SPEAKER_00 0:32

Welcome back to the Sandwich Bread Podcast, conversations about life and money for the sandwich generation. I'm your host, Tom Kaminsky, and today we're talking college savings. Our guest, Ann Garcia, is a wealth advisor with the Mather Group, the author of how to pay for college, and the person I think of first when someone says college planning expert. She's been quoted in the New York Times, Wall Street Journal, U.S. News and World Report, and now apparently also a featured guest on the Sandwich Bread Podcast. This is part one of a two-part conversation, and we're keeping it focused. Just 529 plans, what they are, how they work, and how to pick the right one. And then with part two, we'll go a little deeper into funding, growing, and getting money out of the 529 plan. If you've been putting off opening one because you aren't sure where to start, or if you have one and you aren't sure how best to optimize it, this episode is for you. Let's get into it. Welcome everybody to the Sandwich Bread Podcast. I'm your host, Tom Kaminsky. Uh on this podcast, we do conversations about life and money for the sandwich generation, hence the sandwich bread moniker. Really, really excited for today's guest. Uh, she is a uh a major figure in the financial planning industry, uh, specifically around college planning. I have to admit, you were not on my list, not because I didn't want you to be a guest, but because I was like, she's too big for this little quaint uh podcast. That's another friend who connected us, and here we are. So I'm very excited to have you on um and thrilled to have this conversation with you.

SPEAKER_01 1:59

I'm excited to be here. Saving for college is such an important piece of people's financial plans. Um, that that you know, anything, anything we can do to get the word out there and and get people started and and and doing it right is I'm always happy to do it.

SPEAKER_00 2:15

A little background on Ann. She is a wealth advisor with the Mather Group uh and a go-to expert on college planning. Uh, she's the author of How to Pay for College and a Sought After Media Guest. Uh, she's been quoted in the New York Times, Wall Street Journal, U.S. News and Report, now is a guest on the Sandwich Bird Podcast as well. You can add that to your resume. But I will I will say, you know, this book was purchased several years ago, and it was on these aren't just props, these are real books I buy and read. And um, I'm very excited to have her on and and dig in a little bit more. She has she's a mother of two twins who have graduated debt-free from college.

SPEAKER_01 2:53

Yeah, they were early college when I wrote it.

SPEAKER_00 2:55

So they have graduated debt-free. That's the update to that story, which is pretty awesome, daunting heading into it. And outside of financial planning, you're an avid runner and skier, and also a fan of middle school rock concerts. You want to offer, share a little bit on that one?

SPEAKER_01 3:11

My nephew was learning how to play electric guitar, and his electric guitar recital was the day that I was visiting um for a business trip. So I got to spend my day off at a middle school electric guitar concert. The only way to top that was that I got COVID from it as well.

SPEAKER_00 3:30

I love it. I love it. So, was it like were they all playing guitar at the recital?

SPEAKER_01 3:35

70s and 80s era metal songs on electric guitar.

SPEAKER_00 3:41

Oh boy, that is exhausting just to think about.

SPEAKER_01 3:44

It ended up actually being a ton of fun. One of the things that really struck me, because my nephew is not a performing type, but guitar is perfect for someone like that because he could like stare at his fingers the whole time he was on stage and look like it was the right thing to do.

SPEAKER_00 4:00

I love that. Well, for the sake of today's conversation, college planning is a huge subject, so much so that you wrote a whole book about it. So I thought for the sake of today's dialogue, we would pick one one component, which is the 529 plan. And so I thought for today's conversation, let's just do it all about 529 plans, what they are, setting one up, selecting a plan, and then getting money out of the plan. And uh, I like to leave one small or a couple small actionable takeaways rather than the analysis paralysis.

SPEAKER_01 4:28

529s are such a great place to start because if you get that set up and get it, you know, get funding set up, you're three-quarters of the way to having a great college plan.

SPEAKER_00 4:37

There you go. That's awesome. All right, so let's start high level. Uh, what is a 529 plan? And in your view, where does it fit into the college savings strategy?

SPEAKER_01 4:47

529 is a dedicated and tax-advantaged college savings account. Anyone can have them. They're primarily run by states, although there are a few private entities that um that offer them. And they work a little bit like a Roth IRA and a little bit like a 401k. It's like a Roth IRA in you put after tax money into it, but the growth and the distributions are tax-free as long as you follow the rules, like a 401k, where they have a set investment menu as opposed to the world of investments that you could choose. A lot of the investments are 529 equivalents of target date funds in your 401k, where they're target enrollment funds where it's put in a risk-appropriate allocation based on how many years you have until college. It starts out more aggressive, where you'll get more volatility, but hopefully higher returns. And as you get closer and closer to college, it becomes more conservative because you're more concerned about preserving your principal and making sure that the money is available when your child enrolls in college.

