Host: College debt and paying off that debt is a huge part of many of our guest’s money stories. Scott, Amberly, and I each have two children, although they vary widely in age. Amberly and Scott have kiddos who are under three years old, while I have one heading to college in August and another heading there in another three years. Wanna hear the kicker? I technically don’t have anything set aside for my kids’ college. Today, we’re talking about paying for college and several different ways to go about it.
Host: Hello, hello, hello, and welcome to the BiggerPockets Money Podcast. My name is Mindy Jensen, and with me today, not only is my college planning co-host, Scott Trench, but also Amberly Grant is joining us too.
Guest: Thanks, Mindy. Great to be here. We look forward to laying out the textbook approach to planning for college for your children, college savings.
Guest: BiggerPockets’ goal is creating 1 million millionaires. You are in the right place if you want to get your financial house in order because we truly believe financial freedom is attainable for everyone, no matter when or where you’re starting, including if you want to fund the maximum, the most expensive college education, um, that exists for children at any point in the future. Amberly, thank you so much for joining us today. We look forward to learning from you. You are an expert on the, this, the, on FASFA and the, the, the, uh, 529 and all the tools for saving for college. Thanks for joining us again today.
Guest: Thank you. I had the privilege of having to experience all of this firsthand and so, and working in the financial aid office. So, I’m quite versed.
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Guest: Before we get into this conversation, I want to add a disclaimer for today’s episode. As you will hear in the episode, we several times mention EFC. After we recorded this conversation, I chatted with a friend and found out that the EFC has actually been replaced with the Student Aid Index, SAI. What are the really important distinctions between these two? Not much. Okay, let’s get into it with that in mind.
Host: Okay, guys, I am super excited to get into this topic of funding my kids’ college. Ooh. All right, Amberly, you are one of the most knowledgeable of the three of us. I know that you can fund college and that’s about it. I think Scott is, uh, second most knowledgeable. I want you to brain dump all of the things that you know about funding my kids college. I mean, someone’s kids college. Go.
Guest: Well, uh, you first have to create an account, Mindy, if you want to fund your kids college, and I’m not doing that for you. Okay. When it comes to university, there are two ways of thinking it, well, three ways of thinking about it. Um, you can get funded by the government grants, which is going to be considered free money. You can be funded by government loans, uh, private loans, of course, as well. Um, or your parents or you as a student can foot the bill.
Guest: When I think about, uh, paying for college, the first thing I think about is how do I get those free grants? And so I want to talk a little bit about assets and how those are applied to both you as an adult or your child. So, um, the FAFSA is what matters.
Host: FAFSA stands for Free Application for Federal Student Aid. My child, because of my net worth does not qualify for any federal student aid of any kind. I filled out, you have to fill out the whole form which is really annoying when you already know that you’re not gonna qualify. Um, so we filled it out. And you have to fill it out honestly. You can’t just like make stuff, I mean I guess you could what are they gonna do?
Guest: No, it’s a federal form.
Guest: Yeah, it’s like mortgage fraud. So Mindy, you have strong opinions on mortgage fraud, I believe.
Host: I have very strong opinions against mortgage fraud. Uh, don’t do it. So I guess you have to fill this out and like to the best of your knowledge. And at the end of this very lengthy form, then they tell you, yeah, no way Mindy. Which was nice but I already knew that.
Guest: So, so Amberly give us an overview. What, what, what are the ways how do you, what what are these kind of cutoffs and how do you start, how do you ballpark whether you’ll be able to to qualify for some of these these, uh, student aid programs?
Guest: Well, first I want to say what FAFSA is for. FAFSA is not just for, um, free money, for grant money. It’s also to determine what your kid will need for, uh, federal student loans and that’s important as well. And you need to fill out FAFSA for a lot of scholarships that you can apply for as well. So, so though you are forced to, to fill out that form, you need to for multiple reasons. And I actually come from this as a perspective of a FIRE perspective because most people who are working towards becoming a millionaire are not going to be able to fund or the government isn’t going to give them free money for their kids’ college, right? There are things you need to pay attention to and structure your accounts appropriately so that you can decide what the waiting is. And maybe, just maybe, you might actually get some free money. So, um, one thing to note, I’m just going to go over just what, uh, is available there. And, um, then we can talk about the numbers. When a child has assets, they’re weighed very heavily in the eyes of the government, uh, when it comes to what’s called an expected family contribution, or an EFC. Uh, for a child, if they have $100,000 house that you have gifted them before they went to university, the government is going to say 20% of that asset is going to be able to be, uh, used to pay for a college every single year. Meaning that that $100,000 asset, 20 grand of it is going to go towards, um, you know, the amount that the government is calculating that you have to pay for university.
