Podcast | Season 2 | Episode 02

The Description 

Ever wondered how you can finance your child's college education without breaking the bank? Join us as we unpack the various options available with our expert advisor, Josh Oller. Learn about the tax-free growth potential of 529 college savings accounts and how starting early could drastically reduce the financial burden of college. The conversation doesn't stop at 529 plans, though. We move on to compare Coverdell ESAs and 529 plans, examining the pros, cons, and who they could be most suited for. 

 This episode is a goldmine of valuable insights, helping you make informed decisions about your child's future education costs. Tune in now to start planning effectively!

**The fees, expenses, and features of 529 plans can vary from state to state. 529 plans involve investment risk, including the possible loss of funds. There is no guarantee that an education-funding goal will be met. In order to be federally tax-free, earnings must be used to pay for qualified education expenses. The earnings portion of a nonqualified withdrawal will be subject to ordinary income tax at the recipient’s marginal rate and subject to a 10 percent penalty. By investing in a plan outside your state of residence, you may lose any state tax benefits. 529 plans are subject to enrollment, maintenance, and administration/management fees and expenses. **

A little more about Josh Oller:

Josh joined Summit Wealth Group in July of 2019 working alongside Chris Wells as a Financial Advisor in Summit's Ridgeland, MS branch office.  Josh completed the CFP® certification in October of 2021. He spends time with Chris in an advisory role and is also part of Summit's financial planning department.

Josh is a graduate of Mississippi State University, where he obtained both a Bachelor’s and Master’s degree in Business Administration, all while competing for the MSU golf team.  Josh began his career in the banking industry in 2012 and eventually found his niche in the credit department of the bank, where he became the VP of Credit Administration.  In this role, Josh was able to learn the many aspects of corporate finance, taxation, and business cash flow. 

Josh later realized that his real passion was working with people.  He wanted a career that helped people reach their goals and is excited to help our team assist clients with navigating the bumpy road to the lifestyle they seek.  

Josh currently resides in Jackson, MS, with his wife, Mollie, daughter, Betts, their cat, Lady Grey, and their dog, Rory. Josh and Mollie love outdoor activities and anything that revolves around food! They often joke that their vacations are focused mainly on what places have the best local restaurants. Josh still has a strong passion for golf and regularly competes at various tournaments throughout the state.

Securities and Advisory Services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. Fixed insurance products and services are separate from and not offered through Commonwealth Financial Network®.

Thanks for listening! Make sure to follow us on all the socials at @summitwealthgroup, so you don't miss an episode!

The Transcript

Jessica

"Hey everyone, welcome back to the Reach your Summit Podcast, where we help you navigate the path to a better, more secure future. We are back here with our advisor, Josh Oller, from our Ridgeland, Mississippi office to continue our conversation about all things college planning and college savings. So, thanks for being back here with us, Josh."

Josh

"You bet, it's a pleasure to be back."

Jessica

"So today we're diving more into college savings and kind of what those options are If you can start early and start planning to save for a future child's college education. So when people think about paying for college, typically when they come in and talk to you, what are their thoughts about it? What do they know about and what do they think their options are?"

Josh

"Well, truthfully, most people just don't even want to talk about it. They just say, oh goodness, like they won't worry about that another day. Yeah, you know, truthfully, everybody knows it's something they need to be planning for. Everybody knows it's a massively large expense coming down the road, you know. But some people's financial situations are different than others. Some people can afford to think about it and some people, you know, you're trying to get by for the next year or two. Most people are thinking that's just something we're going to kick down the road, we'll worry about that later. You know, I try to urge them not to not to do that, not to think that way. Let's set up something to where we're saving now, because you know the compound interest in some kind of savings of equal right now is going to pay massive dividends later. But you know, like I said, most people don't realize that there's tons of options to pay for college out there. Regarding scholarships, need based aides a big one You've got the FAFSA. You know the free application for federal student aid. I think we're going to touch on that, maybe on a different podcast. Yeah, you know, there's student loans, government loans, parent plus loans. You know there's even tax credits you get for, you know, going to college between the lifetime learning credit and the American opportunity tax credit. So the government has tried its best to make it as easy as possible to pay for college. But you know it requires a little, a little motivation on your side."