SPEAKER_00 5:47

In your view, how does that fit into the college savings strategy? Like if you've got a young family starting off, is the 529 place to begin, in your view, when it when it comes to college savings?

SPEAKER_01 5:59

That is the place to begin college savings. I mean, college savings is one of your savings buckets and it comes after emergency savings and retirement savings. But I think it's important to keep retirement and college in balance because you have 18 years to save for college versus you may work for 40 or 50 years. So that whole, you know, save for retirement because there's loans available for college, that's why we have over a trillion dollars in outstanding student loan debt. And so kind of my rule of thumb is I call it the 10% rule, if which is this, if you're not maxing out retirement, then no more than 10% of what you save for retirement should go into college savings. If you're saving$10,000 a year in retirement, no more than$1,000 goes into goes into college savings. If you want to bump up your college savings rate, bump up your retirement savings rate while while you're at it.

SPEAKER_00 6:57

I love that. One of the challenges challenges as a financial planner, you've got clients with these really important but competing goals that they come at. I use the analogy of like put on your oxygen mask first before putting it on your children on an airplane. Because if you like you mentioned earlier, if you don't save enough for retirement for yourself, you are moving into your children sooner than they want you in there.

SPEAKER_01 7:21

And in the same way that if you don't save anything for college and your student takes out tons and tons of loans and and can't afford housing, they're gonna move back into your house.

SPEAKER_02 7:29

I know.

SPEAKER_01 7:31

Um it is important, it is important to do both, and it's important to do them in you know, in in balance with with one another. One of the uh one data point that I find really interesting is students whose parents have saved for college in any amount, like starting with about$500 in savings, not only enroll in college at higher rates, but they graduate at higher rates.

SPEAKER_00 7:52

Interesting.

SPEAKER_01 7:53

So when you commit to saving for your child's college, you are improving the likelihood that they actually get that through the process and out the other side.

SPEAKER_00 8:02

Related to that, and this seems to be an evolving dialogue over time, but do you see still see ROI for a college degree? Absolutely.

SPEAKER_01 8:13

Do you think um and the ROI isn't just financials? On average, a college graduate will earn a million dollars more over their lifetime than someone without a degree. And that's just with the bachelor's degree. If you go on to advanced degrees, that number multiplies and compounds. College graduates also have typically half the unemployment rate of people without college degrees. So it's not just earnings, it's consistency of earnings and financial stability. But the benefits of a college degree go well beyond just financial benefits. College graduates are more likely to marry and less likely to divorce. They are more likely to be homeowners, have lower rates of heart disease and type 2 diabetes. Now, obviously, there are socioeconomic components to a lot of those things. They live longer, healthier, and happier lives. In fact, college graduates vote at higher rates, they volunteer at higher rates, they're more likely to befriend their neighbors than um than people without degrees. And so when you think of the adult you want to create, those are typically attributes that we as parents want for our kids.

SPEAKER_00 9:16

Yeah, and it's easy to get caught on the strictly dollars and cents ROI of a college degree. There are those kind of broader valuable components to it, which as a college graduate myself, I've experienced the intangible components of it. I am having interesting conversations with clients about the changing landscape and AI and these other kind of new entrants into higher education. And they're saying, is college, is it something we want to save aggressively toward? Is does it make sense and will it even be there in 18 years in the way we see it today?

SPEAKER_01 9:48

Yeah. Well, I think too the other thing that's important is college comes at a range of price points. You don't necessarily get higher ROI by spending more on college than by spending less on college. My own kids are a perfect example of that. You know, I have twins. One went to a single-digit acceptance rate private school, and one went to a single-digit rejection rate public school. And coming out of college, they both had pretty much identical jobs. I mean, one was computer science and one was finance, but they were both working for Fortune 500 companies in those early career rotational programs, you know, same salary, same benefits, slightly different jobs. Now they're both at a point of changing jobs. And the one who went to the public school had a lot easier time with finding the second job than did the one who went to the private school. Yeah.

SPEAKER_00 10:39

There's always the master's degree component as well, right? You can go to a state school that might be lower cost for undergraduate, do it well, get a good job, and that good job might pay for an elite master's degree or something to that. You know, so you kind of it's a it's a kind of uh leveling of the playing field potentially by leveraging benefits through your employer. All right, I'm sufficiently sold that college is still value valuable, but I think it's good for the audience to hear because I view it as a valuable component of investing in your child's life and well-being. But I do like to bake in flexibility for my clients because you don't know. They're one year old, you know, but it's the perfect time, as you know, due to compounding interest, the perfect time to save is today, right? Next best time is tomorrow. It's not 10 years from now. So I'm sufficiently sold on 529 plans. Let's play out a scenario if we could, Ann.

unknown 11:31

Yeah.

