The Personal Finance Podcast - The Pros and Cons of The 529 With Sean Mullaney

Episode Date: December 25, 2023

In this episode of the Personal Finance Podcast, we're going to talk to Sean Mullaney about why the 529 plan may not be as great as you think. How Andrew Can Help You:  Join The Master Money Newsletter where you will become smarter with your money in 5 minutes or less per week Here! Learn to invest by joining  Index Fund Pro! This is Andrew’s course teaching you how to invest!  Watch The Master Money Youtube Channel!  Ask Andrew a question on Instagram or TikTok.  Learn how to get out of Debt by joining our Free Course  Leave Feedback or Episode Requests here.  Thanks to Our Amazing Sponsors for supporting The Personal Finance Podcast. Shopify: Shopify makes it so easy to sell. Sign up for a one-dollar-per-month trial period at  shopify.com/pfp Chime: Start your credit journey with Chime. Sign-up takes only two minutes and doesn’t affect your credit score. Get started at chime.com/ Policygenius: This is where I got my term life insurance. Policygenius is made so easy. To get your term policy go to policygenius.com and make sure your loved ones are safe. Listen to Planet Money wherever you get your podcasts. Visit MasterClass.com/PERSONALFINANCE and get one free annual membership when you give one annual membership this holiday season.   Links Mentioned in This Episode:  529 Plan IRS sheet Connect with Sean Mullaney Website Linkedin Twitter Book Connect With Andrew on Social Media:  Instagram  TikTok Twitter  Master Money Website  Master Money Youtube Channel   Free Guides:   The Stairway to Wealth: The Order of Operations for your Money  How to Negotiate Your Salary  The 75 Day Money Challenge  Get out Of Debt Fast  Take the Money Personality Quiz Learn more about your ad choices. Visit megaphone.fm/adchoices

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I'm your host, Andrew founder of MasterMoney.com. And today on the Personal Finance podcast, we're going to be talking to Sean Malaney about why the 529 plan may not be as great as you think. If you guys have any questions, make sure to hit us up on Instagram, TikTok, Twitter, at Master Money Co. and follow us on Spotify, Apple Podcasts, and whatever podcast player you love listening to this podcast on. And if you want to hop out the show, consider leaving a five-star rating and review on Apple Podcasts, Spotify, or your favorite podcast player.

Can I thank you guys enough for leaving those five-star ratings and reviews? They truly mean the world to us. Now, today, what I'm going to be doing is diving into the pros and the cons of the 529 plan with Sean Mullaney. Now, a lot of times you'll hear me talk about 529 plans, and I think they are a great way to say for college. But I also want to have guests on the show who are going to state the case of the other side.

And what Sean's case is, is he said there are pros to the 529 plan that you should definitely consider, but he's also going to go through the cons of the 529 plan and why it may not be the best vehicle for some situations. So Sean and I are going to dive into, A, the basics of a 529 plan if you've never heard of what it is,

then we're going to dive deeper into things like the tax benefits at the 529 plan. What happens if you don't use a 529 plan? what happens if you don't use a 529 plan? And then we're going to also dive into things that parents should consider. So especially if you're on the path to financial independence and you are not five yet, then this is a great consideration. And we kind of talk through some of that stuff. And then we're going to go even deeper into use restrictions of 529 plans, how parents can actually capture those state tax benefits inside of 529 plans and some of the differences with Secure Act 2.0.

And we're also going to talk about some of your ways out of a 529 plan if you've already started investing and you change your mind. So this is an action-packed episode and I want to start doing this where we have guests coming on talking about some of the negatives of the things that we talk about all the time so that you can weigh out some of this stuff and make sure that it is right for you. So without further ado, let's welcome Sean to the Personal Finance Podcast. So Sean, welcome to the Personal Finance Podcast. Andrew, thanks so much for having me. I am pumped to have you here because you dive deep into some of these topics that I think we

really need to talk about. And today we're going to be talking about 5. 29 plans because you have a great perspective where everybody out there is kind of saying, hey, you just need to put your money into a 529 plan for your kids, but you have a different perspective on that. And I think your perspective is something that a lot of parents need to hear right now in this day and age. So before we dive in, can you talk a little bit about yourself and your background and what got you interested in finance in general? Yeah, thanks so much, Andrew. I'm a career changer.

So my professional background is in accounting. I worked for over a decade for big four accounting firms. I worked for a little over three years for the IRS office at Chief Counsel, mostly doing corporate tax type stuff. But I always had that itch around personal finance. And eventually the itch got such that I had to scratch it. So in 2018, I left Big Four accounting. 2019, I started my own financial planning firm.

And I've been doing financial planning since 2019. And yeah, I just love this stuff. And I tend to be very tax-focused, right? So I have a blog, PhiTaxguide.com, where I share a lot of my thinking around some of the common tax planning strategies and, you know, things to look out for, things I tend to like, things I tend not to like. And yeah, so that's sort of the background I'm bringing to this conversation. And that is what I love because I love the deep dives that you do on some tax situations.

