the ways

01:15:45.200 | that you can essentially play with some of these systems,

01:15:49.320 | but hopefully that gives you enough of an idea,

01:15:51.680 | at least what the requirements are.

01:15:54.420 | Tuition and fees, books, supplies,

01:15:55.920 | and equipment must be required.

01:15:57.540 | Special needs services just must be incurred in connection,

01:16:01.100 | and expenses for room and board,

01:16:03.040 | they have to be enrolled at least half time,

01:16:04.760 | and it can't be more than the greater

01:16:06.960 | of either the actual amount,

01:16:08.920 | if they're living in on-campus university housing,

01:16:11.480 | or what they use for their federal financial aid filings.

01:16:15.720 | How much can you contribute?

01:16:16.860 | We've covered that already.

01:16:18.920 | You can contribute from,

01:16:21.080 | you can contribute up to the,

01:16:23.580 | well, I need to give you more detail on this.

01:16:28.120 | The contribution limits vary,

01:16:30.900 | depending on which type of plan you're participating in,

01:16:33.240 | whether you're using the plan that is for private colleges,

01:16:37.960 | or whether you are using a plan for public colleges,

01:16:41.520 | whether you're using the savings plan.

01:16:43.160 | In essence, though, the amount cannot be more

01:16:46.000 | than the amount necessary to provide

01:16:47.680 | for the qualified education expenses.

01:16:49.880 | There are no income restrictions on who can contribute.

01:16:54.160 | So if you make $2 million a year,

01:16:55.600 | you can contribute to this account,

01:16:57.280 | but you cannot be more than what is needed

01:17:00.080 | for each beneficiary.

01:17:01.340 | So if you only have one beneficiary,

01:17:02.640 | don't put $3 million into this account.

01:17:05.080 | That's not gonna work.

01:17:06.040 | But you can add multiple beneficiaries,

01:17:08.120 | and you can change the beneficiaries along the way.

01:17:10.720 | Losses.

01:17:13.280 | If you do have a loss in a qualified tuition program account,

01:17:16.960 | yes, you can take the loss on your income tax return.

01:17:20.380 | After all of the money has been distributed

01:17:22.080 | from the account, if you have a loss,

01:17:24.460 | then you can go ahead and take that.

01:17:26.000 | Now, the IRS says in publication 970

01:17:29.260 | that this comes in as a miscellaneous itemized deduction

01:17:33.580 | on Schedule A, and this is subject to the 2%

01:17:36.760 | of adjusted gross income limit.

01:17:38.120 | That's what they say.

01:17:39.340 | That is less advantageous than simply an ordinary loss.

01:17:44.260 | Now, interestingly, even though the IRS publication says

01:17:47.560 | this is where you can claim it,

01:17:49.660 | from my research, this indicates

01:17:51.380 | that there are some tax experts who disagree,

01:17:55.080 | and based upon studying the code,

01:17:57.620 | say that you can take it as an ordinary loss.

01:18:00.140 | But to the best of my knowledge,

01:18:02.200 | this has not yet been litigated.

01:18:03.820 | So if or when it is litigated,

01:18:05.420 | that would be important to know,

01:18:07.540 | I guess, before the tax court and see what the decision is.

01:18:09.900 | But if any of you are aware of any additional information

01:18:12.100 | on that, feel free to comment on today's show notes

01:18:14.240 | and let me know.

01:18:15.080 | But at least the point is, you can take losses.

01:18:17.420 | Distributions.

01:18:19.860 | The interesting thing about this account

01:18:21.680 | is there are a couple different things you gotta calculate,

01:18:23.700 | whether or not the distributions are taxable.

01:18:25.620 | And there's a difference between taxable distributions

01:18:29.020 | and penalized distributions.

01:18:31.660 | So let's talk about whether the distribution

01:18:33.140 | is taxable or not.

01:18:34.660 | In essence, when you boil the rules down,

01:18:37.180 | if you have a distribution from the account

01:18:41.380 | that exceeds the adjusted qualified education expenses,

01:18:44.740 | it will probably be taxable.

01:18:47.100 | Now, the challenge is that the adjusted education,

01:18:51.700 | excuse me, the adjusted qualified educational expenses

01:18:55.180 | number is the total qualified education expenses

01:18:59.380 | which have been reduced by any tax-free

01:19:02.240 | educational assistance,

01:19:04.260 | including any tax-free scholarships or fellowships,

01:19:07.860 | any veterans educational assistance, any Pell Grants,

01:19:11.700 | any employer-provided educational assistance,

01:19:14.420 | or any other non-taxable payments

01:19:17.420 | other than gifts or inheritances

01:19:19.020 | that have been received as educational assistance.

01:19:22.100 | So you've gotta work out and see

01:19:24.120 | is there a taxable distribution

01:19:25.700 | or a non-taxable distribution.