Guest: As a, an adult, your personal, uh, assets are, um, are also weighed to see how much the government’s going to allow you to take in grants and or, uh, student loans, et cetera. And for you as an adult, it’s 5%. And this is where that, uh, conversation around UTMA or a 529 account comes into play. Um, a UTMA, which is a Uniform Transfer to Minors Act, is a child asset. So some people use that to fund their university, but the thing is, you have to remember that that is now going to be weighed, any dollar in that account is going to be weighed at 20%, um, for any grants or like student loans your your kid can get, which is something to pay attention to. Um, also, for a UTMA account, it is automatically transferred to your child at 21. So if you’ve got like $100,000 in there and you have an irresponsible child, they are going to get all that cash at, you know, at 21 years old in one lump sum. And so it’s something to pay attention to again with that specific account.
Guest: Then there’s what’s called a 529. Um, this one is state specific in regards to, you know, what you can put into it if you get tax uh deduc- deductions for it. Um in Colorado, we can use this, uh, any amount we put in there we can put as a tax deduction on our yearly taxes. But a 529 account belongs to me, the parent. And my child is just a beneficiary of the account. Therefore, it’s only weighted at 5% when we’re looking at, um, you know, your estimated family contributions for your FAFSA application. Um, any over contributions for your child as a beneficiary can be used uh and, um, moved into, I’m going to use the word moved into but a Roth IRA if they’ve, uh, been the beneficiary for 15 years, um, up to about $30,000 is the limit right now. Um, so those are just the two accounts that you can fund a child’s college and both of them will be used like to for the government to understand if you’re going to get free money, quote unquote, uh, from a grant or you just use that money to pay for college, like Scott, you were saying, you know, you’re going to anticipate that your income and assets are going to be so high that you’re not going to be able, your kid will not, um, actually qualify for any grants, but those are the two accounts that people are talking about and those are just the differences between the accounts.
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Guest: Thanks, Mindy. Looks like we added 529 listeners during that break. To everyone who’s listening to the BiggerPockets Money Podcast, welcome back.
Host: The UTMA versus 529, it sounds like UTMA is not really what I want to do. Is there a use case ever for the UTMA over a 529 plan?
Guest: I haven’t seen one. I’m sure there’s one, and I’d love for our listeners to tell us, you know, what they see that use case for. I do not see a use case for it.
Host: Okay. It doesn’t sound like a good idea when it’s weighted 20% versus 5%, and they get it at age 21, like you said, they could be very irresponsible. Thinking back to a 21-year-old Mindy, of course, I was perfect but I can see how that would not quite. Like 21-year-old Scott I bet was a little more wild than 21-year-old Mindy.
Guest: I never, I never won a fraternity case race, for example just.
Host: You weren’t the captain of every sports team that you played on?
Guest: Yeah, those days are long gone now. I live a very suburban life, Mindy.
Host: What, let’s, let’s go back to this, this discussion here because I, I’m going to use it from a personal standpoint, right? I, I asked for this, this particular podcast out of selfish reasons. I want to think through this decision now that I’ve had a new, a new baby daughter on this and I’m super privileged to learn from you, Amberly, as an expert on, on these, these items. I start with a couple of really high level assumptions, right? I have, I have a two and a half year old and a one month old at this point. And my belief is that, I, I, a couple, a couple of items. One, I do not wish to transfer wealth to either of them, um, heavily in advance. I may change my mind at some point in the future, but I do not want to do that now and begin the the the process of, of doing that tax advantaged way doing that. That may be a mistake later in life but that’s just not my, my intent at this point. So I’m, I’m a little averse to that, um, UTMA, um, gift, uh, in, in the context of that philosophy. Second, um, I, I want to pay for college for them. And that includes up to and including them attending a very expensive private university if that’s what they choose, covering full room board, tuition, and some pocket spending money. You, some people may criticize or call that lavish, but that is, uh, my, my choice and that’s what I want to plan for, uh, in the context of my, my child’s, um, education. I also don’t want to overfund, um, a 520, a 529 plan for example and have too much allocated to college savings because I believe that while there’s every reason to believe that college could cost just as much or more relative to inflation, I’d actually bet, um, frankly that it’s gonna cost less relative to inflation, um, than it does today, college, uh, by the time my, my children are of a, of, uh, of college age because I believe that some shake-ups are coming to the federal student loan program and people are getting smarter about the ROI of college, uh, in a general sense. So those are the kind of the starting assumptions that I have for this. What are your reactions to those assumptions? Do you agree or disagree with them or, or do you challenge or push back on any of them?
Guest: I wouldn’t be paying for my entire kids’ college. Um, I also think that the room and board, I want my kid to have a job. Like in college and beyond. And I find it’s a very interesting thing when people want to protect their children through university to only be quote-unquote students because I don’t actually think that prepares them for the real world. So I am also funding, uh, university for my kids but I’m doing it to a certain amount that I’ve decided on. And it’s not actually reflective of necessarily the college that they’re going to go to because I know that some of it they can reuse for a Roth IRA if they need to. And I think that’s a really nice, um, flexible way of using a 529 account. Um, but I have lived in college towns. I have partied with college kids and I noticed that the kids who have everything paid for, I lived in Tucson, Arizona, I worked at Frog and Firkin, which is a college bar. I worked in the office of student aid at the community college. And I find the kids who have everything paid for, room, board, food, um, are some of the most irresponsible not only students, but also, um, with money in general. Um so, I hesitate when I hear you say that I think, uh oh, you may be setting them up for failure.
