Episode 25: How do I fund my child's college?

The episode discusses the two main ways parents can fund their child's college education, either through a 529 plan or a state prepaid plan. The episode provides an overview of both options, including their features, potential benefits, and considerations. It also explores potential questions parents should ask themselves to decide which plan is best for their child, emphasizing the importance of considering their own financial situation first.

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The single most common question I get from parents is how do I fund my child's college? Well, we're going to answer that in today's episode of Retire Early, Retire Now.

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And welcome back. This is the 25th episode of retire early, retire now. I'm your host, Hunter Kelly. I own Palm Valley Wealth Management. I do this podcast to help people reach their financial freedom to either retire early or retire now.

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So go ahead and subscribe so you can be notified for a new episode every Tuesday morning. it seems like every week we get new listeners. So if you are liking what you're hearing, go ahead and share it with a friend or leave a five star review on your favorite podcasting app. And let's get this episode started.

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So today we're going to talk about how do we fund our child's college? or vocational school, whatever that ends up being for that child? So today we're and generally the questions I get are based around 529 plans and state prepaid plans. So we'll talk about those mainly. but before we jump in, this is going to be a two part series and today we're going to talk about the funding, like I said, with the 529 prepaid. And then next week we will actually have, a college coach, if you will. the business name is called Florida College Coaches, Wendy Mollo, and we're going to have her on, and she helps with, helping your child with school selection, application assistance, essay review when they're applying for that school, scholarships. In other, graduation assistance, things of that nature, other services as well, but basically transitioning them from middle school, high school on to college and then helping with, with all of those different things, because it can be very overwhelming, especially if you have not been in the education system for, your entire adult life. but today we're going to talk about that funding and so the two main ways that parents fund college or grandparents for that matter is through either a 529 plan or a state prepaid plan. And so when I talk about the prepaid plan today, it is mainly going to be based off the Florida prepaid. That's just where I live. So I'm most familiar. but, prepaid plans work very similar in each state. but there may be some nuances that you'll have to, to. certainly research and dive into. obviously this is an educational podcast. So if you have more specific questions about your plan, I would get on to your state plan website, or find a professional that, specializes in whatever state that you live in. So jumping right in, we'll go into a basic overview of each type of plan. And then from there we will go into what questions should I be asking myself on how I want to fund this particular account to help my child go to school. secondary school, graduate school, things of that nature. So we'll start with that prepaid plan again. We're going to look at it through the lens of the state of Florida. And so prepaid plans are great because, they actually lock in your tuition rate. So let's just assume you had a child this year. And you're like, ah, I want to sign up and I want to get my kid ready for college or at least start funding that process. Well, you can log on or look up for a prepaid or whatever state tuition plan that you're in and you can sign up for. at least how it works in Florida. You can do a two year degree at a, college, a community college. You can do a two year degree at a major university. You can do a four year degree. They have room and board packages, food packages, things of that nature. And you can break it down from, okay, my child's basically zero years old, they're going to go to school when they're about 18 years old, and they breaks it up into different types of payments. So you can do yearly payments, quarterly, monthly, you can lump sum it, but the great thing is, is there's no potential loss of principal, if the state tuition increases more rapidly than maybe investments would, well, they're going to guarantee that your child is going to have. That amount of credits for, the time that they're in college. So it's a great way to guarantee that rate. and you're going to get a guaranteed rate of return essentially from that. Now, some questions that you should be considering. Well, what if I move? I live in Florida now, I bought a four year degree package. but my job has moved me to California or Wyoming, wherever the case may be. what can I do with that particular plan? Well, in the state of Florida. You can actually keep paying on that plan and then your child will actually be considered a, state resident when they go to apply for, whatever Florida State College that, they want to go to. that's good in the sense of you don't necessarily have to worry about moving away and then not having the plan available and you put two, three, four, five years worth of payments in. they will let you keep that plan,

