SPEAKER_01 0:32

Welcome back. This is part two with Ann Garcia. If you haven't heard part one, go back and start there. During that episode, we covered what a 529 is, how it works, and how to pick one. Today we're getting into more technical components. How much to save, how to grow it, how to get money out, and what it does to your financial aid. Well, let's go. What's a helpful starting point? I know you had your Ann's 20,000 rule in your book, targeting based on growth rates per year of college. Could you elaborate on that a little bit?

SPEAKER_00 1:00

Yeah, I mean, people always say, you know, how much do I need to save to pay for college? And I think it's helpful to look at it from the other perspective of how much can I save? And then when your child is college age, that's your college budget, is your savings plus your ability to pay, to pay out of pocket. If you wanted to have public university fully covered by the time your child is 18, fully covered through savings, you'd need to save about$350 a month per child. For a lot of families, that's that's just not doable. The good news is college is truly available at every price point. You know, my son has a friend who got a four-year degree for zero dollars. She did two years of free community college in her state, and then she was working for Starbucks. Starbucks has a tuition partnership program with Arizona State. So she finished her degree online at Arizona State and paid zero dollars. Her diploma looks the same as everyone else's. She walked across the stage with all of her classmates when she graduates. So it is fine to pick a savings amount that works for you and then use that as a way to determine what your college budget will be. What's not fine is you set that up when your child's a newborn and never revisit it because your financial circumstances will change over time. And you may be able to contribute more at different points in your life.

SPEAKER_01 2:25

Yeah.

SPEAKER_00 2:26

I know when you have a new baby, suddenly all of your money is going somewhere else. Also the time when it's most important to start saving. And that's what that gifting page can be so incredibly helpful for. Share your 529 plans gifting link with people who are generous with you and hope that hope that they contribute to your account. Yeah. But little changes over time yield big results. So for example, if you set up a 529 with a monthly contribution when your child is born, and every year on your birthday, you up that contribution by$10 a month, you'd have$15,000 more dollars available for college by the time they graduate from high school. And you probably won't notice that$10 a month coming out of your budget.

SPEAKER_01 3:14

Yeah. I do tell you if they flat out don't think they can afford it. And I see all the budgeting and everything in their cash flow. I'm like, I know you can squeeze$25 a month out of this. I know you can do that. You won't notice. Like you have 18 subscriptions, make this another subscription, pay yourself a little bit.

SPEAKER_00 3:30

So yeah, and that's why it's so important to set up automatic contributions, is so that it just goes automatically.

SPEAKER_01 3:36

You mentioned the gifting page for family. If there's a state tax deduction that the grandparents maybe aren't going to be able to take advantage of because they live out of state, do you direct clients to have them gift that money to the your client and then pass it through? It gets complicated. And I do it does get complicated.

SPEAKER_00 3:55

And it's worth figuring out, you know, how valuable is that tax deduction versus the time it takes to actually get it. So, you know, if grandparents are giving a couple hundred dollars and it's easier for them to use the gifting page, great. If they're giving a couple hundred dollars and it's easier for them to send you a check or Venmo it to you, that's great too. Just make sure that it ultimately uh ends up there. Some states do allow you to take the tax deduction for contributions that are made on your behalf, as long as that other person isn't also taking the tax deduction. It's worth looking, it's worth looking at your state's um, at your state's, at your state's rules.

SPEAKER_01 4:34

Yeah. Yeah. And we can't, I can't stress this enough. Every state has little quirks and differences in the rules. You really have to go beyond the FAQ's page on the on the state tax 529 website. Do your due diligence so there's no surprises at tax time.

SPEAKER_00 4:48

Since we keep mentioning states and state plans, I just want to make sure it's abundantly clear the state plan or other plan that you choose to invest in has zero impact on what colleges you can use your 529 at. Any 529 can be used at any college that you can take out a federal student loan to pay for. If you're hearing from people like, well, what if I move? It's okay. If you move, you either start a new plan, keep the current one, roll it over. The only thing, the only impact that 529s have on your child's college choices is they make a wider range of college choices available to them. More savings gives you more choices.