And you kind of challenge some traditional methodology that comes out that a lot of people are just talking about all the time from Roth IRAs to things like what we're going to talk about today, which is the 529. So before we dive into this, you kind of talk about parents need to, understand that they need to secure their own financial independence before they even are, you know, are interested in investing in a 529 plan. So can you talk about why that's so important for parents to understand? Several reasons. First of all, you only have so long to save for and pay for your own retirement and financial future. Your child has, in theory, a 50-year time frame in terms

of earnings, at least in theory, to pay for college education, right? So that's one thing. Second thing is, if you want to create a whole lot of pain in your current young child's life as an adult, when your child is an adult, one of the best ways to do that is for mom and dad to not be stable in their own finances, right? The best financial gift mom and dad can give to junior is stabilizing mom and dad's own finances. That is the top number one gift from a financial perspective that mom and dad can give to junior. It will be great for junior to be an adult and to know that mom and dad financially are secure and taking care of.

And so that should be the goal so that mom and dad have financial success and also to help set junior up for success. And that should be the primary driver, particularly when we're young parents. And then something else, you know, Andrew, I know your audience has a lot of young folks, a lot of 20-somethings. I'm in my mid-40s, so 20-somethings are young to me at least. There are going to be some newborn parents in the audience here. And I know this.

When you're the parent of a three-month-old, a six-month-old, there's a lot of pressures in your life. And we have to put $500 into a $529, you know, on the agenda. And as a pressure point, at that moment in your life makes no sense to me. And we'll go into more details on this. But, you know, when you're raising an infant, a toddler, you got a lot on your plate. And I'm here to tell you, in my opinion, right? I'm not giving you advice, but I'm giving you my opinion.

And my opinion is this mom and dad should focus on their marriage and on raising junior properly, not so much on, we got a scrimp and save so we get that $500 into the $529 this month. Exactly. And I could not agree more on most of this because I think the biggest thing here that comes into play is understanding that we talk about the oxygen mask method all the time, take care of your retirement first before you actually, you know, start to invest for your kids or even put money into a 529 plan.

But in addition, what you stated and what I love about, this is that you're also taking that financial pressure off of your kids in the future because you're taking care of yourself. And so you actually can take care of your own retirement. A lot of kids get this pressure of their parents. You know, they're aging parents. They cannot sustain themselves. They have to go into a home, all these different things. And so it's a really big financial pressure for them. So I love that idea. And people really need to think through that as well. Take care of your own retirement first. Then you can start to invest for your kids. Now, 529 plans. Most of our audience knows what a 529 plan is. But if they do not, if they've never heard of a

529 plan. Can you kind of explain what that is? Sure, Andrew. So 529 from a tax perspective is almost sort of like a Roth IRA for your kids college, right? It allows you to put money into a tax advantage account that call it a 529 or qualified tuition program. That's the IRS lingo, right? But most of us use 529. So you can invest money and then that can be invested in mutual funds, assets that hopefully grow and appreciate no guarantees. And the appreciation is essentially tax deferred while the money's in the account. And if the money comes out for qualified educational expenses, guess what? It's tax free. But let's think about what we're doing strategically. Let's put the tax rules to the side for a second,

especially when we're thinking about parents of a newborn, toddler, nursery school child. What you're doing when you're saving for a 529, in a 529 is you're essentially prepaying an expense that your child may or may not have in 17, 15, 18 years, right? So your child may or may not have college tuition expenses. There are all sorts of reasons why they may not. They may be very successful academically. Maybe they get a scholarship. They're the quarterback of the football team, more likely soccer, track, or swimming, right? But, you know, there are reasons that your child may not actually incur that expense. But what you're doing is you're prepaying an expense that your child may or may not have in 17 or 18 years.

Well, I think before you do that, you need to ask a more fundamental question. Have mom and dad prepaid their own expenses five years down the road? Have mom and dad prepaid their own expenses 15, 17, 18 years down the road? And by the way, we know mom and dad outside of a very early death are going to have those expenses. They're going to need heating, air conditioning, hopefully some food, right? They're going to have at least some expenses, regardless of how into the five community and financial independence movement they are. And certainly have mom and dad paid their

expenses, prepaid their expenses 30 years down the road. If the answer to all those questions are no and pretty much we know we're going to have those expenses, why are we prioritizing, prepaying junior's expenses that junior may or may not have 17 or 18 years down the road? And that makes complete sense because I think for a lot of people, they like again, you got to take care of your own situation before you are investing for your kids. And so, you mentioned some of the tax benefits there. Are there any other tax benefits of a 529 plan that would be a pro for people? Yes. So let's go through that, right? So you have to look at the state you live in first. So let's think about tax benefits on the way in and then during the 529 holding period and then on the way out, right? On the way in, there's one main tax benefit and it's a state tax benefit in this very state to state. Now, I will say this, though. Think of what are our three largest states by population? My state, California. California, Texas and Florida. Based on Texas and Florida not having an income tax and California not

having a tax break on the way in, those in our three largest states have no tax benefit on the way in. However, New York has a tax benefit on the way in. These tax breaks vary by size in terms of impact. Many states is a relatively modest benefit every year. Now, I know there are some states, like I'll give you one example. I'm not an expert on South Carolina taxation, but my My understanding is South Carolina is very generous from a state income tax perspective to 529 contributions. So if you live in South Carolina, your child's going to go to the University of South Carolina, you ought to be very much looking into a 529, even just to fund it to then shortly thereafter

