The Pros and Cons of The 529 With Sean Mullaney

Transcript:

On this episode of the personal finance podcast, why the five 29 plan may not be as great as you think with Sean Mulaney.

What's up everybody. And welcome to the personal finance podcast. I'm your host, Andrew founder of master money. co and today on the personal finance podcast, we're going to be talking to Sean Mulaney. About why the five 29 plan may not be as great as you think. If you guys have any questions, make sure to hit us up on Instagram, Tick Tock 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 help 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 five 29 plan with Sean Mulaney.

Now, a lot of times you'll hear me talk about five 29 plans, and I think they are a great way to save for college, but I also want to have guests on the show. We're going to state the case of the other side. And what Sean's case is, is he said this, there are pros to the five 29 plan that you should definitely.

consider, but he's also going to go through the cons of the 5 29 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 5 29 plan. If you've never heard of what it is, then we're going to dive deeper into things like the tax benefits of the 5 29 plan.

What happens if you don't use a 5 29 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 fi 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. 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 five 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 five 29 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 of 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 for 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. So I have a blog by tax guy. 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 taken 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 forties. So 20 somethings are young to me, at least. There are gonna be some newborn parents in the audience here, and I, 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 5 29, 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 to scrimp and save. So we get that 500 into the five 29 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 5 29 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 that 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 kid's college, right? It allows you to put money into a tax advantage account, they call it a 529, or a 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. Like let's put the tax rules to the side for a second, especially when we're thinking about parents of a newborn toddler, you know, 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. 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 5 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 independent 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 we pretty much, we know we're going to have those expenses. Why are we prioritizing prepaying juniors expenses that junior may or 18 years down the road? And that makes complete sense. Cause 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 five 29 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 stroke. 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, 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 3 largest states have no tax benefit on the way in. However, New York has a tax benefit on the way in these tax breaks.

Next slide. So, um, um, my understanding of the state income tax is that as a state, it's a relatively modest benefit every year. And I know there's some states, like I'll give you one example on nine expert on South Carolina taxation. But my understanding is South Carolina is very generous from a state income tax perspective to 529 contributions.

So if you live in South Carolina, you're. Child's going to go to the university of South Carolina. You want to be very much looking into a five 29, even just to fund it to then shortly thereafter pay the tuition bill. Cause my understanding is, uh, the deduction may be unlimited. It's, 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 of benefit though, because most investment income tends to be tax favored, right? Most investment income qualifies for some 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 401k, 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. 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, you know, 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? Cause how much does college cost? It typically is. Inflated as that is, that's a whole other conversation, whole other podcast episode. But 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, will probably be a whole nother 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 5 29 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 lowballing 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 for 529, 40, 000 dollars 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 on, you know, radibly they decide, you know, or 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 percent 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 a 529, I think that's a good thing to do.

I completely agree. And I think it is really, really important to kind 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. Uh, so overall, it is really, 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's a mechanism to my understanding, and I must admit, I have 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 travels, not 1 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 that health savings account.

And I, myself, I'm a big fan of the health savings account. One of the reasons is you could 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 five 29 doesn't have that feature.

And so we really have to be thinking, you know, in terms of. The benefits 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. 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 cause 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 five 29 plan that that parents who are on the path to financial independence may want to Consider this.

So should parents that are still on that path, maybe they don't have those 30 years of expenses saved up yet, should they actually consider the 5 29 plan? And if not, what should they consider? Alright, so, uh, first of all, if grandma and grandpa want us to fund a 5 29 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. Right now, when we, we think about 5 29. 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 save in a taxable account in mom and dad's own name and maybe mentally segregate those assets as being most likely for juniors 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 can serve multiple masters. So an asset and taxable brokerage account can be used to.

