Grandparent 529 Plans: Big Changes + How Retirement Savers Can Maximize the Tax Benefits
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Welcome to Stay Wealthy Podcast. I'm your host, Taylor Schulte, and today I'm talking about 529 college savings plans. In fact, a big change was recently made to grandparent-owned 529s that seem to fly under the radar.

In addition to discussing this change with you, Robert Farrington from The College Investor joins me to discuss three important things. Number one, how to maximize the tax benefits of a 529, why 529 plans are great estate planning tools, and how to invest your money inside a 529. We

We also talk about alternatives to 529 plans that retirement savers might consider. So if you want to learn about the new 529 rules and how to maximize the tax and estate planning benefits of these accounts, you're going to love today's episode. For the links and resources mentioned, just head over to youstaywealthy.com forward slash 156.

Investors who are in retirement or close to it might think that 529 college savings plans no longer play a role in their financial life. But just like IRAs and 401ks, 529s have many different use cases, and some of these use cases can help address and meet common retirement planning goals. Some can also be helpful from a tax planning or estate planning perspective.

To help us dive into the world of 529s, and specifically grandparent-owned 529s, I invited a special guest to join me today. Hey, I'm Robert Farrington. I am the founder of The College Investor. Thecollegeinvestor.com is one of the top blog sites, if not the top, for all things related to college planning. And some of the most popular articles and resources that Robert has published to the website are on the topic of 529 college savings plans.

529 college savings plans are state specific and they were originally created in the late 1980s to help combat the financial strain that college had put on families and students.

Florida, Michigan, Ohio, and Wyoming were the states that played a major role in bringing these plans to life. And since their creation, roughly 12 million families in the United States have saved nearly $260 billion inside of 529 accounts or more formally referred to as Section 529 plans.

So what exactly is a Section 529 plan? So a 529 plan is a special type of education savings account that offers a ton of great tax benefits for saving for education. It used to be saving for college because this would be the account that you would want to use to save for college because any money you pulled out could be pulled out tax-free when used for qualified college expenses. But over about

the last five to seven years, Congress has broadened what you can use a 529 plan for. And so now it's really better to call it an education savings account because you can use it for K-12 expenses. You can use it for trade school, vocational school. Basically, the definition of what you can use the account for goes a long way.

but the money goes in potentially tax-free or tax-deferred, grows tax-free in the account. And as long as you pull it out for qualified education expenses, it'll be tax-free when you withdraw it.

I know the stay wealthy community loves saving money on taxes. So let's be sure we really understand the tax benefits of 529 accounts. As I had mentioned at the top of the show, 529 plans are state specific. So while the investments inside of a 529 account always grow tax deferred, just like an IRA or 401k and withdrawals that are used for qualified education expenses come out tax free for everyone across the country.

Each individual state does have specific rules around the tax treatment of contributions that go into a 529. A lot of states offer benefits for contributing to a 529 plan. So right now, five states offer tax credits to their residents to make contributions to a 529 plan. Twenty nine states offer tax deductions to their residents.

for making contributions to their 529 plan. So in over half of the United States, you know, there is a good tax benefit for contributing to a 529 plan. And then, of course, you do have the tax-free states anyway. So, you know, there's a lot of tax benefits for contributing to a 529 plan that could lower your state tax bill. It's important to note that these are state tax bills and state

plans, the federal government doesn't get too involved on 529 plan regulation and there's no federal tax break for contributing to a 529 plan. For those of you that do live in a state that provides a tax deduction or a tax credit for 529 contributions, there is an important and sometimes overlooked tax strategy for parents and grandparents to keep in mind each year. Here's Robert with more. There's a huge benefit just putting the money into the account of

Even if you were to say withdraw it right away. So in some states, let's just say that you are paying for education today. Well, you could literally just funnel the money through the 529 plan. I'll put an asterisk there because a couple states do have a one year waiting period, but most of them don't.

You know, you can put the money into the account, realize a state tax deduction, and then use the money out of the account, even if it doesn't grow at all, to save some money on taxes. In addition to some states now allowing 529 plans to be used to pay for K-12 and apprenticeship programs...

Some also allow funds up to a certain limit to be used for student loan debt repayment. Congress, with the SECURE Act, now allows for a $10,000 one-time use for repaying student loan debt. So again, it has the potential to let you use pre-tax money to repay some student loan debt.

