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kyle stacey
ABOUT Kyle

Kyle Stacey is a CERTIFIED FINANCIAL PLANNER™ professional with Pure Financial Advisors. Kyle graduated from San Diego State University, earning his BA in Financial Services and received the SDSU Personal Financial Planning Certificate. Kyle works directly with clients to help them accomplish their financial goals specifically pertaining to the areas of retirement planning, tax planning, [...]

Should you use a 529 plan, Coverdell, prepaid tuition, or a brokerage account to pay for college? Learn the various ways to save for education for your kids and grandkids, the pros and cons of each, and strategies to make the most of your college savings.

Free Financial Assessment

Transcript:

Andi: Thank you all for joining us on this webinar on how to pay for college education for your kids or your grandkids or anybody else who this applies to. Now please welcome your presenter, Kyle Stacy, CFP®. Kyle, thank you so much for joining us today and sharing your knowledge with us.

Kyle: Yeah, thanks. Thanks, Andi. This is going to be fun. College planning. This is definitely a subject matter that hits a little home for me. As a parent of two kids, 5 year old daughter, two year old little boy, it’s a daunting task, right, to think about college savings in the time horizon, how expensive this is. So I was excited to kind of share this and do this webinar today.

Andi: Excellent. Thank you so much. Shall we get into that presentation?

Kyle: Yeah, absolutely. So today is really about setting a foundation of how much to save. What does college cost? Don’t shoot the messenger there when I tell you what that is. Some different types of options to be saving too, as well as coming up with a plan to structure a college savings for your kids, loved ones, grandkids, whoever it may be. Let’s kind of start with the basics. We got to figure out, okay, assess the needs of how much funds you’re going to need to save. There’s a ton of different savings options. Neither one is better or worse than the other. It really just depends on what it is you’re trying to accomplish, how much you’re trying to save and how much you’re trying to provide for your loved one, your kid, grandkid, whoever it may be. Again, obviously building a savings plan, you’re going to have to save some money toward this goal. How much needs to be saved? Are you planning to pay for some of college? half of college? just the tuition? Do you want to pay for the whole thing? I think one of the biggest gifts that my parents provided me was the fact, besides being born, I got to give them credit for that, and all the life knowledge they’ve given me, is the fact that they paid for my college through and through. The only thing they asked of me was to work through college, which I did. I held up my end of the bargain, but I can’t thank them enough for that. So I would love to be able to pass that along to my kids. I would imagine it’s going to be much more expensive than it was when they paid for it. I think my parents got off the hook for about $40,000 for the time I spent in college. My sister’s college was a little bit more expensive. She went out of state. And it’s difficult because if you don’t have anything saved, you’re trying to scrap what you can, work overtime, you might have to take cash out of the house to pay for it. Again, so I was very thankful for that. I would love to provide that for my family, and I’m sure those of you watching would love to do that as well. Again, the biggest part about any plan or strategy is making sure you’re monitoring it. Checking in. The environment is going to change, right? Nothing is stagnant. Okay. I encourage you guys as we go through this to ask questions. Andi’s got the chat feature up and loaded there. We’ll try to get to questions at the end of the meeting. So we’ll hold all of those for the end.

FREE GUIDE: The ABC's of College Funding

College Expenses

All right, so how much are you going to need? Right? Let’s assess some needed funds and some savings options. So if you didn’t know already, college is expensive, right? News flash. So let’s walk through these: average cost of a 4 year private college with room and board, about $50,000 per year. Not over the 4 year period, that’s per year. Again, that’s private college. So some public would be a little bit cheaper. But if you’re looking at just the average cost of an in-state, that’s still about $26,000. I think the average is right around $12,000 to $15,000. But if you’re looking out the door, total cost, room, board, tuition, fees, books, all of that, it’s about $200,000. Some people don’t have that saved for an entire lifetime for retirement, let alone for school. Right? So it’s like, how the heck are you going to do this? What are the different vehicles? How can you start with saving there? This is interesting. So Fidelity did this poll, and Fidelity is one of the most reputable custodians on the face of the planet. And they found that 61% of families have no financial plan to pay for college, which is essentially just winging it, right? I mean, granted, 39% do have a plan, but that’s much lower of a percentage than 61%. All right, let’s talk about some savings options. These are just a couple of them. We’ll go through maybe a couple of others if we have time.