Guest: My parents paid for college. Um, room and board. Uh, I worked during the summers, um, on there but, uh, I, I, that’s, that’s what happened for me and, um, you know, I certainly behaved irresponsibly in college and some of the opportunities from college also set me up for, I think things later in life that kind of led me to, to the career trajectory that I, that I’ve had there. So I can see it both ways there. I think it depends on the, the individual on there and again like I, I, I completely respect and understand that and I think that’s a that’s a conversation that happens in so many households here with so many different conclusions being arrived at, um, by different folks.
Host: Well I think you’re an anomaly, Scott.
Guest: Why’s that?
Host: I, I think more, more people are of Amberly’s example. They, it’s, if they are, if everything is paid for they don’t have any skin in the game, they’re not going to appreciate it as much. They’re going to take it for granted. Um, you are just because I know you. You’re, I’ve known you for 10 years. You are just an anomaly in general.
Guest: Well, look, I, look, I, I think, I think that it’s fair to say I took it for granted, uh, in college to a certain degree on those, those items in there and and that certain of Amberly’s criticisms are are correct there. They might be correct for some of my, my friends as well. I want to speak for them but then I, I look at it and I see, I see folks of all different types of backgrounds succeeding in a variety of ways. I can point to friends that are doctors, lawyers at big firms in there, um, and, and all, all in between. And so again, I think, I think it’s a wonderful debate on it. That’s just, I just have a, I would just push back and say, and say, uh, there’s a, there’s, there’s multiple ways to think about, um, each of these circumstances and you know, I I would like to plan for the option to pay for the entirety of my, my girl’s college education on there and that is my plan, that may change at some point in the future, but that is that is the base case that I have going into the, the planning process on it. So, I, I think it’s a great pushback and discussion, completely respect it. Um, will still maintain my my stance that I want to, I want to plan on that.
Guest: I, so let’s talk about how you would actually fund that, right? Um, and I, I do want to give credit to people in general. We, I think we all have our wild days and then we all, you know, settle down into good lives, whatever that looks like. So I, I should give some people some credit here. Um,
Guest: Not everyone did. Not everyone.
Guest: Yeah, I, I know, I’ve got the examples too. I’ve got the doctors and lawyers and then the people who just never got out of it, right? Um, but what I, what I guess what I’m really trying to say is that, um, I like that you work through, uh, through summers. I think that’s a really important thing because uh university not is just not about payment but it’s about life experience. And so I think as long as we can set our kids up for life experience as well as the education process, that’s great. So let’s talk about how you can fund that. First of all, you have to decide what you think university will be worth in that time frame. So, our case, um, we decided that when each child is born, we’re giving them $10,000 to start their account. And in, uh, Colorado, uh, since you live in Colorado, um, College Invest is the way that you’re going to do that. It’s a specific website that you need to use so that you can actually get those tax credits. Turns out I didn’t know that in the beginning. I use, I did it through Fidelity through 10 grand in there and I cannot claim that, um, unfortunately on my taxes because you have to go through this one specific website. Um, from there, I have determined that I’m going to fund each college, uh, each child’s college up to $85,000 because my children have the option of going to college in Canada, um, as well as the United States. So I figured that’s a good amount to cover, um, four years at CU Boulder, uh, in the business program, just for the, like the just the university part, not room and board, because I figured that will be something else that we can determine later. Um, and so then now I’m putting $1500 a year, uh, on top of that $10,000 until they’re 20 years old and that will cover the up that will be the $85,000 I’m going to need to cover what I’m willing to cover for both of my children. Um, and that’s how we did the calculations is essentially, what’s that future value we want it to be? Around 80 to $100,000, and then we worked backwards with a lump sum because I like lump sums. I like to just throw it all in there and then slowly accumulate after that. What do you think, Scott?
Guest: Yeah, I, I think, I think that that makes, I think that makes sense. I, I would say the, the 529 maximum is, is $29,000 for a married couple to contribute to a single child. So you could do that each, to each child there. Um, for each child. And I believe you can contribute up to five years, um, at once. You cannot contribute then for the next several years on that but you can contribute up to five years on that. So that’s a big pile of money. It’s almost 150 grand. Um, on top of that that program that you discussed Amberly, the College Invest, I believe gives you a $1,000 match for the for for the child for five years or at least they they were doing that with my first child. I don’t know if they’re still doing that, um, today. Which is an awesome, awesome benefit. And the, the, that what makes sense to, so I want to back into basically a a a let’s call it a $75,000 per year estimate for fully burdened tuition and room board and books per child at an expensive private institution. I want to be able to, be able to fund that, um on there. I believe that will be overkill. But if I was planning on that, that would be what, like 300 grand, a little bit over 300 grand. So I would want to put in, you know, and that’ll double every seven and a half years. So I’d want to put in about 75 on day one, essentially, and just let it rip for the next 15 years because the tax, the advantage of the 529 is the tax free growth. So max it out all at once, boom, done. Um in there. What do you think about that? Is that the right plan? Is that, is that, is that the right way to think about it in your opinion, Amberly?
