Ep # 84: 529 Plan For College Savings? Not So Fast!
Saving for college is something that definitely matters to a lot of those that we work with (parents and grandparents) because continuing education is important, and because it’s not cheap! Student loan debt is all over the news. In the absence of saving, you’re stuck with loans. In this podcast episode, Ben is joined by our newest member of the Haas Financial Group team, Mike Hendrickson. They discuss the different ways you can think about saving for college, and perhaps more specifically, why the very popular 529 Plan may NOT be the right fit for you.
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Benjamin Haas 00:03
Hi everyone and welcome to A/B Conversations where we will help you CFP your way out of it. A podcast where you get into the minds of a couple of Certified Financial Planners on how we think and feel about everyday financial planning questions and what should really matter most to you. A healthier financial life starts...now! Here we go. Welcome Mike. I should probably A/B conversations but this is clearly not Adam. This is our newest team member, Mike! Equally as handsome thought. Welcome to our podcast. This is like baptism by fire, right?
Mike Hendrickson 00:43
Right. I'm sorry for ruining the A/B portion of the - I guess it doesn't work out with adding an M to this. So, sorry about that, we'll try and get through it though.
Benjamin Haas 00:56
Yeah, you know what, it's pinch hitting today. Pinch hitting off the bench for Adam. But on a topic, as I understand it, you're pretty passionate about. So, let's talk about it and maybe I'll set the stage. I think in your experience and also ours, saving for college is certainly something that matters to our clients, parents, and grandparents alike. One, because that's a goal, continue education. But two, it's not cheap. I know you looked up some numbers. Private schools these days, we're talking what
Mike Hendrickson 01:07
$55,000 per year.
Benjamin Haas 01:28
And even public education is not exactly cheap. We know student debt has been all over the news. In the absence of saving, you're kind of stuck with loans, so let's just talk about it. There are ways you can go about saving for college and perhaps more specifically to what we want to get into today. This very popular 529 plan may not be the right fit. So let's do it. Where do you in thinking about client conversations kind of start the savings conversation?
Mike Hendrickson 02:07
Well, I have a bias towards and I hope most advisors do is that first of all, take care of yourself. You need to make sure that your retirement is as secure as possible. And that the kids, selfishly, the kids can take care of themselves. So
Benjamin Haas 02:31
I don't mean to interrupt; you can take out a loan for college. You can't take out a loan for your retirement.
Mike Hendrickson 02:37
Right. So therein lies where the conversation will begin. Now, let's assume that wasn’t a good spot to start having that conversation. I used to be of the mindset that 529 is, that's what you do. Set up an account, set a monthly savings, and do as much as you can and continue to max out your retirement savings while trying to max out as much as you can towards this college savings. In practice what I have seen, however, is that it's not always right. I see that it's either, I've actually come across situations where it's overfunded. So, you have people with enough secure footing that they have overfunded their child's 529, which can lead to other problems. Then the other side of it is that if people are spending money on their children in a normal daily kind of basis, they can pay for education in a private school or sports teams. These are things that you that you need to spend money on. The numbers that I saw was $300,000 to raise a child from zero to 17. That's about $18,000 a year. What they are averaging and expecting.
Benjamin Haas 04:13
Are you sure you wanted to have that third kid now that we're throwing numbers at this, Mike?
Mike Hendrickson 04:17
Well, as you well know, it's not always an X's and O's like financial planning, it can't always be black and white. It's got to be a personal type of decision. So, was it the best decision from a financial planning situation? No. But we can't always look at it like that, we’d drive ourselves crazy. So I don't know from a financial planning, financial advisor that whether that was a great idea but don't tell my wife that I said that.
Benjamin Haas 04:53
So now that I know that I drove that off the rails, what I hear you saying and we have some of the same conversations too. That 529, maybe the downside is a little bit of lack of flexibility. Once it's in there, it really has to be used for those college expenses. Is that your biggest gripe with the plan?