Or, you know, if we're looking from a parent or grandparent perspective, it allows you to maybe gift some money pre-tax and help somebody else repay their student loan debt, maybe a child or grandchild.

However, it's important to note that not all states allow this. So again, these are state-based plans. And so you need to check with your own state law. So this one is the one with the fewest number of states that allow it. Only 23 states allow you to use 529s for student loan repayment.

One really interesting thing that I learned through my research for this episode was that student loan debt is not just a problem for our youth. In fact, of the $1.6 trillion in total student loan debt at the end of 2020, borrowers over age 50 accounted for about 22% of it or about $336 billion. And

It's a growing problem with this number being five times higher today than it was in the early 2000s. The over 50 age group is the fastest growing cohort of borrowers in this country right now. And it's kind of interesting because it's like, how do you still have to do loan debt over 50, right? And so one, some people may have just been kicking the cans down the road, but I think a larger portion of this cohort is actually parents who

you know, that have borrowed for their children's education. So as we talk about, you know, grandparent and parent saving for college, well, why do these, this generation also have student loans? Well, if they didn't save for it or they didn't plan for it, a lot of them end up borrowing for it. And now as they approach retirement ages, they're like, what do I do with all this student loan debt? As I'm looking at, you know, what's in my retirement account, what I need to live off of. And it's really becoming a challenge. And

It's one of the reasons I advocate. I'm a big believer that parents should never borrow for their children's education. I know that might be kind of harsh for some people, but I think parents need to put the oxygen mask on themselves, take care of their own plans, their own retirement, because there's a ton of ways to pay for college. They might not all be ideal or best case scenario, but there are a lot of options.

When it comes to your retirement, there's not options. You're not getting a loan from the government for your retirement, right? You've got to deal with your own house and make sure you're good to go before that time comes.

To make matters worse here, what many people gloss over or what many people don't know is that student loan debt cannot typically be discharged through bankruptcy. In other words, if you default on federal student loan debt, the government can tell your employer to withhold your pay or they can seize your federal tax refund or even garnish as much as 15% of your social security benefits.

In fact, in 2015, the most recent year that I could find data for, roughly 114,000 borrowers over the age of 50 had a portion of their social security benefits seized to repay defaulted federal student loans. The collateral of a student loan is your future earnings. So we talk a lot about like a mortgage. The collateral on a mortgage is your house, right? They foreclose it if you don't pay it. The collateral of your car loan is the car. They'll repossess it if you don't pay it.

Well, I think one of the biggest missed arguments today about student loan debt is the collateral. The collateral is your future earnings. You borrowed this money to go to college or a parent borrowed it because the goal was, right, to increase your future earnings. As we've all heard the stats, right? You go to college, you make more than if you didn't go to college.

Well, on the flip side, if you don't repay these student loans, they will take your earnings to repay it. The government will. Private lenders can sue you to get your earnings. So that's the collateral. And I think it's important to frame the borrowing conversation in that.

Okay, with a solid understanding of 529s, what the funds can be used for, and how to maximize the tax benefits, let's get into some of the big changes that specifically affect grandparent-owned 529 plans. But before we do, you might be wondering, what is a grandparent-owned 529 plan? Well, to answer that question, we have to first understand how 529 accounts are titled and owned to begin with, because there are some unique characteristics.

So when you set up a 529 account for someone, you have to choose a single account owner and a single account beneficiary. Just like an IRA or a 401k, most 529 accounts do not allow joint ownership.

For example, a husband and a wife cannot both be the owners of a 529 account. You can, however, list one spouse or one person as the owner and the other spouse or the other designated person as the contingent owner. That way, if something happens to spouse or person A, well, spouse or person B can immediately step in and take over the ownership and management of the account.

But unlike an IRA, where you can name as many beneficiaries as you want, a 529 account only allows one beneficiary per account. You can change the beneficiary one time per year, but you do have to name someone in order to get the account open and funded.

Naturally, the beneficiary is typically the person, the child, grandchild, niece, nephew, whoever. Typically, the beneficiary is the person that you went to go set up this account for in the first place.

But if you're not sure who you want the beneficiary to be yet, or maybe you're setting it up for an unborn child who doesn't have a social security number yet, you can always name yourself as both the account owner and the account beneficiary, allowing you to get the account open and funded. And then when you decide who you want to name as the beneficiary or the unborn child is now born and has a social security number, you can then swap the beneficiary from you to that person.