Guest: Again, I love lump sum, so yes except for one thing to think about. You may have a kid that you realize is really not going to go to university. So you don’t know your kids full personality yet. We can kind of see them, right? Like from the beginning, but that’s something that you want to be careful of is if you’re gonna do that huge lump sum in the beginning and essentially let it ride, you might go 10 years in and realize you have a kid who’s super handy with plumbing because they’re helping you with house renos, whatever it might be, and that university might not be the way for them. So you might want to back off of contributing those extra years, uh, to that account. But I don’t see any problem with that because again, I like the lump sum method and then slowly, uh, you know, putting money towards it afterwards. It just depends on how you’re, how you are okay with not using that money. And the great thing with a 529 is you can transfer it to someone else. Say your one daughter is like, you know what, dad, I am going to become a plumber and I’m not going to do this. You can put, use some of it towards vocational school. So maybe she uses about $75,000 of it but then you’ve got the other 225,000. Um, maybe you save it for their, like her children or you give it to a cousin or something like that or you go back to school yourself. But just know that it may be overfunded with especially with that large of an amount.
Guest: Okay, a couple, couple of questions. Can I use, let’s say, let’s say, you know, I, I love my debt funds, right? And hard money lending on here. Uh, I know they’re very, that most people are like, what the heck, I’m not ever gonna touch that. But, but let’s say I put, you know, 75 in or or 100 in into these accounts and I’m able to put it into a debt fund or a hard private note that generates 10% simple interest. Can I use that interest to pay for preschool for example or summer programs or those types of things on an interim basis with tax with tax-free dollars?
Guest: And yes, so you can send them to preschool. Um you can use 529 to send them to preschool. I’m sure there’s a whole list on the government website. I don’t want to speak out of turn on what you can and can’t use it for.
Host: I just looked up can you self-direct the 529 plan and I’m seeing no everywhere.
Guest: Okay, so no, but I, I would have to find some sort of other investment that was reasonably available via publicly traded securities or standard brokerage investment accounts. But I could, conceivably, use simple interest proceeds from that in something fairly safe and use that to fund, um, preschool or after school activities in some capacity or summer camps or those types of things during that period as well, which would wait have, which would also be a, which would be a tax advantaged way to fund some of those things on an interim basis leading up to college. Is that right?
Host: 529 plans can be used for, uh, college and secondary education, elementary or secondary school K through 12 tuition and fees, uh, books and supplies, student loan payments, room and board, uh, things that a student would need like a computer or internet or things like that. Um, I am looking at, looking for a list of all of these things that you can use it for. It’s not just limited to college.
Guest: And Mindy, when you’re talking about room and board, we have to be very careful with that because it’s not room and board like what we think, oh it’s a $3,000 apartment we got this is gonna be out of the 529. It’s legally what the college states, what room and board should be based on their area and that the university sets that price. So you can’t just go ball out. Um, you’ve got to, you can only take out what’s, uh, the university says is appropriate for room and board. Um, the other thing though you have to remember Scott is that you can just take that money out. Say you overfund it, we’re going back, your, your kid’s a plumber, um and you overfund it, you can take your contributions out. But it’s the growth on the contributions that you’re going to pay a penalty on. And if that 10% penalty is no bother to you because you want the cash, then you just take it all out and you go do whatever you want with it afterwards, right? So just remember that with all of these things, though there’s tax advantages to keeping it and and growing it in these accounts. We still have access to our money, we just have to pay for it.
Guest: All right, okay. And and that’s just on the gains. So if I put in, you know, uh, 75 or 100 grand and it becomes 300,000 later, uh, in life, I can pull out the 100 grand and use the 200 gain to pay for all the college expenses, for example.
Guest: I believe that’s the case.
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Host: Welcome back to the show. I want to point out right here that every state is different. We have 50 United States plus Washington D.C., which has its own set of rules. So all of these things that we are talking about kind of apply loosely to all states, but also the, the 35,000 or $38,000 Scott that you said, that’s specific to Colorado. We have a document from or a link to a Fidelity article that talks about all the different, um, all the different states and what the benefits are. California has no benefits, no, uh, tax deduction, no, uh, income credit, nothing. Uh, Colorado for 2025 has a $25,000 deduction or, if you’re single, or 38,000 if you’re married filing jointly. So it’s, it looks like Colorado is one of the best states to be contributing to a 529 plan in.
Guest: And and Colorado has reasonably high taxes too. Um it’s a flat tax of four, 4.55% on income and capital gains, um, in there. And and I did look this up, you cannot use in most cases the 529 plans to pay for preschool, um for the most part. So it’s really only for private K through 12 tuition and the things that I think, I I think the spirit of it regardless of what the letter, um, might say in many cases, is it’s got to be for tuition, essentially, or the the directly related things to tuition for educational expenses.