529 Plans

But the bellwether is going to be the 529 plan, right? This is a plan that allows you to save as you go. You can front load money into it. We’ll get into the details here on all of these. Coverdell accounts, another way of saving for college. Contribution limits aren’t as big, but again, still a way to save for college. There’s prepaid tuition accounts. So this is kind of like buying units for a future college. You’re buying today’s prices for college tomorrow. So these can be a great way to do it as well. And then there’s the good old fashioned brokerage account, right? Just a non-retirement account. You throw some money in there, you can buy whatever you want. It’s your asset. It’s not the kids’ name or anything like that. You’ve got full control. So we’ll kind of focus on these today. Talk about pros and cons, getting through those, and see what questions come up as we go through this. All right, so let’s start with the 529 plan. Again, pros and cons to everything. The biggest pro with a 529 plan is the fact that all of the earnings grow tax-free. So think about it kind of like a Roth IRA. You take some money, you fund it into the 529 plan. Typically, the parent, a grandparent, is the owner of the account. The child or the person going to college is going to be the beneficiary of that account. But you can put money into the account and as it’s invested, again you can choose how aggressive or conservative you want to invest that money, it’ll grow tax-free, all the whole way. You pay no taxes along the way, no penalties along the way, and then eventually, when it gets time to pay for those college expenses, the money can be pulled out as long as the expense is qualified, tax-free. Okay, so you get a little bit of a tax advantage there. The funds can be used at all eligible schools nationwide. Something else that’s not in there is if you do have a qualifying abroad program, as long as the school is qualified, you can use 529 plans for abroad schools as well. Okay. And then anyone with an income can open an account. There’s no income limitations or you don’t have to have a job or anything. As long as you have cash to put in the account, you can fund it. There’s no issues with that. Okay. There are some downfalls with 529. Nothing is perfect. The fees tend to be a little bit higher than if you were to just invest the money outside of the account. Then you’ve got a little bit of a compressed time horizon here. You might have only 18 years, whereas with a longer-term, like a retirement plan, you might have 30, 40 years. So the investment vehicles are a little bit more condensed and compressed. They tend to be a little bit more expensive. And then you do have limited savings options, which again, is a little bit of a silver lining. That could be a good thing. I don’t know how many of you go to In ‘n Out Burger, but I kind of like the fact they only have 3 options on the menu. It keeps me from having analysis paralysis there. So limited investment options, you’re not going to get a ton of maneuverability there. Okay. Something else with 529 plans is the fact that they’re pretty flexible. Right. They used to be pretty rigid in the fact that you could only use them for tuition and fees. They’ve expanded that pretty substantially over the last decade. And especially with the Tax Cuts and Jobs Act recently, what they did is they expanded it so you could use some of the money for K through 12. So if you have tuition at a private elementary school or a high school, you can use up to $10,000 to pay for that. In addition, let’s say you go through college and there’s leftover money. You can actually use $10,000 of the 529 plan to pay off student loans. So there’s a little bit more flexibility than it has in the past. So again, this is kind of the Marquee plan that people use for college savings. Just as an added benefit, at the end of this, I’ll kind of show you how I save for my kids’ college and how I’m funding it.

Andi: I’ll just reiterate the fact that we are getting a number of questions. We’ve got several that are lined up on 529 plans. Stick with us. We are holding those to the very end. So you will get your questions answered. Just keep thinking of them, keep putting them into the chat, and Kyle will answer them at the end.

