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Helping Your Kid Pay for College? Check Out This Podcast.

By Alison Southwick and Robert Brokamp, CFP(R) – Oct 19, 2021 at 3:05PM

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And a look at stocks that provided great lessons.

In this episode of the Motley Fool Answers podcast, Motley Fool personal finance expert Robert Brokamp interviews Mark Kantrowitz, an expert on the topic of saving for college. And we answer your questions about options for rolling over your old 401(k).

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

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This video was recorded on Oct 12, 2021.

Alison Southwick: This is Motley Fool Answers. I'm Alison Southwick, joined as always, by Robert Brokamp, Personal Finance Expert here at The Motley Fool. Hi Bro.

Robert Brokamp: Hi, Alison.

Alison Southwick: You bombed into anything we're with your name this week.

Robert Brokamp: I just like the surprise, I don't know what to expect and that's what I love about it.

Alison Southwick: Surprised, there was no surprise. In this week's episode. We're going to talk about the stocks that taught us our biggest investing lessons. Bro is going to interviews college savings expert Mark Kantrowitz about financial aid in the Coverdell, and will also answer your question about rolling over your 401K. All that and more on this week's episode of Motley Fool Answers. [MUSIC] Well, it's homecoming season and what better time to ponder the mistakes of our youth, Bro?

Robert Brokamp: So many to think about.

Alison Southwick: So many. This week I'm enlisting the help with some fellow Fools to recount the stocks at them their biggest investing lessons. First up we have Chris Hill, you know him as the host of the Motley Fool Money and Market Foolery Podcast.

Chris Hill: The stock that taught me my greatest investing lesson is Ligand Pharmaceuticals, the ticker symbol is LGND. It was early 2003, and Ligand was featured in an annual write-up of stocks that The Motley Fool's investing team have put together. I didn't have any biopharmaceutical stocks in my portfolio. The guy who recommended it, he was smart, he knew the industry. I read his report three times and I bought a couple of 100 shares, and within just a few months the stock price doubled. Also during that time, I started losing sleep. I would wake up in the middle of the night and when I tried to get back to sleep, I found myself thinking about this company because I didn't really understand what they did. It was a real distraction. I was literally losing sleep over a stock that had gone up. That is crazy, so I sold it. I doubled my money, I paid happily. The short-term capital gains taxes just so I could be rid of it and in the nearly 20 year since then I have only bought shares of businesses that I understand. From time to time I talked about what I call the sleep factor. Ligand Pharmaceuticals is the stock that taught me that lesson. I still lose sleep now and then but never because of my portfolio.

Alison Southwick: Next step we turn to Emily Flippen and she's an analysts here at the Motley Fool and also a host of the Industry Focus Podcast.

Emily Flippen: The stock that taught me Mike greatest investing lesson was actually the last stock that I sold, which was Best Buy. I had been a shareholder of Best Buy for a number of years, but I was never really quite sure why I had bought it in the first place. I guess I heard about it, I was a customer, so I liked it. After holding the stock for a number of years, I looked at my brokerage account one day and I saw that its share prices increased something like over 200 percent. I thought to myself, this is probably the top right, so I sold it. I remember in pretty short form thereafter the stock dropped nearly 30 or 40 percent. I remember feeling like I had just made a really good decision. Although again, I really wasn't quite sure why. However, since I sold Best Buy's actually outperformed the market again over the long-term increasing another 100 percent, and almost reflecting on that and thinking, what can I learn from this experience. The lesson isn't to never sell, although I certainly would have been better off if I hadn't. The lesson was always have a thesis for why you buy a business in the first place. I had no thesis for Best Buy before I bought it. I wasn't sure what I was looking for when I was determining if the business was succeeding or failing. If I had, I would've been able to tell that Best Buy wasn't overvalued, but whether that it's business was just doing exactly what it had set out to do and it was doing it really well.

Alison Southwick: Finally, we have Asit Sharma, he's an analysts at The Motley Fool, and he is going to share the stock that taught him one of his biggest investing lessons.