SPEAKER_01 5:27

Yep. Great. And one little note, I'm just gonna throw this in on the if you move conversation. Before you roll it over, carefully consider if you've gotten tax deductions for the state you're leaving. Make sure if you're rolling it over, they're not gonna claw back those deductions you've gotten. That is increasingly coming up. We want our tax dollars back. You pulled it out of our plan. So that is the incentive to open up a brand new 529. I'm not saying that's the case. Um, hit pause before rolling over and double check that with your account. All right. So growing your 529, we've touched on this a little bit already in this conversation, but do you typically lean on those age-based target date funds? Is that is that kind of your preferred set it and forget it mentality when it comes to investing and growing it? Is there a point where you know maybe you're fully funded for college? Should we pivot and move to just all high yield cash in the 529 plan? Do you have kind of different ways that you think about that on the investment side?

SPEAKER_00 6:25

Yeah, I mean, a lot of it depends just on how how aggressively you're funding your 529. You know, if you're one of those typical families that's putting, like I said, a couple hundred dollars a month into it and it will be one leg of your college funding stool, then I think the age-based plans are great. You know, there are enough other complexities in life that this doesn't need to be one of them. If you're funding it more aggressively, where there's a high likelihood that you're gonna have excess funds, then it's worth thinking about what those excess funds are gonna be targeted for. And so, for example, let's say you intend for your child to go to grad school. Well, some of that money should be invested for that six years out or whatever time horizon it is, risk risk horizon. And a really important consideration with your state's plan is do they allow you, for example, to choose multiple age-based plans? Because that's the easy way to do it. Some do, some don't. Um some will only allow you to use the target enrollment plan for your child's birth year. Interesting. Okay. So so that's worth looking at. Um, and if that is the case for you, then it might be worth opening a second 529 somewhere else where you can choose, um, choose the target date. I I also for states that give a that give a state tax benefit for contributions, I often tell parents to use their 529 like a high yield savings account during the college years. You know, so take the tax deduction. Most of them have an FDIC insured account. And, you know, for example, if you've got a kid who's paying rent every month and you're paying that out of pocket, take it in the 529 and just, you know, rinse it through the 529 to get the tax benefit. There are rules for that, such as, for example, you know, in Oregon, where I live, you have to have the amount of money that's eligible for the tax credit in the account as of December 31st of the year.

SPEAKER_01 8:25

Okay.

SPEAKER_00 8:25

In order to take the tax credit. Um, so that's typically just something you need to be mindful of in your in your later college years to make sure you're not spending it down um more rapidly than that. But you know, there's all kinds of ways you can use your your 529. You do need to coordinate if you're doing that, you know, rinse your money through the 529. You know, with interest rates being as high as they are, just not paying tax on that interest is gonna give you a bit a bit more money.

SPEAKER_01 8:54

Yeah. If you're using that as a sheltered yield, you know, it's medical. And if it's like a vanguard, you know, yeah. And and then that money in most cases, if it's not in that 529, is in the parents' high yield savings account and they may be at the highest possible tax rate. So it's basically a tax-free savings account if you know you'll be using it.

SPEAKER_00 9:16

Yeah, and add to that a state tax benefit, and you've bumped the yield up by by quite a bit. So there are circumstances where I think it makes sense to look outside, you know, outside the menu. But when your kids in college, if you're funding for other things besides just college, funding it that aggressively, and then it's just a question of what am I actually targeting? You know, am I targeting extra money for Roth conversions? Am I targeting extra money for grad school? And then investing appropriately based on that.

SPEAKER_01 9:45

Great. Okay. The next segment I want to dive into is getting money out of the 529. And a lot of folks are feel like it's in prison when you put it in there. And I try to stress to them, though, there's so many ways we can we can get this money out. Yeah. Including just taking it out and paying the taxes and penalty, which is not as terrible as it sounds. So we talked about a widening menu of higher education options. So we've got traditional college, four-year college, trade schools, community college certifications as well. We've talked a little bit about the Roth IRA approach. What other kind of uses are there out there that that we may not have touched on?