Coverdell Accounts

Kyle: Another option is Coverdell accounts. So these Coverdell accounts, it’s another way to save for college. They’re just not as flexible, but they do have some benefits. Again, it’s tax-free growth, right? So the money that you’re investing over time, grows tax-deferred. You don’t pay any taxes on it. As long as the expenses from the account are qualified, it’s all tax-free. The tax-free withdrawals, there are much more investment options. It’s just kind of like it’s almost like an IRA account, like an IRA trust account that you have a little bit more flexibility in how you’re going to invest the money. And it’s also not considered in financial aid availability when not in the beneficiary’s name. So it kind of helps with that ESC credit if that’s something that you’re concerned about. Again, there are some cons here. There are income-based contribution limits. So if you make as a married filing joint household more than $220,000, you are not eligible to contribute to this plan. There are income limitations, okay? There are also yearly contribution limits. So the maximum that you can put into a Coverdell account is $2000 per year per beneficiary. That’s important because if you have a Coverdell set up, and let’s say the grandparents have a Coverdell set up, they cannot exceed between the two of them $2000 per year, okay? Otherwise there’s penalties and the money has to be withdrawn. Again, the yearly contribution limits. So if you kind of think about it, you’re not going to be able to save a ton of money for college here if you’re looking at $2000 a year. And for maybe an 18 year time horizon, the max you could probably get in there with, let’s say, 6% or 7% growth over 18 years might be $60,000 to $70,000. And if we just saw in the previous couple of slides, it’s almost $200,000 to pay for the full boat cost of college. So this could be a good option if you’re just looking to pay for a little bit for your kid, grandkid or loved one there. They only can contribute until the beneficiary is 18, right? You can’t contribute thereafter. And it’s also, like I said, not likely to provide for all of the college funding just due to the fact that you can only put so much into it.

Prepaid Tuition

Okay. Another option is prepaid tuition. These are becoming a little bit more popular over time because you get to essentially buy today’s unit price for the future. Again, you’re locking in those future tuition costs. College expenses typically grow at about twice the inflation rate. Inflation is a little high right now. It’s a little over 8.5%, but the 100-year average is about 3.7%. So college expenses actually grow at about 7% per year. So if you can lock that price in today, this could be a good option for you. And you can set these up whether you do it monthly or you can front load it with cash as well. What happens if your child doesn’t go to college, though, right, is you get your money back. You don’t lose the money that you put into it. You can get your dollars back, and you’re also going to, again, receive favorable financial aid treatment. It’s assessed up to 5.64% rather than 20% if it’s your own asset there. So these can be really good options if you’ve got, let’s say, a long lineage of, like, alma mater- grandpa went to Ohio State or grandpa went to Michigan. I’m just pitting the rivals against each other. And then the dad went- and now you want the kid to go or the grandchild to go- there’s a long lineage you can lock in today’s tuition rates. Some of the cons, it’s not going to cover costs outside of tuition, so it’s not going to cover room, it’s not going to cover board. It’s just the tuition. And it’s only available to residents in the state. So if you’re in California and you want to go to Michigan, you can’t do this. You’ve got to be a resident of that state. And then there’s limited enrollment periods. You can’t just go, hey, I want to sign up for a limited tuition plan. Because tuition is flexible, it continues to increase over time. So typically, in the Spring semesters, from February, March, and April, they’ll give you a time frame that you actually have to enroll in these plans to lock in the price. And then from there, as you sign up and you fill out the applications, they’ll say, hey, how much is it going to be? Is it going to be $500 a month? $200 a month? whatever the cost ends up being? One thing that’s nice about prepaid tuition is you don’t actually have to invest the money. The state will do it for you. So you take that out of the equation. You don’t have to pick mutual funds or investments and monitor that if that’s something that you’re concerned about. Most states, and they’re all a little different, they tend to almost guarantee the fact that you are going to have enough money by the time you get to that expenditure. So again, pretty flexible. These are becoming pretty popular.

