Ep. 86 | What's the 411 with 529 Plans?
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John Tripolsky:Hey, everyone, and welcome back to the Teaching Tax Full podcast episode 86 today. We are gonna take
John Tripolsky:a look at what's the 411 with 529 plans. But before we do that, let's take a brief moment and thank our episode sponsor as always.
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John Tripolsky:Welcome back everybody, and how about this episode title? Kinda catchy. Yeah? It's a 411 with 5 20 nines. I would love to take credit for it, but I can't because this guy, Chris Pacquero, actually came up with it.
John Tripolsky:Mister captain creative, keeper of all tax knowledge, and some other inappropriate names I could probably come up with, but we'll keep it very, very PG. Chris, welcome back, man. What's happening?
Chris Piccurrio:Oh, it's great to be back. And, one of the things we have to remember in life, you said keeper of tax knowledge, which which I appreciate that compliment, but knowledge does us no good if we don't share with the world. And we've got one of the main reasons we did teaching tax flow as a concept and created this podcast. You and I, as a labor of love because we are, I know this might be shocking, we're not paid handsomely for doing the podcast financially. Doesn't mean we we don't have some financial benefit, but it's definitely, a labor of love.
Chris Piccurrio:And we really wanna build a community, and we learn from each other. So thank you for this nudge to consistently share any knowledge I have and not keep it. Yeah. You know, we we'd smack her
John Tripolsky:out a little bit if you try to keep it all in there. And I and I say this too because this topic we're gonna look at today. Right? 529 plans. So college savings plans.
John Tripolsky:And before we get into it, I mean, honestly, again, as I as I say pretty much every show, it's kind of like the informal disclaimer.
Chris Piccurrio:I am not a tax pro. So I look at these topics through a different lens than I think, you know, yourself, your team, etcetera, might do it. Right? So, like, you guys are looking at it from much more of a tax perspective. I'm looking at it really from more of your average Joe.
Chris Piccurrio:So, like, this topic to me is is very broad in a sense, although it's topic specific. We're gonna talk about really what these plans are, but then even beyond, you know, their name, college savings, how it can benefit you come tax time. So that's why I'm super interested in this one. This is a really good topic. There has been some expansion of what the 529 plan can do for you.
Chris Piccurrio:There's also a new rule in 2024 under the Secure 2.0 Act that that we will unveil at the end of the show. So don't don't just listen to the first half. You're gonna wanna know what's going on. Now we talk about teaching tax flow, John. You know there are 3 laws of teaching tax flow.
Chris Piccurrio:One of them is that the tax or tax agencies are your involuntary business partner, meaning tax laws are written to encourage and discourage certain behavior. With the rising cost of college and university and the popularity of the Roth IRA, section 529 of the was created to to help people save for college and to allow them essentially to at least use after tax dollars or tax free dollars to pay for qualified education expenses. Hence, 529 plan. Now a 529 plan is a state plan. So each state offers a, what's called a 529 plan.
Chris Piccurrio:And what's interesting is you don't have to live in that state for the for you to basically involve yourself or invest in that state's 529 plan. So for instance, our family, our 529 plans are actually, West Virginia. I've only driven through West Virginia, and it's been a long time. It's been a decade since I drove through West Virginia when we lived in Michigan driving down to Myrtle Beach with the when the kids were itty bitty. But they offered the family of mutual funds that our my business partner and financial advisor recommended that we take advantage of.
John Tripolsky:And you pretty much answered my question there. So, like, why would somebody look at a different state than when they reside in or might go to college into the future, etcetera? You pretty much answered it there. It said it's basically the collect it's the investment accounts or the investment setup, which obviously is different versus it. Absolutely.
John Tripolsky:So
Chris Piccurrio:we are getting encouraged by the the government to invest money for future educational expenses of people that are close to us. The other thing is, remember, there are 4 different color coded diagnosis based on your marginal tax rate in the teaching tax law system. The one that I think is the most important and most underused is the gold diagnosis, tax free incoming growth, because it's it's pretty much, assumed that tax rates marginal tax rates are going to go up in the future. So to be able to have assets grow tax free is a very powerful thing. Instead of giving you you know, let's say I put $10,000 into just some random fund, it became worth a 100,000, and I decided to sell those investments and pay for my child's college, I would have a taxable event of $90,000.
Chris Piccurrio:Who knows? I could owe $30 a tax. Now I just gave a third of my profit or capital gain. I know there are long term capital gain laws and and rates to your business partner. So that's why 529 plan, goal diagnosis.