SPEAKER_00 11:31

Got a newborn baby, their parents they want them to go to college. Where would you start the savings process?

SPEAKER_01 11:38

Well, one of the things that I love about 529s is recently there's been all kinds of legislation that has opened up uses of 529. So it's not exclusively for college anymore. And one of the great options is being able to roll$35,000 of that balance over to a Roth IRA. Now it has to be the beneficiary's Roth IRA if it's not used for college. Um, so with a$529, you have an owner, which is typically the parent, and then you have a beneficiary who's typically the child. But for families who genuinely do not know if their kid's gonna go to school, to college, one option is that when the child's born, they open a 529 where the parent is the beneficiary. Because then if that child genuinely doesn't go, the parent can be rolling that money to their own Roth IRA. And then as that balance builds up, as the child gets older, then you open one that's in the child's name and continue funding that. You always have the option with that first one that was set up of changing the beneficiary to the child or transferring the balance over to the child's 529, but but that preserves maximum flexibility for the parents, right? I'm not sure if it's college or retirement, so I put it in my own name. And then if it doesn't end up being needed for college, I have the opportunity to roll it to my own retirement savings. Truly, a 529 becomes a launch fund, right? Because if the kid never goes to college, you just start doing those Roth conversions and they've got money that they can access, whether it's for a home purchase, a car purchase, you know, whatever thing they need, they can be pull actually be pulling it out of that Roth IRA or just taking um non-qualified distributions from the 529. But something like 80% of Americans do some form of formal training after high school. And 529s can be used for apprenticeship programs, for other training like that, they can be used for continuing education. So for us as certified financial planners, we could actually use$529 for a continuing education and certification programs.

SPEAKER_00 13:42

And I do share with clients the the arc of the use of 529s is expanding over time, not shrinking. And as trades have gotten more valuable in certain areas or certifications have certainly grown over time. The the funds have kind of evolved to meet those changing needs. And then different funding is strategies have grown for private education K through 12. We've seen 529s now get more flexible in that regard as well. Yeah. So in 20 years, it could be even more flexible to get money out of a 529.

SPEAKER_01 14:10

And here's the thing the average 529 balance is less than 30,000. I would say, you know, keep those in the back of your mind in case your kid doesn't go to college. But if your 529 is one of those average ones that's less than 30,000, make sure you keep it there for college because that's barely a year of public college.

SPEAKER_00 14:29

Okay. So selecting a 529, do you have any thoughts on for some for some states it's a pretty easy call. There's one choice and you need to use it to get that state credit or tax deduction. Um, but do you in general have a like a framework or resources you lean on to select the best 529 for your family?

SPEAKER_01 14:49

I try to keep it simple because one thing I've discovered over the years is analysis paralysis is a barrier to starting. And the most important thing to do with a 529 is to start it when your child is is young. And I've seen so many people say, well, my state plan isn't great. And so I started looking around and I had so many questions, and suddenly it's five years later and you've lost out on your potentially your five highest growth years of your 529. So my rule of thumb is if your state offers a tax benefit for contributions to their plan, contribute to their plan. And if not, then open an account in the Utah My 529 plan, because that's the lowest cost, best run, top-of-the-line plan that's out there. And for most people, either A or B is correct.

SPEAKER_02 15:35

Yeah.

SPEAKER_01 15:35

Um but for the majority of families who might be contributing a couple hundred dollars a month to a 529. If your state offers a tax benefit, use your state's plan. If your state doesn't offer a tax benefit, use the Utah plan.

SPEAKER_00 15:49

Use the Utah plan. Okay. That's exactly my framework. I tend to point my clients to the Utah plan, and I should disclose I have no financial relationship with that plan. It's just really well run, a good user interface, good investment menu, and super low cost. I mean, that's that simple.

SPEAKER_01 16:05

Yeah. This would be a super easy set it and forget it decision where you you choose one plan once, you set up automatic funding and do an age-based plan. And the only thing you do in subsequent years is increase your contribution.

SPEAKER_00 16:19

Now, question for a state that offer reciprocity, where basically if you open and contribute to any 529 in any state, get that state-level tax deduction, not tax advice, consult your tax professional. But when there's reciprocity, do you still go with the Utah plan or do you where do you generally point call it?