Brokerage Account

Okay. The good old fashioned brokerage account. I personally use a little bit of a combination with brokerage account and 529 plan. Most of the reasons, the fact that again, you don’t know- kids are unpredictable, right? What if they don’t go to school? What if they end up doing something else or taking a different path? All you care about is that they’re happy. But I like the idea of having complete control, right? If you accidentally over-fund a 529 plan, for example, and you’re left over with a bunch of cash, you can gift it to another beneficiary within the family, which is fine, but I’d rather much rather have the money personally for myself. You have complete flexibility here as well compared to just strictly education expenses. So you can kind of think about a brokerage account, kind of like a life account, right? If the kids got- they need a new car or the car needs fixing or any expenses associated with the child, you can kind of use a brokerage account as their own and there’s no rules or regulations against it. Also you’re going to have much more broader investment choices here. You have the entire universe to invest in rather than specific funds for either the Coverdells or the 529 plans. There’s some cons though, right, to that is the fact that there are no free lunch when it comes to taxes. You still have to pay taxes on any gains within that brokerage account. Granted, they’re capital gains rates, and this is maybe a topic for another discussion or time, but capital gains rates, depending on what bracket you’re in, they could be tax-free. So depending if you’re in a 12% tax bracket, you can get that down to 0%. Or if the account is managed appropriately, what you can do is tax loss harvest the account over the child’s lifetime until they get to college and that’s where you can utilize losses and gains to then create tax-free income out of there. So again, a little bit more sophisticated, but can be done. But it’s also likely to lower any expected family contributions. If you are lumping that in trying to get any financial aid or if you’re trying to qualify for scholarships, things like that, it could lower that contribution. Okay. All right, so we just captured a couple of options here for the vehicles to use for savings.

Build a Savings Plan

Let’s talk about actually building your savings plan. And again, this is going to vary for everybody. Some people want to pay full boat for the entire expense. Some people just want to cover what they can or maybe they just want to provide a little bit of something to help alleviate parents, grandkids from having to take out huge loans, things like that. So let’s talk about this. All right, so number one goal right, choose the right plan you think is correct for you. Again, I personally use a couple of different ones. Doesn’t make that right or wrong. It’s just what I’m comfortable doing. You’ve got to complete some applications, whether it’s a Coverdell, the 529 plan or the prepaid tuition account, or you’ve got to set that up. You’re going to need the beneficiary’s information, name, date of birth, address. Typically, there’s two ways of doing this. There’s an owner of the account which is going to be either the parent, the grandparent, or the person opening the account on behalf of the beneficiary. So the beneficiary is the person that is planning to go to college. Funding the plan, how much money needs to be set up on that? Is it going to be biweekly? Is it going to be a paycheck deduction? How often are you going to fund the plan and then choosing the investments again, if applicable? Remember, the prepaid tuition plans do not require you to actually choose investments. And then you can automate the savings, right? Get that thing going on an automatic ACH into the plan. You can even set it up for ongoing investing. Just try and make things as easy as you can on yourself. And then directing gifts to a savings plan, so a lot of these college savings, especially 529 plans- if we just go back a moment to those, some people will use 529 plans as an estate vehicle. Because what you can do is you can essentially front load the contributions into the 529 plan. There’s no contribution limits with 529 plans. However, there are certain gift rules that if you put too much in, you’re going to actually have to record that as a gift on your tax return. It’s a 709 form. So be conscious with how much you’re funding into that. What some people will do is they’re trying to get assets out of their estate. They will front load it into a 529 plan. And as of 2022, the annual gift amount is $16,000. So one person can gift another person $16,000 with no issues. If you’re a married couple, you double it. So that’s $32,000. What some people will do if they have the cash, is they’ll front load, and the 529 laws allow this, to front load 5 years’ worth of contributions into the 529 plan, and then you get to spread out that gift over 5 years. Okay? So you can really supercharge this by lumping cash into that. It’s not an option for everybody, but it is a mechanism that you can do. And then those assets that you transfer into the 529 plan are out of your estate. Again, another way to sort of tie in college funding and two separate goals. All right, let’s talk about some statistics. Some of these are going to be a little bit mind blowing, to be honest with you. So again, planning is going to give you the higher likelihood of being successful. It’s a fact, and these stats prove it. So whether you have a plan or do not have a plan, you’ll notice 56% of people who do not have a plan started saving for college. 95% of the people that do have a plan have started saving. The median amount of saved is $24,000 for people who have a plan versus those without only have about $10,000 saved. Okay? And then of the people that feel on target for their savings goal, almost 1/2 of the people that have a plan in place feel confident. 21% do not. So these statistics as you go down the line, having a plan in place gives you the likelihood of being successful. 2/3 of the people have a 529 plan. Again, the 529 is kind of the bellwether of this space, the most popular, the most convenient, flexible. But I think this last point is probably more paramount than any, is the fact that talk to your kids about savings and paying for college. And this goes not just for college savings, but just in general. Financial transparency is really important. And there’s been a lot of studies done on this that show kids who are more financially educated and more well aware of the finances within the household are more likely to make better financial decisions within their own life. So be upfront and be transparent with your kids and help them understand what the money is for, how hard you are working to save for their college. And the statistics are really proven that out, right? So those who talk about it, they have a plan in place at 60% versus 36%. Okay?

