Well, today is part two of our series on financial legacy and try to explore how kids and grandkids can have an impact on your financial plan. Today, we're focused on the grandchildren and helping with the cost of college.
What's the best way to do that? We'll talk about your options coming up next. Hello and welcome in. I'm Ben George. He is John Stillman at Rosewood Wealth Management. John, how are you? Great. Good to see you, Ben.
Yeah, good to see you. I know the cost of college is something that continues to rise. Thankfully, North Carolina has very good in-state tuition costs for parents here.
But anybody trying to come out of state or maybe leaving the state, it is a different problem. So, the cost of college always weighs pretty heavily on families, right? Yeah. I mean, it's certainly true that the cost of college has done nothing but go up over the course of the last 20 or 30 years. I sort of wonder if maybe we've reached a tipping point on that because so many people have so much in the way of student loans that it's actually created a negative impact on our economy. And I kind of wonder if maybe there's not going to be a little bit more, for lack of a better word, discernment on folks' part in terms of how much student loan they take out, which if people aren't willing to spend as much for college, supply and demand would dictate that those costs come down some. So, it could be that we've reached the peak on that, but we just don't know yet.
Yeah. And if that changes do happen, they certainly won't happen overnight. So, the idea of trying to help fund your college costs for your children and grandchildren are a big question that comes up quite a bit at Rosewood Wealth. So, today, I want to look at the grandchildren side of this, John. So, for grandparents that are thinking about, okay, I got a new grandchild or I just had one that was born, I want to start doing what I can right now to help set them up for college.
What's the best way to do that? So, let's start with the 529 plan conversation and we'll kind of talk about the pros and cons of that. So, a 529 is a college savings account. It is specifically set up for saving for higher education. Now, you can also use it for things like private school tuition, even in high school.
That was a change that was made in recent years. So, it doesn't have to be specifically college, but generally, when we talk about the 529, we're talking about saving for college. So, the way that it works is any money that you put in there, there's no tax advantage when you contribute the money to the 529 plan, at least in North Carolina. There used to be a state tax deduction that you would get on money that you put into the 529, not a federal deduction, but a North Carolina state income tax deduction. There might be some states that still have the state deduction for 529 contributions, but it's not a federal deduction.
And if you're in North Carolina, it's not a state deduction for you. So, there's no immediate tax benefit to you when you put money into a 529, but the money in that account does grow tax-free. So, let's pretend like we weren't making regular contributions to it. Let's just say we put in $5,000 into a 529 plan for a grandchild. On the day of their birth, we put that money in there, and now it has 18 years to grow and compound before they need it for college. Well, let's suppose that in that 18 years, that 5,000 turned into $25,000.
Pretty good growth. And as long as you take that 25,000 out for approved higher education purposes, then you don't pay any taxes on any of that growth. Now, if you decided to take it out and not use it for school expenses, well, now you've lost all the tax advantages.
Now, it's a different conversation. But as long as you're using it for school, it's growing tax-free. It's growing tax-free toward that purpose.
So, that's a pretty big benefit. Now, as I said, if you're using it for something else, like if you say, hey, we want to use it as a down payment on a house, well, now we've lost the tax advantages and we're going to get penalized for using it for something other than school. So, if you think there's any chance that you want this money for something else, well, then you would be better off not to save in the 529. Let's not designate that as school money. Let's just let it be money that's in a brokerage account that your kids or grandkids could use later down the road for anything they wanted.
They could use it for school. The downside is if it's not in a 529, when they cash it out, they're going to have some capital gains to pay on whatever growth they had. But that's the price you pay for the money not being earmarked specifically for education. If you wanted to use it for a car purchase or a down payment on a house or paying for a wedding or whatever, well, the money is yours to do with as you please. You just have to pay the taxes on the gains. So, that's kind of the pros and the cons of the 529.
Now, one other interesting thing to mention, and this just changed a couple of years ago. If you end up with money in the 529 that you're not going to use for school, again, let's say it's the idea of a grandchild and you've been saving money in a 529 for them. If they decide not to use it for school, you can move that money over to a Roth IRA for your grandchild. So, let's just say you had $50,000 at the time that they went to college in a 529. And let's say they got a scholarship that was a partial scholarship, not a full ride. So, they had some expenses, but they didn't need that entire $50,000 for their schooling.
And so, let's say they use 30,000 of the 50,000 for school. They have 20,000 left in the 529, and they don't need it for educational expenses. Well, you can take that money and you could move a little bit over each year. Once they start working, once they have a job and they're eligible to contribute to a Roth IRA, you could make the contributions to the Roth from the 529. So, if they're limited to $7,000 a year as their Roth IRA max, you have 20,000 in the 529. You basically have almost three years of Roth contributions that you could make from the 529. So, it was growing tax-free in the 529 plan. Now, you're going to move it to a Roth where it's growing tax-free until their retirement. So, again, that's a new wrinkle that's only been around for a couple of years, but it kind of takes away the risk of quote-unquote overfunding the 529. That was a concern that a lot of people have. Well, what if I put this money in there and they end up not going to school or they get a scholarship and they don't need it? Well, then what? Well, the then what solution now is you can move it to the Roth. That was not the case before.