What this all means essentially is if you want to set up a 529 college savings plan for five different people, well, you'll need to establish five different accounts, each with a single owner and a single beneficiary.

This ownership structure is often what makes 529 accounts so appealing. And that's because the account owner not only gets the state-specific tax benefits if they exist, but they also maintain control of the money that's contributed to the account. Even if the beneficiary listed is an adult, the account owner is still the one who gets to decide when and where to distribute the funds. The beneficiary never has any say in the matter.

Of course, the account owner will ensure that the money goes towards qualified education expenses for the beneficiary because, well, that's why they set it up in the first place. The ownership structure allows the grantor, the person contributing the money, to prevent the beneficiary from using the money to, let's say, buy a new car or invest in cryptocurrency.

So what then is a grandparent owned 529? Well, it's simply a 529 account where a grandparent is the account owner and their grandchild is the beneficiary bypassing the parents in the middle.

And this is common because the grandparent wants to maintain control of their money. If they made the parent the owner instead, the account and the funds contributed to the account are now owned by the parents. And who's to say the parent or parents don't liquidate the account to go on a nice vacation instead of using the funds to pay for the grandchild's education?

Sure, the parent would incur taxes and penalties on that liquidation because it's not going towards qualified education expenses, but it's not enough to stop or prevent someone to do that who has those motivations. In addition to maintaining control, grandparent-owned 529s have always been a hot topic in financial planning because of how the assets inside of a grandparent-owned 529 are looked at and treated on the college FAFSA forms.

Before we dig into those specifics, let's quickly break down what the FAFSA form is. The FAFSA is the Free Application for Federal Student Aid. And so every 17-year-old and their parents will be filling out the FAFSA to see if they qualify for any type of financial aid. And it's important to note that financial aid means scholarships,

that are both merit and need-based. It means grants that are both merit and need-based. And it means student loans, specifically federal student loans. So if you want any of those things, you have to fill out the FAFSA, the Free Application for Federal Student Aid. And this

looks at the parent and student's income. It looks at the parent and student's assets. And then it comes out with a number at the very end of it called the expected family contribution. And without getting too in-depth, the bottom line is if you have a lot of income and assets, you are expected to pay more for college and you will get less scholarships and grants.

And if you have very minimal income and assets, you are expected to pay less for college and you will potentially qualify for more scholarships and grants. The student loans

Doesn't matter. Need-based, non-need-based, anyone get a student loan, but they have to fill out that FAFSA form. Maybe like you, when I hear student financial aid, I immediately think of lower income households, families and students who are truly in need of financial help.

But that is a common misconception with regards to FAFSA forms. The FAFSA is basically the key to unlock all these things. The schools will use it to determine their scholarships and grants, whether that's need or merit based. And then, of course, it's basically your student loan application. So even if you have plenty of assets, if the student needed a student loan, they had to have filled out the FAFSA. And that's a miss for a lot of students.

because they realize last minute, oh my God, I need student loans. And they're trying to rush to get the FAFSA done and get all this stuff approved right before the deadline. So this is the application you need for any of those things. And I also recommend that people fill it out every single year. So 17-year-old, 18-year-old, 19, 20, like every year of college, just fill out the form and

You might not get anything because you have income and assets, but at the same token, you never know. There's a lot of programs. There's a lot of things available, especially from colleges. And yes, it takes a little bit of time, but once you do it once, it's actually fairly easy. You just repeat the process. Super simple. Spend 20 to 30 minutes of your time. Fill out the form. It

It's important to clarify here that families who are receiving financial aid right now and want to maintain it do need to submit a new form every year.

But those who are not relying on financial aid at the moment might still consider tackling this complex form each year as well. Why? Well, as you can imagine, it's hard for anyone to keep up with all the opportunities and grants that are being offered by schools and partner organizations. And completing the form is the only way to know for sure if there's something out there that you specifically might qualify for. But really,

But Robert shares a couple of other good reasons as well. One, you might start off as a dependent student in year one or two, right? And then maybe you become an independent student in your remaining years. Maybe your income changes. Maybe the parents' income changes or asset changes. You know, there's a lot of variables. I mean, it doesn't seem like a long time, but four years is kind of a long time, especially if you're thinking of a four-year college career. Yeah.

As noted, and as some of you may have experienced before, the FAFSA form takes some time to complete given the amount of information that's collected. In addition to the basics, your name, social security number, date of birth, etc., families are required to supply information on their income and assets including bank accounts, investments, real estate, and certain types of businesses that they own.

