Planning For College With Wealthramp Network Advisor Paul Sydlansky

Pam Krueger:

All right. Hi everybody. I’m Pam Krueger, founder of Wealthramp, and I wanted to interview Paul Sydlansky because he is an expert on something that so many of you care about, which is funding your child or your grandchild, or your loved one’s education. So Paul, thanks for being able to do this today.

Paul Sydlansky:

No, no problem, Pam. I’m looking forward to it.

Pam Krueger:

So let’s just kind of start with the assumption that people don’t know much about what the choices are and what the options are. So for young families with young children, let’s say that they’re both working and they’re both stocking away money in their 401Ks, and they also want to make sure that they’re putting away money toward that child’s education. What do you find is the go-to mechanism for saving investing, getting some tax breaks for saving for college?

Paul Sydlansky:

Yeah, so right now, Pam, that’s still the 529 account and the 529 account has a lot of different benefits. The biggest one for parents is going to be the tax free growth. So if you are a young couple and say, fund a 529 account for your child of $10,000 and then 18 years later that grows to a hundred thousand dollars, that $90,000 of growth is going to be tax free as long as you use it for qualified college expenses.

Pam Krueger:

Right. And there are other options out there, but I really do wanna focus right in on the Rolls-Royce, the kind of go-to. Paul who is the 529 ideally suited for? And when I ask the, the who question, I don’t mean at what age the child is as much as I mean the household, the economics of the household, because I tend to think of a 529 savings plan as being really most of the benefits accruing to people who are at least middle income or above.

Paul Sydlansky:

Yeah, absolutely. I think it’s something, and this goes to when we think about goals for parents, and parents always are trying to figure out, do I save for my own retirement? Do I save for my child’s college education? And for us it’s really always parents who have to put their mask on first. And so that means save for your own retirement first. If parents aren’t able to do that, if you’re not maxing out your 401K or coming close or putting big dollars to fund your own retirement, I think a 529 doesn’t really make sense. It should be something where your own core plan is taken care of. And this is kind of the next level.

Pam Krueger:

Okay. Because I read a statistic, I think it’s something like 70% of the benefits from using and funding a 529 go to families with more than $200,000 in household income. I’m not saying that’s good or bad, I’m just saying it is what it is.

Paul Sydlansky:

Yeah, no, that makes sense. Definitely for a family that’s going to have the means and, you know, that kind of takes us into the aid that a family might look to receive for college. And so we can talk about that, the needs-based aid versus the merit-based aid. And that’s another thing that families need to think about when they’re thinking about college.

Pam Krueger:

Yeah. Before we go to the higher income households, let’s stick for a second on the kind of family that is going to be needs-based. They do want to and expect that they’ll have a combination of the child’s earnings, parents contributions from the 529, but also, something from financial aid. Let’s just take that middle income family who maybe has more than one child and it’s a real challenge. How do they use the 529 best to their advantage?

Paul Sydlansky:

Sure. So I think you really need to take a hard look at some of the income and asset limits when your parents are thinking about school. And, for us, most of our clients are middle income and they’re going to really wage out some of these income limits, so they’re not going to be eligible for some of these need-based aid. And so I think being realistic right about that from the start, you know, there are things to do, like you want to minimize the amount of assets in your child’s name. Parents’ retirement accounts aren’t included in the equation, but there’s usually going to be income level limits as well as asset level limits. And so for most of our clients, the families we’re dealing with, they’re not even thinking about getting need-based aid.

Pam Krueger:

Okay. So now let’s get into the mechanics of the 529. And also then we’re going to hit on what’s new because since Secure 2.0, there have been some benefits that have been put on steroids to some extent. So let’s just talk about the basic mechanics. Walk me through what most people, most of your clients who you recommend should use a 529 to fund their kids’ college. How old are they? What are they doing and how are they doing it?

Paul Sydlansky:

Sure. So for us, we love the 529 and it’s getting started as early as possible because your biggest advantage as an investor is time. And when you think about your child’s education, the same holds true. The child is a newborn, you’re going to have at least 18 years, maybe 19 years before that child goes off to school. So for us, we really like to try to put more dollars in right up front, but we’re also big fans of being able to put larger lump sums in addition. Now if you can’t do that, the next best approach is going to be your dollar cost averaging. And that might be a monthly amount that you’re going to contribute to, similar to how you would do for a 401K or any other type of goal you’re saving for. But really, first and foremost, if we had our choice, it’s being able to put those funds in right away, get the full advantage of those, that compound growth that we talked about.