Asit Sharma: Michael Jordan understood better than most, that the human brain is wired to create its own narrative from sensory inputs at any given moment. Even if that narrative doesn't correspond to the reality that's on the ground. There's some great videos on YouTube of Jordan with his ball fix in which he stands stocks bill in many cases, and the world's greatest athletes are running, cleared by him or stumbling backwards or even standing toe-to-toe, bewildered while he's flipping the ball nonchalantly toward the basket. I just find that so interesting, and it reminds me of my own bewilderment with Microsoft, which has happened to me time again over the years. This is the stock that's taught me my greatest investing lesson. That lesson is when you find a company with superior products and a dominant market position helmed by a visionary CEO and leadership team with huge balance sheet resources. That company can grow for a lot longer and at a faster rate than your brain thinks it's reasonable or plausible or possible. I've watched Microsoft, especially since Satya Nadella took over as CEO turn into a juggernaut. I've profited from the shares, but then sold them thinking this can't go on. How much bigger can Microsoft get? How many years can it keep growing at this rate, the answer is many more than I can conceive of. The moral of the story is don't be like me. When you find that company that exhibits these characteristics, don't get faked out.

Alison Southwick: Bro now it's your turn. Do you have a stock that taught you a great investing lesson?

Robert Brokamp: I do. It didn't just teach me a lesson. It actually is tied to one of the great stories in Motley Fool history, and that is back in 1999, Tom and David were actually on the view giving some stock advice to Lisa Ling who was on the show at the time. This is I think June of 1999, and she said I wanted to get better with my money, and Tom said, "Okay. What's the service or product do you use?" She said Starbucks go there every day. They recommended Starbucks. They came back on the show and I think it was like 6-8 weeks later and Starbucks was down, and Lisa was not happy. They said the overall market is down, that's probably where it's down. What they didn't talk about it was [laughs] some funny things going on with Starbucks. Starbucks at the time was speaking about becoming a lifestyle brand. They were going to start selling frying pans, towel, sofas, and [inaudible 00:06:47] . Howard Schultz the CEO of the company at the time, said that they would create a premier lifestyle portal on the internet, and saying with the Starbucks website would offer a "Feeling of romance or relaxation." The market didn't like that, [laughs] so the stock went down.

Alison Southwick: A very romantic frying pan. [laughs].

Robert Brokamp: Yes, exactly. Tom said to Lisa Ling, listen, it's just a few months. We're investors for the long term, see where it is in five-years. If it's not up in five-years you can kill us. She didn't have them back on the show. But five-years later the stock was up and I don't know if she held onto her stock, but if she did she would've earned more than 2,000 percent since 1999 compared to over 200 percent for the S&P 500. Now, I didn't get into Starbucks as early as Lisa Ling. I got in when the market collapsed in 2008, I paid about twice of what she did but I still did very well. The lessons being I do think the whole buy what you know when it comes to investing can be a little overstated but it's a great place to start. If you start there, you start with already some knowledge you already have about the company, about the service, why it's appealing, and it might lead you to make a good investment. The lesson there, of course, is that Starbucks has made mistakes, becoming a lifestyle brand and lifestyle portal on the internet didn't work out so well, but that's OK. No company is going to be perfect. In fact, I liked that they were trying something new and different. But as long as it's a solid company, you hold on for a long term you're going to do OK.

Alison Southwick: Well, for me I have told my Rackspace story before, but usually I have told it in the context of the Cloud it was the time around 2011 when all anyone could talk about was the Cloud and how we're supposed to invest in the Cloud and therefore Rackspace. I was one of those people who heard people say the Cloud over and over again. I was like, I'm going to invest Rackspace. You could argue that mine is a story of investing whatever you etc, etc. But I think there's probably a better lesson that I learned. That's because I was lucky enough to be working at The Motley Fool at the time. One of the co-founders, I think it was Pat Condon, he came to our office and was actually interviewed in front of the whole company. That also was one of the perks of working at The Motley Fool, is you'd have people come in all the time to talk to you about their company or maybe it's the Aflac Duck for whatever reason or the Tae Bo guy came and talked to us. At one point we had the founder of Five Guys come, remember that. Man, he was really upset with a diversified outside of French fries and burgers, oh, he was dug in.

