Anwers to Pre-Retirees 9 Biggest Worries

Lorem ipsum dolor sit amet, consectetur adipiscing elit, sed do eiusmod tempor incididunt ut labore et dolore magna aliqua. Ut enim ad minim veniam.Excepteur sint occaecat cupidatat non proident.

Get Your FREE Copy Today!

When Grandparents Give the Ultimate Gift

Aug 26, 2016 10:05:16 AM
Author: Scott Hanson



Scott and Pat are paying for their kids to go to college using 529s. But they explain why that might not be the best way going forward.

Subscribe to Hanson McClain's Money Matters Podcast

Read Full Audio Transcript:

Scott: Maryann, you’re with Hanson McClain.

Maryann: Hello there.

Scott: Hello.

Maryann: So my husband and I just became grandparents for the first time.

Scott: Congratulations! Boy or girl?

Maryann: A girl. But she lives nearby, so that’s even better.

Scott: Oh good.

Maryann: We are wondering what is the best way to set aside money, education money for her. I'm talking about both college and maybe private school if that’s what our daughter and her husband want to do. I don't know if it's a 529 or if there's another vehicle that is better?

Scott: Well, a 529 is for college expenses. If your primary goal is to save for college expenses, the 529 is going to be your best bet. If it will be used for a private high school, then an Education IRA can be more beneficial to you. I can't remember the last time we've opened one.

Pat: Maryann, are you and your husband both still working?

Maryann: No.

Pat: You’re both retired. I don't remember anything about the Educational IRA.

Scott:  It's been a long time since you've...it could be used for either. There are limits on it, they are not as flexible as a 529, but it can be used for private elementary school.

Pat:  Let’s talk about college because that’s the furthest away and that's going to be the biggest expense. The 529 plan works great. It's an interesting time in my life. I have two children in college and we are using the 529 plans.

Scott:  Your kids went to private school.

Pat:  That's correct.

Scott:  How much more expensive is college than private school tuition.

Pat:  Substantially more. With the 529, the monies go in, it grows tax deferred, you don't get a deduction and if it's used for college expenses, it comes out tax-free. 

Scott:  You can always change the beneficiary at anytime and it's out of your estate.

Pat: You'll want to use the automatically rebalanced ones. Most states have an automatically rebalanced one.

Scott: Well, California's plan, they've got a great plan called “ScholarShare.” And ScholarShare, you've got many different options. But they've got an option that's the aged-based plan so...

Pat: There's an aggressive age-based plan and age-based. And my recommendation would be to use the age-based plan at this point in time.

Scott: And so, as your grandchild gets older, less of the money is in risky assets and more in conservative assets. So that by the time they are college bound, it's in conservative assets ready to be used for college expenses.

Maryann: Are there limits on how much can be put into that?

Pat: Yes.

Scott: But it's so high.

Pat: But they're so high.

Scott: Hundred and fifty grand or something like that.

Pat: Yeah, they're really, really high.

Scott: Five years' worth of annual.

Pat: Yes. I think it's even higher than that. It's in the couple hundred thousand dollar range.

Scott: Yeah, I don't know if anyone's ever maxed it out.

Pat: Yeah, I've never seen one maxed. Are you in that situation?

Maryann: But it couldn't be used for if they wanted to. That's only for college.

Pat: Correct.

Scott: Well college expenses.

Pat: But it's your money, right? So you could take the money back out of it without them. They don't go to college, you can change the beneficiary.

Scott: And actually, it can be a trade school as well, it doesn't have to be college. But it can't be for…

Maryann: It's post-high school.

Scott: Yes, correct.

Pat: Correct. But if the child decides not to go to college, it's your money. You can take the money out. You pay taxes on it as well as a 10% penalty. Or you just change the beneficiary to someone else. You can change it to your great grandchildren.

Maryann: Right. Right.

Pat: Change it to anyone you want. 

Maryann: Now, what happens to that money were we to pass away before it gets used?

Scott: You'll probably list your daughter as the beneficiary or your son depending on the scenario. To take the account over but still be of benefit to your grandchild.

Maryann: Okay.

Pat: And they work great. They work great.

Scott: Yep, I've used them for, I've got my second kid going into college. I've got 529 plans I set up for them when they were both born, and calculated the funding.

Pat: Isn't it funny though, when I was putting it in, it seemed so far away to taking the money out?

Scott: Yeah.

Maryann: And since it's our asset, it doesn't affect any scholarship or any financials for her?

Pat: So, in the first year it has minimal effect. In the second year, it will have more of an effect, but it's not a substantial effect under the current tax law. We're talking 18 years out.

Scott: Who knows?

Pat: Who knows, right?

Maryann: Right.

Pat: It's anyone's guess.

Scott: What we do know is that it will be different.

Pat: Promise you that.

Scott: Yes. College education is a hot political topic now.

Pat: And these 529s actually may not be eligible. Who knows, right? You might not … Four years from now, five years from now, who knows whether it will make sense to put the money in, whether college will be free for everyone that wants it. Who knows? We have no way of knowing. But today, they make sense.

Maryann: All right. Thank you very much.

Pat: All right.

Scott: All right.

Pat: Appreciate the call.

Scott: Good luck, Maryann.

Maryann: Okay.

Pat: Congratulations.

Scott: Congrats, yeah.


How to select a financial advisor

Recent Posts