So, that's a little handy thing to have in your back pocket. PAUL And there is still a maximum on that too, right? So, there is still a little risk involved with overfunding.
BRIAN Yeah. So, there's a lifetime limit on how much you can move from the 529 to the Roth. I'm guessing if you have a grandchild that's two, it's conceivable that that lifetime limit will change by the time they're 18 or 20 or whenever you're looking at moving money over to the Roth for them. So, don't worry so much about that dollar amount. But yeah, we probably don't want to end up with $100,000 in a 529 for a kid who's going to go to a public school or not go at all.
Now, if you're dead set on sending them to, I don't know, Colgate or something like that, that's going to cost you $45,000 a year. Okay. Well, it's going to be almost impossible to overfund the 529 in that case. But if everybody in your family has always gone to a state school, a public school, and that seems like they're out there likely to go, well, yeah, let's not go crazy with funding the 529.
BRANDON Okay. So, 529, obviously, the most natural decision is to go to that as a college funding. But there are other options, Jon. So, let's talk about some of the other ones that you might consider.
JONATHAN Yeah. So, like I said, you could just have a brokerage account and it could just be money that you save for your grandchild. And it doesn't have to be earmarked for anything. It's just money that they could use at some point down the road.
Now, if you go that route, there's a couple different paths you could take. It could be a brokerage account that's just in your name and you're just saving money and their name is nowhere on this account. They don't have any access to the money at any point. It's just your money. Now, mentally and emotionally, maybe you have earmarked this particular account for Little Johnny or whoever. I don't know why we're still using Johnny as the name. There's no kids named Johnny anymore. But if we want to say to ourselves, this is Little Johnny's account, we can do that. We can always change our mind later if we want to.
There's no legal mechanism whereby we made it Johnny's account. It's just your money. And so then, if you have $50,000 in that account and 20,000 of it is gains, you could say, all right, well, I'm going to liquidate it so I can give him the cash understanding that those gains are going to fall on you.
That's going to be your tax bill. So that's one approach. You could, at some point, take the investments in that account. Don't liquidate them yourself. You could gift them to your grandchild and have them liquidate. Well, there's still going to be a capital gain there when they liquidate. But maybe they're in a different tax bracket than you. If they don't have any other income, maybe that liquidation doesn't really create a tax bill for them because their income is so low. Or maybe that liquidation is their only income.
So that's a possibility. You could give that money to them before liquidating. It could be that you set up either an UTMA or an UGMA account. Those are accounts that are designed for miners. And so, essentially, you would be the custodian of that account until they turn 18, at which point the assets in that account go to them. So they have no ability to cash it out or liquidate or do anything until they reach 18, that age of majority. But once they do that, then you no longer have control.
It's now their account to do with as they please. So a few different ways you can go there. And again, you got to think about your family dynamics and decide what really makes the most sense for our family, knowing what we know about our kids and grandkids. Well, I know it depends for everyone that you work with, John or Rosewood, but is there a common route that you either push someone towards or you see your clients choosing?
I wouldn't say there's a common route necessarily. It's so case by case for the family. I mean, if it's a family where everybody's blue collar and a little more entrepreneurial, maybe mom and dad both have their own business and they think, yeah, well, the kids probably don't need to go to college to take over the family business.
They just need to go to trade school and learn how to be a plumber or whatever it is. Maybe that family is going to err on the side of not putting money in the 529. Maybe they'll save some money for their kids, but not in an educational account. Then there are other families where everybody always goes to college no matter what, and higher education is really important to them. And you have to go to college, even if you don't know what you're going to do. That's just what we do in this family. Well, that family probably is going to lean more toward having the 529.
So there's not a normal or a correct way to do it. We just have to decide what's right for you and your family. All right.
Very good. Well, if you want to follow up on that conversation, sit down and maybe weigh your options, run the numbers, see what makes the most sense for you. You can always go to rosewoodwealthmanagement.com or just go to meetwithjohn.com.
The best way to get on John's calendar, meetwithjohn.com. We'll continue this four-part series. We've got a couple more coming up. Please hit subscribe wherever it is you listen or watch. We'd appreciate that support. John, as always, thanks for taking us through this. Yes, sir. Always a pleasure. Carolina Wealth Stewards doing business as Rosewood Wealth Management is a registered investment advisor in the state of North Carolina. The material presented is intended to be general information and should not be construed by any consumer as the rendering of personalized investment advice.
