College Savings Plans: Efficiently Preparing for the Future

When college comes to mind, so does how to afford it. Apart from your gifted dependent having an impressive scholarship, there are better ways to save up for them and to do it efficiently.

Today we will talk about programs that involve saving up to afford that and hopefully do it in a way that will make some money in interest and tax breaks to help that journey along because really, who doesn’t want to make better money along the way?

Transcript

Chris Holling: 0:00

Okay, all right. I'm organized. It's happening. We're making this making this happen. Cuz cuz cuz I, I, you're right. I did have a great night out last night. We had some drinks, we had some laughs It was a good time.

Sean Cooper: 0:16

Good

Chris Holling: 0:17

I'm not fully 100% yet again today after my drinks and debauchery last night, which, strangely enough leads us directly into our next conversation about college. Right. So

Sean Cooper: 0:33

that was quite the intro. Yes. Now I did want to pick back up where we left off in regards to qualified accounts. And we talked about retirement accounts already. So thought we should address

Chris Holling: 0:57

hang on

Sean Cooper: 0:58

college savings accounts as well.

Chris Holling: 1:00

Yes. But you're you're almost as excited as I am. So I got I got a real you in here. Okay, because we haven't introduced ourselves. Right. Thank you, everyone, again, for joining us here on the truth about investing. Back to Basics. My name is Chris Holling.

Sean Cooper: 1:18

And I'm Sean Cooper.

Chris Holling: 1:19

And we want to talk about college plans with

Sean Cooper: 1:23

I know this is off topic. But it came to mind just now. So you know how

Chris Holling: 1:28

We just started how are we we off topic already. That's my job

Sean Cooper: 1:31

Because so I have to do the transcripts. Right, which, you know, people have said they appreciate which I'm really glad to hear. When I do the transcripts, it kind of defaults and tries to separate out the us as speakers.

Chris Holling: 1:47

Oh,

Sean Cooper: 1:47

But when it says I'm Chris, when you say I'm Chris Holling and then I say I'm Sean Cooper, it always ends up under one speaker. I don't know why, but it's always you that is Chris Holling, and Sean Cooper until I edit it.

Chris Holling: 1:59

But have you ever considered that maybe we're the same person?

Sean Cooper: 2:05

That'd be really weird for our listeners

Chris Holling: 2:07

That's be so weird.

Sean Cooper: 2:09

That would also require a lot of patience. I'm, I'm not that patient to create

Chris Holling: 2:14

Or that coordinated that go through this. Right. Right. I'd be arguing with myself about using too many numbers. And then like that line with Robin Williams says I'd like to talk to you about schizophrenia. No, he doesn't shut up. Let him talk.

Sean Cooper: 2:32

Yes.

Chris Holling: 2:33

Okay. Yeah, college plans. College plan. Okay. Yeah. So, you know, I don't even have a cool neat introduction. Because to be to be honest, everybody that's listening here. You know, all all six of you. Because I think I said last time, like all five of you, I think I think we have grown in our listener base a touch so i'll six of you

Sean Cooper: 2:59

No, with how many downloads per episode. I think we're doing a little little better than that.

Chris Holling: 3:04

Yeah, actually, I think we Yeah, I don't know. I'm not even gonna dig in that far. But yeah, we we

Sean Cooper: 3:10

Unless somebody just wanting to listen to it on like multiple devices, because they really love our stuff. Which

Chris Holling: 3:16

if you're doing that you call me Because you are my biggest and best supporter just hitting up ever. Like you're, you're hitting like five different platforms. And so it looks like five different listeners and I want to be your friend and that's fine. No, I, I was gonna say that, like the the full transparent version of it is. I was talking to Sean yesterday. Like, hey, we should we should do the next episode. He's like, we should go over college planning stuff. I said, cool. What's that? Basically?

Sean Cooper: 3:47

That was kind of the gist of it. Yeah.

Chris Holling: 3:50

And so I don't know I could throw in this kind of fun introduction and like, well, don't you know that the the best way to blah, blah, blah, but but I'm, I'm learning with you guys. And I'm gonna kind of treat it like I know even less than that. No, I'm just kidding. I don't know anything about it. So, Sean, tell us what we're talking about today.

Sean Cooper: 4:12

Well, there are basically two different types of college savings plans. Most everybody's

Chris Holling: 4:18

Hold on, hold on, hold on, you're explaining it to me like I'm five like, I know that there's two different plans

Sean Cooper: 4:23

I thought that was the goal.

Chris Holling: 4:25

That is the goal. That's what we're shooting for here. I get that there's two different types of plans. But why am I planning at all

Sean Cooper: 4:33

Oh,

Chris Holling: 4:34

yeah, see me reeling in like that.

Sean Cooper: 4:36

It really depends on if you want to start saving for your your or your children's continuing education.

Chris Holling: 4:44

Cool.

Sean Cooper: 4:45

So if you don't if you don't have a desire to do that, then this is largely irrelevant.

Chris Holling: 4:50

No, I think this works well for me because I with with the new kiddo around she's got she's five months in like a few days which is wild to me.

Sean Cooper: 4:59

Yeah.

Chris Holling: 5:00

And, and I do I do think about stuff like that, because I think it's important to have that available, or at least at least a good mindset on it. So now that I'm looking at it as someone that's like, Hey, I, I'm looking ahead, I've got the wherewithal to know that this is gonna come up. And I know that I want to do it. Cool. I want to do a college savings plan. Is that the proper term for it? Yeah,

Sean Cooper: 5:25

yeah, that works.