And this is where things get interesting, specifically as it relates to student assets versus parent assets versus grandparent assets. The FAFSA looks at both student assets and parent assets. And depending on how the 529 plan is owned, it can be reported as a parent asset or a student asset.

If the student is a dependent student or the parent owns the 529 plan, a student owns the 529 plan and they're dependents, it's a parent asset. If the student is an independent student, it's reported as a student asset. And here's the cool part. If it's owned by anyone else, for example, a grandparent, it's not reported as an asset, right? Because it doesn't fall into the student or the parent bucket of

of how it's treated. So why this matters is because if the asset is a student's asset, it's their money,

It counts a lot more on the FAFSA. It counts up to 20% of the asset value. However, if it's a parent-owned or a dependent student-owned asset, it only counts as 5.64% of the asset value. So that's all that they're gonna count towards paying for college. So it's significantly less. And then of course, if it's a grandparent-owned asset,

counts as zero on reducing any financial aid. So this can really play a role into how much need-based financial aid a student receives.

Granted, if there's a lot of money in either parent or student's wheelhouse, probably not going to get much need-based financial aid. But if there's not a lot of money there and assets and income, and the 529 plan is really the bulk of the assets, it really isn't necessarily going to impact them very much. So it's something really important to consider as you're saving. Now,

Granted, if you just start early and this 529 plan grows, well, who cares, right? If it's going to cover the cost of college, you don't need to worry so much about need-based financial aid. But if you're starting late or there's other situations, it might be something that you want to think about. And that 529 plan is one of the best ways that you can save for college because it has the least impact on need-based financial aid. Yeah.

Historically, grandparent-owned 529 accounts impacted a student's eligibility for financial aid more so than parent-owned accounts. For that reason, grandparents in many cases chose to go ahead and relinquish account ownership to the parent, even though it meant losing control of the money. But

But thankfully, that's changed. And those changes, while they've caused some confusion, do in fact go into effect this year. Starting with the 2024 FAFSA, qualified distributions from a grandparent 529 will no longer count. So it's important to note that, right, if the grandparent owns the asset,

it wouldn't have counted on an asset picture today. But let's just say, you know, the grandparent took out $20,000 to help the child pay for college. Well, all of a sudden that student now would have to report $20,000 in income for the year. So it wouldn't affect the first year's financial aid picture, right? So let's just say it's a freshman. It wouldn't affect the freshman year. But then when they go to fill out the...

FAFSA for their sophomore year, all of a sudden they would have had $20,000 more in income because of that distribution. And that could have negatively impacted any financial aid they were receiving in year two. And so a lot of people were getting surprises, right? They're like, oh, I can pay for college. Everything is great. I'm going to start as a freshman. And then all of a sudden they go to their sophomore year and they're like, whoa, whoa, whoa. They had to come up with a bunch more money and that was not expected. Well,

Starting with the 2024 FAFSA, any distributions from a non-custodial parent or a grandparent or an aunt or an uncle are not going to be reported as either an asset or the distribution is not going to be reported in income. And you might be thinking, well, whoa, it's only 2022 and we're recording this podcast. 2024 seems so far off. Well, remember, the 2024 FAFSA, you're going to apply for it in 2023 and you're going to be using your tax returns from 2022. Right?

So that's why this year, as of now, those distributions will no longer affect financial aid eligibility in the future. In addition to using a 529 to help save for and fund education, many families also use them for estate planning purposes.

Some tax experts say that it's one of the most underutilized estate planning techniques, and that's because the money in a 529 account is exempt from federal estate tax. And therefore the dollars inside the account don't count towards your taxable estate. Now you might know that the federal estate tax only applies to estates that are worth over $12 million in change or $24 million in change for a married couple.

While a very small percentage of Americans are currently above those limits, it's important to know that as it stands today, the limits are set to drop to the $6 million range in 2025. And these limits can and do change quite dramatically. You might remember in 2005 when the estate tax exemption was $1.5 million. So don't get too comfortable with the current amounts as they are far from being set in stone.

Also, there are other quote death taxes that are separate from federal estate taxes and don't fall under the same exemption limits. For example, 13 states have state estate tax and a few even have an inheritance tax. If any one of these death taxes might apply to you when you pass away, well, getting money into a 529 account, an account that's held outside your taxable estate might be a wise move.