01:19:28.300 | As part of that planning,

01:19:30.120 | you've gotta look at also how to coordinate the expenses,

01:19:33.740 | the qualified educational expenses,

01:19:35.680 | with other tax credits that you may be taking.

01:19:38.260 | So you might be coordinating this

01:19:40.100 | with Coverdell Educational Savings Account distributions

01:19:43.040 | or coordinating it with American Opportunity

01:19:45.060 | and Lifetime Learning Credit distributions.

01:19:47.340 | And you'll find out if some of the distributions

01:19:50.500 | are taxable or not.

01:19:52.080 | It's possible to have a taxable distribution

01:19:54.860 | that does not also have a 10% additional penalty tax.

01:19:59.220 | But in general though,

01:20:01.260 | you're usually going to have a 10% additional tax

01:20:04.260 | if the funds aren't used for education.

01:20:07.660 | So this is one of the key points.

01:20:09.760 | We're getting a little nitpicky here

01:20:11.020 | and I'm not gonna go any deeper than that on the audio.

01:20:13.060 | If you have a specific planning scenario

01:20:15.340 | that you're trying to figure out,

01:20:16.660 | look at it with your own set of facts,

01:20:18.220 | with the actual numbers,

01:20:19.320 | and then refer to the IRS guidance documents

01:20:22.080 | and look at it with your own scenario.

01:20:25.240 | The 10% additional tax, however,

01:20:29.020 | does have some exceptions.

01:20:32.540 | And so you don't have the additional 10% penalty tax

01:20:36.580 | for a distribution which is paid to the beneficiary

01:20:39.980 | or to the estate of the designated beneficiary

01:20:42.380 | on or after the death of the designated beneficiary.

01:20:45.180 | So the example here would be

01:20:47.300 | if I'm the beneficiary of an account and then I die

01:20:51.940 | and that money then is paid to my estate,

01:20:55.220 | it would indeed be a taxable event,

01:20:57.900 | but it would not have the 10% additional penalty tax.

01:21:01.760 | The next exception is any payments that are made

01:21:04.260 | because the designated beneficiary is disabled.

01:21:07.380 | So if it's disabled,

01:21:08.440 | the payments can be made without the additional tax,

01:21:10.780 | the 10% penalty.

01:21:12.460 | Additionally, the penalty tax does not apply

01:21:15.600 | to payments that are included in income

01:21:18.120 | because the beneficiary received

01:21:20.220 | a tax-free scholarship or fellowship,

01:21:22.500 | veterans educational assistance,

01:21:24.380 | employer-provided educational assistance,

01:21:26.780 | or any other non-taxable tax-free payments

01:21:29.460 | other than gifts or inheritances

01:21:30.800 | which are received as educational assistance.

01:21:33.980 | This is useful because it means that if you oversave

01:21:37.500 | for your child's college expenses

01:21:40.060 | or your child gets scholarship income, something like that,

01:21:44.220 | when the money is distributed,

01:21:45.740 | as long as the numbers of the expenses work out

01:21:48.460 | and the scholarship income, you follow the rules.

01:21:51.000 | But basically, whatever distributions that are made

01:21:53.960 | because they received a tax-free scholarship or fellowship,

01:21:57.660 | those distributions will not be subject to the penalty tax.

01:22:01.260 | You will owe income tax, but not the penalty tax.

01:22:04.020 | So that's helpful.

01:22:05.180 | Then the fourth and fifth exceptions

01:22:06.540 | is any distribution that's made on account

01:22:08.700 | of the attendance of the designated beneficiary

01:22:10.820 | at a US military academy,

01:22:12.980 | and then also any distributions that are included in income

01:22:16.940 | only because the qualified education expenses

01:22:19.140 | were taken into account

01:22:20.460 | in determining the American Opportunity

01:22:22.140 | or Lifetime Learning Credit.

01:22:23.800 | So it gets a little bit too tricky

01:22:25.300 | to try to explain in an audio format.

01:22:28.500 | But in essence, there are some ways

01:22:31.460 | to take some distributions from the account

01:22:33.280 | where you will owe tax on them,

01:22:34.700 | but you won't owe the penalty tax.

01:22:37.400 | In general, you don't wanna over-save into this account,

01:22:40.280 | but there are some exit plans

01:22:43.120 | as I have sketched out for you.

01:22:44.680 | What if you do over-save?

01:22:47.320 | Well, one of the most useful things

01:22:48.960 | is that you can simply change and roll over the account

01:22:52.240 | from one person to another.

01:22:53.880 | So you can change the beneficiary on the account.

01:22:57.760 | And the people that you can change this to,

01:23:00.320 | the number of people is quite broad.

01:23:02.700 | This is the most useful exit point.

