By coinnews 
00:00 Brad Smith
It is National 529 Day, an annual event to encourage families to save for their children’s college education through a 529 savings plan. We’ve been covering this savings vehicle all week, but as a reminder, 529s are typically state-sponsored investment accounts designed for you to save for higher education. And they’re powerful because your earnings grow federally tax deferred and qualified withdrawals are tax-free. But one key question that we have is how much money should you be aiming to save? My next guest has an answer, and joining me now on set, we’ve got Trisha Scarlatta, who is the head of Education Savings at JP Morgan Asset Management. A good friend of the show, we’ve had you here time and time again. Good to see you back here in studio. You say the right amount is relative, which we do know, everybody’s situation is different. But is there a helpful kind of rule of thumb as a starting point?
01:36 Trisha Scarlatta
Yeah, I mean, I think you got to look at what your savings is and what your capacity is, right? So I think always, always, I would say, first save for retirement, right? So that, no matter what. So I think start there. At least be saving up to the amount that your company matches, because that’s free money, right? So that’s number one. But I think it’s just starting. No, you don’t necessarily need to be where ultimately is going to get you to a hundred percent of tuition costs, but just start. Even $100 a month, from when a child is born, can get you two years of covered tuition costs. So even just as little as $100. Obviously, you go up to $500, you can almost cover the whole thing. But when you wait too long, Brad, that’s when you got to be putting in a thousand, fifteen hundred, and those numbers are really hard.
03:07 Brad Smith
And so you sent along some helpful charts as well here, and I want to show some folks these charts that show why starting as early as possible is really crucial. Explain the data behind starting, saving at your child’s birth versus when they’re young kids.
03:25 Trisha Scarlatta
Yeah, and most people do wait. Most people delay those six years, as you’ll see in this chart. And when you delay, every six years you delay is half the amount that you’ll have in that account. So what you want to do is use time as your friend, because that, just as you mentioned in the beginning, it’s that tax-free deferred compounding growth over time that’s going to help get you there. Of course, in addition to your investment returns. So use time, give yourself the time to be able to save.
04:05 Brad Smith
Those small monthly contributions that you were talking about, they they add up over time. But even according to your own data, not every family is taking advantage of 529 savings plans. So where are we seeing people take advantage of this? How many do, and how much money are folks losing out on by using other savings accounts?
04:43 Trisha Scarlatta
Sure. I mean, I think right now, the stat is, you know, that 63% are not using 529 plans. And about half of that 63% is just sitting in cash. So they actually are saving for college. But what I’m telling them to do now, or what I’m telling everybody online to do is to not just save but plan. And a plan is understanding the costs, knowing the reality around financial aid, and not just putting money in a checking or savings account. It’s investing that money and leveraging the benefits of a 529 plan. There’s there’s $1.5 trillion earmarked for college, not in a 529 account. Wow. So, and then you got about another 50% that are just looking to leverage their retirement money, and we don’t want people to do that. If you plan early enough and give yourself the time, as we talked to earlier, you won’t be in that situation where you feel desperate, where you’re borrowing against your retirement. And every $10,000 you take from your retirement account is $30,000 plus less at retirement. Wow. And we find a lot of families are doing that.
06:43 Brad Smith
So let’s compare the return on investment for a tax tax-free account versus a taxable account. You sent a great chart as well that we want to show.
06:56 Trisha Scarlatta
Yeah, my favorite page.
06:57 Brad Smith
This one actually looks at a $10,000 initial investment with monthly contributions here. Break this one down for us.
07:05 Trisha Scarlatta
So, all things being equal, you have a $10,000 initial contribution into an account, and then $500 subsequently on a monthly basis. Starting at zero, you give yourself 18 years. Simply based on taxes, assuming the same 6% return, you have almost $42,000 more in a tax-free account, such as a 529 account. This is my favorite page in our college planning essentials guide because everyone that says, “I’m just going to pay out of pocket, I’m going to pay as I come, as it comes,” this is the page. Why would you give up that money? That’s almost two years of in-state public tuition. It’s a lot of money to leave.
08:08 Brad Smith
Yeah. And so some Americans might be worried about what happens to all this money if their child doesn’t go to college. How can the money be used if it doesn’t go to the original beneficiary?
08:22 Trisha Scarlatta
Sure. I mean, first of all, we we get a lot of families say, “I’m not sure what my child’s going to do.” And the statistic from last year is just about 70% of graduates, high school graduates last year, went to a two- or four-year institution. So don’t let that be your excuse, number one. But if you’ve done the right thing and for whatever reason, your child isn’t going the traditional route, so it’s two- and four-year institutions. It’s obviously books, expenses, room and board, off-campus housing. But you can also use it for K through 12 tuition. Um, there’s special needs you can use it for. If your child has special needs, you can certainly apply to that. There’s also student loan, you can use it to pay, um, for student loan up to $10,000. And also, you can now roll over to a Roth IRA, which is tremendous. So now you have the ability to fund an a college education. And then, if you are someone that’s planned really well and there’s excess, you can roll over up to $35,000 into a Roth IRA and potentially set your child up with a retirement account for the future.
09:40 Brad Smith
Really interesting. Great advice, as always, Trisha. Thanks so much for taking the time.
09:45 Trisha Scarlatta
Pleasure. Good to see you.