Pam Krueger:

Yeah. Well I’m a big fan of dollar cost averaging. Yes. I mean, to me it’s like sometimes the most simple strategies are the best strategies, but not all 529 plans are created equal. So let’s talk about that. For the last 20 years we have always heard about Utah as being a leader in 529 plans. So give me an idea of how, when you look out at, at what the options are, how flexible, what are you looking at to judge or grade these different 529 plans? What makes Utah a winner? And a continuous winner at that?

Paul Sydlansky:

So, I’m a little biased being from New York. I love New York’s new 529 plan. It’s fantastic. What I look for, first and foremost, is going to be cost. And I wanna see the platform that’s leveraging low cost ETFs and something that’s going to make it really simple for clients to use because this is money that you wanna put away and forget about it. And a lot of the time you’ll be given individual options, which is nice, but some have target date funds, which can make it easy for parents. So cost is definitely one. The other thing to think about is you want to see if your state provides tax deductions for you. So we mentioned some programs within 529 plans. The main advantage for parents is the tax free growth, but when you put money in, what happens in a lot of states is that you can get tax deductions, but you need to be in that state sponsored plan to be able to do that. So that’s important. One other thing I wanted to add that I’ve seen a bunch is you want to make sure that you’re going into the state sponsored 529 plan. Unfortunately, there’s a lot of banks and credit unions and brokerages that sell their own 529s, but these are often laden with really, really high fees.

Pam Krueger:

Yeah. Paul, let’s pause there because you know, when we talk about internally when we speak jargon, like oh, high fees, high fees, I get the question like, on a daily basis, what do you mean by high fees? Let’s give an example. When it comes to 529s that you feel have reasonable / justifiable fees versus others that are high or have layers of fees. What’s the difference?

Paul Sydlansky:

Yeah. So let me give you an example because I can speak to the New York plan. So New York has different balance portfolios that you can pick that are mainly Vanguard funds. So you’re looking anywhere from maybe 0.10 to 0.2%. I also saw, unfortunately, a client who tried to do the right thing and went into their local bank, opened up a 529, but using the bank’s platform. Now this was really egregious, but they were charging an upfront fee of 5% every time the client put the money in. Yeah, I couldn’t believe it, but 5%. So that’s, that’s really high and that’s kind of crazy. But when I think of high, probably in the 1% is going to be too high for this type of plan.

Pam Krueger:

I was going to say, I figured you might say a point and a half, you know, which, think about that guys, that’s return year over year, over year, your return is eroded by that much. I mean, recapturing that fee compounded over time is thousands of dollars, let alone 5% beware. I’ll just say it if you don’t want to say it, I’ll say it. Beware of banks, beware of brokerage firms offering the 529 plans. Just go straight to the state sponsored.

Paul Sydlansky:

Yeah, I couldn’t agree more. That was the worst one I’ve ever seen. And like I said, luckily we got the client out of that pretty quickly and into the New York state sponsored plan.

Pam Krueger:

Well, wow. But I want to circle back for a second to your own state’s plan and the benefits and so forth. Again, not every state is created equal. Now you love New York and other people love Utah. Is there like a top five or do you publish any kind of a list of 529s that you have vetted that you feel personally are really worth considering even if you don’t live in that state?

Paul Sydlansky:

Yeah, so I do actually, and again, I’m a little biased here because I really like New York. We do have some clients who use New York, even if they’re not living in the state, especially if your state doesn’t provide you any type of deduction on your state tax level returns. So, you know, that can be important. And like I said, the fees are number one, but also I look at usability. They have to have a really good website. Something simple, something that’s really easy to hook up to your checking account. We just saw a plan in Maine that wasn’t that bad. I think they’re coming around a little bit, I would say on some of the state plans that we’ve seen. You can get rankings on those pretty easily.

Pam Krueger:

Okay, good. Because if you could either publish or if you’ve even felt comfortable just naming the top three that you’ve seen that you feel like are really low cost, you know, with great flexibility, and offer benefits that you like.