01:23:06.660 | If your oldest child doesn't use the funds,

01:23:09.020 | you can just simply transition the funds

01:23:10.540 | to your next child and along the way.

01:23:14.480 | And so any kind of rollovers, there's no tax implications,

01:23:18.120 | the money continues to be sheltered

01:23:19.920 | and it can be passed along.

01:23:21.600 | Here are the people to whom it can be passed

01:23:24.360 | to these members of the beneficiary's family.

01:23:27.920 | And so for the purposes of this rollover,

01:23:30.280 | the beneficiary's family includes the beneficiary's spouse

01:23:35.500 | and the following other relatives of the beneficiary.

01:23:39.160 | Son, daughter, stepchild, foster child, adopted child,

01:23:45.280 | or a descendant of any of them.

01:23:51.020 | So we now said any descendant of the beneficiary.

01:23:54.840 | So if that's you, any of your descendants,

01:23:57.120 | if it's your child, any of your child's descendants,

01:24:00.200 | any descendant of any of their descendants.

01:24:04.400 | The brother, sister, stepbrother,

01:24:07.340 | or stepsister of the beneficiary.

01:24:09.660 | Father or mother or ancestor of either.

01:24:15.340 | Stepfather or stepmother.

01:24:19.220 | So on the father, mother, stepfather,

01:24:21.700 | the father, mother, or ancestor of either.

01:24:23.620 | What that means is that if you set something aside

01:24:25.500 | for your child and you don't use the funds

01:24:28.540 | for their education, you can change the beneficiary

01:24:31.500 | to be you and you can do my retirement plan

01:24:34.560 | of getting a PhD in Paris out of the 529 accounts.

01:24:39.460 | Any ancestor or even to your child's grandparent

01:24:44.640 | if they want to go back to school.

01:24:46.840 | Stepfather or stepmother.

01:24:48.440 | So it doesn't say ancestor of stepfather or stepmother,

01:24:51.200 | just stepfather or stepmother.

01:24:52.920 | Son or daughter of a brother or sister.

01:24:55.760 | So if your child doesn't use the funds

01:25:00.760 | but your child's brother has a son or daughter

01:25:04.160 | and they want it to go to them, that's allowable.

01:25:07.220 | Brother or sister of father or mother.

01:25:10.540 | So meaning if your child is the beneficiary

01:25:15.560 | but you're their father or mother,

01:25:19.440 | your brother or sister is an allowable change.

01:25:23.460 | Son-in-law, daughter-in-law, father-in-law,

01:25:28.360 | mother-in-law, brother-in-law or sister-in-law

01:25:32.320 | of the designated beneficiary.

01:25:33.980 | The spouse of any individual listed above or first cousins.

01:25:39.840 | And that's the list.

01:25:42.480 | So that's a fairly comprehensive list.

01:25:44.360 | So if there are in essence educational needs

01:25:46.960 | anywhere in your family, then this account

01:25:48.920 | can be used to fund those needs.

01:25:50.520 | That's the essence of how the accounts work.

01:25:54.120 | Now there are a number of specific detailed questions

01:25:58.480 | of implementation.

01:26:00.560 | And with 529 accounts, the key is not in

01:26:03.840 | how does the account work, the key,

01:26:05.280 | although that is a factor.

01:26:07.400 | The key is in the application of it.

01:26:09.420 | How do you know, as an example, if your state

01:26:12.800 | has a prepaid tuition program that is financially viable

01:26:16.720 | and financially solvent?

01:26:18.800 | How do you select among, after all,

01:26:22.160 | the only 529 plans you can participate in

01:26:24.720 | are the ones that are sponsored by a specific state.

01:26:27.600 | So how do you choose among different state options?

01:26:31.480 | How would you know whether Virginia's plan

01:26:33.360 | is better than Florida's plan,

01:26:34.520 | is better than Alabama's plan?

01:26:36.280 | How do you calculate the fees?

01:26:38.160 | And then one of the big ones is

01:26:40.140 | what about the state income tax deduction?

01:26:43.180 | Because this might be a compelling reason

01:26:45.880 | for you to participate in a 529,

01:26:47.920 | and it might be a total waste of time.

01:26:49.440 | For me in Florida, we don't have state income taxes,

01:26:51.520 | it's a total waste of time, don't even think about it.

01:26:53.520 | But for some of you, this could be very useful to you.

01:26:56.480 | So we will cover those in future shows.

01:27:00.080 | I hope that was a useful intro to you,

01:27:02.280 | I kind of did a double header here

01:27:03.640 | with putting those information together,

01:27:05.360 | but I feel better about the flow of the show

01:27:07.120 | and my ability to convey the important points.

01:27:09.960 | I know I got a little bogged down there

01:27:11.360 | in the middle with the political planning,

01:27:14.240 | but it is actually an important part of financial planning.

