00:00 Brad
Parents of college students don’t have the luxury of waiting out market turmoil before withdrawing funds from a 529 savings account. So what kinds of actions should these account holders take? Joining me now, we’ve got Ross Riskin, who is the Investments and Wealth Institute Chief Learning Officer. Ross, good to have you here. What what’s your advice for folks who plan to use their their 529s this year?
00:37 Ross Riskin
Yeah, Brad, it’s a great question. I would say just right off the bat, the people who should be reassured are those who have younger children further away from the goal, because, as the previous speaker just said, you have time on your side to benefit from still being invested in the equity market. However, if you have young adults that are going to be enrolled in the coming fall or they’re already enrolled in school, you need to be taking a closer look at how those funds are invested. Now, most people still have funds invested in target enrollment portfolios, so very similar to target date funds found in retirement plan accounts that gradually reduce their exposure to equities as they get closer to the goal. The problem with those, though, is what makes up the majority of the portfolio then? It happens to be fixed income. And we know in the current environment, the past couple of years, fixed income hasn’t done that well. So even if you thought you were in the prudent investment choice of being in a target enrollment portfolio that looks conservative, a lot of those portfolios have lost value over time. So it makes sense to be looking at those guaranteed principal options within the 529 plan accounts. Uh, as the previous speaker alluded to, you could still actually get access to those FDIC insured bank deposit programs within 529 plans to get that 4 to 5% tax-free in a 529 plan with no risk of principal loss.
02:41 Brad
What about timing? How should parents be mindful of when they’re taking out the funds?
03:00 Ross Riskin
Great question. So I think you need to be mindful of a couple things. The first most important thing is to make sure that the amount of distributions you’re taking out matches the amount of qualifying expenses incurred in the year, if you want and plan on the distribution being fully tax-free. So a couple of things to keep in mind with that, just because they have to happen in the same year doesn’t mean they have to happen in any particular order. So you may have a situation where a family has other funds available and they want to pay a tuition bill from other funds and then reimburse themselves from a 529 plan because they could keep those funds invested and get 4 to 5% guaranteed for a couple more months. That can happen as long as it occurs in the same year. But the other issue you run into is, uh, when you’re paying maybe a spring semester bill in January, but you took out a distribution in December. Well, you have a mismatch there that you need to be aware of. And then finally, probably the most relevant thing, especially for those tax filers now coming up on April 15th, is for those families that plan on qualifying and claiming the $2,500 American opportunity tax credit, you can’t use funds from the 529 plan to be allocated to claim that credit. It’s called double dipping. You can’t get the credit and a fully tax-free qualified distribution. So you’re going to have to be using other funds, maybe from other resources, maybe the student borrowing some debt, uh, to be able to claim both of those, uh, tax benefits in the year.
05:11 Brad
What about households with younger kids who are trying to make sure that they can set up the 529s correctly to to to last for many years and to really sow into?
05:45 Ross Riskin
Yeah, it’s a great question. Uh, as I alluded to before, I think that’s where we don’t want to be overly concerned with the market noise. You still have time on your side. So if you have, you know, 12, 15, 18 years or even longer, as you mentioned from a legacy planning goal, maybe even plan for grandchildren and future generations, we want to make sure we have, uh, exposure to the equity markets. Target enrollment portfolios can make sense in those cases because you want to have access to and be invested in those assets that have the probability to achieve greater returns over longer periods of time, especially when they’re invested in tax deferred or tax free vehicles like 529 plans.
06:43 Brad
Now, 529s can be used for much more than college tuition. How else can parents put those savings to work?
07:01 Ross Riskin
Great question. So there’s a lot of different ways, uh, the definition of qualifying expenses has expanded over the past several years, uh, via new tax laws and changes, right? Tax Cuts and Jobs Act, which is on everybody’s mind right now, what’s getting extended, what’s not. But we know we can use up to $10,000 per year K through 12 tuition expenses. We know we can use lifetime limit of $10,000 per beneficiary and each sibling of the beneficiary to repay student loans. And probably the most popular thing that consumers and advisors are talking to clients about now are those that maybe have excess funds left over in the 529 plan. Instead of changing the beneficiary to someone else in the family, they can roll up to $35,000 over the lifetime into a Roth IRA for the beneficiary. Now, that’s going to take a couple years to actually do because, uh, you’re subject to the same annual funding contribution limits for Roth IRAs and traditional IRAs, but it’s just expanding the use of them. So there’s no more excuses of “Don’t put money into a 529 plan because it can only be used for college expenses.”
08:34 Brad
Ross, thanks so much for taking the time here with us. Appreciate it.
08:43 Ross Riskin
Thanks, Brad.