Chris Holling: 5:26

Cool. So I want to do college savings plan. And now I know why. Because I'm really just trying to do it for her. And now, when I say, Well, how do I do it, Sean, then you go. Well, Chris, as a matter of fact, there are two different ways that you can do it. And I go, really? Can you tell me about those two different ways? I'd love to, and then you pick up from there. Right?

Sean Cooper: 5:49

Okay. Yeah. So the two primary ways Yeah, the one most people are familiar with our 529 plans, those are state based plans, not that you have to are limited to your particular state, but it's offered through the state. Most states only offer one, two, maybe three at the most in terms of plans, and they are typically through specific providers, like American funds will have a 529 plan with your state. But anyway, these these 529 plans or college savings plans, they offer a tax incentive for setting money aside specifically for continuing education. And when I say continuing education, I mean higher education. So undergraduate, associates, Masters, etc.

Chris Holling: 6:45

Okay, so I call somebody and say, I want to start a 529 or what?

Sean Cooper: 6:51

In some respects, yes. One of the, so you can actually do it yourself, you know, jump on, pull up your, you know, assuming you want to stick to your state, which we can discuss why or why not why, or why you wouldn't want to do that. But you can actually just go online setting up an account through one of the providers, Vanguard, American funds, whoever your State offers, and you can actually do it yourself. You can also call an advisor and do it. The interesting thing about 529 plans is they have not kept pace with the industry. So they are technically still only offered through broker dealers. So

Chris Holling: 7:37

okay,

Sean Cooper: 7:38

yeah, registered investment advisors. Anyone doing business strictly on a fee only basis doesn't have the ability to actually offer to help you with a 529 plan. So like the way I do business, I can't actually help somebody with a 529 plan. And it's just because they've kept that limited to commission only advisors, basically. Which is very strange to me, but that's what they've done so far.

Chris Holling: 8:08

Okay, then. And so I get that you, you can't do that on your end as far as how you run your business. But if if you could, and I was talking to you, and I said, I want to set up a 529 with you, then you would say, Okay, great, this is what we're gonna have to do and what's, what's that? What's that thing? How are we going to arrange it,

Sean Cooper: 8:32

You'd literally look up, what options are available in your state, and then decide between those options, which provider is the best for your purposes, and realistically, there's not a huge difference between the providers except to the extent that they the fees that they charge, and the investment options that they have available. So that's really all you're comparing at that point.

Chris Holling: 8:55

Okay,

Sean Cooper: 8:56

they can be used for virtually any institution.

Chris Holling: 9:00

Okay, well, and, and I, I get that I get that it can be arranged some way somehow, and you'll see your options, and it depends on the person but like, I guess, I guess what I'm trying to ask that I'm not asking very well is, I say I want to set this up. And then because you're arranging this for me, do I send money to you? That's a agreed upon amount that I pick or is this something that the person I'm working with goes you expect to see a need for about this much money at this point? Is there any does it work like an investment account where I put a certain amount into that and then it grows ebbs and flows along with the market or what was what does that even look like?

Sean Cooper: 9:46

Yeah, so you know, you definitely never send it to me.

Chris Holling: 9:52

Okay.

Sean Cooper: 9:53

Since I don't I mean, a my clients never send me their funds directly. They go to the custodian Because

Chris Holling: 10:01

the custodian?

Sean Cooper: 10:02

yes. Typically you use a custodian as a degree of separation for purposes of limiting conflicts of interest.

Chris Holling: 10:15

Sure. That makes sense. I've just never heard of it. And it makes me think of mopping floors in a school. So I just didn't even have a custodian in mind

Sean Cooper: 10:23

okay. Yeah, no, the custodian is the company that holds the funds. So it pulls some risk off the table so that you know that your advisor is not somehow dipping into your funds in odd ways or anything like that.

Chris Holling: 10:39

Sure.

Sean Cooper: 10:39

You know, the, the advisor never has access to the funds directly. They they have, you know, on a discretionary account, they have control over how the funds are invested, and they can typically pull their fees out, but that's about it. They can, you know, if you call them and say, Hey, I need this money, then they can put it in a requester the custodian typically to get it sent back out to you. But yeah, so you actually send your money directly to the custodian, or, you know, with the 529 plan, whoever the provider is, they'll either already have a custodian setup, or in some cases, they are also the custodian in the case of some of the big broker dealers.

Chris Holling: 11:19

Okay.

Sean Cooper: 11:20

But yeah, most time they're using some kind of third party as a custodian.

Chris Holling: 11:27

Yeah, I had no idea. I just didn't even know that that was a thing. So cool,

Sean Cooper: 11:30

yep.

Chris Holling: 11:31

I'm glad. Okay, so, so the money gets sent to the custodian. But when when I'm sending the money to the custodian, is that an amount that I'm picking? Is it an agreed upon amount, right, that stays the same every month?

Sean Cooper: 11:47

that's entirely up to you? Yeah, the only restrictions really, so there are some restrictions on 529s as there are with all, you know, all investment accounts that the government gives you some kind of tax benefit on, they're going to put, apply restrictions to it. So for 529 plans, there technically is no limit on how much you can put into a 529 plan. But because you're typically not saving for yourself, you're saving for a child or maybe a grandchild or, you know, maybe somebody else's child or what have you, the The only real limits that are come into play are going to be the gift tax exclusion. So that's 15,000 annually, per person per on each end sending, receiving. So you can gift you can gift up to 15,000. To anyone realistically, without any type of tax consequence for doing so.