SPEAKER_00 10:21

I mean, it's a pretty wide list. You can use it for tutoring, you can use it for test prep. I think now you can use it for dual enrollment classes when your kids in high school. Um, cool. You can use it for test taking, all kinds of things like that. Um, I will stand by the point I made earlier, which is use these alternates as a justification to start saving for college earlier because you know that there's going to be a way to spend this money. As your child approaches high school and you get to the point where you might actually be able to do some of these things, look at what your account balance is and say, can I afford the$150 dual credit fee out of pocket because I don't have four years of college in the 529? Or do I have enough in the 529 that I can actually be taking it out for these purposes? Great.

SPEAKER_01 11:16

Um, and then do you, you know, if say a 529 is is on a trajectory to be overfunded, this is something I'll I'll run into with my clients who have kids in private K through 12. Do you then start distributing out during those K through 12 years if you feel like you're overfunded for college? Or how do you look at that? Or do you even save intentionally toward those goals?

SPEAKER_00 11:36

Yeah, and and yeah, like you said, you you can be intentional about using that. One one cautionary point, many states do not conform to the federal rules for qualified distributions. Yep. Now, typically you still come out ahead because most states don't don't penalize you for distributions for non-qualified purposes. You just pay the state income tax. Some do actually include a penalty as well, like California will do that. So, but you also may be subject to that state tax clawback.

SPEAKER_01 12:07

Okay.

SPEAKER_00 12:08

If you've, you know, if you've taken a state tax deduction. So if that's the case in your state, and it is the case in a lot of states where private K-12 is not a qualified expense, it's often beneficial to open an account in another state that you intend to use for those purposes because that clawback piece of it is a pain in the neck.

SPEAKER_01 12:27

Yeah. Yeah. It's messy.

SPEAKER_00 12:29

Um But it's still, you know, it's federally qualified, state non-qualified. That's still cheaper than having a taxable brokerage account where you're going to pay capital gains, you know, on the gains as opposed to just state income taxes.

SPEAKER_01 12:41

Great. And then one thing I do want to bring this up because this is on a lot of folks' mind as they're saving into a 529 plan impact on FAFSA. Could you talk a little bit about, you know, does the balance of your 529 impact FAFSA?

SPEAKER_00 12:57

Yeah. So, you know, 529s really are a powerhouse when it comes to financial aid. It is the most advantageous place to stash your money from a financial aid perspective. That doesn't mean it's invisible. So on the FAFSA, your child's 529 counts as an asset. Now, assets are are assessed at 5.64% of their value. So that means every$1,000 in your$29 will reduce your financial aid eligibility by$56. That means you come out ahead by$944. Now, notice I said that child's$529, their siblings'$529s don't count. So let's say you have two children,$100,000 saved for college. If it's just sitting in a savings account, a brokerage account, anything like that, that's$100,000 worth of assets. If it's in a five, if it's in each of their$529s, and let's just say hypothetically they're twins, so it's equally divided between the two, then it's only$50,000 worth of assets for each of them.

SPEAKER_01 14:01

Yeah.

SPEAKER_00 14:02

There's a second financial aid form called the CSS profile that is used by about 250 private colleges. On the CSS profile, you do include both 529s. But the real beauty of 529s is that the distributions aren't reported as income. And that is the only account you can use for college where the distributions aren't counted as income. And that's really your income is really what drives your financial aid eligibility far more than your assets, because 46% of your income, of each marginal dollar of income for most people, is counted as available to pay for college. So if you have money in a taxable account. But if you have money in a taxable brokerage account, so let's say$529 or brokerage account, both worth$50,000, both$25,000 worth of contribution and$25,000 worth of growth. When you pull money out of that brokerage account, 50% of it is income. A, you're going to play pay taxes on it. And B, that income shows up on your FAFSA and increases your ability to pay by 47 cents of every dollar. Same thing with a Roth IRA. So a Roth IRA, because it's a retirement asset, doesn't count as an asset at 5.64%. When you take the distribution out, it is reported on your tax return. And so that is income 47 cents on the dollar.

SPEAKER_01 15:31

And that's even if you're distributing the contributions into the Roth IRA based on anything that compliments.

