Episode #14 – Smart College Savings: Why You Should Consider a 529 Plan

Welcome to the Millennial Money Moves Podcast. On this episode, we’re diving into one of the most powerful tools for funding education, the 529 College Savings Plan.
Whether you’re a parent planning for your child’s future, maybe a grandparent looking to give a meaningful gift, or just curious how to save for college in a tax smart way, this episode is for you.
This content is purely educational and does not tend to be financial advice or financial planning. Please consult your professional financial advisor or tax professional to receive tailored advice to your personal situation.
Babin Wealth Management is not responsible for action taken by listeners based on the educational content provided. If you would like to receive personal financial advice, please reach out to Babin Wealth Management directly at babinwealth.com.
Let’s make moves. Welcome everybody to another episode of the Millennial Money Moves Podcast. The podcast where we’re breaking down the financial stuff that actually matter to your real life.
I’m your host, Sean Babin, and in the passenger seat, I got my guy, Blake Bandani. Good to see you, buddy.
The one and only, baby. Always good to see you. And I like how you said, actually matters, because it’s true, everything we talk about is the only thing that matters.
Yeah, only thing that matters.
Yeah, man. It’s like why I say they actually matters is because I remember learning so much stuff, finance stuff, like being a finance major, learning all these things, formulas, derivatives, all these crazy things.
And like, I was always wondering how this applied to my real life. Guess what? None of it did.
Or what about when you get your licenses and everything you got tested on?
It never comes up again.
Yeah. The licenses, the CFP was great. That was all real world stuff.
But there’s all this finance knowledge that needs to just be like, what is this? What is an IRA? What is the ROTA?
That’s what we’re doing on the pod. We just had Father’s Day pass and Blake brought up an awesome idea of like, we just had Mother’s Day and Father’s Day. We should talk about what you could do for your kids.
And he was like, what does education savings accounts or college savings accounts look like? So today, we’re going to dive into 529 accounts, which are education savings accounts.
And we’ll just, I want to go into the deep depths of the details with them, how they work, how to utilize them, and kind of go from there. Anything from you, my guy.
No, I think that would be awesome, especially to honor the mothers and fathers out there. To your point, I mean, even when we went to school, what now, 12, 13 years ago, you know, college doesn’t get any cheaper, right?
And so as parents, probably got to start thinking about what you’re going to do for your kids when they get to that point. I think this is a big topic of things you can proactively plan for, right?
And set not just yourself and your loved ones up, but also your kids for success if they do end up going the college route.
Yeah, that’s exactly it. I mean, college has gotten so expensive, almost to the point of like, is it really worth it? And, you know, that’s to each their own in that decision.
But saving as early as often, like as soon as they’re born, I tell people, as soon as they get a social security number, that’s when we need to open that educational savings account and just start putting money into it, because we need 18 years.
We need that time on our side to really grow that wealth. I did some quick math, because people ask me, you know, how much do we need to save? Like, what’s a good number?
And, you know, what kind of money are we gonna need? Obviously, it ranges drastically. Are we going to junior college?
Are we going to, you know, Harvard? Yeah, what are we doing? Where are we going?
So, I use this kind of like a middle rule of thumb of like $150,000, you know, what you could potentially spend on a child’s education. And I don’t think that’s like too crazy.
That’s kind of like maybe on the little high side, but, you know, that’s a little, you know, almost $40,000 a year kind of thing. And I think that’s a very fair estimate.
That’s sad and crazy as that sounds like. But I think that’s a perfect, perfect.
Yeah, it’s kind of wild. Yeah, $135,000 a year, which it’s just wild where it’s gotten to. So anyway, so the math behind it is, if you do $4,000 a year, assuming an 8% rate of return, because 529s are invested, we’ll get into that.
If you do $4,000 a year at 8% for 18 years, that’s $150,000. So that’s what you got to do for 18 years. So we’re assuming you start right away, right when they’re born.
And then by the time they’re 18, that’s what they could potentially have.
So now obviously there’s probably a lot on your mind after your kid is born. But to your point, once that social security number is live, can you realistically set up the plan as soon as you have the social?
Absolutely. Some places don’t even, you don’t even need a social. In my experience, the companies I use, they need socials to kind of get the accounts rolling.
