By coinnews 
00:00 Speaker A
All week on wealth we’ve been diving into 529 college savings plans. How to open, use and manage this plan. Today we’re going to talk about common pitfalls that people encounter with these accounts. For more, we’ve got Rich Paul Amini who is the head of education savings programs over at Merrill wealth management. Good to have you here with us Rich, you lay out five common mistakes with 529 plans. Pulling money too early, not coordinating with financial aid, forgetting to reduce risk as college nears, and not understanding qualified expenses, plus not understanding tax benefits. So let’s break down each of these starting with pulling money too early. What is the issue there and how can people avoid it?
01:50 Rich Paul Amini
Yeah, so it really, it really boils down to not properly timing your withdrawals. The IRS rules for taking withdrawals allow you to either make a withdrawal directly to the school for things like tuition, room and board etc., but it allows you to reimburse yourself for other expenses that you wouldn’t pay directly such as books, a laptop, other supplies and so forth. However, the IRS rules for taking those qualified withdrawals require that the withdrawal is made in the same calendar year as the expenses were paid. So for example, if you purchase books or a laptop for your child, or your beneficiary in September, you want to be sure to take that 529 withdrawal no later than December 31st of that same calendar year to avoid the IRS potentially not allowing it as a tax free withdrawal.
03:57 Speaker A
Another mistake that you commonly see, not coordinating with financial aid. So what’s the issue there?
04:18 Rich Paul Amini
Well, it’s really about understanding the financial aid rules, right? And they do change often, and they’ve changed over the last couple years. But the first thing is, you know, many families think because, you know, they invest in a 529, or a 529 is earmarked for education, it is going to be more detrimental to you than investing in other accounts. And that is just simply not true. 529s are treated as a parental asset. And therefore, no more than 5.6% of it will be weighted against you in the federal financial aid formulas. It has a relatively small impact. On the other hand, if you invest those same assets in an account where the student is the account owner, such as a UGMA or UTMA custodial account, those assets are looked at more or less favorably in the financial aid formula, and 20% of those assets will be weighted against you in the formula. So about a 15% difference in how those assets are treated. So 529s are treated much more favorably.
06:20 Speaker A
And so you also see people forget to reduce risk as college nears, what exactly does that mean?
06:36 Rich Paul Amini
Yeah, so you know, a 529 is an investment account invested in the market. So as your beneficiary is nearing college, it’s important to start reducing risk by allocating a portion of your investments, or reallocating a portion, into cash equivalents to cover your near term expenses. Let’s say the next 12, 15 months of expenses. This strategy provides you a cushion from short-term market volatility as we’ve recently seen, while also providing a piece of mind that you can cover the near term expenses regardless of what the market is doing at that particular time when you need to take the withdrawal.
07:59 Speaker A
And then while we have you, another common mistake. People don’t understand what a qualified expense is. How can you avoid that?
08:17 Rich Paul Amini
Yeah. So, the good news is qualified expenses has really been expanded over the past several years through various legislation, right? So when we first started 529s it was purely college, right? Post secondary, and you could use it for tuition, fees, room, board, books, supplies, equipment, etc. Uh, over the years, it’s been expanded. Now you can use it to pay off up to $10,000 in existing student loans, you can use up to $10,000 a year to pay for K through 12 public or private schooling, uh you can use the money to pay for expenses related to um, apprenticeship programs, things like books, tools, equipment and so forth. So it’s really important that you understand what is a qualified expense versus what is not a qualified expense. For example, we often get calls from clients saying I want to purchase a car, or pay for airline tickets with my 529, and that is not a qualified expense. So if you do take a withdrawal for that purpose, you are going to be subject to income tax and potentially a penalty on the earnings portion.
10:23 Speaker A
Rich, great to have you break down some of these common pitfalls. We appreciate it.
10:32 Rich Paul Amini
Thank you, Brad. Have a great day.
10:36 Speaker A
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