Yeah. So, I mean, I think we kind of all know when it comes to estate planning, like either you give it away or the government's going to take it away. So if you're looking at ways to gift, but you also want the gift to go for a cause, well, an education savings plan can be a really interesting tool for grandparents to save for college. So that's

Just so you know, there is a limit on how much you can contribute to a 529 plan. There's actually two limits. The first limit is really the gift tax exemption level, which as we're recording this, I believe it's $16,000 this year in 2022. And so, you know, a couple could give, what, $32,000? I'm doing the math right there. To one 529 plan, right?

per year. But 529 plans also allow what's called super funding, where you can take a five-year contribution, which I believe now would be 180, maybe not. Don't quote me on that. But they can make a five-year contribution at one time to 529 plans. So let's think about a situation where a

a parent or sorry, a grandparent might have, you know, two children and each of those two children have, you know, two children a piece. So maybe there's six children

dependents, well, you could start gifting out significant chunks of money to these people and they have to be used for education, right? So if that's a value that you have in your family or you just don't want them to go blow it on a car or who knows, right? Like, well, these plans really only work for education because one of the things we didn't touch on was if you take the money out for non-qualifying expenses, well, you're going to get hit with taxes and a 10% penalty, right?

So, you know, it doesn't make sense to use these plans and accounts for non-education expenses. So if you want to use it for education, well, the money goes in, it can be withdrawn tax-free, and you can contribute significant amounts. It depends on your state, but the maximum amount that you're allowed to have in a 529 plan until they no longer allow you to contribute varies anywhere from $300,000 to $500,000, depending on your state. But that doesn't mean the money won't grow, right?

That just means that you can no longer make contributions to your account. So you could potentially gift a sizable amount to these plans,

And realize that into the future, you can change beneficiaries, you can change account owners. So I've seen families that actually use a 529 plan as effectively an education trust. You could super fund these things, put a ton of money into them. They grow for years and years and years. And then just over time, these families change the beneficiaries to reflect who needs education.

And it's going to be a great way to not only take the money out of your own estate, but you're putting it into a cause that you might value as a grandparent. I mean, here's where it can really be interesting is you have a child and potentially a grandchild. As you let the money sit there, you let that money grow. Maybe the child or the grandchild goes to school. Maybe there's still money left over. There's nothing to say that you can't transfer the ownership to that grandchild's

Right. And then they give it to their children as the beneficiary in the future. And these things can keep going. There's no there's no as of now, you know, I'm sure this loophole will get closed in 20 years. But as of now, there's nothing to stop that from happening. While 529s have their fair share of benefits, they are not the only tax friendly option for parents and grandparents to consider to help save for and pay for education expenses.

It's important to weigh all of the options and understand the pros and cons of each before just blindly opening a 529 account because it's the only solution that you've been presented with. So the Coverdell was like the original education savings plan. They are attractive in some ways, but since 529 plans have grown in what you can use them for, they become less and less attractive over time. And you actually rarely hear about them come up.

up too often anymore. The big benefit with the Coverdell is that you can use it for unlimited amounts of K-12 education funding. So the 529 plan, you can only use $10,000 a year for K-12 tuition only. And that can be a limit, especially some of these private schools at K-12 might be $20,000 or $30,000 a year. So

That could be a challenge of a 529 plan, whereas a Coverdell has no limit on what you can use for K-12. But they do have a limit on how much you can contribute. And this is the problem, is there is a $2,000 annual contribution limit per beneficiary. And so even if you're thinking about expensive private school, it's like, is your money going to grow enough or anything to even potentially cover the cost, right? So...

It doesn't get you very far. And so that's the problem there. You also have, you know, just a UGMA, UTMA, you know, custodial account. So these are just taxable accounts, right? But they could be used for anything. So the cool thing is, is that, right, it's just, it's just a taxable brokerage, except it's held in a custodial account for the child, right?

And so there are some implications potentially with the kiddie tax and other things that could be a negative for this, especially if the balance gets sizable and there's dividends and growth and sales happening. But on the flip side, there's no limitation, right? So because it's just a brokerage account in the child's name, you can use the money for anything or the child can use the money for anything. And so

Um, that's a benefit. And also when we're talking about the FAFSA, custodial accounts are considered a student asset. So when we were talking about like, what's the worst asset to hold on the FAFSA? Well, a custodial account is the worst to hold. But on the flip side, if there's a significant amount of assets in the custodial account, well, you know, it doesn't matter, but they are going to be counted. You know, the most penalty basically is a custodial account.