But yes, so when someone has a new kid, we’re congratulating, here’s a onesie, love you, can’t wait to meet the little one, and then, oh, by the way, we need to talk life insurance and 529 educational savings accounts.
A 529 educational savings account is a tax-free vehicle that is used for qualified education expenses. You put money into it, and it gets invested, just like your 401k, just like an IRA.
You pick some kind of mutual fund or fund in there to grow the wealth. That’s the growth driver of the wealth, whether it’s all stocks. However, the case might be you invest it, is kind of what I’m just trying to get to.
And you can use the money in such different cool ways. You can use it for K through 12. You can use up to $10,000 a year for like private high school, private middle school, you know, whatever that is for you and your family.
And then once they get to college, qualified expenses are tuition, books, cuters, on-campus housing, parking passes, like basically anything that’s run through the school.
And it’s a really cool system in the sense of the ones I’ve dealt with are kind of like a reimburse yourself. It’s not like, Hey, here’s my receipt for tuition. You know, give me the money back.
It’s like, Hey, Sean, I just paid my kid’s tuition or I need to pay my kid’s tuition. Send the check to the tuition department. Send it to me.
I’ll pay it or kind of reimbursing yourself. Now, again, if you’re using it for BS, you’re just always run the risk of getting audited. And that’s when they would say like, Hey, these aren’t qualified expenses.
And then when you use 529 money for non-qualified expenses, you get penalized the growth plus 10% penalty.
So let’s pause here because I think I already have a couple of questions for you, but this is awesome. But you mentioned 4,000 per se for 18 years can get you to that goal. Is that the limit, by the way, is 4,000 that you could put in?
Or could you do additional if you have the bandwidth to do more than 4,000?
Really good questions. There technically is no limit in how much you can put in a 529 account.
You know, if you’ve got big time and want to put big time money in it, you want to stay within the annual gifting limit, which is $19,000 or $38,000 for a couple. $19,000 for an individual, $8,000 for a couple.
So a couple could, you know, fund a 529 account with $38,000 and not go over that annual gifting exemption and end of their lifetime gifting. I’m sure people are like, what the hell is going on with that? But that is kind of the annual max.
But what’s cool with the 529, if your grandparents or your parents are very successful and they want to put even more, you can times that annual gifting number by five, and they let you do five years of contributions as an upfront deposit kind of
To five times of that limit, gift limit.
Yeah, you can do that all at once, and then you work with your accountant to be like, hey, here’s what we did for our grandson or great-grandson, whatever the case may be, and then they’ll stretch out that gift over five years.
But you can front run it with up to five years, right off the jumps.
So for our procrastinators, maybe you didn’t set it off the jump and put 4,000 or whatever was comfortable from day one, but there is almost essentially like a catch-up feel to it if you wanted to do a little bit more because you missed out on
Yeah, you definitely can go all the way up to that gifting limit of like, like I said, 19,000 or 38,000 for a couple.
And that’s a lot of money. I mean, that’s a good chunk to put away. Most people don’t have that kind of flexibility.
So what I’ve done or tried to get people to shift their minds, like just having a kid and going through all this, you know, when a birthday comes or when they’re born, you know, everyone’s given you all this stuff, these clothes that they’re going to
grow out of in two months, three months. Megan and I were kind of like, hey, instead of all this stuff, like it’s weird asking for cash.
But if you prefer instead of like, hey, instead of spending 50 bucks or 25 bucks on her and like toys and things we maybe don’t need, give us $25 and check or whatever the case would be.
We’re going to put it into her education account, her college savings account. And we try to do that for birthdays as well, because it’s just crazy how much stuff they accumulate. And it’s like we really don’t need more of it.
Like, it’d be awesome to just have money put into her college savings account. So that’s some ideas for people out there who are like, how can we get a little bit more money into an education savings account?
So a couple of questions on that. Do you get it as like adjusting your income if you’re putting that into this college savings? Like, does it come off the bottom line of your own individual taxes if you’re putting that in for your kid?
Or is it just a separate bucket?
Really good questions. 529 plans are state-sponsored plans.
Okay.
Some states will give you a state tax deduction just on the state side, and then some won’t. So like the state of Arizona, for example, will give you a state-tax deduction up to $4,000 per kid. So you got two kids, you put in $4,000 each.