Chris Piccurrio:Let's dive into what it is, some of the benefits, one one thing you have to be aware of, and then that spoiler, the new rule with the Secure 2.0 Act. Awesome. Awesome. And, Chris, Chris,
John Tripolsky:you know what? Let's maybe I'm gonna throw you a wrench because I haven't done that in a while. Right? So I'm sure there's a fair amount of people that are wondering, oh, well, this sounds great. Makes total sense.
John Tripolsky:Right? I I forgot, and I don't even know if they're still around. Right? I remember getting these in the mail, 10 years ago about, you know, GERB he was, like, the Gerber, you know, education fund or whatever. I don't know if that's the same thing.
John Tripolsky:But with today's kind of educational climate, if we will. Right? And you don't have to answer this right now, but just kinda keep in mind, maybe answer it down the road. What if somebody doesn't go to college or does it apply to certificate programs, online education, etcetera? How does that look compared to their traditional 2 or 4 year programs that, you know, we grew up.
Chris Piccurrio:That is the John, you know, sometimes you have some questions as the kids say are mid. Mid is a mid's a. The kid I know your daughter might be too young to say that but that's what that's what the word on the street is like, this question is not, quote, unquote, mid. This is a very good question. Oh, I take now I'm very big head.
John Tripolsky:Alright. Let me sit up let me sit up a little straighter here. You can hear my chair squeaking around now, my pass I just grew 3 inches. Okay.
Chris Piccurrio:I'll take it. Running around probably excited that he's like, oh, dad had a good question.
John Tripolsky:Yep. But did they come out very far
Chris Piccurrio:and few between? Normally, it's it's a bad one. So So when when 5 29 plans were established, which probably 20 years ago, something around there. I I can't remember exactly. There was restrictive of what what they could be used for.
Chris Piccurrio:But because of the concerns that you just threw out there, the use of them has been expanded. So let's talk about what a 529 plan is. It's a special type of account that an adult is typically the owner of, and a child is the beneficiary. You can always change the beneficiary, which is a strategy to hedge against if that certain beneficiary, I e student, doesn't use the money for the originally intended purposes, education expenses, quite easily. So if I for start a 5 29 plan, it's in my name.
Chris Piccurrio:I'm the I'm the owner of the plan. And, for instance, my wife and I have 3 5 29 plans. We have one for each child. Luckily, for my 15 year old, he was born in January of 2009. My daughter was born March of 2010.
Chris Piccurrio:The stock market was took a big dump, for lack of a better term, so their plans have performed extremely well. My youngest was born in 2013. But each of them has their own separate 529 plan account. I'm the account owner. They are the beneficiary.
Chris Piccurrio:You don't have to be a parent to establish a 5 29 plan account for for a beneficiary. You could be a grandparent. You could be a rich uncle. You could be a very nice neighbor and do this. So from a parent planning perspective, I've always found that if you establish a 5 29 plan for a child, especially when they're really young, let's say they're making their first first holy communion.
Chris Piccurrio:Let's say they are, let's say they're turning 2 or 1. My wife and I always encourage them, yes. My child is 1 years old. They would like to rip something open. They don't know what the heck they're ripping open, but they wanna rip something open.
Chris Piccurrio:So instead of buying a really expensive toy that they're probably going to step on or put in their mouth, kindly buy a a toy for them to open, and then the rest, we will happily put in their 529 plan for them. So it actually encourages, and I think people are more benevolent around your family when they know where the money's going to go. That's just my own personal opinion. If my family ever listens to this podcast, sorry. You were duped a little, but I'm pretty confident they will not listen to this podcast.
Chris Piccurrio:They should listen to this podcast.
John Tripolsky:That is one thing. It you know what? Maybe maybe that's what we should do for the holidays is, you know, give a, like, a QR code and put it in an envelope and give it to our family members. Be like, this is the best gift we can give you is having to listen to us more.
Chris Piccurrio:Yeah. And I actually got that idea from, Brooke Acre, CFP, certified financial planner, who was a who, it's funny we're talking about 529 plan and kids because she she now was on our our podcast about long term care. So and and she has a, you know, she's a big friend of the program and and, has a lot of great ideas. But alright. Let's dive into 5 29 plans, though.
Chris Piccurrio:So they it's a special type of account or plan, rather account, that you can contribute money into, and that money is invested. That money is invested into different portfolios of stocks and bonds and and what just like any other brokerage account. Now when the money is put in from a federal tax perspective, there's no deduction for it. So when if I put in $10,000 into my child's 529 plan and I was a Michigan resident, I don't get a federal tax deduction for that. Now, some states do allow for a state tax deduction for contributions into a 5/29 plan.