Chris Holling: 12:54

When

Sean Cooper: 12:54

on an annual basis,

Chris Holling: 12:56

when you're putting all this together? Do you I understand what you're saying about like you're putting it together for someone? Typically? Do you have to know who you're putting it together for like if I if I knew I was putting it towards whatever I need for for my daughter right now and then just down the road? She doesn't need it. But the next kid does? Can I utilize the same funds for her? Or do I have to go through the process of like closing that account to get ahold of it? Does that make sense? I don't know if thats..

Sean Cooper: 13:29

Yes, yes. So typically. So you do have to name someone in the as the beneficiary of the account. However, typically, if there are other members of the family, so say you have a couple of kids, and you open up a 529 for the oldest and they end up not going to college. So they don't use the funds, you know, in some of the rules on whether or not you could use it for other continuing education purposes, you know, anyway, assuming they don't use it. Depending on the plan, most of them will allow you to move that to another member of the family.

Chris Holling: 14:11

Okay, that makes sense,

Sean Cooper: 14:13

but typically not outside of the family. So you do have to be so there are going to be restrictions on that.

Chris Holling: 14:19

Sure. Yeah, that makes sense. And then because because you're using the word beneficiary if if I set it up, and then I was to pass, does that automatically go to the person that was listed as the beneficiary or is that more through a will that needs to get that?

Sean Cooper: 14:39

So it's a little bit different with the your college savings accounts in terms of how they're typically titled, because typically, it's going to be a at least when you initially set it up, it would actually be an account that's essentially in your name, but for the benefit of your child.

Chris Holling: 14:57

Okay, that's what I wondered.

Sean Cooper: 14:58

Yeah. So even They are the they're the beneficiary but not in the same sense as like your IRA, where you have your or your retirement account where you have your account in your name, and then your wife is the beneficiary, in this case, the the child's a beneficiary, but she's the benefit beneficiary not to the extent that if you die, she gets it. But you know, when she, they reach a certain age they get it.

Chris Holling: 15:25

Right. Right. That makes sense. Okay.

Sean Cooper: 15:30

So getting back to some of those restrictions, so 15,000 a year, it's not technically restriction on the 529. But anything above and beyond that is going to end up in a gift tax that will have to be paid. The most people view that 15,000 as kind of the cap on em. With that said,

Chris Holling: 15:54

What's the typical gift tax like in case I'm deciding whether or not I want to take that in consideration?

Sean Cooper: 16:00

Let me see what the gift tax is. Currently, it's not something I keep tabs on. But the other thing is, you can even though it's 15,000 a year, you can actually aggregate five years up to five years together and make kind of one lump sum if you wanted. It's also like I said, per person. So if you had multiple kids, you can gift 15,000 to each of them, and then they're your spouse can do the same thing. So it kind of gives you quite a bit more flexibility in that regard, which is why it's normally not a huge issue.

Chris Holling: 16:33

Gotcha.

Sean Cooper: 16:34

Other thing to keep in mind is, although the federal government doesn't put a limit on it, there are lifetime limits that can be that are applied by the state in terms of how much you can contribute for each person's 529. And depending on your state that ranges anywhere from 235,000 to 529,000. So

Chris Holling: 16:59

Wow. Okay.

Sean Cooper: 17:00

Yeah, pretty generous limits there. And I think the biggest reason they do that is some states actually offer a tax deduction for contributions made to 529s. Not all do, but some of them do.

Chris Holling: 17:17

That. I mean, that makes sense. Because would you pair that kind of like you would with your, your Roth IRA or, or anything that you're making your contributions to? Right.

Sean Cooper: 17:28

Right, but it's only the the state income tax that it's going to benefit. So as opposed to the federal, which is, again, why some states don't offer a necessarily a tax deduction on it, because you may not have income tax in your state.

Chris Holling: 17:44

Sure. That makes sense. Okay, so then, then I set this up, and I have the account that's ready to go. And I do it through the right approved person that can actually help me out with this. And we agree upon an amount that we calculated, so every month, it's going to be that certain amount, and I get a tax incentive out of it at the end of the year, and everything looks great. And then when I start putting my money into this account, to to go towards the beneficiary at some point, does it match with the market at all? Or is that something that's up to me when I talk to the person and we set up a plan or what?

Sean Cooper: 18:24

Right It depends on what you choose to invest in And again, that depends on what provider you use, what funds they're gonna have available? But yes, you ultimately, typically will invest it in the market in some way, shape or form.

Chris Holling: 18:38

Okay. Okay. That makes sense.

Sean Cooper: 18:40

Yeah. Typically, mutual funds, occasionally exchange traded funds, but you'll have a basket of them available to you.

Chris Holling: 18:49

Cool. All right. So that's,

Sean Cooper: 18:53

so the other restrictions that really come into play are going to be when you actually pull the money out. So the big, as I pointed out, the the state tax benefit for making these contributions is most likely going to be pretty minimal, unless we're talking about some really high income tax states like California, Oregon, Hawaii. So the real benefit to these accounts is on the withdrawal side. So typically, if you if you were to just say open up an individual account in your name, and then you are going to use that those funds for college, any gains in that account are going to be taxable as you go along. Whereas with the 529, it's going to grow tax deferred, and as long as the money is taken out and used for qualifying education expenses, it comes out tax free.

