David: Thanks for joining us today for this planning topic, a little tutorial. And today we’ll be talking about 529 plans. Just as a quick reminder, I’m Dave Greene, CEO and owner here at CJM Wealth Advisers. We have with us today, Parker Trasborg, who is another CFP and a financial advisor here. So without further ado, Parker, 529 college savings plans. What are they?
Parker: It is a college savings plan. It was actually created back in 1996 by a tax law. Before that there were Coverdells and you could do savings bonds for college savings. But this became a really attractive option for parents, grandparents, extended family members. You can even open one for yourself if you really wanted to.
David: So it can touch everybody’s lives. Part of the reason why we’re talking about it today, because all those people can be, could choose to participate in it. If they do so, what are the major benefits that they might enjoy?
Parker: So the one major benefit is the tax advantages that you have. Tax deferral, you’re able to contribute to the account, the money sits there, it grows tax free. The government doesn’t take any taxes on the interest or dividends that accrue. And if you use it in the future for a higher education expense, then the money also comes out tax free. And in Virginia you’re able to take a tax deduction on any contributions made up to a limit of $4000 per account, per beneficiary.
David: Impressive and compelling. Right there were three different tax benefits that you might have if you’re investing in 529 plans. Another one of the benefits is flexibility?
Parker: Yeah. So there’s flexibility on the investment side. Like I said before, the old way you would be able to open some savings bonds. Now with the 529 plan, you have access to mutual funds from different fund families, and there’s flexibility to be able to bump the account around between different members of the family, depending on the circumstances you have going on.
David: Good stuff, good stuff. So those are the reasons why I should do it. Is there a cap that we should be aware of?
Parker: So with those tax advantages, there is a penalty if you don’t end up using it for a higher education expense. There is a 10% penalty in the future if you use it for anything other than that. And as I said before, since it’s invested in mutual funds you’re also subject to market fluctuations.
David: Got it. One other thing that some clients have mentioned, maybe some misunderstanding as to state specific, right? So if I open up a Virginia plan, does my child have to go to a Virginia school?
Parker: Nope. You can actually go to any school in the country. And with the recent tax law change, you’re able to even use the account for a high school or pre-high school education, as long as it’s private and it has a cost to it as well.
David: Right. So it’s extended into high school. One of the other interesting things is we do have some clients who have kids who have gone to colleges outside of the country and as long as they’re on the list of the Department of Education (they are ok). So let’s fast forward, child’s now 18 years old and going to school. What can we use it for?
Parker: So tuition, room and board. If you’re living off campus, you can still use it for room and board up to the cost of on-campus housing. You can use it to buy computers, iPads, whatever technology is needed. Now I don’t think you can use it for TVs or anything fun like that, or a PlayStation 4. And you can use it for books and those types of things for college expenses.
David: Good stuff. Good stuff. So let’s for our audience maybe wrap it up 20 seconds or less, kind of the major highlights as to why this is a compelling way to save for college.
Parker: Yep. So as I mentioned before, the most compelling reason is really because of the tax advantages. There’s really no other account outside of an HAS (Health Savings Account) where you’re able to get the tax deduction upfront, the tax deferral, and then the tax free withdrawals in the future. And then the flexibility that you have to be able to bounce around between family members as well as the different investment vehicles that you can have.
David: Good stuff. Good stuff. Have you opened one up for Skyler?
Parker: Of course, I did that the first day I got her social security number.
David: Well done, dad. Well done. There’s three 529 plans in the Greene household, so practicing a bit what we preach. This is a really good strategy to consider for parents, grandparents, extended family. I want to thank you for taking the time today. Hope it was helpful. If you have any questions, give us a call. Thanks again.