pay the tuition bill because my understanding is the deduction may be unlimited. It's very generous, right, or practically unlimited. All right. So that's the benefit on the way. And it's only state taxes, right? So that tends to be a much more modest benefit than federal taxes. Then what's the benefit while we hold the 529? The big benefit there is the interest, dividends, capital gains generated inside that 529

are just not subject to current federal and state tax. That's a nice benefit. I will say in today's era, that's not that great a benefit, though, because most investment income tends to be tax favored, right? Most investment income qualifies for something called qualified dividend income, certainly not all. But a good chunk of it, especially things from equities, dividends from equities, tend to qualify dividend income if they're just in a taxable account.

But if they're in the 529, they're tax-free. And then if we withdraw it to pay for qualified education expenses, everything is tax-free when we withdraw it, right? So if we take out $10,000 to pay a tuition bill and we had a $10,000 tuition bill this year, that thing is fully tax-free, regardless of how many earnings there have been historically in the 529. So those are the main tax benefits of a 529. And some of those can be powerful for parents who know that their kids are going to go to college. But long term, I think some people try to think of this in some way, shape, or form. And they try to compare them to retirement accounts. But why are

these tax benefits less desirable than retirement accounts could be? Yeah. So let's go through that, right? So on the way in, the big one, right? There's no tax deduction federally on the way in. I'm guessing the audience is aware that if you contribute to a traditional 401, 403B, 457 at work, you get a tax deduction on the way in. So right there, a 401k is much more valuable potentially than a 529. But let's keep playing it out. Right. So then people say, well, but the 529 is just like a Roth IRA. Isn't that incredibly valuable? Yes. However, we have to think about time frame. Part of the reason we love the Roth IRA is that it gives us tax insurance for what could be a 60 or 70-year time frame. I alluded to right now, the taxation of investment income, capital gains,

qualified dividend income by historic standards is actually very low. This is a great time to be an investor with taxable accounts. But I will concede this. The Roth IRA is great because it gives us tax insurance. The good times are not always guaranteed to last forever. And if I'm in your audience and I'm 30 years old and I'm saving, say through a Roth IRA at home, well, my investment horizon on those savings could be 60 years easily, right? I should be thinking about at least the possibility of making 90. So if I'm in a Roth IRA, I'm giving myself maybe 60 years of tax insurance. So if tax rates change, if they increase capital gains tax rates, qualified dividend income rates, well, I've got an insurance policy against that. Well, okay, great government. You've

increased capital gains tax rates, but I'm in a Roth IRA. You can't get me, right? Well, let's compare that 60-year time horizon to our 529 time horizon. That time horizon depends on when we start our 529, but even for a newborn, we're looking at 22, 23, 24 years. Right. So our time horizon in terms of protection from future tax changes is so much less. And the nominal amounts tend to be so much less too, right? Because how much does college cost? It typically as inflated as that is, that's a whole other conversation, whole other podcast episode. But even even if we say, oh, yeah, college is going to cost $250,000. Well, if you're going to retire for 30 years, I got news for you, that's going to cost a whole lot more than $250,000, right? So retirement tax breaks

tend to be relevant for a much longer period and tend to be relevant around a much greater quantum of assets. Exactly. And I think that's a really powerful thing to understand. And you are right. I think the bigger problem overall with this whole entire situation is probably the price of college, which like you said would probably be a whole other podcast, but I think that is one huge factor we could talk through at some point in time in the future as well. So if we don't use a 529 plan for a qualified education expense, what would happen in that situation? Yes. So that's a great question, Andrew. And this is part of the drawback of the 529, right? I refer to this as a lockup or handcuffs on our money, right? So say you have a 529 and it gets to, I don't know, $200,000. And then junior goes to college and

spends on, you know, tuition, room and board, books, maybe 40,000 a year. I'm just using round numbers, right? Sadly, today, that's probably low balling it. But let's just use some round numbers. Maybe there's some scholarships in the picture or whatever it might be. So it's $200,000, $529, $40,000 every year of qualified education expenses. You get to the junior graduates, and now there's $40,000 left over in the $529 and say there's no younger sibling in the picture so we can't change the beneficiary easily and those sorts of things. So now you have $40,000 left inside that 529. And without some other planning, we'll talk about later. Let's just say mom and dad want that money back, right? Well, what's going to happen is they're going to look at that 529 and look at

historically how much did you contribute and how much did it grow. And they're going to say, well, okay, if you take that $40,000 out and let's say based, you know, radably they decide, you know, The computer tells you, well, 25,000 of that is your old contributions, and 15,000 is earnings. Well, guess what happens? $25,000 comes out tax-free. That's no problem. But $15,000 comes out subject to ordinary income tax, right? So that just goes at your highest bracket in the year of the withdrawal.