Chris Holling: 19:47

Oh, interesting. Just Just the interest though, or

Sean Cooper: 19:51

the whole thing is gonna be tax free because you pay taxes on it when you put it in.

Chris Holling: 19:55

Right right.

Sean Cooper: 19:56

It was already counted as income. Yeah. Which the flip side of that is if withdrawals are made for any reason other than those eligible expenses, it's going to be taxed at your income tax bracket plus the IRS is going to tack on another 10% penalty.

Chris Holling: 20:15

Right. Okay.

Sean Cooper: 20:16

So you want to make sure that these funds are going to be used for qualifying education expenses.

Chris Holling: 20:22

And and when you do something like that, does it work? Kind of like an HSA in a way where the transaction happens directly between this account and say, the college down the road? And you don't have a hand in it? Is that how they monitor that type of thing?

Sean Cooper: 20:39

Not necessarily. You can actually pull it out and then, you know, submit that you have these expenses, or say you had these expenses, and then pull it out and identify it on your taxes later. Oh, it's not quite as clean in that regard. Yeah

Chris Holling: 20:58

makes sense.

Sean Cooper: 21:00

So the other options for college savings, the ones that are probably less well known to most people are going to be prepaid tuition plan, which is going to be similar to the 529. And in terms of its who offers it in terms of its tax ability or the tax benefits. The big difference is, instead of setting up this broad blanket 529, that allows you to use it for any qualifying education expenses. The prepaid tuition plan is specific to a particular college or group of colleges. And those institutions, you you literally have to use the money for those institutions, otherwise, it's basically wasted. The big advantage to it is you're literally paying the tuition upfront.

Chris Holling: 21:58

Okay, but only to that location

Sean Cooper: 22:00

you're locking in today's rates, what,

Chris Holling: 22:02

but only to that location. So

Sean Cooper: 22:04

correct.

Chris Holling: 22:05

Like if I wanted to do MIT, then I would put it towards MIT. And suddenly, I thought, No, Yale is a better choice, then then that's, that's my problem, because it wasn't going towards that school specifically.

Sean Cooper: 22:20

Right, exactly.

Chris Holling: 22:22

Okay.

Sean Cooper: 22:22

Yeah. So the advantage is you're locking in today's rates, you know, you the funds can still effectively grow to a certain degree, it's a little bit different in that regard. But yeah, the big restriction, there is going to be choice gets eliminated.

Chris Holling: 22:40

Okay,

Sean Cooper: 22:41

so, the

Chris Holling: 22:43

is there? Is there any opportunity to like transition that at all like it Say, say I go the road of MIT? And then it's been five years? So I haven't I haven't utilized any of it. Can I go through the paperwork in order to work on transitioning to Yale and and kind of close the account and move it in a way? Or is that going to suffer penalties in order to do so or what is it just lost? Like, what happens if I changed my mind or something?

Sean Cooper: 23:13

My assumption is is lost. It's gone. But I would need to look that up.

Chris Holling: 23:17

Okay. That's fair. I'll take an I don't know. I don't mind that.

Sean Cooper: 23:24

Yep. Yeah.

Chris Holling: 23:25

So that

Sean Cooper: 23:26

My assumption is it's lost

Chris Holling: 23:27

Chris asking the real questions.

Sean Cooper: 23:34

The the final account that you can utilize would be a Coverdell, ESA.

Chris Holling: 23:41

Okay.

Sean Cooper: 23:42

With the Coverdell ESA, it's more restrictive in terms of how much you can put into it. So you're, you're capped out at 2000 per beneficiary. And you cannot make any contributions after they are 18.

Chris Holling: 23:58

Okay,

Sean Cooper: 23:59

it also puts limits on income. So for individual filers, and this is 2020 numbers. It phases out from 95,000 to 110,000. In modified adjusted gross income, so anything over if you make over 110,000 as an individual fire you filer you can't contribute to a Coverdell esa at all. For joint filers the phase out is 190,000 to 220,000. And again, the cap the cap is 2000 per beneficiary per year. So much more restrictive in terms of how much you can put into it and whether or not you can put into it at all. However, it's more flexible from the standpoint of where you can open it, how you can invest it and how you can use it.

Chris Holling: 24:52

Okay.

Sean Cooper: 24:54

Basically, with a Coverdell esa you can essentially open that up with almost any custodian, so that's something I can even do. They haven't restricted it to commission based individuals. So it's more flexible in that regard. And because you're not restricted to these specific providers, like American funds, or Vanguard who have some great options. But instead of having, you know, the 15, or 20 funds that they might have within their, the accounts that they've made available to 529s, with covered ESAs, you basically have the entire universe of investment options available, including, you know, the over 10,000, mutual funds, ETFs stocks, what have you, so a lot more flexible in that regard, like I said

Chris Holling: 25:49

so, so

Sean Cooper: 25:50

where you can open it and what you can invest in? Go ahead.