01:27:17.480 | In, when you're talking about risk for a portfolio,

01:27:21.560 | one of the major mistakes that many new investors make

01:27:25.520 | is they only think of risk on a one dimensional basis.

01:27:27.960 | You know, the risk of market risk, for example.

01:27:30.320 | You know, the value of their investments going up or down.

01:27:33.280 | But there are many kinds of risk,

01:27:34.800 | and one of those, one type of risk is tax risk,

01:27:37.560 | so a change in the tax code.

01:27:39.320 | Another type of risk is political risk,

01:27:41.000 | a change in the political climate of an environment.

01:27:44.320 | What do you do if you own an oil company,

01:27:46.280 | and you own stock of this oil company,

01:27:47.800 | and that company goes through a socialist revolution,

01:27:50.400 | and the government comes in

01:27:51.600 | and completely nationalizes the country?

01:27:55.000 | Excuse me, the company?

01:27:56.400 | It's happened, it's happened many times.

01:27:59.360 | So that's a risk.

01:28:01.240 | And so in personal financial planning,

01:28:03.160 | when you choose to participate

01:28:04.400 | in things like a 529 account, you have a risk.

01:28:07.480 | President Obama, in cahoots with Congress,

01:28:10.160 | might change the law, and you might find yourself

01:28:12.120 | not sitting on a tax-free asset that you were planning on,

01:28:14.960 | you might find yourself sitting on

01:28:16.280 | merely a tax-deferred asset.

01:28:18.080 | Or, previously, you might have gotten in,

01:28:19.960 | and it might have gotten better,

01:28:20.800 | you might have gotten in under the tax-deferred plan,

01:28:22.640 | and found out that it was just a tax-free plan.

01:28:25.000 | So join us for part two, and I'll start to go through

01:28:27.720 | how to make these actual decisions to your own,

01:28:31.600 | in your own scenario, and try to figure out

01:28:33.480 | what plans should I participate in, what state,

01:28:35.840 | okay, if I'm in this state,

01:28:36.920 | then how do I make these decisions?

01:28:38.560 | How do these assets account for, you know,

01:28:40.840 | other aspects of my planning?

01:28:42.240 | Asset, I haven't talked about asset protection,

01:28:44.280 | I haven't talked about estate planning,

01:28:46.120 | so there's much more to this series,

01:28:47.860 | but we're gonna continue this masterclass on investments.

01:28:51.320 | Thank you so much for being with me today,

01:28:52.680 | I really appreciate it,

01:28:54.400 | and I hope you found this info valuable.

01:28:56.380 | If you've got questions that you want me to answer for you

01:28:58.980 | as part of this show, come by the Facebook page,

01:29:01.440 | and you'll see a video that I posted

01:29:02.640 | at facebook.com/radicalpersonalfinance.

01:29:04.920 | Ask me your question, and I will make sure

01:29:06.540 | to include it in this show.

01:29:09.360 | If you'd like to support the show,

01:29:10.360 | join the membership program,

01:29:11.320 | I would be greatly indebted to you if you would do that,

01:29:13.360 | it will help me to continue bringing you

01:29:15.160 | this depth of content details

01:29:16.680 | at radicalpersonalfinance.com/membership.

01:29:19.560 | Peace out, y'all.

01:29:20.480 | Thank you for listening to today's show.

01:29:25.220 | If you'd like to contact me personally,

01:29:27.360 | my email address is joshua@radicalpersonalfinance.com.

01:29:32.360 | You can also connect with the show on Twitter,

01:29:34.400 | @radicalpf, and at facebook.com/radicalpersonalfinance.

01:29:39.400 | This show is intended to provide entertainment,

01:29:42.960 | education, and financial enlightenment,

01:29:46.760 | but your situation is unique,

01:29:48.520 | and I cannot deliver any actionable advice

01:29:52.260 | without knowing anything about you.

01:29:54.440 | Please, develop a team of professional advisors

01:29:58.920 | who you find to be caring, competent, and trustworthy,

01:30:03.120 | and consult them, because they are the ones

01:30:06.460 | who can understand your specific needs,

01:30:09.360 | your specific goals, and provide specific answers

01:30:13.660 | to your questions.

01:30:15.440 | I've done my absolute best to be clear and accurate

01:30:18.280 | in today's show, but I'm one person, and I make mistakes.

01:30:22.220 | If you spot a mistake in something I've said,

01:30:24.520 | please help me by coming to the show page and commenting,

01:30:27.940 | so we can all learn together.

01:30:30.120 | Until tomorrow, thanks for being here.

01:30:32.860 | - The holidays start here at Ralph's,

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01:30:42.640 | your go-to shrimp cocktail, or your first Cajun risotto,

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01:30:55.880 | Look for the locked in low prices tags,

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RPF0138-529_Plans_Pt_1