Paul Sydlansky:

Got it. Yeah. If I had to pick the top three, it would probably be New York, Pennsylvania, and then Utah.

Pam Krueger:

So Utah’s still in there?

Paul Sydlansky:

Yeah.

Pam Krueger:

Great, well that’s helpful to know. Now let’s get into some of the tax benefits. Let’s get into some of the flexibility issues. Just really quickly, we won’t make this too long, but I do want to hit some of the high points of why a 529. Let’s talk first of all about withdrawals and let’s talk about the flexibility and restrictions.

Paul Sydlansky:

Absolutely. So a couple things to note, and you also mentioned some of the changes I’ll touch on in the secure Act 2.0. But, when it comes to withdrawals, you have flexibility when you take the funds out, right? So say for example, you have $100,000 saved for college. You could take out $50,000 all at once to pay for a full semester, or you could take out $10,000 and spread it out over the course of the child’s college education. So you have a lot of flexibility there, and that’s important. One of the things I just wanted to touch on that kind of gets some of our parents nervous is what happens if I have money left over in my 529? So everyone has a fear of overfunding it. And in the past, really all you could do was either move that account to another sibling or you could change the beneficiary and move it down one generation to maybe a grandchild.

And that was a pretty exciting option for some folks, but others who, you know, didn’t want to fund another future generation, that wasn’t top of mind, that wasn’t too appealing. And so really the only other option was if you withdrew the money and didn’t use it for college costs or qualified school costs, you would have to pay taxes on the growth. So if we go back to that example, if you put $10,000 in and you had $100,000, and none of it went towards school, well, you’d owe the government the capital gains on that $90,000 and in addition you would owe a 10% penalty on that $90,000. And so that really turned a lot of people off. But with the Secure Act 2.0 that recently passed, one new piece of legislation that will be in effect in 2024 will allow that account to convert into a Roth IRA up to $35,000.

Pam Krueger:

So cool. I was surprised that this legislation had bipartisan support from everybody. It’s really a huge benefit.

Paul Sydlansky:

It’s awesome. When we talk to our parents and keeping even is a big thing a lot of times, right? Especially if you have multiple children, yeah? If you have one child who maybe needs a majority of the 529 money and another child that doesn’t, parents try to think about, well how do I maybe make it even because the other child didn’t use the money, right? Could be due to their school, maybe they got scholarships, maybe they went to a lower cost school. How do we keep it even, and this is a way to say, okay, if there are some leftover funds, you can actually give them a head start, and gift them up to a $35,000 Roth IRA when they’re in their twenties, which is an amazing start to a career and a retirement account.

Pam Krueger:

It’s brilliant. Yeah. Get’em going with it. It really answers a lot of questions for a lot of people. Especially, in regard to that concern about what if I put too much in and then where does it go? By the way, you know, anybody can own a 529 plan and you can select any beneficiary except actually including yourself, which is kind of interesting. There are no limits to the number of 529 plans that you can own even for the same beneficiary. Is that true?

Paul Sydlansky:

Correct. Yeah. So if mom and dad want to open a 529 and grandma and grandpa want to open up a 529, that child can have two 529 plans. Then you brought up another good point. When we’re dealing with families with multiple children, we always say each child should have their own 529.

Pam Krueger:

Oh, speaking of grandparents, tell me about the grandparent loophole.

Paul Sydlansky:

The grandparent loophole. You mean passing on to a next generation. Yeah, so this is really kind of a cool legacy building benefit to fund future generations to come. And so the simplest way I think about it is, let’s say, a grandparent wants to fund a grandchild and they open up a 529 account for that grandchild. Well, they can put a large amount of money in and let’s say that that grandchild never uses it or maybe they have kids. What you can do is you can take a really aggressive approach with those funds and eventually change the beneficial ownership from that grandchild to maybe that great-grandchild and let the money grow for 40 or 50 years. So when you think about the advantages of tax-free growth, being able to do that and pass it down to another generation, it’s an incredible wealth building opportunity.

Pam Krueger:

Yeah. Okay. And are there any other things that you feel like people don’t know or let’s say the, what are some of the biggest misconceptions that you come across that parents misunderstand about the 529 plan?