Guest: I was not lucky enough to have a 529 plan. How I ended up paying for college was out of pocket, uh, applying for 20 scholarships, um, and using, you know, the FAFSA grant money because I was 24 years old. And that’s the other thing to note for kids, is that once you’re 24 years old, you are no longer a dependent of your parents. So Scott, in your situation, maybe your kid’s like, hey, I’m going to go travel the world for a couple of years, maybe dad you can help fund that. Um and then they’re going to go to university a little bit later. At 24, all of a sudden now it’s only my assets that are going to be, uh, used towards, uh, my contributions for university. And that’s something really great to note. But here’s the thing a lot of people are like, well, I, I’m just going to emancipate myself from my parents at 18 and then I can, you know, not use their income on the FAFSA application. But that’s not easy. Um, the only, some of the only ways you can really not be considered, uh, under your parents for FAFSA under 24 is if you’ve been in the foster care system, if you’re homeless. So you need to have a really good case for um you know being removed from your parents’ income and it is super hard because I looked into it when I was going universe- university at like 22 I started it, I stopped it and then I went back at 24. Um and that was the thing that I no longer needed any contributions from my parents, which were zero anyways so it didn’t matter. But um that’s just something to note for people that if you go a little bit later, uh, you no longer are tied to your family.
Guest: Makes sense. And and I think, I think most people listening to this podcast, I’d imagine, are thinking about how to fund college in a nearer term setting with the, you know, with the, with facing the reality that because they’re listening to a show like BiggerPockets Money, um they’re likely, more likely than not, to not qualify for a lot of FAFSA at that point in time. And so it’s planning to pay the full price and how do you mitigate those things. There’s so many options around it around state schools and community college credits and all these different things you know working through there, uh on there and maybe having a, a clear decision with that. I’m starting with the most extreme kind of yes, I’m ready, I am planning years in advance to be able to have the option to fund private school tuition but believe it’s unlikely to, to come to that. And and by the way, I don’t think I will go all the way to that $75,000 per child, um in there. I think I’ll start with something like closer to 35 to 50 because I believe that there’s another risk of overfunding the account because of all those other options for college. And, I believe that if I just don’t fund, use those funds for that I can just buy real estate or something else with that. Not quite get the same level of perfect tax advantages in terms of being able to sell the assets that I, you know, for, for from educational purposes, but I have a lot more flexibility with that wealth later in life anyways.
Host: On that note, it’s always important to give people permission. You do not need to pay for your your kid’s university. You don’t need to pay for their room and board. You need to secure your retirement because they can borrow against university. You cannot borrow against your retirement. And I think that’s just a big thing especially in the United States that people feel very guilty about, um, and you shouldn’t. Like you said Scott, you saw people succeed with college being funded, without it being funded. I’ve seen people succeed with college being funded, without it being funded. Um, I’m an example of that, you’re an example of that. We’re both on this podcast and we had very different routes to getting here. Uh, so I think it’s really important to to remember that there is no right way of doing this.
Guest: Absolutely. And I love, I love that and and I think a lot of people out there, I think a lot of people will completely agree with what you’re saying and I think a lot of people will share my mentality of I would delay my retirement in order to fund fund my kids’ college education. Um, if it was if it meant them getting into the best school or the the best opportunity that we thought was available at that point in time. Not everybody shares that, but a good chunk of people do, I think. And that was, that was the way I was raised, and and and, and and and the privilege my parents gave me and that’s something that I would, I would absolutely sacrifice and delay for, um, if it came to it on that. I think that that’s a requirement for many people’s planning, but not everybody’s.
Host: Mindy, what are you doing um with all this? Your kids are much closer to college age and this problem is right that, right around the corner for you.
Guest: Uh it’s nice that you called it a problem, Scott you are absolutely right. I was, uh, living in Illinois when my oldest daughter was born and then we moved to Wisconsin where my youngest daughter was born. And in Illinois, I started doing research on their 529 plan, and I either misunderstood or misread what was going on or maybe their rules changed. I read it to be if you put money in and you don’t use it for college, you lose it all. You can keep the contributions, but the growth was all wiped out, and I have since been told that that is not true. And I was very happy that that wasn’t true, but then, you know, my kid’s going to college in August. So this is this is a bit more of a an immediate concern for me. Although Carl and I have done very well with our investing, we can absolutely afford to pay for college for her. Um I do have a friend who told his kids I will pay for your college. And then his kids didn’t apply for any scholarships and or grants or, you know, anything, and he was kind of stuck footing the whole bill. So I have shared with my kid that I am going to pay the equivalent of CU Boulder, which is about $30,000 a year. Um that is what that is what I will pay for you and anything above is coming out of your pocket. And she heard that to be, okay fine, I’ll just, you know, I’ll pay, I’ll get scholarships or grants or whatever loans and I’ll pay it off when I get a job. And one of the colleges she was looking at was $80,000 a year. Her chosen major is uh, she needs at least a master’s, maybe a doctorate in it. And she, when I when I showed her, you know, you’re you’re willingly taking on $50,000 a year in student loan debt. When you graduate with your four-year degree, you’re going to have $200,000 in student loan bills. And she’s like, well, yeah, but I’m going to get a job that pays $100,000. I’ll be able to pay that in two years. And I’m like, I know you listen to me talk about money all the time. We never had the conversation about, uh, what is FICA? You know, she’s not had a a traditional paycheck yet and that was that was really eye-opening for her and it changed the way that she looked at college. Um am I gonna end up paying for her college? Most likely. But I wanted her to choose a college that wasn’t $50,000 extra in in bills. Um, I currently have as much saved for my college, my kids college as you have saved for my kids college, Scott. So great big fat zero dollars. Amberly, we’re gonna, you’re gonna double what we have saved. Uh, and we have all collectively saved zero dollars for my kids college.