Monthly Estimate, 4 Year Public University

All right, so let’s talk numbers. How much do you need to save to get to these? So if you start when your child is born, if you want to pay for 1/3, 1/2 or the entire thing, you can kind of see how much you need saved. And so just kind of looking at these numbers, if you start when your child is born, if you wanted to pay for the whole thing, $472 a month, that should get you pretty close to that $175,000 number. Or, sorry, that’ll get you about 1/3 of that. So call it $50,000, $60,000. That’s if you wanted to start saving when your child is born. If you start saving when your child is 6. So let’s say you listen to this webinar, your child is 6 and you’re like, oh, shoot, I got to get caught back up. Well, if you want to pay for 1/3 of the college, again, that’s going to get you to about $60,000, $70,000, you just need to start funneling away about $300 a month. If you want to pay for the whole thing, it’s almost $1000 a month just by getting started 6 years later. And the numbers get a little bit tougher if you start when your child’s 12, you’ve got to start about $2100 a month to get caught up. Okay. So again, the moral of the story is get started sooner rather than later to do this. All right.

Check in and Calculate Changes

And then the most important part is checking in. You got to monitor the plan that you’ve set up. Things are going to change. Right. Tax law changes. 529 plans just in the last several years have expanded quite a bit and have made it a little bit more attractive. And you might want to pay for secondary school expenses. Right. Maybe there is a private school or elementary school that you want them to attend. These laws are changing constantly, especially with how important it is in this country for people to go to school. So monitoring the plan, being flexible, and again, it doesn’t get any cheaper. Right. 7% of the annual growth rate of college expenses, that’s twice what the 100-year average of inflation is at this point. So getting started sooner rather than later is going to be your best bet. Okay. So that was a lot of content that we covered in a pretty short amount of time. I’m sure there’s plenty of questions. Andi’ll get to those and we’ll answer those, but if for any reason we do not get your question answered, feel free to reach out. Andi’s going to put up a link to schedule a strategy call if you need to have any of your questions answered. We can talk about funding and creating a retirement plan and education plan for you that aligns with what you’re trying to accomplish.

Questions

Andi, do you have those questions?

Andi: Kay says, “How do we know if we are saving enough for our kids’ college? The 529 for our 15-year-old is $24,000 and I contribute $330 a month. The 529 for the 7-year-old is $11,000 and I contribute $250 a month. I’m still undecided if I should increase the contribution into their 529.”

Kyle: Okay, so it sounds like the question is gearing around, does she have enough for the beneficiaries? I guess the question is going to be kind of answered as, how much do you want to pay for the college? Right. If you’ve got that amount saved up now, you’re putting away $330 a month, you’ve got about 3 more years, so it’s another $12,000. You should have about probably $36,000 at a minimum in that account, plus a little bit of growth. So it’ll be a little over $40,000 or so by the time that the first one gets to college. If it’s $10,000 a year or that’s what you want to kick in, I’d say you’re right on track. If you want to pay for a little bit more, you probably need to bump that up a little bit or maybe find a way to get creative in how you’re going to be funding it.

Andi: All right, the next question is from Eric. He says, “I have 529 accounts for my two children, ages 10 and 7. The money is in Fidelity Blend Funds 2030 and 2033. The expense ratios are quite a bit higher compared to the Fidelity Index 2030 and 2033, which is an option I can switch to. Given the timeline until the money is needed and the expense ratio difference between the options, does it make sense to switch to the index funds? Not knowing what the market will do over the next number of years until it’s needed, is looking at just expense ratio okay to make this decision? Does it make sense to do a 50/50 split in the allocation?”