Finally, you have the Roth IRA. A lot of people talk about, oh, using a Roth IRA to save for college because one of the benefits of a Roth IRA is that the early withdrawal penalty is waived if the money is spent on higher education expenses, right? So they're like, oh, we can use a Roth IRA to pay for college.

And that's great. But I always like to say, who's Roth IRA first off? So a child's Roth IRA or a parent's or a grandparent's Roth IRA, it all makes a difference. So one, a child, how do you get money into the Roth IRA? It's relatively challenging because the child has to have earned income, you

you know, they might not start getting earned income till later in life. Is the money going to grow? And then part two is Roth IRA money used to pay for college is going to be counted as income the second year. So it's that same problem we talked about earlier where in year one, it looks great. But then when they pull the money out of the Roth IRA in year two, it's going to be income for them. So they might reduce potential financial aid there.

going forward. Finally, for grandparents, I think this is one that's just not touched on a lot, but it's important to note. And it's not an education savings account or anything, but grandparents can pay for college tuition and it's not subject to the gift tax or the gift tax exemption. As long as you write the check directly to the school,

That's just it. You're just paying for education. And so if a grandparent does have a lot of assets and there's a grandchild or a child that's, you know, going to college, then

You know, you can avoid all this too. And you literally could just write the check for college and it's very possible to do. So, you know, depending on your situation, that might be the easiest. It doesn't set up a legacy. It doesn't, you know, do anything in that regard. But, you know, you don't have to worry about gift tax or anything like that. You can literally just write the check to the college. Speaking of just writing a check to college.

some of us can't help but wonder what if our child or grandchild doesn't want to go to college? What if they want to start a business or what if they gravitate towards an untraditional online curriculum that isn't considered a qualified education expense? And that's honestly the number one hesitation, I think, of all of these college savings accounts, right? Is what if my child doesn't go to college?

And that's kind of the trend, too, that we're just hearing in the public discourse. Like, what's the value of college today? Yada, yada, right? So I think it's important to note that one of the things we've been seeing over the last few years is this trend of allowing more and more students

options for using a 529 plan. So like I said, back in the day, it used to be qualifying college expenses only. Today, we see qualified college, K through 12 tuition. You can do it for vocational school, apprenticeships. You can use it for student loan repayment. And I do see

this trend continuing to increase. Now, will it just be allowed to use for anything? Probably not. But I do see it continuing to expand to be able to use for education holistically in a lot of ways. And so I think that is one of the biggest things. I think part two of that

conversation is, you know, what is the worst case scenario? The worst case scenario is that you pay taxes on your earnings and a 10% penalty on your withdrawal. So, you know, that's the worst case. That would suck. It's not great. But that assumes that like you never transferred the money to somebody else or used it for another child or let it grow for grandchildren again. So like if you're thinking about gifting this, maybe grandchild A doesn't ever go to college.

But that's not to say that grandchild B or C couldn't leverage that as well. Or it's not to say that great grandchild A doesn't go to college and the money just grew for an extra 25 years. And so, you know, there's a lot of options in that regard of how you leverage these funds. The last thing to really understand with regards to 529s is how the money is managed and invested inside the account.

More often than not, the investment solution that most 529 account owners opt into is what's known as an age-based mutual fund, also known as a target date fund in the retirement planning world. Just like a traditional target date fund that you might be familiar with, age-based mutual funds take risk off the table and get more and more conservative as you or the child in this case gets closer to the designated date.

For example, if the beneficiary of a 529 was just born today, you might choose a 2040 fund because in the year 2040, 18 years from now, that child will be 18 and headed off to college.

The 2040 fund will be fairly aggressive and risky today because there's a long time horizon, but each day, very, very slowly, the fund will automatically rebalance into more conservative investments so that by the time the funds are ready to be used by the year 2040, most of the money is safe and secure.

However, as I've noted in prior episodes, when talking about target date mutual funds inside of your retirement accounts, when you look under the hood of some of these age based funds, they can oftentimes be more aggressively positioned than you might have assumed, even by the time they reach the beneficiaries target date.

For example, the Fidelity 2021 fund, this is intended for students who started college last year, that fund is down almost 10% this year. My guess is you probably wouldn't want the funds that you need to use right now to pay for college to be in the red losing money.