You just now got an $8,000 state-tax deduction. Kind of nice. But then you go to our friendly neighbors to the west, California, they give you nothing.
There’s no one centered.
So it’s all state-dependent. Fair enough.
Exactly. Yep. It’s all state-dependent of what they’ll give you, if there’s anything for some type of carrot for contributing to a 529 account.
So even if you’re a grandparent and you live in Arizona, and your grandson or granddaughter lives elsewhere, what we tell people to do is open them an account in your name with them as the beneficiary, and then you contribute to it, and then you get
No, it makes total sense.
And then, so question for you as far as the gains over the next 18 years, right? As long as you’re using it for qualified expenses, there’s no gains taxes on the amount you made in the market. Did I hear that right?
Correct.
It’s just like a Roth IRA in the sense of the money goes in, grows tax-free, comes out tax-free if used for those qualified education expenses.
And what is awesome, because in my planning conversation, most parents go, okay, well, we don’t really know if they’re going to go to college.
And so, you know, putting that on them when they’re, you know, a month old is how, what’s the out of this thing? What are our options? Or what if they get that full red scholarship that I’m sure we’d all be happy for?
So what’s very cool, and this is new within the last couple of years, the government allows now a 529 account to be rolled over to a Roth IRA. Wow. So let’s say you’ve got a…
Now, it’s not the full amount. There is a limit. It’s currently like $37,000, $38,000 is the max that you can roll over from a 529.
I’m actually going to look that up so I can double check. All right. So right now, it’s $35,000, the lifetime maximum that you can roll over into a Roth IRA.
In the name of your child.
So your child gets to college, goes through college, has whatever money is left over.
Instead of just using it and taking it out, well, now they can roll the leftover portion into a Roth IRA for themselves. Or your kid gets to high school, college isn’t their thing.
Now we can take up to the $35,000, roll it over into a Roth or they get that scholarship. At least a portion of it now we can keep into a tax-free bucket and give them an awesome head start for their own retirement savings.
Imagine if we all started with $20,000, $30,000, and a Roth IRA at 20 years old. Like that would be pretty incredible.
And so after your child turns 18, you no longer can fund these. Is that fair to say?
No, you can. You absolutely can if you want to. If you need that, if you have the money and you want that tax deduction, or live in a state where it makes sense to, you can keep funding it.
But if it’s overfunded and you’re beyond that $35,000, which I’m sure will grow with inflation, just like everything does with the IRS, that number will get higher and higher as time goes on.
But yes, so now you’ve got $50,000 in there and only $35,000 can get rolled over. So wondering what we’re doing with $15,000 of it. Then you can pass the money to another kid.
If you’ve got another kid, that money can get changed over into their name, which is awesome.
If you don’t have any other kids, and you need the money back, then yes, the portion of growth can be taxable to you, as well as there’s a 10% penalty of taking the money for non-qualified expenses.
Awesome. And then what about for the aunts and uncles out there? Could you set one up for your nephew or niece?
Or is it strictly parents, grandparents, etc.?
You can set one up for anybody if you really wanted to. Yeah, if you wanted to set one up for yourself, because you live in a state that gives you that incentive, that tax incentive to do so.
And for your niece or nephew, yeah, you can absolutely fund it for them.
And what about the parents out there thinking, well, okay, I save up, get this funded for my kids, college education, or even through, you said K through 12 as well.
But they end up not going to college or not actually using it, and you roll it into this IRA for your child. Does the child have access to that now?
So I’m thinking, do you really want your kid to be able to pull out the $40,000 that’s in it or $50,000? Could they do that hypothetically, or could you put some safeguards on it?
Like, hey, we’re going to roll this into a Roth IRA, but you can’t touch this until your retirement age. Or is it fair game for that kid?
I mean, it’s their account now. It’s in their name. If they wanted to take the money out, they can’t.
IRAs get hit with that 10% early withdrawal penalty. And then Roths have their own rule. If you have to have them, it’s called a five year rule.
It’s got to be funded for five years.
Totally.
And so it’s got to be funded for five years. And then even after that, if you’re under 59 and a half, there’s still the 10% rule. So they absolutely can take it and run and pay the taxes and move on from it.