Kyle: Okay.

Andi: That’s a lot.

Kyle: Yeah. What I heard there was there’s two different 2030 funds it sounds like. One is a blended fund and then one is just an index fund, but the blended funds a little bit more expensive, is what it sounds like.

Andi: Correct.

Kyle: I would be curious to see what the asset allocation is, but the one that’s a little bit more expensive is probably what’s called like, a fund of funds where there might be 5 or 6 mutual funds that are put together or blended to make up a 2030 target date. Whereas the index might just be a passively managed 2030 fund. That’s the target date. It’s the only investment. So that’s probably why it’s a little cheaper. Be careful with those two. I don’t believe they would put a retirement 2030 fund in a college savings account, but 2030 might mean something different to different people, right? A 2030 retirement fund might have a different asset allocation than a 2030 college fund. There might be different weights of stocks and bonds within those. So I would check the allocation first. But if the allocations are similar and you’re comfortable with that, I’d go with the lower expense ratio.

Andi: All right. The next one is from Emma. She says, “My husband and I have two kids under age 5 and $600,000 in 529. Can we transfer, not change beneficiary on the account, to a nephew and then ask them to pay us some of the money in a $15,000 gift? Thoughts on penalty withdrawals later?”

Kyle: $600,000 might be the biggest 529 plan I’ve ever heard of. So it sounds like the question they’re asking is, can we change the owner of the account instead of us to my nephew? And then, can they take money out of it and then pay us the $15,000?

Andi: That’s what it sounds like.

Kyle: They over funded the 529, is what it sounds like. The answer to that is no. In order to change the owner of the 529, unfortunately, someone has to pass away. Certain states will allow you to do it, but it’s not really going to change too much. The beneficiary, you can change that all day long, right? As long as you’re changing it to a family member, first cousin, things like that, it doesn’t matter who’s the beneficiary of it. And then paying yourself $15,000, it wouldn’t really make a difference whether you took the $15,000 out or you gave it to someone else for them to give to you because you’re going to have to pay taxes and penalties on it. That’s a non-qualified distribution. So that answer would be no.

Andi: All right, as I mentioned, we do have a number of questions. I don’t know if we’re going to be able to get to all of them, but keep typing them into the chat. Or if you want, go ahead and schedule that free financial meeting. That Intro to Pure Strategy call so that you can get all your questions answered. The next one is from PK. He says, “We have a Coverdell IRA set up for our kid. He’s a junior in high school and his plan is-“

Kyle: – it’s for college. But this is for high school. High school is secondary. Right. That’s K through 12. This is going to be something that you’re just going to have to be kind of- my answer would be yes. It’s not a requirement for college, but it is associated with the high school. So I would just consider that a fee. That would be fine in my book, but it is a little bit of a gray area.

Andi: Okay. Next one is from Jason. He says, “Can my child have a Coverdell and a 529 plan at the same time?”

Kyle: Yes. And it kind of gets back to again, remember, there’s different contribution limits based on your income for Coverdells. So sometimes if a parent is working throughout their career and they start to exceed those thresholds, they may still have a balance in a Coverdell account and then they might start funding a 529 plan. So the answer to that is yes.

Andi: Okay, so our final question actually comes from Virginia. “Can we use our savings bonds for college education?”

Kyle: Oh, yes. Okay. The answer to that is yes. So there are two different types of savings bonds. There’s EE bonds and I bonds. I bonds have been pretty prevalent here in the media as of late just because of inflation running hot. Those have a little bit of an inflation component on them. But any interest accrued on EE or I bonds can be used for college expenses. So you don’t have to pay the tax on the interest that’s accumulated, as long as it’s for the beneficiary. And it has to be in the parent’s name, it cannot be in the child’s name.

Andi: All right, so I think that is it for us for today. Again, if you have any further questions, go ahead and schedule that Intro to Pure Strategy call. Again, Kyle, thank you so much for taking the time and sharing your experience and your knowledge with the audience. We really appreciate it.

Kyle You bet. Yes, it’s been fun.

Andi: Alright y’all, have a great day.

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