Chris Piccurrio:So in Michigan, I think the max is $10,000 per per family. But let's just talk about the federal side. No deduction on the federal side. That $10,000 goes in, I'm the account owner, my child is the beneficiary. That $10,000 is allowed to grow tax free.
Chris Piccurrio:Now we know the rule of 72 says that money is gonna divide 72 by the return. So if you're getting an 8% return, your money will double in 9 years. Let's say it's a baby, the money will double 2 times by the time they're 18. So easy math, 10,000 if I put it in when the year the child was born could conceivably and reasonably be $40,000 when they're 18 years old. At 18, they're extremely smart.
Chris Piccurrio:They begin to attend this Michigan State University instead of any other big ten schools.
John Tripolsky:The ones that go unnamed by yourself, I imagine.
Chris Piccurrio:Yes. Unnamed. Or wherever they they attend, that money could be used throughout their college years. And so if they get a tuition bill for $7,000, room and board for $6,000, you can use the money from the 5.29 plan to pay that, and the entire gain from the 10,000 to the 40,000 is now tax free. So the number one benefit, 1, is tax free growth.
Chris Piccurrio:Meaning, on a year year basis, as that 10,000 became 40,000, if the if the mutual funds and investments paid dividends and interest, you didn't have to pay tax on any of that. So you have tax free growth as a benefit and then tax free withdrawals, just what I described. And what you alluded to is that what can you withdraw the money for tax free? It used to be rather restrictive. But withdrawals from the 5 29 plan are tax free if they're used for now what we call qualified education expenses.
Chris Piccurrio:So that goes beyond just room and board. That includes tuition, fees, books, supplies, and room and board. So for instance, if you know, especially books. I'm I mean, people jeez. You're show we're showing my age when I say that I used to, you know, buy books and sell them back, but a lot like, I'll give you an example.
Chris Piccurrio:A lot a lot of places require students to have a certain computer, a tablet, some type of maybe a advanced calculator, some type of, most likely, software, something beyond just the room and board and the tuition as an expense. So those are eligible expenses for a tax free withdrawal. And I imagine previously too, it would probably
John Tripolsky:and I'm just guessing. Right? It was probably very restrictive in a sense that it would say, okay, well, you, that you must attend one of these smallest of institutions, but it was probably a little bit more. We'll say, direct maybe, where, like, University of Phoenix probably wasn't on there, you know, even though that they were growing in popularity and all these other things. So I imagine that, you know, as we're chatting through this, the gates have kind of opened up a little bit because really the world now has realized that there are all types of other institutions that people are attending.
John Tripolsky:Right? So for example, I know a lot of a lot of people that are in construction. Some of some of the individuals that make the most per year that I know are actually in the trades, where previously that probably wasn't even an option. Correct?
Chris Piccurrio:So, Ray, let's let's talk about what education what educational higher educational institutions or organizations qualify for that tax because the money's gonna grow tax deferred. That tax free withdrawal is important. You named it college and universities, but all it also includes vocational and trade schools. Like you said, that those technical, if you're getting into, you know, being an electrical worker or you're becoming,
John Tripolsky:a plumber, a welder.
Chris Piccurrio:I'm sorry? You could be
John Tripolsky:like a plumber, a welder, an electrician Absolutely. Machinist.
Chris Piccurrio:Have very, very high demand. Community colleges qualify. And even apprenticeships qualify as long as it's certified by the US Department of Labor. So it could even be a a cosmetology school. It could be something like that.
Chris Piccurrio:So those have always been eligible for that tax free distribution. The one thing that changed a few years ago that really helped is that you can now take a distribution of up to $10,000 per year per beneficiary for k to 12 schools. So for instance, my oldest son decide decided to go to a private high school, and he just finished 9th grade. I could've, and I'm deeply considerate. I didn't do it last year, and I just you know, sometimes the the it's the plumber that has leaky pipes.
Chris Piccurrio:Right? True story, man. And you know me well. I didn't even think to me to take and some money out of his 529 plan to pay for his high school. I could've done it last year.
Chris Piccurrio:And this and I was just thinking, like, oh, I should take yeah. I could take $10 out of his account for 24 and pay a portion of his high school tuition and, tax free. So k to 12 now qualifies, which is which is amazing. My and that's public school. So if public schools, if you have any type of tuition usually you wouldn't have tuition expense at public school, but you if it's a you never know.