Paul Sydlansky:

So it’s probably the penalty and the way we think about the penalty because people are always like, well, what if I, I don’t wanna pay a penalty? But another way to think about it is that remember that penalty is only on the growth and that penalty is only 10%. And I know I say only, but another way to think about it is it basically brings those earnings up to an ordinary tax rate. And so if you think that the funds that you would’ve been paying taxes on would’ve been long-term capital gains, so 15%, maybe 20%, and then if you had another 10%, well that basically puts you into an ordinary income rate for those parents. So it’s kind of a different way to think about it. I guess it’s not the worst thing in the world if you have money left over, especially because maybe it’s a smaller amount of money. And I wouldn’t want people to be afraid to not put the 529 money in there because of that reason, because it’s such a great tool.

Pam Krueger:

Okay. So Paul, with all the changes that have happened from Secure 2.0 that have now sort of put this on steroids, I kind of get it and you’re not the only one who feels, people just need to understand that this is probably the best funding mechanism for college and tuition expenses. But I want to ask you one more question just to sort of compare for me, um, using a Roth IRA instead of a 529, are there any instances where you see the Roth IRA winning out?

Paul Sydlansky:

Are we talking about it for the child or for the parent?

Pam Krueger:

For the child.

Paul Sydlansky:

Uh, it’s hard. I still think the 529 is the best plan. I know obviously, the Roth has its advantages and it’s tax free growth and all that, but I still think for a child for school, you can’t beat the 529.

Pam Krueger:

And maybe the only time a Roth could really beat out the benefits of the 5 29 plan might be, let’s get back to that family that is going to need no financial aid because the Roth IRA doesn’t get counted against the financial aid.

Paul Sydlansky:

Correct. So because it’s a retirement account and not a college asset, that’s going to be held against them negatively. The Roth IRA also has those contribution limits too. I don’t really like the Roth as much too, just because you can’t put the big dollars in that maybe you could with a 529, but if you’re talking about a lower income family, maybe that’s not even an issue.

Pam Krueger:

Yep. So, I just want to be balanced on that. So for me, the bottom line is that the 529 outweighs the Roth IRA for all of its benefits, including the latest and there’s more benefits than we haven’t touched on or talked about. I mean, we could go on for an hour and get in the weeds on this, but you know, depending upon income situations and where you are with your family assets and so forth, the 529 is still the way to go. Is there anything else that you want us to know about what you do with parents to make this part of a holistic planning exercise?

Paul Sydlansky:

Uh, absolutely. You, you can’t make these decisions in a silo. And one of the first things we do when we talk to parents, we try to really understand where this is on their priority list. And we also try to make them understand that of course, a dollar can only go in one direction and it’s going to be hard for them to borrow money to live off of when they’re retired, whereas your college student could borrow money now for college. And so we’re big proponents of making sure that your own financial future is secured before you try to set up your child for a secure future. And, that’s hard sometimes for parents.

Pam Krueger:

Oh my God, it’s really, really hard.

Paul Sydlansky:

Really hard for them to say, no.

Pam Krueger:

Are you telling me that when I’m 75 there won’t be any financial aid for me to tap into for my retirement? Well, yeah. And you know what? You do not want to rely on your kids.

Paul Sydlansky:

Yeah. And to kind of bring it to that holistic picture, part of our process is to show the trade-offs because you know, everybody has limited income, everybody has limited assets and they can only go towards certain goals. So we show parents, hey, if you want to send your child to an $85,000 a year school, okay, but understand this is going to have a material impact on what you can do in your 401K and your other goals. And so look where you’re going to be. And we show them those trade-offs because nobody really understands that. Those are hard to do. And that’s why we have financial planning software and we can map out these scenarios ’cause that’s the information that parents need to make those decisions.

Pam Krueger:

Yeah. I love it. That’s great Paul, thanks a lot for opening up and explaining not only the 529 and confirming that it is still, you know, the premier way to go to save for college, but also to remind us that this is never done in a vacuum. That’s really important. It’s all part of the piece of, it’s one piece of your whole pie.

Paul Sydlansky:

Absolutely. Yes.

Pam Krueger:

I’m hungry. Um, but anyway, I appreciate it very, very much and we’ll look forward to talking to you again.

Paul Sydlansky:

Alright, thank you for the opportunity, Pam. Nice talking to you.

Pam Krueger:

Bye for now.


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