SPEAKER_01 16:37

Generally, I go with the Utah plan. There actually are very few states that offer reciprocity. And part of the reason why states offer a tax benefit for contributions to their own plan is the fees that they charge are based on the assets in the plan. And so as the balance in the state's plan grows, the costs come down for all the participants. And so most states want to incentivize people to contribute to their own, to their own state plan for that, um, for that reason. Um there are one big thing I've noticed with there's a handful of states that don't offer what's called a gifting page in their 529. Okay. And a gifting page is a link that you can share to people that lets them contribute to your child's 529. Um if you're in one of the few states that doesn't have a gifting plan, then even if your state offers a state tax deduction, it makes sense to open a Utah account. Like you, I have no financial relationship with the Utah plan. It's just good.

SPEAKER_00 17:36

Yeah. Um so a second plan basically.

SPEAKER_01 17:39

Open a second plan there, you know, put$100 in it and have that so that you can share the gifting link with other people.

SPEAKER_00 17:48

With other people to allow that.

SPEAKER_01 17:50

It's a crazy thing not to have, but there are a couple Louisiana and and a couple others um don't have it in their plan.

SPEAKER_00 17:57

And then going back to selecting the plan for our listeners that might not be working with a financial professional. I lean on that annual Morningstar report. They do the annual 529 report where they rate all the state 529 plans, they analyze the fees and the quality of the plan. Uh, Utah, again, always kind of makes its way to the top. I will speak to the arc of this space. I see fees coming down and I see plans improving pretty dramatically. There have been some really awful plans out there, and I'm seeing them realize the woes of their ways. Are there other resources you use to evaluate the quality of a plan?

SPEAKER_01 18:31

Well, here's so here's the thing with um, here's the here's the thing with analyzing those plans. Again, I I feel like it gets back to that whole decision paralysis. I go with the broad diversification, low costs, and and all of that, you know, choose a plan that uses Vanguard or dimensional as the underlying, as the underlying funds in your plan. Others outperform recently for exactly what you said. The plan has gotten better. They've lowered fees, changed their investment lineup, and things like that. And so, and so it's hard to know when you're looking at it, why is it outperforming? Why is it underperforming? If it's outperforming because it's gotten better, that's a reason you might choose to participate in your own state's plan. If it's because they're using actively managed funds, there's no guarantee that those funds will continue to outperform over the time you're looking at for your for your child's um investment. A few years ago in the Oregon plan, um, the bond funds were using a lot of junk junk bonds pre-2008, 2009. So people who thought they were in very safe investments, in fact, were not in safe investments at all. And that's something that unless you're poking under the hood and seeing what you know, what does this fund actually actually hold, you know, that's a risk that you run into with the less transparent, um, more actively managed funds as opposed to, like I said, the Vanguard and dimensional.

SPEAKER_00 19:54

And yeah. Okay, that's interesting. I I try to look at the investment menu of every 529 plan. I haven't seen a lot of things like that. That's a little alarming. Yep. And let me ask you this a leading question. Would you ever, like if you're a financial advisor, if you're a listener here and your financial advisor's pushing the advisor sold plan, uh, what would you say to that?

SPEAKER_01 20:15

I would say that as long as you are capable of going online and opening your own account, you shouldn't be using an advisor sold plan.

SPEAKER_00 20:23

Okay. Um I read that in your book and I just wanted to say it again.

SPEAKER_01 20:29

Now, where I do see benefits to not not necessarily advisor sold plans, but having an advisor manage your plan is, you know, grandparents set up that plan when they were quite a bit younger, and now they're experiencing diminished capacity or for whatever other reason need some help. A lot of times the retail plans don't allow advisors to assist at all. To me, that's one of the nice things about the Utah plan is that as an advisor, I can be authorized on my client's account so that I can help them with the distribution should the need arise.

SPEAKER_02 21:03

Got it.

SPEAKER_01 21:03

Um so it's one thing to have an advisor assisting with your plan. It's another to go with the advisor, with the advisor sold plan. You know, the fees are always going to be higher because those funds are paying commissions back to the advisors.

SPEAKER_00 21:17

Yeah.

SPEAKER_01 21:18

And so that's just your money that's being redirected to someone else.

SPEAKER_00 21:21

That's a wrap on part one. In part two, we get into the more technical aspects of a 529. How much to save, how to invest inside the plan, all the ways you can get money out, and the FAFSA question I hear most from clients. Anne Garcia's book, How to Pay for College, is available on Amazon and wherever else books are sold. Her website is how to payforcollege.com. We'll link to both in the show notes. If this episode was useful, share it with a friend who just had a baby or has one on the way. That's exactly who needs to hear this. We'll talk to you again in part two.