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A description of the selection methodology can be found here.
Welcome to Norris Mclaughlin’s Navigating Your Future. This is a limited podcast series discussing estate planning and the well-being of your future. I’m your host, Chris McGann, an attorney at the Trust and Estates Practice Group at Norris McLaughlin. In this episode, I’m joined by Jim Boyd. Jim, want to introduce yourself? Hey Chris, thanks for having me a little bit about myself. I’ve been in the profession almost 25 years at this point, which is crazy. You can’t believe that I’m a Certified Financial Planner professional and I’m an owner in Cane Financial Group in Horsham, PA All right, thanks for coming along, Jim. And today’s Family Planning Insight session. We’re going to be talking about 529 plans. So to kick it off, Jim, can you just generally describe what is a 529 plan? Yeah, a lot of people are confused on it. Really. It just refers to a section in the IRS tax code that allows families or individuals to be able to start saving for the exorbitant cost of education, really higher education in our country. And then do you know specifically what 529 can be used for, like what types of education expenses? Is that just tuition or is it broader than that? So there’s a lot of different things. So the reality is a lot of people think it’s just for tuition, but it can be used for room and board as long as a student is enrolled at least parttime. It can be used for computers, it can be used for books. So there are a lot of different areas that it can be used for. And originally, 529 was just for qualified higher education thinking like college trade school, Med school, dental school, those types of things. But with the passage of some different recent legislation, up to $10,000 a year can be used through K for K through 12, you know, in private schooling for K through 12. That’s just for tuition though, Correct? Correct. You had mentioned the exorbitant cost of college, and I couldn’t agree with you more. I was looking up just a general statistic recently, and the average cost for private schooling tuition in 2003 was 19,000 a year.
That’s an average number, In 2023 that’s jumped up to $44,000 a year. So you can see that over 20 years, that average cost has doubled. And it kind of scares me as a parent with a young child, what that’s going to look like for my child’s future and for my bank account. I mean, definitely, I’m connecting with a lot of younger clients in the estate planning arena, the work that I’m doing for them. And this is one of the first things that comes up in our conversation because I’m connecting with a lot of young parents with young kids and I bring up the idea of a 529 account with them because they generally just, you know, don’t have any idea what it is. They might have heard about it before. You just mentioned all the great things that it can be used for to pay. And what I explained to them from an estate planning perspective is the tax advantages that come with it. So not only can you pay for all the tuition, the room and board, computers, transportation, anything like that, but from an estate tax perspective, opening a 529 account that gets it out of your estate, so when you die, that won’t be includable in your estate for estate tax purposes, You’re contributing post tax dollars into a 529 account. So all that growth is tax deferred. So from an income tax perspective that’s phenomenal. Assuming that you of course use those funds to pay for the education expenses that you mentioned. So that’s really you know, two of the real big benefits. I do note that in New Jersey we have an inheritance tax. So if someone passes away and they leave a 529 account to someone who’s not a kid or a spouse, that could potentially be subject to inheritance tax. But that’s really not a big issue for most people in terms of a 529 Is it easy to set up and administer or is it complex? Yeah, I’m a firm believer in simplicity and things that are easy to do in, you know, low barriers you have to jump over to get involved in. So something that’s nice about the 529 is I always tell individuals, whether I’m, you know, teaching a course or I’m meeting with new clients, is don’t let perfect get in the way of good or great. So you can always set up a plan and then tweak it later.
I think the reality is the younger you start, the younger child is when you start a 529 more powerful it is. Something you hit upon Chris is the beautiful tax deferral that you can get from a 529 if you use it appropriately. So if you start saving money when your child is first born, that gives you 18 to 24 years of compounding time in a tax free environment to allow that money to grow. And as Ben Franklin said back in the day, one of the miracles of the world is compound interest. And the other thing too is you can make it a family affair where you can have grandparents get involved and contributing. So instead of, you know, gifting $1000 toys at the holiday time, maybe give $500 worth of toys to the kids and put 500 towards a 529 You know, so get the whole family involved. It it, it really increases everyone’s efforts and paying for something that’s just become so absorbent these days days and 529s are super easy to set up. Every state sponsors a 529 set it right up through the state’s sponsored site. Or if you work with a financial advisor, most financial advisors have a number of different plans that they can offer you as well too. So 529s are pretty easy to set up, so don’t let that stop you. Oh, that’s awesome. And I also know that when you do set them up in certain states, sometimes you can get an income tax deduction, which I know in Pennsylvania is nice. You can deduct up to 32000 as a married couple of your contributions that you make to a 529 whether it’s a PA sponsored plan or another state sponsored plan. And New Jersey recently jumped on the bandwagon in 2022 and now you can get a small deduction up to $20,000 per year for a married couple as long as your income is less than $200,000.