Chris Piccurrio:You could have that. Private or religious k to 12 schools. So that really opened things up, and that minimized the amount of people that have money in their 5 29 plans at the end of the rope. Let's say they graduate from from college with a bachelor's degree and they're still mining their 5.29. So that that that remedies that.
Chris Piccurrio:And actually, this just makes it really, in my opinion, right, much more attractive and comfortable to invest in now. Like, say, for example, right, if
John Tripolsky:we were talking about online educational programs 20 years ago. People, what in the what? Like, you can't teach things online. Like, that's impossible. Right?
John Tripolsky:So things change. So even now, right, just seeing that, you know, the the government has stepped in and opened the doors to accommodate the new, again, educational climate, if you will. It it's much more comforting knowing that, like, hey. You know what? They're just not gonna pigeonhole you into one little category, and you have to stay within that or, you know, your SOL.
John Tripolsky:So it it's good to see that that they open that up
Chris Piccurrio:and and recognize that. Right? So in a in a lot of thing yeah. So there there there's that one, it opened up what it could be used for. In in theory, you can use it anywhere between kindergarten and in in a doctoral degree.
Chris Piccurrio:It's it allows for tax free growth, tax free withdrawals. We always I already talked about some states have a benefit or a deduction on the state return. It also helps in estate planning benefits. You know, right now, we're in an estate planning environment, where, you know, people could have almost $13,000,000 in their estate. Well, after the tax cuts and jobs act expires, that's gonna go down significantly.
Chris Piccurrio:So the landscape of a state tax is gonna change back to what it used to be, in my opinion. And what that means is that if you have if you have grandparents that have 5/29 plans because they right now, they can fund up to $17,000 to 529 plans because they right now, they can fund up to $17,000 per year per grandparent. So if you have grandparents imagine grandparents that are concerned about estate planning, the estate planning rules change. I mean, this might seem extreme, but let's say they've got a few $1,000,000, their health is kind of going downhill, they've got 10 grandkids, they could ultimately move $340,000 per year because they each could do the 17,000 into 5 29 plans tax free, get it out of their estate, and get it growing tax free for their grandchildren. That is ridiculously amazing.
Chris Piccurrio:One other thing yeah. And I'm gonna mention on the estate planning benefits. There's a special rule that allows taxpayers if they contribute more than the annual estate gift gift tax limit to do a 5 year average. This was very popular in Michigan back when the ME, MET came out, meaning some states offered a prepaid tuition opportunity, for for their kids. But the point is this.
Chris Piccurrio:Let's say grandparents are trying to they wanna put a $100,000 into a 529 front load basically for this child, get it growing tax free. Instead of them having to use take that 100,000 minus their annual gift tax exclusion, they can amperset over a 5 year period. And there are some limitations based on income, but the point is if you're listening to this, and if you're still listening, you're gonna get my special treat at the end here on the new tax law. But if you're listening to this and you have young ones that are in a family that's educationally minded, this is a amazing tax strategy that a lot of people don't use. And remember, one other remedy, John, would be, let's say you have 2 children.
Chris Piccurrio:Maybe you put the 529 plan in the name of one parent's name and the beneficiary is the older child, and if the older child doesn't use all the money, then you move the you move to the youngest younger child as a benefit. You can always change beneficiaries. There's no gift tax implications because you're still the account owner.
John Tripolsky:And a question for you, and I and I apologize if you did mention this one too. But say you start a 529 plan for a 5 year old child. Right? The intent is higher ed and say they never step foot in a classroom post high school. They don't pull from this for k through 12.
John Tripolsky:No trade school. Nothing. What happens at that point? So at that point, you've got
Chris Piccurrio:a couple options. You could change the beneficiary to someone else. You can, you could you could maybe keep him as the beneficiary, and then if they have children, change the beneficiary to their children. You could put it in some or, I mean, if you took a distribution and it didn't get used for education expenses, then all that growth's now gonna be taxable, which is a which is a problem. Or there's no there's not a required minimum distribution or our, the thing we've been holding back on, a new rule of the Secure 2.0 Act starting in 2024, this year.
Chris Piccurrio:If you have money in a 529 plan that was not used for education expenses, you can actually take that and roll it into a Roth IRA, which gives you a lot more flexibility and still can grow tax free. There are some rules. The money has to have had been the money has have has to have been in the 5 29 plan for at least 15 years. And at this point, the rollover is limited to $35,000 in over your lifetime. But that does that's a huge remedy for people with extra money in their 529 plan.