Guest: I think like let’s let’s just zoom back out here, right? We’re all we’re all in BiggerPockets Money. Everyone listening to this is listening to BiggerPockets Money by definition. Brilliant breakthrough insight by me on that point, particular point. Um on this. But you know like, you know, the the the obvious solution here is the pursuit of FIRE gives you options to spend general, the wealth you build in a general sense, however you want. And there’s not real, like if you if if you build multiple millions of dollars in that wealth that worth, you can buy a mountain home or you can buy a college education, right? So from it. And I think that that’s the point I’m grap-, that’s actually the problem I’m grappling with here is because overfunding the 529 plan comes with a penalty on it. It’s not a, it’s not the end of the world, it’s 10% penalty, um, uh from from a withdrawal that’s not not for those those purposes, uh, plus the tax plus the the the realization of the the gains or the income on that. But it’s, it’s a penalty, it’s a it’s an issue there and you don’t want to overfund it by a huge amount, um, because the alternative is just building wealth in a general sense, right? You could take a loan, you could buy a rental property, pay it off, um like Brandon Turner came up with a couple years ago, and just refinance it, um, and you have no taxable event, uh, at that point, for example. So there’s other, other ways to fund college here and it’s the 529 is more powerful than even that strategy because it’s truly that the income is truly not taxed um on that front when depreciation runs out whatever, you can still, um, uh, uh, uh, still still use the gains tax-free to pay for these qualified education expenses. But again, there is an issue of overfunding it, and the better, the best solution is to just have so much wealth that you can easily afford paying for that and your financial life style, which is where you’re at Mindy, on there. So I think, I do think that this is an obvious breakthrough, an obvious insight, but also the the, you know, a fundamentally part of the strategy.
Host: Well, yes, but it’s tax deductible depending on your state. There are some states that have absolutely no benefits. Alaska, California, Florida. There’s, it it says they’re not tax deductible, you don’t get a tax credit for contributing to the 529 plan. As I’m reading this and please correct me if I’m wrong it has been established several times on this show that I do not know what I’m talking about when it comes to a 529 plan but with regards to this it seems to me that it makes more sense for you to put this money someplace else in a different type of account than to put it in here if it’s not tax deferred. Is it Does it just grow tax deferred in all 529 plans?
Guest: It’s post-tax contribution and it grows tax deferred.
Host: I don’t think it’s all post-tax contribution. There’s, there’s no tax deduction in Alaska, there’s no tax deduction in California.
Guest: On the state level there can be state tax deductions, right? But the federal level, the federal one is the like, like all the planning for me in 80 20 of the planning is on federal taxes. I pay way more to the federal, Uncle Sam, than I do to the state of Colorado. Um, right or wrong on that. And so that that’s the strategy. The strategy is how do I avoid paying Uncle Sam for this stuff? And the 529 plan is an excellent way to do that for educational expenses. So the goal is to fund exactly the right amount or just under the right amount needed to fund all future educational expenses for my children and then whatever, whatever if, if the future years bring additional generations whatever that those are those are funded and available for it. But not so, not to the point where I am foregoing the ability to use that wealth productively in other aspects of my life, either for my enjoyment, my kids enjoyment, charitable donations, whatever around there. But that’s the goal I think of all the college planning.
Host: Yes, but I’m on Fidelity’s website right now and it says tax benefits to contributors. 529 plan contributions are removed from their taxable estate. In 2025 contributors can give up to $19,000 a year without counting against the lifetime gift tax. But with the super funding or accelerated gifting strategy a contributor can give up to five times that yearly limit in a single year without triggering the gift tax, as long as they don’t surpass $95,000 in contributions over five years. But while 529 contributions are not tax deductible federally, many states offer tax benefits on state income tax returns. It seems to me that that there’s still a benefit for creating a 529 plan but depending on what state you’re in those benefits are significantly reduced.
Guest: Like Colorado is a great one. We’re all three in Colorado. It’s an awesome state for us to be funding our 529 plan. Here’s a question, maybe Amberly knows the answer to. If I create a Colorado 529 plan, can that money be used for a California college?