Chris Holling: 25:53

Okay, sorry, just five year old explanation terms. So because of that flexibility, it's offering more opportunity for growth in

Sean Cooper: 26:01

potentially yes

Chris Holling: 26:02

interest in that time, okay. That's what I was trying to figure out. Like, if I if I'm a guy that's handing this off to the custodian, and I hired somebody to do it, and they're saying, well, it offers lots of opportunities to use these other funds. Like, to me as the guy that has stuff explained to him as a five year old, like, I don't care, just just make stuff work and, and make stuff do good things. Right. But

Sean Cooper: 26:23

keep in mind, the custodians not typically going to advise you on how to invest your funds. They're just

Chris Holling: 26:29

No

Sean Cooper: 26:29

the one's holding it. But yes,

Chris Holling: 26:31

right. No, I understand. I was more just expressing that. You know, why? Why would it matter that I want more flexibility? If, if I'm not concerned about you know, what, what school I'm looking at, it's just just my layman's term explanation for me that the benefit is that there might be better opportunity for the actual interest generated to help with the account to grow.

Sean Cooper: 26:56

Correct. The other thing that you brought up there is with Coverdell. ESAs the what qualifies as eligible education institutions. includes some of like, your, your technical Institute's and things like that. It's not just accredited colleges, other institutions can also you can use the Coverdell esa funds for other institutions as well. You can even use them for I believe, like, education, K through 12.

Chris Holling: 27:31

Like private schools, or

Sean Cooper: 27:32

Yeah, correct. Yeah. So that it's far more flexible in terms of how you can use it. as well. Now, they've, they've been pushing to shift the 529 to be more flexible with how you can use them as well. But at this point, my understanding is the Coverdell. ESA is still the most flexible, because you can do that K through 12. You can use it for other qualifying institutions after high school that aren't just you know, your your qualifying colleges, and then is a bit more flexible and other qualifying education expenses as well. They'll be the final rule that they put on a Coverdell. Esa is it must be distributed by age 30. So the Coverdell, ESA has more flexibility in terms of how it can be utilized since the 529 is just eligible college expenses, whereas the Coverdell, ESA can be used for K through 12 expenses, and non college institutions that are post High School. So quite a bit more flexibility there. Although the 529 they are pushing to be more flexible that way. Right now, the Coverdell. Esa is still the most flexible, the one other place where they put more restrictions on the Coverdell. Esa is going to be a cap that they actually put on it and you must distribute the funds from the Coverdell. Esa by age 30. of the beneficiary.

Chris Holling: 29:07

Oh of the beneficiary. Oh man. That's, that's a that's a little much. You have to be 30 to spend this

Sean Cooper: 29:14

no. Yeah, it's the beneficiary.

Chris Holling: 29:17

Okay.

Sean Cooper: 29:18

Yep. So yeah, you can't contribute after age 18. And it has to be distributed by age 30. But more flexibility until in terms of how it can be used.

Chris Holling: 29:28

Okay. And then still same possibilities of which I mean, granted, we don't have the answer for but same possibilities as the other one, where if it's, if it's not spent, then it's possible. It's just a loss.

Sean Cooper: 29:41

Yeah, it can be rolled to another family member.

Chris Holling: 29:44

Okay.

Sean Cooper: 29:45

Yeah. Yeah, so, typically, that's what you'll see with these retirement accounts as you can typically roll them to another family member. But definitely not as restricted as the prepaid. Right college plan where? Yeah, you better hope one of the kids decides they want to go to that school.

Chris Holling: 30:09

Right?

Sean Cooper: 30:10

And then the the tax advantage is basically the same you there's, there's no, well, I will say that would be one difference that your state isn't going to offer any type of tax advantage for contributing to the Coverdale whereas the 529, they might. So that's something you want to look into whether or not the states can offer any type of tax incentive for making contributions with the Coverdell. Esa they will not. But in terms of withdrawals, same basic philosophy where it has to be withdrawn for eligible education expenses, that's just more liberal in terms of what those eligible expenses are. But if you pull it out for any other reason, you know, you pull pay income tax plus the 10% penalty.

Chris Holling: 30:56

And just to clarify, because maybe I misunderstood you that that income tax happens only on the state level or both state and federally.

Sean Cooper: 31:05

Oh, you mean for contributions?

Chris Holling: 31:08

I either? I guess I meant on the penalty, but

Sean Cooper: 31:11

Oh, on the penalty? No, that's, that's gonna be on. On both.

Chris Holling: 31:15

Okay.

Sean Cooper: 31:17

The 10% penalty is a federal penalty, not a state penalty.

Chris Holling: 31:21

Okay. Okay,

Sean Cooper: 31:23

in terms of the the tax ability on funds that are pulled out for, you know, just your income tax, if you pull it out for fun for any purpose outside of the eligible expenses, then yes, if you have a state income tax, you're probably going to pay state income tax on that as well.

Chris Holling: 31:40

Okay. And so that so that I understand that we've got the the first one, which is the the standard 529, and then the 529, you're making the contributions that are going into it, that there's a couple different schools of thought, wow, see, I'm about to get real confused here. Okay. So the 529, that you made the contributions, and then it can only be pulled out to go towards a college and however you arranged that is up to you, and you talk to a custodian and all those things. And is it the variation of the 529 that makes that that specific one where you can only use a certain school or what was the title of that? Again, I'm just trying to summarize it in my head.

Sean Cooper: 32:22

The prepaid tuition plan? I let's see. I'm not sure if it's like technically. There's a prepaid 529. But yeah, it's a yes. It's a form of 529. Yes

Chris Holling: 32:41

Okay. Okay, so it's a form of 529. Are you saying that, like, metaphorically? Or, or would I would I contact the person that's running this stuff and say I want a 529 prepaid?

Sean Cooper: 32:53

No, it is truly a form of a 529. Okay, if you just if you're looking for a prepaid tuition plan, just say that and they'll, they'll get it squared away, if you want, if, you know, just a traditional 529 people are not going to default to a prepaid tuition plan.