Jessica

"Yeah, a little initiative to get in there."

Josh

"Yeah, a little initiative, that's a better word for it."

Jessica

"And there's also the savings options which you're very familiar with, if people can start early and get that going. So a big one that people hear about and I feel like it's one of those mythical creatures, like they don't know what that is. It's something to do with college, but it's a 529 college savings account, so kind of what is that and what are some of the nuances that go into having a 529."

Josh

"Yes, the mythical 529 savings plan. These accounts are incredible. To me they're probably second best, maybe third best, behind an HSA and a Roth IRA. You know what these accounts are is essentially, you take your after-tax dollars, dollars that come in from your job. They hit your paycheck. You invest them into this account, however much money that may be. You invest them in you know financial securities, whether that's stocks, bonds, mutual funds, etfs, and you invest it over a long period of time. So let's say it's, you know, 15, 20 years, let's say 18 years, before your kid goes to college, and any growth within that account. So let's say you put $20,000 in there 20 years down the road, that accounts worth $50,000,. You've got $30,000 of earnings in there and whenever, as long as you use that money to pay for qualified keyword, qualified educational expenses, all of that, those earnings, that growth that's accumulated within that account, are completely tax-free. So it's free money on the board as long as you use it for college. There's also you can use it for, you know, k through 12 expenses to an extent. You can only use up to $10,000 per year on tuition only. You can use it on books, certain fees, room and board, which is a big one you cannot use it for like transportation, so you can't use this account to go out and buy a car for your son or daughter. But, like I said, the key, the key thing about it is all that tax-free growth in there that's been building up over the years. You get to pull it out completely tax-free as long as you use it to pay for college. The questions I get a lot and say, okay, josh, how much should I be putting in there? Well, you know we can sit down with clients you know very easily and look up the cost of college, talk to them about do we think their kid's going to get scholarships, do we think they're going to actually go to college or are they going to go to trade school, are they going to go to junior college? You know we can kind of come up with a plan and say, hey, let's start putting X amount of dollars in there. Nowadays, with the cost of college and the options of graduate school, getting a PhD, going to medical school, whatever it may be, it's really kind of hard to overfund these things. Even five years ago I used to always kind of tread lightly on the clients about hey, there is a little worry about overfunding those things. However, the government has kind of changed the laws and rules to where overfunding them is really not as scary as a proposition anymore. Another question I get a lot of times what if my kid does get scholarships? What if we get $50,000 in discount and he goes and gets a full ride? The way that works is you can then pull funds out up to the amount of scholarships they get. Let's say you got $50,000 in this account. They get $15,000 in scholarships in one year. You can take $15,000 out that year. However, you do have to pay taxes on whatever that income is. You don't get that full tax benefit out of the deal, but still a community."

Jessica

"But it's not money lost or anything."

Josh

"Exactly the amount of taxes you're paying on that gain is probably pretty minimal based on the amount that you earned on it."

Jessica

"What kind of are some of the limits to contributing to a 529? Is this something anybody can do? Are there certain income levels that can't do it anything like that? First of all, I do want to point out that if 529."

Josh

"You set an example of the 529, you set it up as usually a parent or a grandparent as the owner of the 529, and then you have the beneficiary. That's going to be the child that you think is expecting to go to college down the road. Every state in the United States has their own 529 plan. Mississippi has one, alabama has one, colorado has one, and so in some states like, if you like, I live in the state of Mississippi there are tax benefits to opening up a Mississippi 529. And so I can put up to $20,000 a year into this 529, and I would get $20,000 deduction on my Mississippi income taxes. It's a nice little perk, you know. Look it up and you're in the state that you live in and see if there's any tax benefits to opening it up. Now, every state does have a maximum amount that you can put into a 529 account. I think for the state of Mississippi it's like $235,000 is the most that I could put into a 529 for my daughter. I think the highest I saw was California. I think it's like $525,000 or $30,000, something like that. That's the max you can put in there, and so they do cut that off as an eventual porting time. The only other thing as far as limits, you know you could put $50,000 into a 529 if you wanted to. However, that is considered a gift from yourself to your child, and then you would have to possibly have to pay some gift tax or dip into your gift tax exclusion and give that happens, and so this year the gift tax, the exclusion amount that you don't have to report, is $17,000. So technically, me and my wife could put up to $34,000 into a 529 for my daughter and not have to worry about filing any kind of gift tax return."