Fun mom and dad's retirement. It can be used to replace the roof. It can be used to fund a dream family vacation, Yellowstone, and, or it could be used to fund college tuition. Any combination of those things. Once we put it in the five 29, it can not serve multiple masters. That's a real drawback of the 529 that I think folks don't focus in on 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 2 main examples. 1 is mom and dad have hit their fine number or 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.

And 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, if it's a newborn and mom and dad are already ahead of the fine number. Yeah. Start thinking about the five 29.

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 kind of segment this, you can have two taxable brokerage accounts. Like for example, I've, 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 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 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 five 29 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, 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 juniors 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 six, seven, 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, um, you might qualify for something called a lifetime learning credit or American opportunity credit too. It's another advantage of using taxable accounts versus 529s.

To fund college, but, you know, 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 fifties or early sixties, we're taking them down.

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 inefficient 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 serve multiple masters? And maybe the master is juniors 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. Cause 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, cause 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, uh, if they're. 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?

Uh, cause 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 2 years and then went to a 4 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 change 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 Sisters 529 is already fully funded, right?

We have those sorts of issues. Congress Insecure 2. 0, which was passed in December of 2022, gave us a second bailout technique. And this technique is getting a lot of attention. What it involves is this. What you can do is move money from a Beneficiaries 529 into the Beneficiaries 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 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? So Right. And then there's a lifetime limit, right? A 35, 000. So basically it's roughly 5 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 5 full years, but let's just use 5 years as sort of our dynamic there. But there's, 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 percent 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 juniors 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 can say, Hey, look, junior, this is important. Maybe juniors, a teacher or some other relatively modest income job.

And junior just doesn't have the money for the Roth IRA in their early twenties. Well, mom and dad can whip out 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 sometimes in financial planning, we call that wealth transfer, right?

Put a fancy term on it, but that could be great for juniors financial future. But my broader point of teens is, look, you don't need a five 29 to fund juniors Roth IRA, but that said the five 29 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, um, having those Roth transfers.

I think that was really powerful when that was passed. And for a lot of people, that's going to give you that additional option. And then, like you said, transferring it down to younger siblings, if you have younger siblings available or older siblings that haven't gone to college yet or anything like that.

So I think that is a really, really cool way to kind of think through this. 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.

While I'm gonna have to pay ordinary income tax plus the 10 percent penalty, but put the time restrictions to the side in terms of use restrictions, there's no penalty. If I 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 theses is 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 poke, right? Not a good financial planning technique, but an available one. All right. Well, think about the 529. 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 of the alternative savings alternatives, even a health savings account, which, you know, 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. You know, 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 fifties. 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. It is 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 or in 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 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 state's 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 state's 529.

And still get a state tax benefit, but that is a drawback of these state tax benefits and they vary some 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. Uh, well, a couple of 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, uh, 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 know, 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 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, um, 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 preparer 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 got to look into it first and make sure it is something that works for you. For example, I live in personally in Florida and we have something called Florida prepaid.

I don't love that five 29 plan. It wasn't flexible enough for what I really wanted. So when I did open a five 29 plan, I went over to fidelity and looked for more flexibility and better investment options. So. For a lot of people, you 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 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 the year 2024, this option to transfer unused 529 money from a 529 to the beneficiaries Roth IRA.

And when this 1st 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 it 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 fifties and they've got a daughter who's a junior or senior at Penn State and they're saying, overfunded this 529.

This secure 2. 0 act provision is good news. We got a bailout technique. We can assess it. Depends on the situation 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 five 29 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? Cause 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 five 29, but that's a whole other conversation. So I think what secured 2. 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. Here's 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 JL Collins and the millionaire next door, which came out in the nineties, but I think it's 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 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 incredible place to park wealth, right?

And to create wealth, right? 100 percent 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. I don't know. You know, a hundred 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, uh, 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 what 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 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? Uh, I'd say simplify, simplify, simplify, right?

So, you know, JL 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. 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 percent 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, fitaxguide. 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. Type in Sean Mulaney videos and then on Twitter, Sean, money and tax. 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.