Chris Holling: 33:09

Right. Okay.

Sean Cooper: 33:10

Yeah, they presented it as an option, but you say 529, it's gonna, they're gonna think the, you know, normal 529 not not prepaid.

Chris Holling: 33:19

Okay, so we got the 529. We've got the prepaid tuition plan, which is a mouthful.

Sean Cooper: 33:24

Yes.

Chris Holling: 33:25

And then then there's the How do you pronounce the other one that was also also

Sean Cooper: 33:30

Coverdell, ESA,

Chris Holling: 33:32

ESA coveredell coveredell?

Sean Cooper: 33:34

Yes.

Chris Holling: 33:35

Coverdell. Esa, and that's the one that offers a little bit more flexibility to where you can use other things like say mutual funds in life to have potential growth potential. Better better growth?

Sean Cooper: 33:49

Potentially, yes. Yes. That is the goal. And ESA, for the record is education savings account.

Chris Holling: 33:56

Okay, the education savings account the ESA. And if you have that better growth, then good on you otherwise, the main benefit for that is it offers a little bit more flexibility as to what you can utilize it for.

Sean Cooper: 34:09

Correct.

Chris Holling: 34:10

Sweet. Look at us learning stuff. Okay,

Sean Cooper: 34:15

we get there.

Chris Holling: 34:16

Okay, what what else? Do we need to touch on with this? Do we have more than we need to address on this? Or did I get my five year old understanding? hit on this

Sean Cooper: 34:27

sounds pretty good. Yeah. Just the The only other thing would be the limits on how on contributions. So

Chris Holling: 34:32

right. Yeah. Which and and that's, that's more dependent on talking to what what depends on your, your state, right. On your limitations?

Sean Cooper: 34:43

Well the Coverdale is the 2000 Okay, annually a per per beneficiary.

Chris Holling: 34:47

Okay.

Sean Cooper: 34:48

But yes, the the lifetime contribution limits are dependent on your state. Yes.

Chris Holling: 34:56

Okay.

Sean Cooper: 34:57

That's for the 529

Chris Holling: 34:59

and then And then you make all this magic happen. And then you get fancy tax incentives on the way. Well, that's the goal, at least.

Sean Cooper: 35:07

Yeah, basically, tax deferral and tax free when you withdraw it provided it you just used for the correct purpose.

Chris Holling: 35:17

That's cool. Actually, this this is all this is all foreign to me, I hadn't even considered any of this. So I'm gonna have to have to look into some of this.

Sean Cooper: 35:25

Yeah,

Chris Holling: 35:25

okay. Cool. I appreciate you going over all this stuff. And it

Sean Cooper: 35:31

happy to

Chris Holling: 35:32

I, yeah, I'm trying to think if there's anything else to touch on that,

Sean Cooper: 35:38

I'm all good. If you are,

Chris Holling: 35:40

no, it's a it's a great opportunity to, to have a little bit of a, a good pre paid plan. No just having the funds available to to help out with whoever it is that you're trying to make sure to look out for. So that when they when they go to school, and they are growing, and are looking for that opportunity to do a keg stand, I mean, study and having having the peace of mind of making sure that you can take care of that person, I think there's a lot of importance to that. And it's just a matter of, of what, I don't know what what, what's important to you, as a listener and to your long term thing, and what you want to set up and, and I'm really avoiding going off on a tangent about sending people off to trade school and learning a trade.

Sean Cooper: 36:34

And if you're thinking about that, though, you're you want to focus on the Coverdell. Esa just for the record.

Chris Holling: 36:39

Hey, that's a cool point. So if I, if I was like, hey, see, I don't even know if this is gonna make it into the podcast you see how this works. This is great. If, if I was like, hey, I want to make sure I have money set aside because I want to see my kid go off to a diesel mechanic school, because that's a trade that I just thought of, then that would that would sit within your ESA is going to be the most flexible opportunity to do something like that.

Sean Cooper: 37:04

Yeah, some 529 will allow it depending on the Accreditation of the trade school, and whether they're actually offering like an associate's degree out of it or something along those lines. But the the Coverdell, ESA is going to be more flexible and more Surefire in terms of whether or not it will be what whether or not it will work and qualify.

Chris Holling: 37:26

Wow, interesting. That's cool. Well, then then that works. There's, there's your flexibility options, if you if you it's each level, actually, I like that. So if you if you want a lot of flexibility, you don't know how things are gonna happen. Sounds like the ESA is a great opportunity. If you have some idea that you the person that you're looking after that's going to head on off to school, I keep thinking like your kid, but you know, you might be using it for somebody else.

Sean Cooper: 37:52

Right.

Chris Holling: 37:53

But it for whoever that is, and you know that they're going to go to school and get some type of education somewhere some way somehow, then a general 529 is probably a good choice. But if you just, you know, that this kid is, is the MIT candidate of a lifetime, then, you know, maybe maybe getting that prepaid plan is a good way to go. I, I kind of like having all those lined up like that. That makes a lot more sense to me now.

Sean Cooper: 38:23

Yeah.

Chris Holling: 38:25

Cool.