Guest: Yeah. It, well the, the reason why Colorado matters is because it’s for those tax deductions. Um and like we said, you know, Colorado offers a state tax deduction so that, you know, anything you contribute up to a certain amount that you can then, uh, deduct it. The thing with the 529 account is that it, it grows tax free. Like you don’t get taxed on it when you take the money out for college specific, um, needs, right? That are outlined as we talked about before and outlined on the government website. And so that is, it makes sense Mindy when you’re saying if you’re in California, maybe it doesn’t make sense to to to contribute to a 529, but it does, because you’re going to have benefits down the line for it, not at this moment in time. So you might not want to overfund it there because it, you’re not really getting anything for it in this day and age. But like Scott said, maybe getting to the limit or putting some money in and then us as FIRE people cause we have a bunch of cash behind us, then we just throw cash at the problem later on, right? And then we’re not worried because we are over-optimizers. And so Scott’s sitting there twirling his thumbs being, is it going to be 300,000 or 330,000, I don’t know. Um so instead of doing that, you can say, hey, I’m going to make it 300k, put that at the limit and then, you know, anything that comes above that I can also contribute it in that, you can contribute in that year that I need to pay it. I think you need to have to, I have to check that one actually out that there may be some sort of wait time between what you can contribute and what you take out. But anyways, you can still contribute when you’re getting closer and you know what university they’re gonna go to and then you can, uh, fund it a little bit more then for those tax advantages if you have them, you just may not get the growth.
Guest: I mean, the Colorado benefits are nice, but the big one is the tax-free growth on a federal basis for the gains, right? Like that’s, if I, if I invest $50,000 now and by the time they’re in college it’s worth $200,000, that $150,000 capital gain is tax-free, right? Both at the federal and state level. That’s, that’s at the highest bracket, a 25%, a 25% boost to that that wealth there and that’s why this is is important. And that brings me back to the whole philosophy of the ideal strategy and it’s a privilege and and, uh, uh, to to to be in this position would be to just put pop 50 grand in as soon as your child kid’s born and maximize that amount of time to compound and never put another dollar in at that point and time it perfectly with the amount you need at college, right? Obviously if I were to assume that college does cost exactly 200 grand at that point in time, uh with it. But that would be, that’s what I feel like is the the optimal bet in this particular case. But there’s so many ways that also you can, I mean not everybody can do that. But if you contribute, if you kind of that philosophy, how early can I fund this plan with a minimum amount and then stop on there? That’s your goal, for example, because of the way that the account is structured in there. If you overfund it, again there are options to take, to use those those things in some limited capacity for things outside of higher educational expenses. But there are also penalties and a little bit of pain in the rear to really reallocate the dollars to other life purposes. So I think it’s important to fund it accurately, in my view, um, in there and it’s not one of those things I really want to maximize and swell out, swell out as much as possible.
Host: So Amberly, what are you doing um at the end of the day? Could you remind us one more time? Was it was it a $10,000 per child?
Guest: Correct, yeah. I do wanna say that I’m in that great, privileged place that I can just throw some money at one of the most expensive times in our lives of having a new kid. Um and I actually was like okay I’ve got 10 grand here sitting in an account it’s not doing anything. I’m throwing that at my first kid and then I figured I had to be fair and do that towards my second kid so I started saving for that as well. Um so I do $10,000 when they’re born and then I do $1500 a year that I just do in like quarterly increments because I don’t know why there’s no reason for it. Uh until they’re I think it’s 18 and that should get me to about $85,000.
Guest: Awesome. And then yeah, with my oldest Katie on there, just that 1500 note in Colorado, there’s that matching program. If you put 1,000 in, you get a $1,000 match. Um at least for her. I’m not sure if that will also be applying to my my second um in there. But obviously, take the free money, um in there in that match. That’s a great, great benefit.
Guest: Yeah, Scott. um for that one were you over the limit? Cause I, I believe that there was a household income limit on that. Or maybe I was, I’m wrong.
Guest: I qualified at the time. So and they haven’t disqualified me at this point. I have not been asked for an item there, but I would absolutely if I did not qualify, give back that money. I did not, I I I have I really haven’t done my done a tremendous amount of deep diving into that that one. So and I was surprised that I was getting the $1,000 gift. So I’ll I’ll check that one out. Um if anybody from Colorado knows how to how to how to declare that I am, I am not attempting to take a benefit that I am not eligible for please uh, on there. Um so,
Guest: Yeah, and Scott I think they have, they’ve lowered it sadly in the past few years. So it was $1000 cause it was $1000 when my kid was born as well and I didn’t even know about it cause I’d put the money into Fidelity and had no idea about this college invest thing. Um so I was looking into it as well and to tell you the truth I think I just disqualified myself from it and that’s a terrible way of doing it because I didn’t even apply and I know that they have leftover funds for these types of things. So I should just double check again with my kid. Um I don’t even know if there’s an income limit. I just, I had made that assumption. Um uh and I think now it’s like 500 instead of the 1,000. Um maybe 750 so womp womp.
Host: It’s still free money.
Guest: Heck yeah.