Chris Piccurrio:Put it in the Roth, and now there's no RMDs on Roths and required minimum distributions, and that can grow tax free. So, John, if you and your wife, you know, have the 5 29 plan for your daughter, daughter obviously goes through becomes a a brain surgeon or something fantastic, but she was very gifted so she didn't you didn't use all the money, and and you and and your wife would say, oh, we got $20 left in this 5.29. Let's roll it over to a Roth. Let's let it sit there for a few years, and then let's go on a cruise or something and celebrate how great my daughter is. All tax free.
John Tripolsky:Well, that's the plan. That's the plan. That's the whole you literally just laid my whole plan out right there. So thank you for reading my mind. But, honestly, I think I think, Chris, I think we hit all the good points on this or I should say all the, you know, all the angles of approaching this.
John Tripolsky:I think we obviously defined what a 529 plan is. We broke down where it can be used previously, but then also today. Right? So how the IRS or we'll say the federal government slash IRS, everybody, kinda collectively, has expanded those boundaries in the formats or classrooms per se where it can be used. But then also, that's a that's a pretty big nugget you dropped there as far as for some for some tax news on just being able to roll that over.
John Tripolsky:And I did I I wasn't aware of that. And we talk about this stuff all the time, and I didn't even know that. So I think it's pretty important. So is there is there anything else you'd wanna share on this topic specifically before we kick you off your own show?
Chris Piccurrio:I think that no. I think we've covered a lot of great bases. 529 plans can be a great tool for not only helping with family educational expenses, but tons of tax planning opportunities. If you have questions, yo, shameless plug, just jump into our defeating taxes private Facebook group in Facebook, defeating taxes.com. John, you know, every once a week, we have questions on 5 20 nines.
Chris Piccurrio:We've got tons of great content. And and and if if your questions get more in-depth, we're gonna make sure that we connect you with the right person in the teaching tax law community, a financial adviser that can help you with that plan and pick the investments.
John Tripolsky:Excellent. And on that note too, that is the person that somebody is probably best suited to go speak to about starting one. Right? Right? Would be a financial adviser and maybe stay away from just the random ads that pop up.
Chris Piccurrio:Absolutely. Yeah. Definitely wanna work with a financial adviser and a tax pro. Right? Because you don't you do need to be aware of some of the tax benefits, but also, again, making sure that if your guardianship front loading, being aware of the gift tax responsibilities, and and this the 529 plane is something it's like a dessert.
Chris Piccurrio:It's something that really is really, really good, but it's not your dinner. So if you're someone that's, let's say, just getting started, you have a young family, you're saving to buy that first house, that might be your first priority at this point. And then but the 5 29 plan, you know, you're not you might put some money to the 5 29, but it shouldn't be your main vehicle of of investment. Absolutely. So great topic this week.
Chris Piccurrio:Obviously, next week, we're gonna switch gears a little bit and talk about selling a business.
John Tripolsky:So I know a lot of people got a lot of questions on that as it relates to tax as well. So tax and legal, great show coming up there. Tax and tax and legal considerations when selling a business. But that's it for this week. Let's close this out as my little saying when I randomly pulled out of thin air about 3 or 4 months ago.
John Tripolsky:So same place, same time technically, different week, different topic. A tweak in every week, right? Back here on the Teaching Tax Flow podcast. Hey, Hey, everybody. John here from the Teaching Tax Flow team.
John Tripolsky:Thank you as always for hanging out with us here on the podcast as we dove into those 5 20 nines. Again, I absolutely love the title of this. What's the 411 with 5 20 nines? Again, I can't take credit for it. The other guy came up with it.
John Tripolsky:I gotta give credit where credit is due. That being said, as Chris also mentioned, jump into defeating taxes, that private Facebook group. This is your open invite to dive in there. You would be actually surprised how many tax pros are in there, believe it or not. And really, just sometimes they respond to the questions faster than we do, which we love to see.
John Tripolsky:That's the whole point of that community is to share information and help everybody move forward in defeating taxes in a non negative way. Right? We're doing it legally and ethically through everything we do and promote here through Teaching Tax Lawyers. So thank you again for everybody hanging out with us on this one. Thank you for I don't remember who exactly submitted this question or suggested this topic, but thank you.
John Tripolsky:Know who you are because I believe we talked about this. And again, we will see everybody back here next week on the podcast.
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