Sean Cooper: 38:25

Yeah, the big. The big thing that is often a deciding factor, or the rather the other big thing that's often a deciding factor between the 529 and the coveredell is how much you're trying to put in. If you're looking to put in foreign excess of the, you know, $2,000 then the Coverdale kind of kicks itself out or, you know, you cap out the, you know, the coveredell at the 2000 and then you switch over to the 529 depending on what you're trying to achieve, but that that limit can kind of throw out, throw the Coverdale out the window potentially too,

Chris Holling: 38:57

huh. Okay, now that's that wrapped up nicer than I anticipated. It would just

Sean Cooper: 39:05

glad to here it,

Chris Holling: 39:06

a nice little nice little bow have three little three little options in my head. Three, three basic foundational options. I don't know. Yeah, I appreciate you taking the time to go over that form. Because I feel like a lot of the times we go into these things, and I have a general idea but it's it hasn't been accept into this next season that we'll be hitting where it's going to be me just not having a clue what you're talking about and slowly unfolding everything. And this this was a good,

Sean Cooper: 39:34

that'll be good too, though, because you can ask me questions that hopefully the listeners would have asked anyway because I can go off on my rants and have a hard time of making it understandable to people that haven't studied finance their entire lives.

Chris Holling: 39:51

I was just pleased to ask you a question today and for you to go. I don't know.

Sean Cooper: 39:56

Yeah, thanks for that. Jeez

Chris Holling: 40:00

There's the kryptonite, there's a chink in his armor. He's weak. That's fine. We'll figure this out. No, I appreciate you taking the time to go over that. And I hope I hope this was helpful for you, the listener. And and we're coming up on the end of this, this season of touching a lot of foundational stuff. I don't know if this feels I maybe I should have opened with this. But I don't know if this feels like kind of a pseudo random episode where we're talking about taxes and savings and investments and just just as far as like retirement plans and stuff. And then then we're like, oh, and college, by the way college. And and it's just, I imagined it might stick out kind of randomly. But the reason that we wanted to touch on this was because once we have an understanding of the direction that you want to go, whether it's you're getting everything, you're getting your feet out under you on the side of getting your savings organized, knowing where you're going to be taxed on things knowing that you need a spending plan. And once you've got that organized and you go, Okay, I need to get prepared for the future. So now I'm looking at my retirement accounts. Now I'm looking at maybe a college savings plan of some sort, these, these are my priorities, and then you now have a direction to go. And then once you have that foundation, you can start to build towards that direction. And then this following season is where we're going to talk a lot more about the ins and outs of how those things work. Rather than just just getting started and, and having a good framework for everything and understanding everyone and taking care of yourself. It comes after this, that that's when we start to get into what investing is, how investing works. And not so much just the how to get started this, this was the basics part to me this season.

Sean Cooper: 41:57

No really all of this stuff is kind of that first level information because you're the taxability of an account, and what the funds are going to be used for determine what type of account you want. Everything else is what you actually invest in inside of that account. This is just the umbrella. And I totally interrupted you, as you were talking about back to basics, which was great. that's that's what it is, is that we we want to touch on this

Chris Holling: 42:26

Well, and in a back to basics stretch. Because the fact is, is that and I mean, Sean, you can totally correct me if I'm wrong. But the understanding that I have is that when people come to you and they say I really want to get started on investing, I really want to start moving forward, I want to do great things long term with my money, and they come to you and have this organized. And there's a strong, strong possibility that all these things that we just went over, some people may know, some, some might not know anything, and this is still important foundational knowledge before Sean can really help you to the best that that he can. And and I use Sean as an example like you should use the person the the opportunities that you have that you think are the best thing I think, you know, if you want to use a great numbers guy, then this, this is the guy. But my point is, is that having an understanding of what's happening and why it's happening and what direction you want your life to go, is the basics to understanding why you want to invest and how you want to go about doing those things. And that's, that's what we're touching on. Because it would totally be possible that you call up Sean and go, Hey, I ant to do these things be like kay, well, you still need to nderstand this other stuff.

Sean Cooper: 43:38

Right?

Chris Holling: 43:38

You'd be having this conversation anyway. And we're trying to save that here. So that that information can go out everywhere. And then you can go, I get it. And now I know what I want to do why I want to do it. And now we're this next step. The the next season is a lot more on the on the how and the ins and outs of how it happens. And that's why why we're slowly building into that stretch. I don't know if that's a if that's a fair encompassing of of everything, or if i threw you in there too quick or anything?

Sean Cooper: 44:11

No, that's fair. One of the it's I mean, it's really part of some one of the first conversations I have with people is helping them determine what type of account makes the most sense for their, their purpose or their goals. And one of the questions I get asked all the time is, Well, which one has the best return? And I'm like, we're asking the wrong question here. The

Chris Holling: 44:32

sure

Sean Cooper: 44:33

type of account has no bearing on your return except to the extent of the the taxability of the account.

Chris Holling: 44:45

Right,

Sean Cooper: 44:45

it's the investments that determine the rate of return. So that is a a next level question after we determine the type of account if and, yeah

Chris Holling: 44:57

if there was an account that got the best return period, everybody would just use that account. All the time,

Sean Cooper: 45:05

yes.

Chris Holling: 45:06

This there, we wouldn't have all these things, we would just have a guy that you call and go, Hey, you hear that account that you have, I want in. And that was the end of the conversation. And so once you figure out what's important to you, and you get that direction, then and this, this may be one of those things. That's why we're touching on this, maybe maybe setting up a higher education, a furthering of education for somebody that you care about, that you that you help take care of. That's, that's why we do this stuff, is that we look into investing, we look at personal finance, so that you are bettering your life and bettering the life that are around you. And that's why this stuff is important.