Jessica

"You are not overhyping this account. This is like everything you're saying sounds amazing."

Josh

"If you make some extreme money, then you're off the way to go."

Jessica

"Exactly so. You mentioned that every state has their own 529 plan. So say your daughter you're in Mississippi, she wants to go out of state somewhere. Can she use this out of state or is she to have to stay in Mississippi for it?"

Josh

"100%. She can use it out of state. I personally the strategy that I use I have a Mississippi 529 for my daughter that I'm funding and in my mind this is just because my mind it's easier for me to separate it this way this is going to be funds that we're going to use for high school and private school here in Jackson, mississippi, so I get a little bit of tax break on that. And then I have a 529 plan in the state of New York that I use. That mentally I'm going to use for my daughter for college, and so I'm kind of funding them with different amounts but, like I said, I could pull from either one of them, pay for college, but mentally I'm kind of separating those two. You can have as many 529 plans as you want and then, like I said, if we are fortunate enough to have another child let's say my daughter, you know, grows up to be 18 years old decides college is not for her. Another great thing about these 529 accounts is that any money that I've put into the 529 for my daughter, I can take that and roll it over to another child."

Jessica

"That is huge. I was going to ask you like, read my mind what happens if a kid doesn't want to go to college once they get that to that age, or they go to college and it's not a very expensive school and there's money left over."

Josh

"Exactly so you can take that money and you can roll it over to another beneficiary, roll it over to a grandchild. You know I've seen cases we don't have any clients that have done this but I've seen cases where there's $500,000 in the 529 plan. They put it literally all into just one child's account. They've got four children you know the oldest child but they decide not to go to college. They just kind of just start rolling downhill. They roll it to the next child, roll it to the next child. If you've got three or four kids, more than likely you know a couple of them are going to go to college, a couple of them may go to grad school, they may go to med school, whatever it is, you really can't probably overfund these things at this point in time. One nuance I did want to mention let's say, let's just say you got two children, you put X amount of dollars in these 529s, they both go on to college, they graduate, they've got jobs and you got $20,000 less in each account. One really cool thing about these things they just passed this in the Secure Act 2.0, which I think passed in 2021, is that if you do have this money left over in these 529 accounts for each kid. You don't need the money. You're financially secure, you're working your way towards retirement. You put together your retirement plan. You then can actually open up Roth IRAs for each one of these children and roll over essentially there's a few nuances to it but roll that $20,000 each into each kid's Roth IRA at that point in time and it really kind of gives them a jumpstart on life as far as retirement. I personally did not inherit a $20,000 Roth IRA. It's just a little nuance that the government has installed Moom 4, which I'm a big fan of."

Jessica

"Yeah, there would be no complaints on my part if I had something like that rolled over just to kickstart me, you know 22. I didn't know how to spell Roth IRA exactly, yeah, and what a gift you can give your kids. I mean the whole thing in general, just a 529, but also if there is something left over, that you're able to help them out even more. There's another savings plan that's not quite as popular but it does come up there. I have seen them from time to time with some of our clients. It's called a cover Dell savings plan. What are some of the aspects of a cover Dell and Kind of how, how do you feel like it compares, I guess difference wise, to a 529?"

Josh

"Yeah, so there are a few little nuance differences there between a cover Dell and a 529. I'm a pro 529 guy, but you know there are a few, I guess, benefits to a cover Dell ESA as well and truthfully, when I did a little research on this I did not realize the cover Dell ESA had been introduced Later than the fast way, not fast way now. I was, I think it's 97 Cover Dell was in, I think, 2007, which kind of always just assumed a cover."

Jessica

"Dell was way older."