Unlike retirement, college only lasts four to five years. You don't have a long runway to dynamically and systematically withdraw money to cover your expenses over a 30 or 40 year time period like you do with your retirement dollars. For that reason, I often suggest that parents or grandparents or any 529 account owner for that matter, consider moving some or all of the money into cash when the beneficiary is one to three years away from needing the money.

And sure, you might miss out on a few percentage points of growth if the market remains in your favor, but losing money will be 10 times more painful. I mean, I think you nailed it. So just like an IRA or other account, you make your deposit into your 529 plan and it basically sits there until you allocate it to an investment. So one, please make sure you do allocate it to an investment unless you're funneling the money through these accounts. But

Yes, all of these plans are state-based plans and each state gets to decide on what their investment choices within the plan are.

And I'd say most states offer you like five to eight different funds to invest in. You know, you got your basic, you know, total stock market bond fund, usually like a cash savings account fund. And then most of them do have target date funds. Like you mentioned, it's important to note though, the target date is the date your child starts college. It's not like a retirement fund, right? So you need to kind of think about like when they're graduating high school, like what year that is. And that's the date you're looking for. Not, not anything farther than that. Right. Right.

And yeah, you need to just pick those funds. But I do think the important thing to look at too is fees, right? So,

One of the things that when it comes to these funds or one of these state plans is that each state gets to set their own plan. And for those of you that receive tax benefits in your state, well, it might just make sense to contribute to your state's plan no matter what the cost of the funds are, simply because the tax benefits...

outweigh any extra basis points that you're paying in fees, right? If you're saving 500 bucks in taxes every year, well, the fees that you're gonna pay aren't gonna offset that. But on the flip side, if you're in one of these states that doesn't offer any tax breaks or maybe you're in a no tax state, the best thing you can do is look for the 529 plans that have the lowest fee structure. So 529 fees are,

are super complicated. And sadly, they are five times more on average than you can expect to pay for your retirement plans. And it's really just heartening in a lot of ways because I will tell you that some states leverage their 529 plan fees to offset their budget costs. Other states don't. Some states are great, right? But some states do. So I would look at your fee structure because most 529 plans don't just have the fund fees, right? So...

Your listeners are probably familiar with expense ratios and what the fund fees charge. But then there's usually also a wrap fee and then there's a plan administration fee around all of that. And that's where that money typically goes right back to the state or a split 50-50 with the state and the plan providers or other ways. And it's supposed to be used for marketing and things like that. But historically, it's not necessarily done that way. So look at minimizing fees because some of the worst states...

charge well over 1% plus in fees on the 529 plan, and they're not offering anything better than the best states, right? And so, you know, you look at these fee structures, you know, go to the plans that have the least amount of fees because, you know,

you typically don't have a lot of time. You need this money to grow. You want it to be used for college. And then on the flip side, if there's a lot of money there and you want it to grow and be a legacy for your family, you don't want that legacy to be eroded by fees that go to state governments that are using it for

that really don't make any sense. So keep that in mind as you're looking for your plans. I know we covered a lot today, but before I let Robert go, I asked him to summarize a few key points and also share some of his favorite resources for those that want to dive deeper. Yeah, I think that's...

the big thing is, is understand the rules in your state. So we touched on this a few times, but you know, there's 50 states, there's 48 plans, Wyoming and one other state, like they just decided to not have their own state plan and they let you go anywhere. But like know what your rules are because the rules for taxes and tax deductions and contributions and all of this are

are dependent on the account owner's state. So this is important to remember. So whoever's owning this account, the rules are based on your state that you're in. So as you open your plan and figure out which tax deduction stuff, know your state's rules, know what your tax deductions are,

know if you're allowed to use it for K-12 education or you're not. Like, I hate to see you get into this and realize that like, hey, you know, none of this applies because I'm in California or something similar, right? We have a full list on the College Investor. You can go to collegeinvestor.com slash 529 plan guide. You can find your state there, but there's other resources as well. But just make sure you know what state and what you're able to do in your state.

Once again, that's Robert Farrington, owner of the college investor.com, which is currently read by over 1 million people per month. I'll be linking to a number of his resources on college savings accounts and 529 plans in the show notes, which again can be found by going to you stay wealthy.com forward slash one five six. Thank you as always for listening. And guess what? I have another bonus episode coming out in two days. Be sure to tune in because I have a fun announcement to share. I'll see you then.

This podcast is for informational and entertainment purposes only and should not be relied upon as a basis for investment decisions. This podcast is not engaged in rendering legal, financial, or other professional services.