And you pay a 10% early withdrawal penalty in most cases. That's $1,500 in my example. So the handcuffs have now created their own problem and the 529 all of a sudden isn't so optimal, right? It has this drawback to it. So I think folks want to be aware of that, that wait a minute, it's not all upside. It's not all gravy. And there are going to be reasons maybe sometimes 529s are going to be overfunded. I generally say, look, if you can avoid overfunding of 529, I think that's a good thing to do.

I completely agree. And I think it is really, really important to kind of. of understand these handcuffs and these restrictions because flexibility with your money is one of the most powerful things that you can have, especially when you are doing this for long term and retirement planning and all these different things. So making sure you can access that money without penalty is going to be really, really important. So overall, it is really important to understand this. When we're talking about qualified education expenses, and this is kind of thinking through, hey, is there loopholes here or anything like that, but what classifies as a qualified education

expense. Yeah, so, Andrew, there's a great IRS resource on this. It's called IRS publication 970. Just Google that. The PDF will come up, I'm guessing, or the IRS website. Generally speaking, when we're thinking about higher education, what we're looking at is things like tuition, things like room and board, things like books and supplies. And then there are, there is a mechanism to my understanding. I must admit, I've not dove in deep into this to repay up to about $10,000 in student loans through a 529. But generally speaking, it's those current year expenses that you have to incur in order to go to college.

Now, apparently travel is not one of them, generally speaking. So you have to incur that. But unfortunately, you're not going to get that. But generally speaking, it's the tuition, the room and board, the books, the supplies you need to go to college. And they generally have to be in the current year. So that's a drawback, right? Folks love the health savings account. And I myself, I'm a big fan of the health savings account.

One of the reasons is you can just sort of, you know, save your records. All right, I incurred a sprained ankle back five years ago, 10 years ago, 20 years ago. I paid 500 bucks. I can later, years later, just reimburse myself tax and penalty free. The 529 doesn't have that feature. And so we really have to be thinking, you know, in terms of the benefit's not going to be that long. And we got to pay it for these qualified education expenses. And if we don't do that, we now have a problem. We have to look for a way to bail that money out. tax efficiently. Absolutely. And we'll put that IRS sheet also in the show notes as well so people can check that out if you want to check that out. So I kind of want to go through some of these considerations because we're hitting on a few of these, but what parents should actually consider over this timeframe? And you kind of have that unique take on the 529 plan that parents who are on the path to financial independence may want to reconsider this. So should parents that are still on that path, maybe you don't have those 30 years of expenses saved up yet? Should they actually consider the 529 plan? And if not, what should they consider?

All right. So first of all, if grandma and grandpa want us fund a 529 for junior, I have no problem with that, right? That's really grandma and grandpa's affair, right? That's their matter. To my mind, that doesn't hurt the parents in any way, shape, or form. Great. Now, when we think about a 529, what we have to do is we have to compare it with the most readily available financial planning alternative, right? And to my mind, this is the most readily available alternative. What mom and dad could do when juniors are newborn, right, is saving a taxable account in mom and dad's own name and maybe mentally segregate those assets as being most likely for junior's education. Okay. And just keep saving. And it's in mom and dad's name, shows up on mom and

dad's tax return every year, some qualified dividend income. It's not the end of the world. And now mom and dad are building up an asset in their own name. And that asset can serve multiple masters, right? In financial planning, we ought to love assets that could serve multiple masters. So an asset and taxable brokerage account can be used to fund mom and dad's retirement. It can be used to replace the roof. It can be used to fund a dream family vacation to Yellowstone and or it could be used to fund college tuition. Any combination of those things. Once we put in the 529, it cannot serve multiple masters. That's a real drawback of the 529 that I think. I think folks don't focus in enough of.

Now, I will say there are plenty of good use cases for the 529. In my opinion, the parents of a newborn who have $300,000 saved up in their Roth IRAs and 401Ks, that's not a good use case for the 529, right? Because mom and dad actually are doing pretty well in my little hypothetical. They got a newborn. They got $300,000 in their retirement accounts. They're ahead of where most Americans are. but they have not fully funded their retirements unless they're going to have a very skimpy retirement, right?

So I would argue that those parents would be better served to fund taxable accounts that later could be used to fund college tuition if needed, right? Maybe it won't be needed, right? Okay. But there are good use cases for the 529. I'll give you two main examples. One is mom and dad have hit their fine number or are remarkably close and juniors 10, 11, 12 years old, getting A's at school, not so good at soccer, right? You know, okay, that child's probably going to be going to college and it's probably going to incur some costs. And mom and dad probably have taxable assets that are already generating a whole lot of interest dividends, capital gains on the tax return. Let's start funding the 529, right? And then the case where juniors 15, 16, and maybe we're getting some state tax benefits and mom and dad maybe aren't at 529, but they're at financial independence, but they're real close and they're committed to paying for tuition, well, okay, let's start routing that money through a 529, scoop up some state tax benefits in

some cases, not all. Those are the use cases that to my mind say, hey, 529 might be the right tool to employ here. But generally speaking, if we've got a newborn in the picture, in most cases, look, if it's a newborn and mom and dad are already ahead of the fine number, yeah, start thinking about the 529. My experience is not too many newborn parents are at financial. independence when newborn comes along. Absolutely. And I agree with that as well, because I think that having that flexibility available where you can have an account that can serve multiple masters, like you said, is going to be really, really important for a lot of people. Now, one way that you can do this is if a lot