Sean Cooper: 45:50

So let us know if there are other foundational topics you need us to cover. Before we get too carried away with the investing and the stuff that I really enjoy. we but it's really him. It's just gonna be this like, like a

Chris Holling: 46:01

He says carrot that's in front of a horse and it's just gonna just charge forward and he's like, what do you mean we get to talk about investing now let's do it. And yeah, if you if you want to talk about foundational stuff, because I'm I'm basic then yeah, we'll we'll absolutely touch on those things. And we we do enjoy the feedback. And we we have been starting to get some a little bit more lately to kind of give us some direction that I am going to leave out and talk to Sean about here because I just remembered I need to talk to him about that of what maybe future seasons may have in store.

Sean Cooper: 46:46

Sweet.

Chris Holling: 46:49

I don't know why, I tried to make a haunted ghost voice. But thank you again, for taking the time to want to better yourself and learn about how to really take care of yourself and take care of those around you that you care about. And it's it's kind of a lost skill to try and want to better yourself the way that you're taking the time to do so. Thank you again for joining us today on the truth about investing back to basics. My name is Chris Holling.

Sean Cooper: 47:16

And I'm Sean Cooper.

Chris Holling: 47:18

And we will have you show up to the next episode because that made sense.

Sean Cooper: 47:26

Not at all.

Chris Holling: 47:26

We will we will have the next episode show up to podcast disclaimer disclaimer. The disclaimer following this disclaimer is the disclaimer that is required for this podcast to be up and running and fully functioning and moving forward. This is going to be the same disclaimer that you will hear in each one of our episodes. We hope you enjoy it just as much as we enjoyed making it. All content on this podcast and accompanying transcript is for informational purposes only opinions expressed herein by Sean Cooper are solely those of Fit financial consulting LLC unless otherwise specifically cited. Chris Holling is not affiliated with Fit financial consulting LLC nor do the views expressed by Chris Holling, me again, represent the views of Fit financial consulting LLC. This podcast is intended to be used and it's in any other use beyond the authors intent, distribution or copying of its content of this podcast is strictly prohibited. Nothing in this podcast is intended as legal accounting or tax advice and is for informational purposes only. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation. This podcast may reference websites for the convenience of our users. Our firm has no control over the accuracy or content of these other websites. advisory services are offered through fit financial consulting, LLC, an investment advisor firm registered in the states of Washington and Colorado. The presence of this podcast on the internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow up or individualized responses to consumers in a particular state by our firm and the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuing an applicable state exemption for information concerning the status or disciplinary history of a broker dealer, investment advisor or other representatives. A consumer should contact their state securities administrator. Amen. button. Oh, that looks significantly better. Okay. Red What red,

Sean Cooper: 50:20

blue,

Chris Holling: 50:22

yellow,

Sean Cooper: 50:23

green.

Chris Holling: 50:23

See? Okay. All right, orange.

Sean Cooper: 50:28

Purple.

Chris Holling: 50:33

Dammit I think you won that one

Sean Cooper: 50:35

Why

Chris Holling: 50:37

well I started with the primary colors and you You crushed it. And then I was like, Oh, well, you know what I'm gonna take that to the next level. So orange because red and yellow and then you're like, oh, purple like Oh, oh, green. Oh, oh, and then and then I didn't have any more options. So you won.

Sean Cooper: 50:58

I appreciate it. I think Yeah, some more options. But thanks.

Chris Holling: 51:00

I didn't know cuz you got the three. The red, yellow and blue are primary colors. Right?

Sean Cooper: 51:06

Right. Yes.

Chris Holling: 51:06

Green and yellow.

Sean Cooper: 51:09

Wait, green and yellow. Dammit No,

Chris Holling: 51:11

Blue and yellow is green. Red and yellow is orange, red and blue is purple. So then what? Yeah, that's what I thought.

Sean Cooper: 51:25

I mean, we could go Yeah, we'd have to go to beyond the secondary colors. Yeah.

Chris Holling: 51:35

And I'm not smart enough for the for the second primary, secondary truck. What's the next level of that? Try try dairy.

Sean Cooper: 51:45

You should probably look it up.

Chris Holling: 51:46

I'm gonna look it up

Sean Cooper: 51:49

I knew you would

Chris Holling: 51:50

Primary secondary. What comes after secondary? So that's a good way to ask

Sean Cooper: 52:01

Oh you're keeping it broad? You're not just specifying with the colors?

Chris Holling: 52:04

tertiary.

Sean Cooper: 52:06

Okay, yep.

Chris Holling: 52:09

port. Good lord. Okay. primary, secondary, tertiary, quarternary quinary cenary. septenary octogenarian? nonanairy and denaneri.

Sean Cooper: 52:22

Okay, they kind of stick with the Yeah, the shapes basically.

Chris Holling: 52:29

Right? Dang it. tertiary, I never would have gotten tertiary. I like tryanairy because then you're actually trying to get that third level. See, that's how

Sean Cooper: 52:55

Yeah we should probably work at that

Chris Holling: 52:57

see that's that because now I'm forced to edit it. That's how that goes. Sean

Sean Cooper: 53:01

Unless you forget That's gonna come out really good.

Chris Holling: 53:03

I might forget. Yeah, try and transcribe that.

Sean Cooper: 53:08

I've had a couple, that I had no idea what to do with.