Josh

"I didn't know. I did not know that. But so a cover Dell ESA is very similar to a 529. You can open these up, you know, most of the time at any bank, any kind of brokerage Wirehouse, you know Merrill Lynch, fidelity, something like that and you can. You invest money in there. As that money grows it works the same way as a 529. Any growth in that account, as long as you use them for qualified education expenses, it's completely tax-free. You're not paying tax on any of that growth. The biggest probably inhibitor or downside of the cover Dell is that you only have a $2,000 limit per child 529, like I said, we can put. Yeah, I usually recommend not putting any more than the gift tax annual gift tax exclusion is. But you know you can put up to 17, even $34,000 if you're married, into a 529. If you have this funds available, cover Dell is just $2,000. Also, there's income limits on the cover Dell. I think it's around $220,000. Once your your, your AGI, your adjusted gross income, goes over $220,000, they don't let you fund a cover Dell. Lastly, cover Dell's you know you have one of your daughter. They go to school. You don't use it all if you don't roll that over to another beneficiary. The account balance has to be zero by the time they're age 30. So okay, not the case for a 529. You can all you kind of hold on to that for as long as you like and roll it over into another child Grandchild's account at some point time. I'd say the positives of the cover Dell's is that they don't limit you on the amount that you can use for, like, k through 12 schooling and you can use that amount for, you know, tuition fees, books, whatever it may be. They're a little more, you know, expansive on what you can use it for in the K through 12, whereas 529 is you can only use it on $10,000 of tuition. I'd say the biggest benefit of cover Dell, say, if you go open one up with you know some wealth group, you go one up with fidelity, whatever it may be, you know you're. The amount of Investment options you have is unlimited. There's, you know, thousands of mutual funds out there, etfs, whatever it is. You can invest in just about anything, whereas when you invest in a state 529 plan, there's only, you know, 15 mutual funds you can pick from. They've got, you know, allocation funds, growth funds, value funds, things like that, but the options are very limited. You're limited to one mutual fund family. You know, I think state of Mississippi uses TI craft, state of New York uses JP Morgan, you know. So you're kind of limited a little bit on what funds you could choose. But that's in general kind of how it works. Like I said, the low limits on the cover Dell. Usually it's kind of the the deal breaker for for most class."

Jessica

"Yeah, it's definitely a limitation. When you said the $2,000 limit on there, I'm like, wow, I mean it's not. If you're going to a big school it's not going to cover much. But and I know you said you're 529 pro all the way, but do you have any situations where, like, a Coverdell would be better for a client than a 529?"

Josh

"Yeah, I think if you're going to a very expensive private school K through 12, you know being able to, especially if you start early. You started at age one and you're putting $2,000 a year, let's say, for, you know, 10 years, you got 20 grand of your contributions into a Coverdell and then you, you know, with some, hopefully, with some growth, you've got, you know, I don't know, 30 to $50,000 in that account. Yeah, I think that's a good example of when a Coverdell could be advantageous because, like I said, there are those limitations. You can only use it on tuition for 529s. That's probably the biggest one right there. Like I said, 529 is my third favorite investment account out there behind the line. Like I said, 529s are pretty good products. It's hard to beat they are. It's hard to beat for sure."

Jessica

"Well, that is a great deep dive on 529s. You gave us a lot of information and definitely a lot of things for people to kind of think about and ask their advisor, reach out questions if some of this stuff might apply to them. That one wraps up this episode of our college savings and planning series. Again, as a reminder, if you're more interested in learning about the college planning and savings routes that we talk about, tune in for the next couple of weeks. We did an episode last week on just estimating cost and how you choose a college. We're going to be going into more about saving and some of the government aid things you can do for college and then student loans. We will dip our toe into that topic."

Josh

"Exciting stuff."

Jessica

"Yeah, thanks again for listening to the Reach your Summit podcast and we'll see you next week. Thanks for listening to the Reach your Summit podcast, brought to you by Summit Wealth Group. If you enjoyed this episode and would like to help support the podcast, please share it with others and subscribe so you don't miss an episode. If you have any questions or topics that you'd like us to cover, please email us at info@summitwealthgroup.com . "