of people don't know how to segment this, you can have two taxable brokerage accounts. Like, for example, I've been in Fidelity before and you can have a taxable brokerage account. You can name those brokerage accounts. If you wanted to separate that money, it's not like it's going to compound any faster or anything like that if they're all in one account. But at the same time, I think that thinking through having that flexibility, you can't is really, really important. Now, the taxable brokerage account is the one that you mentioned for that flexibility. You think that is the best option overall for parents who want that flexibility? They want to be able to have this money available and maybe they need it for emergencies way down the line or maybe they need it for their retirement or they want to just kind of segment it for that 529 plan. Do you think that's the most flexible option for them? I think so, Andrew. So a few thoughts on that. My argument around 529s is not that mom and dad should not pay for college, right? That's not the argument here. And I apologize. for the double negative, right? Mom and dad should consider funding college based on their own personal

values. That's a values judgment. I've been opinionated on this podcast. I'm not going to offer an opinion on that, right? You form your own opinion on that. But I do think generally speaking, the taxable account is the best way when mom and dad are young. In most cases, I don't think mom and dad should be thinking about using their own retirement accounts to fund college tuition, right? partly on the traditional accounts, that's often going to be taxable. The withdrawals are generally going to be taxable, right? So it's inefficient that way. When we take money out of a taxable account, we just pay the capital gains tax. So maybe you take $10,000 out of mutual fund ABC that you own and it's like mentally segregated for being for junior's college. Well, okay, we take $10,000 out. That's a

taxable sale. Well, what's the tax on that? Well, it's not a capital gains tax on $10,000. It's the capital gains tax on $10,000 less our historic basis. So that could be $6,000, $8,000. So the taxable amount in that example isn't $10,000. It might be $2,000, $3,000, $4,000. So it's not that tax inefficient to just incur some capital gains tax because you're not paying tax on the entire amount. You know, you pay the $10,000. And oh, by the way, you might qualify for something called Lifetime Learning Credit or American Opportunity Credit, too. It's another advantage of using taxable accounts versus 529s to fund college. But put that to the side.

The other thing, too, is some people want to use Roth IRAs to fund college. That can have, to my understanding, two drawbacks. One, Roth IRAs are best left untouched if we can. Let's get them more and more tax-free growth as opposed to in our 50s or early 60s. We're taking them down. It doesn't mean can't be the right answer in certain cases, but we generally like to let those Roth IRAs cook tax. free for a longer and longer period of time. Second, even tax-free withdrawals from a Roth IRA can

create income on the FAFSA form. That's a whole other conversation, but it might be that you're creating an income that reduces financial aid that would have otherwise been sort of tax-free, so that may be tax-in-efficient as well. So I just like these taxable accounts. And look, we live in an era where investment income is rather lightly taxed. So why not take advantage of it and then let that money served multiple masters, and maybe the master is junior's tuition bill. That's okay. I agreed. And I think that is for sure definitely, you know, the same thought of thinking that I have as well, because that's why I love taxable brokerage accounts is for that flexibility. And definitely on the Roth IRA front, like you said, there are situations where that probably would work,

but I like to not interrupt compound interest unnecessarily. So that is one big thing for me as well. Rather have that tax-free growth in there if we're going to look at that that way. So one big question, I know we'll get this question after this podcast air. So I figured I'd ask you on the show because we always get this when we talk about 529 plans is parents that are worried about, you know, their kids may get scholarships, which we've touched on a little bit already, and or if their kids decide not to go to college, maybe they want to go to trade school or something along those lines. Do you have any response to them? Should they still, you know, consider saving for their kids college, you know, in that instance, if they, you know, believe in saving for their kids

college, should they still go forward in doing so? Because a lot of parents I have talked to have stated in the past, you know, they just don't even want to save for their kids college in case this instance happens. But for me, overall, maybe you look at some of these flexible options or how do you think about that for those types of parents? Yeah, great question, Andrew. So I step back and I say, this is part of the reason we like taxable accounts because great, we've got that powder dry and we can deploy it for education if we wind up incurring those expenses, but maybe we're not. And now that money can be redirected to our own retirement, to replacing the roof, to buying a new car, whatever it might be. Now, there are going to be some folks in the audience.

who find themselves with a so-called overfunded 529, right? There's just more money in there than was needed for whatever reason, right? Junior didn't go to college. Junior went to community college for two years and then went to a four-year school, whatever it is, right? And so then what we have to think about are, is there a tax-efficient bailout of that 529? And where I like to look first is, does junior have a younger sibling, right? That's usually the easiest path is say, okay, Well, Junior didn't use all this money, but Junior's got sister. And sister is going to be going to college in five years. Great. We changed the beneficiary in the 529. Tax free. We don't have to worry about the amount in the 529. That's, to my mind, the best bailout of an overfunded 529 for one particular beneficiary. All right. Well, maybe junior doesn't have a younger sister. Maybe younger sister's 529 is already fully funded, right? We have those sorts of issues. Congress, in Secure. year 2.0, which was passed in December 2020, gave us a second bailout technique. And this technique's getting a lot of attention. What it involves is this. What you can do is move money from a beneficiaries 529