Robert Brokamp: Yes, he was not very happy with the time it took to make shakes, but he had to give in an offer shakes. I remember him also saying that he had a lot of fun and college, but generally a college degree isn't worth very much, so that was an interesting takeaway.

Alison Southwick: Yeah. Many people coming in like that all the time. In this case, its one of the co-founders of Rackspace, Pat Condon. I thought, well I own Rackspace as should go hear what this guy has to say. Again, my knowledge of the Cloud was just people yelling the Cloud over and over again near me. As he was talking, you could tell that he was just a man who had perhaps seen enough and was not sure what direction to go because someone asked him, what you're doing, how you make your money is something that Amazon gives away for free. You could tell that he was like, "Yeah, we got to figure that out." But he said in such a way that told me [laughs] that he just did not know how they were going to figure it out. I remember at the time thinking like, wow, maybe I shouldn't own Rackspace. But instead of listening to my gut, I held onto it and eventually it did get bought out by another company. But my takeaway from that one is the leadership really truly excited to talk about whit is that they're doing at the company. Or can you tell that they are just like oh man, I don't know the Cloud, the Cloud man is killing us. That's enough from us on the show I want to here from our listeners. Do you have a stock that taught you a great investing story? Send it our way to [email protected] and maybe we'll share it on the show.

Robert Brokamp: Motley Fool readers and listeners tend to like investing in individual stocks and many who are parents or grandparents are disappointed, when they learn that the investment choices within 529 College Savings Plans are pretty much limited to mutual funds. But don't despair Fools, stocks can be bought within the Coverdell Education Savings Account. Here to talk about the benefits and drawbacks of these accounts, as well as the financial aid process. As Mark Kantrowitz, a college savings expert, and the author of several books, including the best seller, How To Appeal For More College Financial Aid. Since we're talking about college, I'll point out that Mark has a couple of bachelor's degrees from MIT and a master's degree from Carnegie Mellon so he's a pretty sharp fellow. Mark, welcome to Motley Fool Answers.

Mark Kantrowitz: Thank you for having me.

Robert Brokamp: Let's start with the Coverdell by asking you to give us the basics.

Mark Kantrowitz: The Coverdell Education Savings Account, it used to be known as the education IRA, includes a lot more flexible investment options and 529 plans. You can invest in individual stocks and bonds. There is however, an annual contribution limit of $2,000 from all sources whereas the 529 plan is effectively unlimited, though there is the annual gift tax exclusion as potentially limiting contributions. It also was originally focused on K-12 as opposed to college so it has a broader set of qualified elementary and secondary school expenses such as tuition, tutoring, uniforms, whereas the 529 plans only recently added tuition, but it's capped at $10,000 per year. Both Coverdell Education Savings Accounts and 529 plans have the same set of qualified higher education expenses, though 529 plans also allow you to use the 529 plan to repay up to $10,000 as student loan debt, something that the Coverdell Education Savings Account does not have. There are age limits in the Coverdell. The contributions must end when the beneficiary reaches age 18, and distributions must occur before the beneficiary reaches age 30. Unless the beneficiaries of special needs beneficiary and you can rollover money from a Coverdell Education Savings Account to a 529 plan account, but not vice versa.

Robert Brokamp: When you look at where college savings as these days, according to at least education, of all the money saved for college, there's about 30 percent in 529 college savings plans, about 8 percent in 529 prepaid plans, only 2 percent in the Coverdell. I have some thoughts on why that is, but what do you think are the reasons? Why is the Coverdell not really caught on the way 529s have?

Mark Kantrowitz: I think the contribution limits are a big part and if you were to contribute $2,000 from birth through age 17, that's a maximum of $34,000 of contributions. People perceive that as not being enough, even though the average total amount saved for college and works out to be a little bit less than that and people should be saving more, but they don't save enough.

Robert Brokamp: I would say another reason probably is that there are the income limits on the Coverdell. It begins to phase out and modified adjusted gross income of 95,000. If you're single, up to 110,000, and then 190,000 if you're married but jointly phasing are completely at 220,000. However, there is a way around that, is there? I mean, the people who earn that much don't have to be the people who contribute to the accounts.