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So for those parents that want to guarantee that their child will have the opportunity to get a a funded education, if you will, the prepaid plans can be a great option because you are guaranteed, a certain amount of credits or a certain amount of years that they are able to go to that particular university or college. another question that you should be asking yourself is kind of the reverse of that previous question. What if my child goes to an out of state school? So as it stands in Florida, essentially what they would do is they would pay. but their language is, is that they would pay what they would pay for a in state school. So this can be a bit of a negative if you want your child to have an opportunity to go out of state. So let's say they decide to go to, Auburn or Harvard or Yale or whatever number, Colorado, wherever they decide to go, their out of state tuition is probably going to be significantly more than what, University of Florida, Florida State, UCF, what those colleges would cost. So you may potentially be underfunded, which, depending on your objective and everything may be okay, but if you want to have a fully funded education, then you would necessarily need to consider that. And if you want them to have the option to go out of state, then maybe a state prepaid plan would not be the best fit for you. Or for your child the next question is always a good question is, well, what if my child doesn't go to school? maybe they go to the military, maybe they start their own business, maybe college is just not for them, right? Um, you're basically going to get back what they would have paid to, a state university of some sort. and because this is a guaranteed product, if you will, they're going to be very conservatively invested. So the rate of return that you're going to get on this particular money may not be the best. to me, I would just almost say, let's just guarantee that we're going to get at least the return of principal, and then maybe we get a little bit of interest. because again, they got, they have to cover their, their behinds a little bit. they need to make sure the money is there so that they can pay for the tuition and fund it toward the school. So they're not going out and investing in equities and private equity and all of those things that have potential to grow, but also have significant amount of risk in it as well. the other side to this is, well, what if my child gets a scholarship? What if they get, in Florida we have this thing called Bright Futures, or, for whatever reason what if they get a scholarship that pays for their tuition? Well, the good thing is, is that, again, you can get that money, refund it, and put toward, your child, again, the rate of return may not be the best, or, let's say you have another child that. for whatever reason doesn't get the same scholarship or doesn't have that opportunity, you can always transfer that to another child, so that they can use that scholarship as well, or not the scholarship, but the prepaid funds that you have, have purchased. So there's a couple of different options there. the flexibility is not a ton in these prepaid plans, but you do have some flexibility if your child doesn't go to school or maybe they go to a free school. get into the Naval Academy West Point, or get a scholarship with a full ride. there is a little bit of flexibility there. that is the overview of prepaid. Again, the plus is you're going to get a guaranteed rate of return and you know that your tuition, the package that you pay for is paid for. and there's no variability in markets or investments or anything of that nature. Now, on the other side is what you have is called 529 Savings Plan. So this is going to work a little bit different. So this is, an account that works a lot like, let's say, a Roth IRA or an IRA, where you're able to put in, a specific amount of money of your choosing. So that could be 50 a month, that could be 200 a month. you're going to put this money in, and then you're going to be able to control what investments are inside of that. So if you want to be uber aggressive or uber conservative, you can do that. And so the potential here is to have a higher rate of return on that money. So now you don't have to put as much money into this particular account to get the tuition paid for. Right? the other thing is that you have more flexibility as far as in state versus out of state. So if your child goes out of state and your investments have done well, where you're getting that higher rate of return, and now they can take that from Florida to Georgia to Tennessee, wherever they want to go to college. and there's no, refund involved or anything like that. And so some questions that you should be asking yourself again, well, what if my child doesn't go to college? you can always transfer it to a sibling, or some sort of qualifying dependent. you can, pull that money out. Now, what's gonna happen is, is if this is not a qualifying event, Then any growth that you have on that money will count as ordinary income and then you'll pay a 10 percent penalty. So in, in theory, you'll net out more money, but it's not going to be as advantageous because you're going to be taxed pretty heavily on it. Now there are some exceptions, obviously if it's an educational expense like tuition, room and board, books, anything school related, you can pull that money out tax free. So that's where it starts to work like a Roth IRA. Let's say you start funding this when the child is very young, you have 10 15 years of growth on that money, they go to school, any money that you pull out for school use will be tax free. and some changes would be, I think it was the the Trump tax laws. Uh, you were able to use those five through nines up to 10, 000 a year for private school. And if you have your child attend private school, and primary and in grade school, then you can, use that five to nine for that as well. Up to 10, 000 a year. Now, what if your child again receives a scholarship, they get a full ride? Well, what the rules state is that If your child gets a scholarship, they are able to pull money out of that 529 plan and avoid that penalty, that 10 percent penalty, what they would have owned. So again, using round