And that’s the risk, I think, that we all run with our kids. That’s another reason a lot of people will do like custodial accounts with their child where it’s both their names on it.
And that’s tricky, too, because once the kid turns 18, some states it’s different. It’s called the age of minority. The different states have different ages.
And so once they turn that age, majority, age of majority, I said it the wrong way.
I almost got it.
Okay, so once they reach that age of majority is what states call it, whether it’s 18, 21, that money is now fully theirs.
Sometimes parents will be like, I want to join an account or a custodial account because they get to control it up until that age of majority.
And if the kid’s not behaving or isn’t going through life the way they want to, they can basically just kick them off that account, put the money back into their name if they want to.
And I’m putting you on the spot, but the light bulb is going off in my head. You’ve been funding it for your kid. Ultimately, there’s plenty of leftover in the account or the kid decides not to go to college and they never use it.
Do you have to roll this into Roth IRA? Can you just leave it in there and then transfer it to your kid when, I don’t know, foreseeable future date? Or is that what typically you do with your clients?
As you get to that age, the kid didn’t use it, and you just say, hey, let’s roll this into Roth IRA? Or could they leave it in that 529?
Yeah, you could leave it in there for a long time. And maybe, you know, if they’re considering a grad program or any other type of education outside of college. Trade schools also work for 529 plans.
I think that’s between me and you. I think trade schools will certainly be an even bigger thing when my daughter is 18 years old.
If colleges go this way, I don’t see where the benefit is of paying $200,000 to get an education in a college where it’s probably not worth that. Anyway, so the 529s money can be used for trade schools.
But yeah, if they get to the point and it’s in there and they’re just like not sure what to do with it.
Yeah, you don’t have to make an immediate decision on their graduation eve, but there’s just more effective ways of being like, okay, let’s get it out of the 529 and into your name.
Or maybe mom and dad had another child behind that person, the graduate, and they’re like, you know what, we’re going to change this money over to the little one’s name. And keep funding it for that one. So it’s super flexible.
You mentioned a good point too, is like it’s got to be a qualified expense.
But what I’m hearing too is there’s not really an education savings police watching the qualified expense. So pull at your own risk.
But if you ever do get audited, you’re probably going to have to show receipts of why you pulled that specific amount out.
Yeah, the ones, the companies that I’ve dealt with who have the 529s, it’s called like a reimbursement. Yeah, it’s not a reimbursement method where you have to prove some type of receipts to get your money.
It’s, you know, you tell us how much you need, we get you that amount. So yeah, if you’re paying for gas or paying for an apartment off campus and, you know, want to run that risk, not advisable, but your money, do what you want.
And you kind of run the audit scheme. But I have heard of other companies that do that will say, hey, you have a 529 with us, we need the receipt. So it is that reimbursement method.
We need to see the tuition receipt. We need to see the parking pass receipt. The dorms receipt, and they kind of do that due diligence for you, which is annoying and good, I guess, at the same time.
But yeah, it depends on what company you work with to have where your 529 is. So yeah, to open a 529, you can go online, Google it. You know, Fidelity has one, Schwab has one, and you can set it up and fund it.
It’s pretty easy to do. And, you know, you pick an investment and kind of go from there to set up your automatic contributions. And, you know, now the accounts often run.
Well, and you know, what’s funny to me is I feel like it doesn’t come up enough in conversations with financial planners.
Like knowing that your client has kids, I mean, I’m assuming most financial planners will bring it up, but I just feel like it’s kind of swept under the rug a little bit.
Yeah, and maybe because there’s not enough money to be made in it for them. I don’t know. I’m not sure.
Like my 529 accounts that I have for my clients, I don’t make a penny off of them. They’re commission free, there’s no management fee, there’s nothing. It’s just, but it’s part of the planning thing.
And it’s a tax planning avenue too, just if you’re in the right states. And people want to set their kids up for success.
And this is the most efficient way, in my opinion, a 529 to set your kid up to pay for their college, pretty much tax deferred and tax free when it comes out. So yeah, it definitely needs to be talked about more, needs to be utilized.
It’s also hard getting parents to save, honestly. Like you just had a kid, a lot of expenses come with that. But the ones who can do it, even if you start just 100 bucks a month, 200 bucks a month, that goes a long way over an 18 year period.
Exactly right.