Mark Kantrowitz: No, they can give the money to their child and have the child contribute the money to the account. But all contributors have to be under that phase-out. If they want to give money to the account, otherwise they have to find a proxy.

Robert Brokamp: Let's say you earn above that. You give the money to the kid, the kid puts the money in the account. Now, when it comes to financial aid, the general rule of thumb is anything that is owned by the parent is not as harmful as anything that's owned by the child. Is that the same case here with the Coverdell, or does the Coverdell still get that favorable treatment even though it was the kid who put the money in the account?

Mark Kantrowitz: The Coverdell Education Savings Account, a Prepaid tuition plan account, and a 529 plan account have the same impact on financial aid, which is, if the account is owned by the parent, it's reported as a parent asset, if the account is a custodial account that's owned by the child, if the child is both the beneficiary and the account owner, it's still treated as a parent asset if the child is a dependent student. In the case of a Coverdell it's going to be reported as a parent asset on the free application for Federal Student Aid or FAFSA form and not as a student asset. That has a big impact in the student assets, like in our Ardmore account, are going to reduce aid eligibility by a fifth of the asset value 20 percent. Whereas if it's in the parents theme, it's on a bracketed scale with a top bracket of 5.6 lower percent.

Robert Brokamp: It's generally definitely better to have money either owned by the parents or in one of these 529 or Coverdell savings accounts.

Mark Kantrowitz: Yeah, these specialized college savings account are treated as a parent asset if it's a dependent student.

Robert Brokamp: I'll also point out that from a practical matter, there's just not that many people who offer the Coverdell anymore. I mean, I think these days if you're looking for a discount broker where you can buy stocks, it's pretty much Schwab, E*Trade, TD Ameritrade, there's some mutual funds that let you do it. You just have to pay attention to the costs. Fidelity doesn't offer a more Vanguard got out of the business. Do you expect that to be a problem? Do you think that in general these people are going to get out of the business, and not offer the Coverdell anymore.

Mark Kantrowitz: I think that there will still be a few companies providing them, but for the most part, there just isn't enough of a market for it to be worthwhile for these companies to pursue it. Also the long-term trend is to phase out the Coverdell, and replace it with the 529 plan, and the intention was to completely eliminate it and take the best benefits of the Coverdell Education Savings Account and roll them into the 529 plan. They didn't do that, that's why we now have the ability to do $10,000 situation in the 529 plan, whereas the Coverdell was unlimited. They had to put a cap, and they didn't add the other qualified expenses. But eventually they will, and then existing investors in Coverdell will be grandfathered in. But in many ways, the 529 plan is a superior way of saving for college and now also for K-12.

Robert Brokamp: I will just make one final plan, this and we'll move on. That is this, it doesn't have to be an either or situation. I mean, you can't contribute to the Coverdell up to 2,000, and then do the 529 if you have additional savings, correct?

Mark Kantrowitz: Correct.

Robert Brokamp: Excellent. Let's move on from the Coverdell to financial aid. Parents can now start filling out the faster the free application for federal student aid as of October 1st. What are some strategies for getting the most aid?

Mark Kantrowitz: So income on the FAFSA is based on two-year-old information, often called the prior prior year. So for the 2022, 23 FAFSA, which families just started filing is based on 2020 income, and the assets are as of the date, the fastest file. So this suggests a few ways to try to improve your aid eligibility. Joan, artificially increase your income during that prior, prior year. If you're going to realize capital gains, offset them with capital losses. In fact, you can go reducing having up to negative $3,000 so that if your losses exceed your capital gains to reduce your adjusted gross income and thereby increase your eligibility by about $1,000 if you have $3,000 of losses. You can avoid taking distributions from retirement plan. Contributions to retirement plans do get added back in as on tax income, but the assets in that retirement plan are not reported on the FAFSA. You can also use your assets to pay down debt, you don't really get any credit for having debt on the FAFSA, but money in your bank is going to hurt you. So you can use that money in the bank to pay down your mortgage, payoff auto loans pay off your credit cards, and not only is that a good financial planning sensing, you avoid paying a higher rate of interest, but you're also going to improve your eligibility from a Federal Student Aid perspective.

