At the Motley Fool Answers podcast, we can tell a lot about what's on our listeners' minds by looking into the mailbag, and no surprise, right now, the topic of interest is starting to be taxes. So for this episode, hosts Alison Southwick and Robert Brokamp recruit a special guest to help answer their queries: Megan Brinsfield, head of financial planning for Motley Fool Wealth Management. Taxes, though, are not the only subject of concern this month, but as a CFP and CPA, she's more than qualified to advise our listeners about retirement accounts, 529s, and more.
In this segment, she tries to help a couple hoping to set aside cash for 10 young relatives' educations. But some of their parents would be poor stewards of a 529 account, and some say they don't even want their kids to have one.
A full transcript follows the video.
This video was recorded on Jan. 30, 2018.
Alison Southwick: The next question comes from Tim. "My wife and I decided in 2016 to invest in our nieces' and nephews' future educations as opposed to giving toys as birthday and Christmas gifts."
Robert Brokamp: The kids loved it, I'm sure.
Southwick: Oh, they will love it!
Brokamp: They will.
Southwick: "We set aside $1,000 per child all under..." What great aunts and uncles they are.
Southwick: "We set aside $1,000 per child all under five, and are hoping that with compounding it will be worth quite a bit when they are college age. We would like to earmark the money for college or early career expenses if they don't go to college, and not just give the kids access to it for spending money at 18." Because we all know that's when we make our best money decisions.
"It's currently in a taxable account invested in a Schwab Lifecycle Fund. Of the 10 kids, we know four have 529 college savings accounts with their parents; two have parents that would not be the best to be in charge of the money; and the parents of the other four suggested savings bonds because a 529 counts against them, eventually, when it comes to financial aid. With the rates on savings bonds being so low, I cringe at this idea. Considering tax implications, is there a better place or way to hold the money than a taxable account?"
Brokamp: One thing I think is important to consider is just maintaining control over the money. You've got a lot of different people there. Some people, it sounds like, are better with money than others, so you definitely are smart to keep control of the account for as long as possible.
Now, a 529 account can do that, so if you open the 529 and name the nieces and nephews as the beneficiaries, you maintain control of the account. In my experience, the financial aid implications of having a 529 account, especially if you are not the parents, aren't that severe. When you fill out the FASFA, which is the government form you fill out to apply for financial aid, those assets won't be included on it. Distributions from the 529 will be included in the following years of FASFA, so some people, like when their grandparents were saving, just save all that money to the last year of college, because then they don't care about financial aid.
Investing in savings bonds for kids who are under five years old and have well over a decade for that money to grow is playing it pretty darn safe.
Southwick: Too darn safe, would you say? When some people hear "pretty darn safe," they think that's a good thing.
Brokamp: That's true. I mean, it always depends on your risk tolerance, and all that fun stuff. The good thing about a savings bond is you can be pretty sure about how much that money is going to be worth in the future, and some people like that security. Whereas if you invest in the stock market, even in a 529, you don't really know how much it's going to be worth 10 or 15 years down the road. I think a 529, in this situation, is perfectly reasonable.
The one thing I'll say, though, is if that money is not used for college, you will pay a 10% penalty on the growth as well as taxes on the growth; so, for the kids who don't go to college and they want to use it for career expenses, you'll have to pay those taxes.
Megan Brinsfield: I think the good news is that 529s can still be used for things like computer internet access if you are in school, so even for like a high school student.
Brinsfield: So, there's potential to maybe use it for qualified expenses, even if you're not going to college.
Southwick: But it's tough, though, because we're talking like 10 kids here? You've got to think two or three out of these 10 kids probably aren't going to go to college.
Brokamp: It's quite possible, and if you don't want to take the money out and pay the taxes and the penalties, it can be transferred to any of the other kids; but then the one kid that had the money is going to miss out...
Southwick: Womp, womp...
Brokamp: ... and you hopefully will try to make it up in some other way, unless they're in a situation where they don't need the money. They might have gotten a scholarship or something like that.
Brinsfield: Just for the record, I am totally the aunt that puts aside money for nephews. I know that the response is always like, "T-h-a-n-k-s, M-e-g. T-h-i-s i-s g-r-e-a-t."
Brokamp: And you chose 529s. You've opened those for your nephews?
Brinsfield: Yes. So, Tim, just be prepared to receive very lukewarm responses from all 10 of your nephews and nieces.
Southwick: But we still think you're doing the right thing.
Southwick: We're excited for them.