transcript

Hi, this is Linda Rogers from Planning Within Reach.

What is a 529 account?

My go-to recommendation for people that are interested in helping their kids save for college is the 529 account. That is a tax-preferenced vehicle. So the money that goes in there can grow tax-deferred and it comes out tax-free as long as it is used for qualified education expenses. So that includes tuition, room and board, required fees, books, computers. There is a list of items that would be included.

Now, even if you feel that you can't save to a 529 account right now - maybe you are focusing on retirement or buying a house first - still open up the 529 account and get it linked up with your bank. The reason is I have noticed with quite a few clients that they have a savings account at their bank for the benefit of the child. When I ask about it, they'll say, well I received a gift. Someone gave me money for my child for college and I didn't know where to put it. This way if you have the 529 account set up, that can be a perfect place to put cash gifts where even if you're not saving consistently, you can get that started for them. So instead of a bank earning no interest essentially right now, it can be invested, it can start compounding.

Additional tax savings with 529 accounts

The other thing to consider is if somebody is contributing consistently - giving you money towards your child's college - see what state they live in. Now 529 accounts, as I said, they grow tax-deferred and come out tax-free if they are used for qualified education expenses. There's no federal deduction on the contribution, but some states do offer a state tax deduction on the contributions. So in the link below in the description, I list all states and if they do offer a state tax deduction. Most of my clients are in California, so you'll notice California does not offer a state tax deduction. But let's say one of my clients has a grandmother living in Colorado who every year is sending a check for the child's college around Christmas time. Well, Colorado does offer state tax deduction. So it would actually save Grandma money if she would instead open a 529 account in Colorado where she's the account owner. The child can still be the beneficiary, but she'll receive a state tax deduction now on her contributions. So I've been able to work through that a few times with clients just to get someone to get that tax benefit. And it's okay that the child has multiple 529 accounts. So that's fine.

Don’t over-fund the 529 account

The other thing to be aware of is you don't want to over-fund the 529 account. As much as they are flexible, you know, you can use them at a 4 year university, a 2-year university, vocational schools, graduate programs. You can also change the beneficiary. So if one child no longer needs the money, you can change it to another child who can use that money, so it really is pretty fabulous. But if you find yourself with money left in a 529 account and no qualified education expenses, when that money comes out and it's used for something else, you have to pay federal and state tax on it, along with a 10% penalty. So you don't want to do that, of course. So I would say speak with your planner just to get a good idea of what you should be saving into it because, of course, you don't know when your child is 4, which college they are going to go to and how much you should be really saving down to the penny. So just try and talk with the planner in terms of how much you want to help fund - 2 years of tuition, 4 years of tuition? Did you and your spouse (if you're married) go to a public university, private university? Do you have a preference for the children? Just talking through that information can help you decide what goal you should be saving into the 529 plan because perhaps it'll be a little bit less than what you ultimately want to save, but the balance can go into a brokerage account or something that is not tax preferenced in the same way a 529 account is but gives you ultimate flexibility. And so that can be an alternative for you to kind of do some sort of combination of the two. Reach out with questions. My name is Linda Rogers, Owner of Planning Within Reach.

Linda Rogers, CFP®, EA, MSBA is the owner and founder of Planning Within Reach, LLC (PWR). Originally from New Jersey, Linda services clients throughout San Diego county and nationwide. She leads the design of PWR's investment portfolios which utilize broad, low-cost investments that integrate environmentally, socially, and governance (ESG) factors.

Planning Within Reach, LLC (PWR) is a fee-only and fiduciary wealth management firm offering one-time comprehensive financial planning, ongoing impact-focused investment management and tax preparation services in San Diego and nationwide. PWR is a woman-owned firm that specializes in busy professionals and impact investors. Planning Within Reach, LLC and their advisors do not receive commissions and do not hold any insurance licenses or brokerage relationships.