Robert Brokamp: One kind of real [inaudible 00:20:29] I've come across is that often aid is distributed on a first-come, first-served basis. You should submit the FAFSA as soon as possible. Is that generally true?

Mark Kantrowitz: That's correct. There are several different types of aid that are awarded in a limited fashion. So there are 15 states that award their financial aid or grants on a first-come, first-served basis until the money runs out. So people who file the fastest sooner get more grants on average than people file at labor. There are certain types of federal student aid, like federal work study funds and federal supplemental educational opportunity grants that are awarded a fixed allocation to each college, and when that money is fully awarded, there's no more money available and then finally, many colleges have preferred financial aid deadlines and regular financial aid deadlines and obviously there's more money available the sooner you apply.

Robert Brokamp: As suggested by the title one of your books, an aid package from college may not be their final offer, according to our ports and Sallie Mae, 71 percent of families who received a financial aid offer from a college and appeal for more aid were successful. What are some strategies for trying to get more?

Mark Kantrowitz: Everyone whose financial circumstances are effected in any kind of slightly unusual way, should file an appeal and that can include changes from that prior, prior year to the president. Like 2020 was in the middle of the pandemic, maybe you lost your job and you still don't have a job. Pay cuts and job loss are actually the most common basis for an appeal and the most likely to be approved. But also anything that differentiates your family's financial circumstances from the typical family and that could be maybe you have siblings from your paying private K-12 tuition or maybe you have high unreimbursed medical expenses or you have high depending care costs for a special needs child or an elderly parent. Anything that's at all a little bit unusual, can be the basis for an appeal and the process is relatively straightforward. You contact the college financial aid office to ask about their process and usually they'll tell you to write a letter summarizing the special circumstances. They might have a form that you download from their website that they want you to complete and then you include copies of documentation of these special circumstances, including what the financial impact was on your family, like copy of your job layoff notice or copy of the letter showing recent receipt of unemployment benefits. The college then decides whether or not this special circumstance merits and adjustments and then they implement it by making changes to the data elements on the FAFSA. Like your income slower, they substitute the new income for the old income, and they also make an adjustment to the taxes or they choose any 12-month period, including an estimate of your income during the upcoming award year and they use that with the financial aid formula, which generates a new expected family contribution figure, which then generates a new financial needs figure, which then generates a new financial aid package. It's very formulaic other than deciding whether or not your special circumstances, justify an adjustment to the data elements on the FAFSA.

Robert Brokamp: The final question, I'm just curious, is there anything else about saving for or paying for college that you think more parents and grandparents should know about?

Mark Kantrowitz: The sooner you start saving, the better off you're going to be and if you start saving from birth, about a third of your college savings goal will come from the earnings. Whereas if you wait until the child interest high school, it's less than 10 percent and you'd need to save six times as much to reach the same college savings goal and so it's never too late to start saving because every dollar you save is the dollar which you are going to have to borrow. But you can even continue saving while the child's in college. There are 34 states in the District of Columbia that offer a state income tax rate based on your contributions to the states, five to nine plan and in most of these states, you can claim that state income tax reduction or tax credit even if you turnaround the next day and you take that distribution to pay for your college cost. That's a way of getting the equivalent of a discount on tuition.

Robert Brokamp: Again, our guests has been Mark Kantrowitz, the author of hundreds of articles about saving for college as well as several books including how to appeal for more college financial aid. Mark, thanks for joining us on Motley Fool Answers.

Mark Kantrowitz: Thank you for having me.

Alison Southwick: [MUSIC] It's time for answers answer and this week's question comes from Chris. I have almost a $100,000 in my 401(k), and although I got a very late start, my Roth IRA has $35,000, thanks to the excellent advice of The Motley Fool, that's nice. Specifically the Stock Advisor service. In August, I left the job that the 401(k) was built through and started a new job. I'm currently 54 years old and plan on working full-time for another ten years. I also drive retirement for my service in the U.S Air Force. My question is, do I need to move my existing 401(k) into the plan with my new employer or are there other options?