into the beneficiary's Roth IRA. And every year, that qualifies as the annual contribution into the beneficiaries Roth IRA. Now, there's limits on that, right? The first thing, limit is just the annual contribution limit. The annual contribution limit for someone under 50 in the year 2024 is going to be $7,000, right? And then there's a lifetime limit, right, of $35,000. So basically, it's roughly five years. What's going to happen is, you know, that $7,000 probably grows at some point in the future. So it might not be five full years. But let's just use five years as sort of our dynamic there. But there's restrictions and limitations on that. You have to sort of work with your child to say, hey, junior, don't contribute to your Roth IRA. We're going to move the $7,000

from our overfunded $529 to your Roth IRA. It's a nice bailout technique. It's better than taking the money out and paying the ordinary income tax and the 10% penalty on the earnings. But it's certainly not a go-to thing. And I wouldn't plan to have it. People are saying, oh, this is an incredible opportunity. You get $35,000 into junior's Roth IRA. Well, mom and dad's checkbook could do the same thing, right? You don't need a 529 to fund juniors Roth IRA as long as they have earned income and they themselves have not maxed out their Roth IRA for the year. You could say, hey, look, junior, this is important. Maybe junior's a teacher or some other relatively modest income job and junior just doesn't have the money for the Roth IRA in their early 20s.

Well, mom and dad can whip at their checkbook and say, hey, junior, here's $7,000. Make sure it gets into your Roth IRA. This is important for your future. I think that's fine, right? That's all, you know, sometimes in financial planning, we call that, wealth transfer, right, put a fancy term on it. But that could be great for Junior's financial future. But my broader point of teens is, look, you don't need a 529 to fund Junior's Roth IRA. But that said, the 529 is overfunded. We ought to at least think about that as a possible bailout technique. 100%. I think that is a great technique to have in your back pocket, especially with having those Roth transfers. I think that was really powerful when that was passed. And for a lot of people,

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advice. I want to help my kids and I want to give back to the community. Ooh, then it's the vacation of a lifetime. I wonder if my out of office has a forever setting. An IG Private Wealth Advisor creates the clarity you need with plans that harmonize your business, your family, and your dreams. Get financial advice that puts you at the center. Find your advisor at IDPrivatewealth.com. Now, you have a great article kind of going through some of these things with the 529 plan, which we'll link up down the show notes. But one thing you talk about there is use restrictions of a 529 plan. Can you talk about some of those use restrictions?

Yes. So let's step back and think about taxable accounts, 401Ks, Roth IRAs, even health savings accounts, right? All four of those accounts, to my mind, have very little in the way of use restrictions. Now, many of them have time restrictions, right? So I have, say, a 401k, I'm under age 59 and a half. So I go take out $10,000 and use it to take a vacation in Las Vegas. Well, I'm going to have to pay ordinary income tax plus the 10% penalty. But put the time restrictions to the side.

In terms of use use use Roth IRA 401K taxable account to go to Vegas and play poker or blackjack or whatever, right? And even the 529, one of my the Cases, look, even the 529 doesn't really have that use restriction if we think it through because maybe I have old medical expenses. I could reimburse myself for those old medical expenses from the HSA and now just go to Vegas and play blackjack and poker, right? Not a good financial planning technique, but an available one. All right. Well, think about the 529. The 529 is highly use restricted when we compare it to all the readily available alternatives, right? In order to get that tax-free treatment on withdrawals, I've got to use it for qualified educational

expenses during the current year. Right. So they're going to be many years of my life where I'm just going to have zero on that line item. Right. So the use restrictions on the 529 are quite onerous when we compare it to all the alternative savings alternatives, even a health savings account, which to my mind actually has far fewer use restrictions than many might think. So I think this is just another reason to not be so gung-ho. Part of the reason I wrote that article and we're having this conversation today is I just hate this idea that, you know, parents get their kid baptized and on the way home from the church, they've got a relative in their ear. Hey, you got to do the 529. It's the greatest thing since sliced bread. And now we've got an additional pressure point, pain point for newborns

parents, right? Not affluent parents who are in their 50s. I just don't like that. You know, folks in the personal finance space mean well, but I think sometimes we're creating this pressure on parents. Oh, you got to fund a 529. You got to fund a 529. And now there are feelings of guilt around, hey, I'm not funding my child's 529. I'm here to say, you should feel proud that you're taking care of mom and dad's finances, which will then be a great benefit for junior in junior's adulthood. Exactly. I think that is the most important thing to kind of think about here. And if you are listening to this and you're a new parent and you feel, you know, stressed or anything by not contributing that 529 plan. Like we're talking about here, it is a okay to something where as long as you're taking care of your retirement, make sure you focus on that first.