SPEAKER_00 15:37

There are four buckets of what goes into the FAFSA. There's the parents' income and assets and the students' income and assets. Students' income and assets typically don't count for much, except that wages are high and you file the FAFSA in the fall. Your student may have had a job all summer where they've made a bunch of money. It's really the parents' income and assets that count, and the five are counted as parents' assets. And it's all of the income on your tax return, whether or not it's taxable income to you. So the Roth IRA distribution is reported on your tax return, even though you don't pay taxes on it.

SPEAKER_01 16:07

Got it. That's great. So quick summary is it represents a relatively small portion of the asset calculation, and the percentage it represents for the asset calculation is really small relative to the benefit of starting the plan early and the compounded growth you get over time. And then on the income side of the equation, it doesn't count, which is huge as well. So I always say more savings.

SPEAKER_00 16:33

Use the 529. More savings means your child's going to have more choices. Because people stress out about the FAFSA and what's this going to be on the FAFSA. And then they go and apply to colleges that don't offer them any need-based financial aid, or they're not eligible for need-based financial aid, and they skipped years and years of savings. Yeah. And suddenly their kid wants to go to a college that's going to cost$70,000,$80,000,$90,000 a year, and they have no savings because somebody told them that they would get more financial aid if they didn't save.

SPEAKER_01 17:02

Yeah. Yeah. I love that. Very compelling. Just a quick recap. We've talked about what is a$529, the context and where it fits into the landscape. Selecting the 529 strategies around selecting a really simple framework that Ann uses that I think is really powerful. Strategies, basic strategies to just get going, growing the 529, how to invest it thoughtfully. And then last we covered getting money out of the 529. So we covered a lot of ground. And this is just, like I said, one part of the college planning journey. That's why Ann can write a book and specialize on all of it because there's a lot here. But I think we covered a lot of ground. And I really appreciate your knowledge and openness and willingness to share it with everybody.

SPEAKER_00 17:42

Well, thank you so much for having me.

SPEAKER_01 17:44

Yeah, before we totally wrap up, did I did we miss anything huge specific to the 529 with this dialogue?

SPEAKER_00 17:51

No, I feel like we covered we covered a lot of ground. Like you said, just get started. Start as early as you can.

SPEAKER_01 17:57

Yeah.

SPEAKER_00 17:58

Today is better than tomorrow and a lot better than next week or next year.

SPEAKER_01 18:03

Yeah. Great closing comments. Uh Ann, where can we find your book or any other resources that you've created specific to this topic or anything else?

SPEAKER_00 18:15

Yeah. So my book is for those who are listening, not watching. It's called How to Pay for College. The easiest place to get it is um is on Amazon, but your local bookseller may have it as well. And my website is how to payforcollege.com.

SPEAKER_01 18:27

I love it. Yeah, so that's Ann Garcia, A-N-N Garcia. My my my wife is in A-N-N-E. So A-N-N Garcia, how to pay for college. And then you've got an awesome website domain, how to payforcollege.com. That's a good get.

SPEAKER_00 18:40

Yeah.

SPEAKER_01 18:41

All right. Well, thanks again, Ann, for joining us. Huge, huge honor to have you on and uh first superstar of the Sandwich Bread podcast. So I'm really grateful you joined us today and shared all your knowledge and wisdom. Thanks again.

SPEAKER_00 18:53

Oh, flattery gets you everywhere.

SPEAKER_01 18:58

All right, all right, thank you very much. My pleasure. And that wraps the conversation with Ann Garcia. College savings can be daunting, and I hope we gave you some ideas on where to begin. Because as Anne said, when it comes to college savings, today is better than tomorrow and a lot better than next year. Anne Garcia's book, How to Pay for College, can be found on Amazon and at a bookstore near you. Her website is how to payforcollege.com. Everything is linked in the show notes. If you've been enjoying the Sandwich Bread podcast, the best thing you can do is share it with a friend, a sibling, or a parent who's navigating all the stuff we dive into at the same time you are. That's exactly who this podcast is for. Thanks for being here, and we'll see you next time.