Mike Hendrickson 05:14
Yes, they opened it up recently, not sure what year was, but they've opened it up to allow it to pay for education for K to 12. So that's up to $10,000 a year that can be used on K to 12. So that's great. That's an awesome use for that but the lack of flexibility. First of all, if you get stuck in well, there are some good plans out there. But if you have a 529 plan that has expensive funds, I've seen a lot of different fund companies with not much of a great fund menu and the funds they do have are expensive and not the best funds. I'm not going to name any names or anything, but just a lack of flexibility in that it's locked in. So, you can't use those funds for when your son or daughter wants to play competitive sports, travel league. It's average that a family will spend 10% of their income on club or travel, those types of sports. The average was $2,500 a year. If you're locking that money up in a 529. You can't use that money for that. I used to be of the mindset, 529 is the way to go and no one could tell me any different. I like to have the flexibility there. The benefit of taking the money, you get a state tax deduction, Pennsylvania, that's 3% benefit. Okay, great. That's not huge, though. The real benefit is that it grows tax free and then when you use it, it comes out tax free. So that's awesome. I don't want to steer anybody away from using a 529 but it's not the silver bullet for people's lives. The custodial counts, the UGMA, uniform gift to minors account, a lot of flexibility there. Can invest in a number of different things, ETFs, stocks, I dare say cryptocurrency. I don't recommend that.
Benjamin Haas 07:41
This has got to get through compliance, Mike.
Mike Hendrickson 07:43
Well, people that want to, can do that. I'm saying that there's flexibility when you have these things and so the 529 locks you in for certain different things.
Benjamin Haas 07:52
Let's go ahead and quickly break that down because I think, you know, as financial planners, you know, your experience, certainly what we've been doing here, the key is to try to figure out like, what the priority is, acknowledging that for the focus on one pro have a way of going about savings, you're giving up something else, right? You said there's no silver bullet. So, in the absence of a 529, if you really want the flexibility - custodial account, you'd say is, number one. Are there other ways that you would go about saving for college though, if college was maybe like, a secondary goal or you weren't really sure where the priority was supposed to be yet. I think about some of the people we meet, maybe even somebody, yours or my age, where at two years old, three years old, five years old. I'm not sure where Lucas's life is going to head and whether he wants to be a mechanic working on trucks or whether he wants to be making rockets one day. The educational experience is going to be very different. If I'm not sure, where do you think the best place to kind of park that savings is?
Mike Hendrickson 09:04
Well, the custodial account would be your go to for that because if you think about it, Ben, like, if it does come to a point where you're like, oh, this kid does want to be rocket scientist. we're going to send them to Berkeley and have a huge bill. I just named Berkeley. I don't know if they do rocket scientist. MIT maybe but we'll have this huge bill, right. Then you could just move at that point, move that money to the 529. I go for flexibility. I go for the ability to change your mind. Once it's locked up in that five turn and he can't do that much. It is portable to other family members. So
Benjamin Haas 09:47
Mike Hendrickson 09:48
Son says alright, I'm not going to go to college or we have all this saved and he's going to go to a vocational school and then we're not going to use all of it. Well, that's great. Then we can pass it to another kid. I've actually seen where there were two daughters. They had overfunded 529's and they are out of college. Just thinking about what they did. They continued to let that grow and so grandkids that weren't even born yet, we'll just keep that there. We'll keep investing it and then we'll pass that down to our kids or the grandkids. There are benefits again, to these. But it's just as we've said, multiple times, it's not the only way to go.
Benjamin Haas 10:38
So, I want to bring up something because something popped in my head when you said that. I think for certain clients or good I'll put grandparents, not just parents, we're talking as parents here, but grandparents can be in this camp too. If the intent is to save, I think sometimes their primary objective is to feel like I've mentally accounted for this, right. I want to set this money aside in a specific account where I know that it's theirs. I wonder if sometimes that's why they default to education account, 529 with their name on it. When really, if the intent was just to save some money, that idea of pooling it together into one 529 plan where you can change the beneficiary does make a little sense. But I think you do have to go back to that primary objective. Specific accounts for each grandchild, you may end up in that spot where you overfunded.
Mike Hendrickson 11:28
Yeah, it definitely can be the case. And one thing we haven't mentioned is, as an option is actually ibonds. ibonds are one way. Another way that we can utilize is just another tool. 9.6% is the current rate as of through October. That's not always going to be the case but here's a tool to save money and combat against inflation. Although college costs have gone way up compared to inflation. So, maybe that's just one little avenue you could use. Sorry, ibonds just popped into my mind as one way.