And that is going to be the best thing that you can do for your kids and your entire family and your personal life as well. Because like we always say, you know, there are no student loans for retirement. So you got to make sure you're taking care of that retirement first. And then they can go on and then take care of your kids, you know, college planning, anything else and investing for them if that's something that you believe in. So when it comes to state tax benefits, though, how do parents kind of of know what state tax benefits they have, you know, for themselves, depending on what state

they live in. And how do they capture some of those state tax benefits? Yeah. So I think we have to step back and say, you know, I'm not here to recommend Dr. Google, but I will say Dr. Google can help in this regard because very few practitioners know all 50 states rules, right? Now, what I will say is this. In most states, but not all, the state tax benefit is going to be limited to making a contribution to your own states 529 plan. But that's not all states. I think there's something like eight states that will say, well, you can use a non-resident states 529

and still get a state tax benefit. But that is a drawback of these state tax benefits. And they vary. In many states, it's a tax deduction on the state income tax return. In some states, it's a tax credit on the state tax return. And you want to make sure, okay, well, couple things. You want to think about, okay, so in my home state, they have a 529 plan. And I understand that to get the state tax benefit in my particular home state, I need to use the home state 529 plan. All right. Well, now I need to assess the home state 529 plan. Does it have the investment options and the fees that are desirable? And maybe it doesn't and maybe I forego the state tax benefit to optimize for fees and expenses and investment choice. But then there are a handful of states that, allow things that, you know, where you could use a non-home state. And now you can, you sort of

have the broad array of choice in terms of, okay, I now can go pick the 529 plan that I think has the best investment options, fees, expenses, that sort of thing, and still get my state tax benefit. The other thing I think to think about, though, is like South Carolina, you may want to use that as you're getting closer to college age because of the ability to deduct the 529 contribution on the state tax return in an almost unlimited way versus if you just pay the tuition directly out of your checking account, you don't get to deduct the tuition. So it's this odd situation where you might want to pay some or all of the tuition just through the 529, even if it only spends a few months inside the 529, just because the way the state tax is, you know, the state

tax rules work, you get a deduction on the state tax return for the 529 contribution, but you wouldn't for a tuition payment, right? That's a little oddity, South Carolina. I think there are some other states that have that. And then the last thing, if I was in South Carolina and I potentially qualified for what they call a lifetime learning credit or a American opportunity credit, I might want to at least still pay some out of my taxable account just to optimize on a potential credit there. Now, those things are income limited. There's all sorts of bells and whistles there, so there could be some interplay between federal and state. But I will say what you might want to do is start with Dr. Google and then have a conversation with your tax return prepare or other

advisor to see what might make sense in your particular case. I think that's one of the key lessons here for a lot of people. You don't want to just go to your state and open up your state's plan. You've got to look into it first and make sure it is something that works for you. For example, I live personally in Florida, and we have something called Florida prepaid. I don't live. I don't live. I don't loved that 529 plan. It wasn't flexible enough for what I really wanted. So when I did open a 529 plan, I went over to Fidelity and looked for more flexibility and better investment options. So for a lot of people, you've got to look at your state-specific options and see what are there and make sure that you understand how this works. And then like Sean's saying, make sure you're

talking to your tax preparer or your financial planner or anybody else who is in your life, who is advising on some of this stuff because it's really, really important to understand this as you go through this process. Now, one last thing I want to ask about 529 plans here is with Secure Act 2.0. Has your views changed on anything when this came out when it came to the 529 plan? Or is there any big changes that you think are a major impact for parents? Yeah. So with respect to secure 2.0, it gave us, starting in the year 2024, this option to transfer unused 529 money from a 529 to the beneficiary's Roth IRA. And when this first happened, there's a lot of excitement out there. And I myself don't share in that excitement, right? Partly because there are a lot of restrictions on this. The 529 itself has to be

15 years old. The contributions themselves have to be at least five years old. That was to avoid stuffing. You know, my daughter is a senior at Penn State and we've just written the last tuition check. Oh, now I'm going to put 35,000 into the 529 and do this maneuver. That's an anti-stuffing rule. Essentially, it says, well, no, the contribution has to be five years old before it could go from the 529 to the Roth IRA. And so the way I look at is you have to think, what is this? Is this an affirmative planning technique or is it a tool in the toolbox that I can use for bailout? And to my mind, it's the latter, right? So if, you know, someone in the audience is in their mid-50s and they've got a daughter who's a junior or senior at Penn State and they're saying, oh boy, we overfunded this

529, this secure 2.0 act provision is good news. We got to be. bailout technique, we can assess it. Depends on the situation. It may not be the right answer, but maybe it is, right? But if you're in the audience and you're saying, you know, I'm 30 years old, I don't have any kids, I'm going to open a 529 in my own name so that in 15 years I can put money in my Roth IRA, I'd say, whoa, hold your horses. This isn't really for that, right? Because you'd still use your checkbook 15 years from now to fund a Roth IRA contribution. And in fact, I worry that that wouldn't be even a valid 529, but that's a whole other conversation. So I think what Secure 2.0 did is it gave us a valuable tool in the toolbox and we'll take it. Thank you, Congress. But it didn't

change the way I would approach financial planning for most folks. Agreed. And I think that is one where a lot of people need to understand just kind of how this stuff works and make sure you understand those restrictions surrounding it because it's not just an all in one bailout that you could just transfer over. There's a lot of rules surrounding that. So really, really important to understand. So, Sean, I'm going to rapid fire a couple of questions at you that we love to ask a bunch of our guests. So we're going to shift gears here a little bit, but we get some really cool answers out of these. So what are some of your favorite books you have ever read of all time? So my favorite book is the Bible.