So you know, those are nice little addons that otherwise go with the create tax benefits of contributing to a 529 So, you know, we’ve talked about just all the good that comes with 529 accounts. Have you ever noticed any or can you explain any pitfalls potentially with a 529 or cautionary tales to keep in mind? I think you know a few things I look at like when you were talking about some of the different tax advantages to getting involved in the plan and we talked about #1, that tax deferred growth and really tax free growth if that money is used for qualified higher education for qualifying expenses. One of the things to remember is there are no federal income tax deductions. It’s only state income tax deductions. So a lot of people, they think, Oh my God, I’m going to get this big tax deduction like I did on my 401K or 403B. That’s not the case from a federal level, it’s just on the state level. But it is something, you know, that’s still nice. As far as like pitfalls, I think the biggest thing where we see is really monitoring how much someone is saving into a plan. For the vast majority of people, the amount that they’re going to be saving into a plan on a monthly basis is not going to be too much where we’ll start to, you know, educate people and counsel them as if, let’s say they have 250-300k in a 529 plan and they only have one child. You know, we’re going to tell them not to put any more money into that plan at that point in time unless they know their child is going to Med school or law school or dental school where there’s going to be a really high price tag because you don’t want to overfund the account. If those monies aren’t going to be used down the road, you don’t lose that money. It’s just the government may impose a penalty in income taxation on the growth of it if it isn’t used for qualified higher education in most cases. So again, it’s just really looking at a person’s situation, their family dynamic and as funding starts, just monitoring how much is going in and or are we on a path to put too much into the plan. I don’t really see that. The reality is, is most people aren’t putting enough into plans or saving it all. So I really like the 529s as a vehicle to save. OK? If child ones account has too much in it, you can move that balance over to another child’s right? Awesome point. You do. You have the ability and it’s not just children. So that’s that’s the most likeliest scenarios. You can transfer to the next child or other children. Mom or dad could use it if they wanted to go back to education later in life. A cousin could use it and aunt and uncle as step brother or step sister. So there’s a pretty wide range of beneficiaries that it could be transferred to each year. Okay and I know that what we call SECURE Act 2.0, this was regulations that recently came out at the end of that offered some estate planning and tax planning advantages and opportunities. One of those includes the ability to, as I understand it, contribute a 529 account potentially to a Roth IRA. Is that accurate? Yeah. So a couple strings attached to it is always happens, you know, when the Internal Revenue Service or or you know the legislators should get involved. But but All in all as a planning community we’re really excited. So again, addressing one of the biggest fears that people had is what if I put too much money into this plan, how am I going to get any advantage from it. So what they recently passed is up $35,000 worth of balance in a can be transferred to a Roth IRA in the beneficiary’s name with a few stipulations. One is the plan has to have been open for at least 15 years and then the other thing is that Roth IRA must be in the name of the beneficiary of the 529 account. And then you have to stick to the Roth contribution limits each year. So 6500 a year each year until that $35,000 has been hit. And and they they inflation adjusts that IRA number each year. So you just want to be cognizant of it 15 years down the road. If you were to do that, just what are the contribution limits for that Roth IRA in that year and that’s how much you could convert over from the 529. So we’re very happy that that passed. Yeah, no, that seems like a great benefit and a great gift potentially to, you know, give to your children or other beneficiaries. So I think you know the key takeaways to come away with from this discussion is that 529 accounts can be a great vehicle to pay for college expenses, potentially get a state income tax deduction. It’s out of your estate for federal estate tax purposes, and probably the biggest one is the compounded income tax growth that happens year after year. So that money will just grow free from income taxes and potentially save parents a large chunk of money in what’s becoming probably a family’s biggest debt at the end of the day.
So I think the key takeaways from this discussion are:
So this has been Norris McLaughlin’s Navigating Your Future, a limited podcast series discussing A variety of topics related to trust in estates and tax matters. I want to thank my learned guest, Jim Boyd, and you the listener, for being a part of this conversation. Be sure to tune in next time for a brand new episode. If you’d like to learn more about our work, please e-mail me at navigatingyourfuture@norrislaw.com.
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