Benjamin Haas 12:17
Well, then let's clarify it, though. So ibond, that's a treasury bond, you have to buy it directly through the Treasury. But there are caps to that, so unlike a custodial account or 529, you'd be able to earmark a certain amount of money per, I'm relying on you here, per individual, it's like $10 grand per
Mike Hendrickson 12:42
Yeah, it's really weird. They have $10,000 per individual social security number and then you can also do another $5,000 in paper. So a paper application. I don't know where they come up with all that, like why difference between 10 and 5 there, but it's $15,000. So hypothetically, you have a new baby. It's a husband, wife and a new baby, you could do $15,000 each into that. Historically, the ibonds, it's more like three, maybe less percent. It's not been a huge vehicle for returns. It's in the news a lot now because you have something that's returning something percent
Benjamin Haas 13:32
Mike Hendrickson 13:32
and everything else is like,
Benjamin Haas 13:35
Mike Hendrickson 13:35
Down in the red. So ibonds have become popular recently and we've seen it in the news anecdotally and just saying, here might be attractive.
Benjamin Haas 13:48
So 529's, custodial accounts, brought up ibonds. How do you feel about the Roth IRA is one of those, hey, save for myself first but if necessary, there's some accessibility there. Right?
Mike Hendrickson 14:05
Right, so they're there, you can use those contributions always, that's after-tax money, so you can always pull that out. But you hold the count and add those earnings for more than five years that can come out, everything comes out for educational purposes. It's penalty and tax free. What I would say is a couple of things about the Roth and the custodial account. It can complicate student aid. The Roth IRA, if and when that comes out, it's considered income. So, it's just those things can complicate when you're filling out the FAFSA and what kind of student aid can be applied. It's always worth just another consideration. 529, a little bit more favorable in terms of getting as much student aid as possible. So, as we go back and forth here, there's just tradeoffs on things and I just lean towards the flexibility of everything and the upfront the lack of the federal deduction on that 529 is what really like gets me as far as not being - between the in flexibility of a 529. Once it's in, that’s locked in and the lack of a federal deduction. That's kind of what makes me more biased towards keeping it in the custodial account and being able to spend it when your baseball team makes the finals and you have $5,000 that year. I'm just getting into it now. You know better than me, that these sports leagues, these sports teams. It can just be crazy. My son's eight years old, he didn't make the tryouts and I feel like, oh no, we're done. We're not going to be able to make varsity team in high school. So, it's just crazy competitive. It's just really what hits home for me as far as like, how much money should I be contributing to my 529? And how much money should I keep on hand for when he wants to go to summer camp? It's a balance. It comes down to a personal feeling and that's what we stress when we meet with clients. Like, there's a financial answer to this but there's also like, what makes you feel good and be able to sleep at night. And feel okay, about what's going to happen next.
Benjamin Haas 16:41
Yeah, because I know that you know this. So, I'm saying this to kind of you getting into the fold with Adam and I on some of this advice. We will often say, what's the right thing to do? Well, it depends, right. And I think using your son is a great example here. He's eight years old. Things are going to change, priorities are going to change, interests are going to change, our financial lives, they're going to change. So anytime you're doing these projections are like, hey, if I put this here and I get this, here's what I'm going to have. You're still making assumptions. So, I really appreciate you being willing to share perspective today on if flexibility matters and to us and planning, it always does. There may be other ways to think about going about this college saving.
Mike Hendrickson 17:25
Absolutely. I think I would just like to drive that home is that is what we've titled this or what we've hit at is, it's not just the one be all solution. We're not against it, it's just that it's not the only way and there's other ways that think about it. Then I'd circle back to how we started was make sure you're taking care of yourself first. That's what I would always do and then we'll work on the college and 15 to 10 years, or whatever the case it is. We can get student aid and get loans and worry about that. But, there's again, no loans for the retirement.
Benjamin Haas 18:10
You got it. Well, hey, I hope that felt good. You know, first time. First time going through a little podcast here. I'll break the news to Adam that you had a pretty good at bat here.
Mike Hendrickson 18:24
All right. I expect it to be tougher with him. In fact, checking in and being able to run numbers really quickly and just living human database.
Benjamin Haas 18:35
Yeah. Let's be honest, you guys are kicking me off the next time. So, I appreciate your insights here. Catch you next time!
Mike Hendrickson 18:43
All right. See ya Ben.
Benjamin Haas 18:59
Hey everyone, Adam and I really appreciate you tuning in. Please note that the opinions we voiced in the show are for general information only and are not intended to provide specific recommendations for any individual to determine which strategies or investments may be most appropriate for you. Consult with your attorney, your accountant and financial advisor or tax advisor prior to making any decisions. Thanks for listening! Investment advice offered through Great Valley Advisor Group, a Registered Investment Advisor. Great Valley Advisor Group and Haas Financial Group are separate entities.
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