Host: And that’s only for littles cause I just looked it up and it said born January 1st, 2020 or after. Um I did look up uh in Colorado how long does the money have to be in the 529 plan before it can be used for expenses and it said there is no limit. There’s no, uh, time limit on how long it must be in the account before you can use it. So one thing I can do is start funding my going to college in August daughter because at least I’m going to be reducing my taxable income on money that I’m already going to spend. Do I wish I would have learned this 18 years ago? Sure. But it’s better to learn it now than pay, you know, how many years of college for her after-tax money when I could be using it before tax. So that came that’s something that came out of this episode that I am really really excited about. And I want to reach out to our audience and say do you know of a 529 expert or are you a 529 expert? I think that we should uh have some questions. If we misspoke or, you know, misunderstood a point that we shared here, please correct us. mindy@biggerpockets.com, scott@biggerpockets.com, amberly@biggerpockets.com. Uh we would love to know what we got wrong so that we could correct it for the future.
Guest: Yeah and I think, I think the biggest criticisms of this episode or the big advice or the input from our community is going to revolve around the 529 plan as an estate planning tool and multigenerational planning tool, which we did not get into. And I’m frankly not thinking through it right now. I’m not, I am, I am not worried about 60 years in the future using this account. That’s not, that’s not the primary purpose of why I would be planning to use it. I am using it as a how do I plan for my two children’s college education? As life progresses, I may update my plans and begin using the tool for different purposes, but I’m just not, I’m not there yet, um personally with this. And I think many people who are thinking about the 529 are are really thinking about it more in the context of the the college savings program piece for the direct descendants or direct generation following them.
Guest: I agree with that Scott because it’s also planning so far in the future with something that is a little bit changing right now. We’ve got a lot of online education. We have different ways of that we are learning and I’m not 100% sure that our kids will be using university the same way we did. Um or even maybe going to university. So that’s my I didn’t want to overfund mine.
Guest: Yeah and another one here and and and I know this is this is going to rattle some folks but I’ll throw it out here anyways is there’s a substantial rise in the last few years of homeschooling. This is not something that me and my wife are intending to do um at any point maybe a year at some point um in there would be the maximum that would that would apply there. But with that rise I wonder if some of these funds will be eligible for many activities related to those items there. So that’s something to consider if you’re in this camp of I’m either going to homeschool for a year or two or for a majority of it. I believe that would be a um I I wonder if there would be more research to do to see if the 529 funds could apply to portions of the activities you might enroll your kids in like if there’s a science curriculum that they ought to do for eight weeks or whatever. That maybe there’s something that would apply there. So something to think about for those folks.
Guest: That’s a really good point because we have two boys um we have learned a lot about you know red shirting and homeschooling and world schooling and we are definitely going towards that in certain portions of their life if it makes sense for them. Uh because I happen to have one of those children who is extremely physical and like is constantly like helping us with our renovations and you know cleaning up all the time and so I don’t think he’s going to be sitting down in those uh school chairs for very long and so we’re trying to see what our options are and it’s a great idea to see if we can use funds for um a 529 for, you know, the the science class that happens in Boulder that uh a few of our friends go to. So thanks.
Guest: You wonder, you wonder how the in my, in my world, you you just I open question about how much harm is done or benefit gained by missing eighth grade for example, seventh and eighth grade. So you know that’s that’s the, that’s the one part of my, in my world. The rest, the rest there’s a lot of advantages to the other grades I think but those two were those two are rough for a lot of kids. So,
Host: Yeah, seventh grade I could have skipped.
Guest: Same.
Host: I am so glad the internet didn’t exist when I was in seventh grade.
Guest: The internet it exists would have made seventh grade bearable.
Guest: Well Amberly thank you for sharing so much knowledge here. This is a great discussion. I love the the different viewpoints that we all bring to this. I I bet you that the Money community will will some some will think about it more like me some will think about more like you Amberly and some will think more like you Mindy and so I think that this is this is helpful but this is this this idea this concept of of college education is going to be something that everybody who’s grappling with FIRE is going to have is going to grapple with and there’s a whole bunch of emotions and values that go into that decision and then how the tools apply in the context of those values and the the goals um can vary wildly.
Host: Definitely dive into your state specific 529 plan and get all the information that you can. I yeah, don’t be like me. Now Amberly, can I contribute to your kids 529 plan?
Guest: Yes, that’s what we do actually. So uh instead of a gifts at baby showers we actually put a link to the 529 for the future child and actually asked people to contribute. For our wedding, we did the same thing. We got married after our first kid um naughty naughty and we ended up asking people instead of giving us any gifts because we don’t need anything we’re in our 30s we’re established. Um we actually asked them to contribute to our children’s 529s. Um so you just get a link from your provider and then that link can go out and then it will send information when someone has contributed to that account so you can send a thank you.
Host: Okay, so for all of you who have kids who are like oh I don’t need another gift for Christmas or their birthday or whatever, set up your 529 plan and give that out to all your friends and family. Hey if you’re thinking about giving our child a gift, this is a great place to do it.
Guest: That child will really appreciate elementary differential equations in 12 years.
Guest: 100%.
Host: All right, that wraps up this episode of the BiggerPockets Money podcast. She is Amberly Grant. He is Scott Trench. I am Mindy Jensen saying gotta hop sugar pop.
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