And I almost kind of think of it as like the 4K perspective, right? Like a lot of times, a lot of participants or employees are deterred from wanting to participate because they’re like, well, I haven’t really started doing it yet.
And that mindset can kill you because even if you just start today, it’s going to help you significantly more when you reach that retirement age.
So even though you may have been missing out on it for the last 10 years, or you just never got to it, the quicker you start is always the better result for you from a retirement perspective. And I think that applies to this.
Like maybe you didn’t get out of the hospital and call your advisor and set up an education 529 plan, but it doesn’t mean you’re too late to the game. Like it’s always viable to start this as soon as you can. It’s kind of what I’m hearing.
Dude, my favorite line is the best time to save was yesterday.
The second best time is today.
Love it. That’s a great line.
So you’re absolutely right. It’s don’t be down on yourself that you didn’t do it. It’s just like, okay, maybe now they’re 10 years old, but you’ve got the income now to be able to set some money aside for them.
Now’s the time. We still got eight years. Like let’s just put some money away.
And again, I think having the out at the end, whether it’s the Roth, whether it’s the money back to you, whether it’s rolling it to another beneficiary, the flexibility of the fence, like they’re just unrivaled.
Like it’s such a cool feature to be able to save for somebody, then maybe give them this big head start and retirement savings that they wouldn’t have had otherwise, or pass it to the next sibling in line, and let them utilize what’s left over.
So, and I think another good point too, Sean, I didn’t mean to interrupt, but it’s, you don’t have to fund it if you’re married 40, 38 grand every year, like a hundred bucks, you know, like just start somewhere, right?
And then you’ll see the progress of it. And then as you kind of get better with finances and budgeting, then maybe you can do another hundred bucks a month or another additional couple hundred bucks. But it’s always best.
And it’s the same perspective in your company’s retirement plan is start it as soon as you can, even if you missed.
Yeah. And like I said, one of the easy tricks is birthdays, Christmas, love that graduations, whatever that might be.
I know it’s awkward asking for cash, but you can make like at Edward Jones, we had these cool almost like postcard mailers that would say, like, hey, instead of giving us a gift, you know, contribute to the 529 account, here’s how to do it, or here’s
how to write the check. And I love that because that’s what you could give on the invite to anyone. Hey, we don’t, you know, we really don’t need gifts.
But if you want to give, you know, send us a check to made out to X for the benefit of our daughter, son’s 529 account. Boom. Like, awesome.
That’s an easy way to put some money away for them.
Better than the 50 bucks you spend on Amazon, that 50 dollars you spend that one year, you’d be surprised what it looks like a year from there.
Yeah, man. We were so impressed with the amount of zero to three month clothes we got, that she wore maybe a quarter of them. And then you got all these outfits that you just give away to somebody or donate.
And it’s just like, man, instead of them spending the 18 bucks at Target or whatever it was, what if we got 20 bucks from each of those pairs of outfits and put that towards something that one got to stay within the family, and then two really helps
I love it.
Well, in honor of the Father’s Day and the previous Mother’s Day, I think this was an ideal topic. But keep in mind, right, just because you haven’t started it doesn’t mean you shouldn’t.
So I think the earlier is always the better, but anything is better than nothing, right?
Absolutely. Like I said, even 100 bucks a month, if you can do that, they’ll gladly thank you. And you’ll thank yourself later when those tuition bills come, or even the trade school bills come, or even the online classes.
All of this can be used for that. And you got a little honeypot with 20 grand, 30 grand in it for them, that is super helpful to cut checks from that versus you wondering, how the heck am I going to come up with this?
So very versatile, the 529 account. If you have any questions, listeners out there, don’t hesitate to reach out to either of us for kind of more deeper education on that.
But yeah, man, I appreciate you bringing up this topic because it’s certainly an epic one.
And like you recognize, not everybody utilizes it or talks about it in their planning, but certainly should and hey, man, nothing better you can do for your kid than the gift of education.
I love it. And to you, Sean, thank you always for the free game. And I know people should pay you for this advice, but hopefully the listeners appreciate it as much as I do.
So we do appreciate you, Sean.
Thanks, man. I appreciate those kind words there. Love you, buddy.
Have a great rest of the week. And we’ll be back at it again next week.
Love you too, brother. Thank you.