Robert Brokamp: Well, Chris, I'm very glad to hear that you're doing well with the recommendations from Stock Advisor. Excellent news. As for your question, when you leave your employer, you have really up to four options when it comes to your old 401(k) account. Number one, just cashing out. Of course, this is the worst choice because it means you'll pay taxes and the 10 percent penalty. If you're not 59 and a half or 55 in some cases but worst of all, you'll compromise your ability to retire despite all those bad consequences, approximately a third of jobs switchers, cash out their 401(k). Your second choice, leave it with the former employer if you're allowed. If you have more than $5,000 invested in your 401(k) as Chris does, then most employers were, kind of allows you to stay put and you may want to do this if you're old plan has excellent investment choices at rock-bottom prices. However, in some cases you may end up paying more because employers cover some costs that they might not cover for ex-employees. Also, once you're no longer an employee, you can't make any additional contributions or takeout any loans from the 401(k). Now, if you have less than $1,000 in your old 401(k), you may just get set a check and you have to roll that over to your new plan or an IRA within 60 days or it's considered a distribution and it may be taxed and penalized. If it's between a $1,000 and $5,000 and the company doesn't want you in the plant anymore, they must roll it over to an IRA. However, they're going to choose the IRA provider and how the money is invested, which is not ideal. So this brings us to choice number three. Transfer your old account to your new employer. 

Now you may have to wait a bit for this since some employers don't allow new employees to sign up for the 401(k) on day one. But once you're eligible, you can merge your 401(k), so to speak, into the new plan, assuming that the new plant allows it. But would you do this? Well, again, it might be because the plan is outstanding, low-cost investment choices and frankly, may just want to keep all your number of accounts to a minimum. You want to have all your work sponsored retirement money in one place. Another good thing to know is that you can generally transfer money out that you have rolled in at any time depending on the rules of the plan. So you can change your mind later. Now, we get to the fourth choice, transfer it to an IRA, since Chris says, he's investing along with our Stock Advisor service this means he likes to pick individual stocks. So transferring the money to an IRA with a discount broker maybe as best choice, since the majority of 401(k) do not allow you to invest in individual stocks and once the money is in the IRA, he really can invest in just about anything offered by the brokerage, stocks, bonds, CDs, ETFS, thousands of mutual funds. Really because of this flexibility, transferring an old 401(k) to an IRA is likely the best choice for most Motley Fool readers and listeners.

Okay, so those are the four choices. Now, I do want to leave you with a word of advice about moving the money, if at all possible, to a trustee to trustee transfer, also called a direct rollover. In other words, you want the money move directly from one institution to the other without you touching it. It's easier on you and reduces the chances of any mistakes. If a check that's sent to you, as I said earlier, you have to get that money into a 401(k) or an IRA as soon as possible. Also, depending on how your old 401(k) handle this, they may have withheld 20 percent of your account value, which then gets sent to the IRS and you have to make up that 20 percent when you move your money to a new account, you'll likely get it back when you file taxes. But if you don't make up that difference, the 20 percent is considered a distribution and once again, maybe tax and penalize. Generally start with the institution to which you're moving the money and give them a call. They likely have a whole department dedicated to accepting rollovers, which of course is a great source of new business for them and they should be able to walk you through the process. Not sure which discount broker to choose. Well, head on over to the Ascent at Motley Fool website that reviews brokers, so as banks lenders, credit cards, and other financial service providers.

Alison Southwick: That's the show. It's edited snarkily by Rick Engdahl. Our email is [email protected] [MUSIC] Please send us your stories about stock that taught you one of your biggest investing lessons. For Robert Brokamp, I'm Alison Southwick. Stay foolish, everybody

TD Ameritrade is an advertising partner of The Ascent, a Motley Fool company. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Robert Brokamp, CFP has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Microsoft and Starbucks. The Motley Fool recommends Aflac and recommends the following options: short October 2021 $120 calls on Starbucks. The Motley Fool has a disclosure policy.

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