Thread by @roncaruthers

1. Why 529's are NOT always the best vehicle to save for college in.

Actually, MOST of the time they're not.

Here is why:

First off, if you're not familiar with the history of the 529, here it is:

2. Prior to 1997, the majority of Americans' saved for college in UTMA or UGMA accounts.

There was no benefit to them EXCEPT:

Once your kid was 13 or 14, whatever gains they had in there were taxed at their rates, which were lower, presumably, not YOUR (the parents) rates

3. HOWEVER, when it came time for college, these accounts were considered a student asset NOT a parent asset.

Why does that matter?

4. Because the Deptarment of Education are dicks when it comes to having money in a student's name....and they want 20% of it each year to go to the college.

If you run the math, since most students take 5 years to graduate, you realize that they want ALL OF IT.

5. The other flaw with UTMA's is that they legally become the posession of your kid the day they turn 18.

So, if you kid wants to blow the money on a Harley or tattoos (or whatever), there really isn't much you can legally do to stop it.

6. Oh, and parents assets are counted at a much lower rate (5.6%) AND the parents get an 'allowance' of money they're allowed to have on hand BEFORE the government starts punishing them in the formula.

So, the first lesson is to NOT have money in your kid's name if you're

7. Otherwise eligilbe for finanical aid, and most families are, even if they make a good income.

If you want to learn more about the financial aid system, and how to qualify for the MOST amount of free money legally possible, then you need to set aside an hour and go here:

8. It's a long one, but you will know more about the college planning process when you're done watching this than:

-Your guidance counselor
-Your financial advisor
-Your other family members
-And your tax professional

9. Anyway, now on to the 529 plans:

First, a bit of history:

They originally started in 1986 in Michigan when the Governor at the time, James J. Blanchard, was concerned about the 'high' cost of college.

BTW, back then, it was about $1,700 A YEAR.

10. Anyway, so he started a way to save for college by 'pre-paying' your tuition.

Over the next 4 years, about 55,000 people signed up for these, but then the IRS got involved and wanted taxes on the gains.

Because OF COURSE they did. Bastards!

11. Anway, the court initially ruled FOR the IRS in 1990, but on appeal in 1994, the court ruled that the pre paid plans were tax-exempt because they came from the state.

THAT led to Congress getting involved to try and make ALL college savings plans tax exempt.

12. And in the Small Business Protection Act of 1996, they created IRS code 529, which gave these pre-paid tuition plans tax exemptions on their gains....and then this got modified again in 1997 to include general college savings plans like today's 529's that we think of.

13. Did you know that originally these plans were due to expire on December 31st, 2010?

Well, now you do.

However, the Pension Protection Act of 2006 made them permanent with no expiration date.

14. Later it was ruled in 2007 that these 529 plans were to be counted as a PARENT asset at the lower rate than I mentioned the student's rates were.

This happened with the College Cost Reduction and Access Act.

So.......

15. If these plans are tax exempt, and don't count against you much in the formula, why am I against them for most families?

Here is why:

16. First off, when they ruled in 2007 that 529's could only be counted against a family at the PARENT rate of 5.64%, they didn't say for WHOM they only counted at this lower number.

And here is the answer: the colleges count the lower rate for FEDERAL MONEY ONLY.

17. What they didn't address is what a private or state school can do with their OWN money.

And many of them have an additional form besides the FAFSA (if you're unfamiliar with this term, go back and watch the YouTube video I referenced earlier)

18. THAT form is called a CSS Profile and is MUCH more intrusive.

So, if a college finds out that you have a 529, they can't HELP themselves but to give you less money and try to 'help' you by making sure ALL of your 529 money gets spent before your kid graduates.

19. So the risk that you'll be punished IS my single biggest concern about a 529 plan.

I don't want to see anyone 'punished' for saving in the wrong place.

Especially since most parents ARE eligible for free money from college.

20.

Here are my other complaints, btw.

-The fees are higher than comparable mutual funds;
-You have a VERY limited window to withdraw the money, so any market losses are magnified greatly over, say, a retirement account where you draw the money down over decades.

21.

-You can only make a 'change' to them once a year.

That's just a FEW of the reasons I don't always recommend them for clients, and in many cases, I have to 'rescue' the money before they apply for financial aid so we don't get burned.

So, what SHOULD you do?

22. First off, I'm a huge fan of pre-paid tuition plans.

So, even though those are 'technically' 529 plans, they run completely different becase these accounts remove market risk from the formula, and the fees aren't as bad.

If you want to start one of these, go for it.

23. I especially like these because states offer them for state colleges where you're not likely to get much aid anyways.

However, I would be cautious about having too much money in the more traditional 529's.

24. If you want to know more about why I dislike them so much, you can read last year's article here (which I actually DID post on 5/29.)

https://twitter.com/roncaruthers/status/1266395293429297152

25. AND....if you want to know some good alternatives to a 529, I'll go into detail on that tomorrow.

So, I hope you enjoyed the history of the 529, and learned from the flaws.

Again, if you want to know more about the college financial aid process, be sure to watch the video.

26. The video and the previous thread should keep you guys busy until tomorrow!

/End of 529 lecture for today.

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