easy numbers, you put 5, 000 in, it grows to 7, 000, but your child got a scholarship for 7, 000, well then when you pull that out, that 2, 000 of growth will not have that, 10 percent penalty as it would have, elsewhere. Some recent changes to 529 plans that I think parents should definitely consider and would push them more toward funding a 529 plan is that you can actually take money from the 529 plan and roll it over to a child's Roth IRA. So, I have a son, he's four years old, I have funded his 529 plan. for the last three or four years. as he grows older, I'll continue funding it. And then when he gets to that college age, as long as that money has been in there for at least 15 years, let's say he gets a scholarship and I don't need all of the money in there. What I'm able to do at that point is start to roll over, money from his five to nine plan to a Roth IRA titled in his name. this can be very huge in the way of setting your child up for successful retirement. Think about, what that money could do as far as growth. Um, and so if you're able to do the full 35, 000 amount over a lifetime, well, now that child potentially has 35, 000 in their Roth. that they're going to have until they're age 59 12, 60, so on and so forth, and easily could have several hundred thousand dollars, if not more, while very little contributions by them. Now, obviously, we want to promote saving and things of that nature, but it does set them up for success. So, if you want, your child to have that option, I think a 529 plan would be, the way to go, as far as getting some money into again, just kind of a quick overview of 529 plans. It's more of an investment account for college, so you're going to open up this account, you're going to put in a contribution each year, each month, however you decide to put that money in there. You're going to pick the investments. The rate of return is not guaranteed, but you do have the ability to pick investments that would far exceed, what you would get in a prepaid plan. Again, not guaranteed, but you, you potentially could have that. And then you have more flexibility of potentially putting it into a Roth IRA for your child, using it out of state. Things of that nature, whereas a prepaid plan is state based and it's going to be a guaranteed rate of return. And generally there's packages of like a two year program, a four year program, ribbon board, things of that nature. so what should we be asking ourselves to help us decide which one is the best for us and our child? some questions that you should be asking yourself is, One, and people all commonly forget to, think about this when considering a 529 plan or a prepaid plan, is my retirement or my financial situation taken care of? Dave Ramsey says this all the time. You can finance student loans, you cannot finance retirement. So make sure your situation is taken care of because if your child ends up having to pay expenses for you because you put them through college, you're just robbing Peter to pay Paul. So make sure your situation is taken care of first. And then go down the line. If your child's to that age where you can start to tell if they're going to college or they're going military or they want to start a business, then you can start to decide, okay, well, should I go prepaid? Should I go five to nine? Should I just put this in a brokerage account for my child to help start a business down the road? understand where that child's going to go. Again, my child is still very young. both my children are four and, and almost two. And so I have no clue. I have an idea, but, they aren't in school yet. I have no clue. So we are just taking the chance of doing a 529 and then we can make adjustments along the way if things change, right? and that's what I would say. So with a 529, with that Roth rollover, if you're unsure, the 529, Is most likely the best route to go until you're 100 percent sure because again as long as you have that Roth rollover option, you know, you want to help your kids somehow That would be a great option to do so and again it all stems from is my retirement or financial situation taken care of first and then so From there. Do I want to send my child to private school before they go to college then that would make a 529 plan more advantageous for you. If you do, if you don't, then you may want to consider the prepaid or different, different way of funding it. will they be in state? Will they be out of state? some of these questions, you have to wait until your child gets a bit older, but you need to start considering that. Maybe you just want to give the opportunity of in state. And they decide to go out of state, then that's on them, right? And then at the end of the day, what is my risk tolerance? am I okay with the fluctuations in the market from a day to day, month to month, year to year basis? or do I want to know that no matter what, my child has two years of Florida, college, or, a four year degree somewhere in Florida, whatever that may be. and so those are some questions that you need to ask yourself.

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And that'll do it for this episode today. Hopefully found that useful and gave you some framework on how to decide should I do a 5 2 9 savings plan or a state prepaid plan for my child. Uh, if you have questions about your specific situation, go ahead and reach out on my website, palm valley wm.com, or you can reach me on Instagram, Palm Valley wm. And I'd be happy to schedule a call with you and answer any questions that you may have pertaining to your financial situation. So if you like what you're hearing, go ahead and leave us a five star review or share it with a friend so that we can continue to grow this podcast to help people out so that they can retire early or retire now. So we'll see you in the next one.

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This podcast is for educational purposes only. This podcast is not financial advice. This is not investment advice. This communication should not be relied upon as a sole factor in an investment making or financial planning decision. If you would like help, please seek a financial tax legal or insurance professional. Please keep Palm Valley Wealth Management in mind when making those considerations.