I haven't read all of the Bible, of course, but the Bible would be my favorite book in the personal finance space. I think two chestnuts still have tons of value, right? The Simple Path to Wealth by J.L. Collins and the millionaire next door, which came out in the 90s, but I think is still highly relevant today. Absolutely. And those are books that we have talked about a ton on this podcast as well. What part of your work or your life makes you come alive? So I'd say in my financial planning work, it's a case where a client is at an inflection

point and they're thinking about two different options and I'm able to identify potentially a third different option that they didn't even know existed. Right. I like to do that. So when we're doing financial planning, you know, I'm a bit of. of a financial planning nerd, right? So sometimes it's like, oh, let's go down a rabbit hole on a tax issue or social security issue, and that's fine and good. But sometimes it's more about, hey, you know what? It's just, I've got a second set of eyes, a different perspective. And just because of that,

not because of any great technical knowledge, I can see your situation just a little differently, and I can identify a third path that might be better than the two you were considering. And in a lot of situations, that is one of the most helpful things that can be out there. What is your biggest fear when it comes to money? Oh, boy. My biggest fear would be that the assumptions that are baked into a lot of financial planning today may not be valid. Now, I will say that would cause all sorts of problems. But for example, the American stock market, you know, over the last century, has been just an incredible place to park wealth, right?

And to create wealth, right? 100%. And look, there's that chart at the end. of the simple path to wealth around all these horrible events that have occurred and they're basically blips on the radar. At some point, that's going to end. I don't know if that's 50 years from now, you know, 100 years from now, 500 years from now, or at least in theory, two years from now. Now, I will say there are so many knock on effects from that. But I would say, look, if you've been an investor in American equities, you've done really well. At some point in human history, that's going to end.

And when is that? I mean, I would say the odds are that is not during my lifetime, but that's just the odds, right? So, and look, this is an investment advice for anyone out there, but at least there's something to be, and this is not keeping me up at night, far from it. But if you want to say, what do I fear the most? That might be it. And that is one I think a lot of people can relate to for sure and thinking through that, you know, there's always that odds that are there.

So it's even, you know, even when you're doing your rates of return, when you're trying to plan out your retirement, it's always good to be conservative because of that's partially because of that reason. And overall, I think that's a really, really important thing. Just to keep in the back of your head, don't let it keep you up at night, like Sean said, but it's just one of those things to always just keep in the back of your head. How do you plan to level up your finances this year? For me, that's an easy one.

So I maxed out my solo 401K for the year 2023. Employee and employer contributions, right? So I have an S corporation, but essentially economically, I'm self-employed. And so I use the solo 401K, which I think is just a great tactic to build. build up tax advantage wealth for those who work for themselves. And, you know, I think increasingly that's going to be more and more people as the world changes. Big corporations aren't looking to hire as many folks. And as technology enables folks like us to work for ourselves. A hundred percent, I could not agree more. That's the same. I use a solo 401k as well.

And it is definitely an amazing, amazing accomplishment to be able to do that. So congratulations on that. If you could tell your younger self one thing about money, what would it be? I'd say simplify, simplify, simplify, right? So, J.L. Collins years ago wrote a book called The Simple Path to Wealth. And what I would say is simple and best are not necessarily mutually exclusive. Right. That doesn't mean simple is always best. But keep in mind that Simple certainly could be the best. 100%. And I completely agree. And then the last one is what does wealth mean to you? Andrew, you know, We have to repay to seizure what belongs to seizure and to God what belongs to God, right? And really, all this wealth at the end of the day is on loan from God, right? And so I do think we should think about wealth in terms of what can we do for our fellow humans. And look, that starts at home, right? So in my case, I'm married. So that starts with my wife and securing our own financial

futures. But we should be thinking about whether it's next generation, depends on your particular circumstances, is it next generation? Is it charity? Is it church? And so I think wealth means that we get to prioritize things that are not wealth. Right? That's one of my little sayings is once we start optimizing, we don't have to optimize everything. And yeah, let's think about this wealth, not just in terms of ourselves, what can it do for our fellow man? And how can it help secure our future versus, hey, I got the latest hot car or whatever it might be. I 100% agree. And I think that is a really, really powerful lesson that we all need to remember. So, Sean, this has been absolutely amazing. Thank you so much for coming on. Where can people learn more about you and what you have going on, your book, and everything else?

Andrew, thanks so much. Really enjoyed today's conversation. You can reach out to me at my blog, Phi Taxguide.com. I like to refer to that as my internet home. It's got links to all my different places. Two other places you can find me on YouTube. Just type in Sean Malini videos. And then on Twitter, Sean Money and Tax. Amazing. We will link all of those up. down below in the show notes below so that you guys can check those out. Sean, thank you again so much for coming on. Andrew, thanks so much. Really enjoyed today's conversation. Rosen lasagna, medium power, 15 minutes. Sounds like Ojo time. Let's play. Feel the fun with Play Ojo, the online casino with all the latest slot and live casino games.

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