Announcer:
It’s time now on KROS for Financial Focus, brought to you by NelsonCorp Wealth Management. The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. Any indices mentioned are unmanaged and cannot be invested into directly. Registered representatives, securities offered through Cambridge Investment Research Incorporated, a broker-dealer member, FINRA SIPC, investment advisor representative, Cambridge Investment Research Advisors Incorporated, a registered investment advisor. Cambridge and NelsonCorp Wealth Management are not affiliated. Cambridge does not offer tax advice. Now, here’s today’s Financial Focus program.
Nate Kreinbrink:
Good morning, and welcome to this week’s Financial Focus brought to you each and every Wednesday morning right here on KROS. Well, this is Nate. I got James joined me today. A different walk up the hill this morning looking at it and seeing some wet ground out there as opposed to brown, dried up stuff.
James Nelson:
Yeah. Yeah, exactly. There’s more rain on the way it sounds like this morning, so that’s good. [crosstalk 00:01:05]
Nate Kreinbrink:
Quite the little front that came through and as you were saying, the big loud boom and flash that came through last night.
James Nelson:
It shook the house. Yeah.
Nate Kreinbrink:
It was definitely one of the louder ones I think I’ve heard.
James Nelson:
Yeah, I think it got everybody’s attention.
Nate Kreinbrink:
Well, I know today’s program, I know the last couple of weeks, I’ve had Mike Van Zuiden with NelsonCorp Tax Solutions, Andy Ferguson with NelsonCorp Tax Solutions on as well the last two weeks talking taxes, hitting on some of those key points. Obviously, the child tax credit, who’s eligible for that, what they should be expecting for it, talking about the delays that some of this is going with some of the filings and the returns that are coming in with just the IRS taking a little longer than normal as far as processing, getting returns sent back. Obviously, delayed tax credits. We talked a little bit last week with Andy regarding bracket management, understanding where that falls with it. All important stuff.
Nate Kreinbrink:
James and I were talking as far as a relevant topic for today, obviously kids back in school, I think all the area schools. A lot of the college kids are heading back. So wanted to talk a little bit college planning today. And I know this is a topic that continually gets brought up, a lot of misunderstood information, a lot of important stuff that is out there that people kind of need to understand when deciding if they are going to look at putting money away for a future child, grandchild, niece, nephew, for their further education, whether you’re a parent, grandparent and understanding what the best route is that could be.
James Nelson:
Yeah, and I think there’s two main decisions. The first one is where do I save it? What type of account do I save it in? And then when do I spend it? Because that’s important too, when that money comes out of, say a 529 plan, can impact those FASFA applications that everybody’s got to file each year. So knowing what bucket to kind of save the money in and then knowing what year to spend that money are two very important decisions.
James Nelson:
Now, going back to the saving part, there’s not only two, but there’s two main buckets that we see generally, and the 529 probably being the most common and the most talked about and that’s pretty nice. Most states have their own 529 plan where you can save money as, say, a parent or a grandparent, put a few bucks away for a child or a grandchild, and you get to deduct that on your taxes. So that’s an advantage for the person that’s putting the money away. And then obviously, the beneficiary of that account, child or grandchild, could have some money later on when they go to school. They have tweaked those rules. So actually, you can use that for any education purposes if your child goes to or a grandchild goes to a private school or anything like that. You actually can now use 529 money for those expenses as well. So maybe that applies, maybe it doesn’t.
James Nelson:
Then the UTMA account is kind of the other avenue where it’s a taxable account, which isn’t as good as the 529 plan, which is a tax-deferred account. But the UTMA account allows a little bit more flexibility when that money comes out. It doesn’t just need to be used for higher education expenses like the 529 plan. The 529 plan, you’ve got tuition, room and board books, computer. Those are kind of the main expenses that you can use that money for. The UTMA account, not so much. You could buy a car if you want to. If the child or grandchild doesn’t go to college, they could use that money as a down payment on a house. So there’s a little bit more flexibility there on the spending part, but no real tax advantage there because you don’t get to deduct those contributions. And again, it’s a taxable account.
Nate Kreinbrink:
Right. And I think you hit on a lot of the key points to it. Another one that kind of goes back is just ownership of the accountant and who owns it and when they own it. 529 plans, if you’re a parent, grandparent, whatever, and you set up a 529 plan, you maintain ownership of that account. You just select the beneficiary of who is able to utilize those funds. If you set it up for an oldest child, per se, they don’t use all of those funds. They don’t go to a college or university to utilize those. You’re always able to change the beneficiary then and basically, earmark those for maybe the second child that’s coming up and then utilize it from there. But again, you always maintain ownership with that.
Nate Kreinbrink:
UTMAs are a little bit different as far as who owns it. If you set it up as a parent, grandparent, you own it until the child or whoever it is that becomes ownership of that reaches the age of majority. Once that age of majority comes into effect, then obviously, that child technically owns that account and can take money out however and whatever frequency they deem appropriate in that instance. So again, understanding those differences too, can help you decide on which one it is.
Nate Kreinbrink:
I know one other question that we always continue to get with, say, the 529 plans is, “What if my child gets a scholarship to go to schools and they don’t necessarily need that, whether it be an athletic scholarship, an academic scholarship, grants, those types of things?” You are able and permitted to take the amount of that scholarship out of the 529 plan without penalty or without tax on any of that stuff as well. So again, if you put money away, they are fortunate enough to get, whether it’s an academic or athletic scholarship, you are able to pull that money out. So that does give you a little bit of an option as well.
James Nelson:
I think that’s key because that’s generally the hesitancy on the person saving the money. “What if they don’t go to school? What if they don’t go to college? How am I going to get this money back out?” And that’s a real concern, but in our experience, Nate, we rarely see anybody take money out and have to pay a penalty.
Nate Kreinbrink:
Right.
James Nelson:
They’re either going to switch the beneficiary to another child or grandchild, which is a viable option. The scholarship that Nate just went through is a nice carve-out. You get a $5000 scholarship. You can take five grand out of the 529 plan and not have to worry about anything. And chances are, somebody is going to go to school. Education expenses continue to go up, unfortunately. That money is going to be spent most likely. So we talk about it a lot. We have these conversations a lot, but generally speaking, that concern of, hey, having to pay the penalty and paying some tax on gains, if the money’s not appropriately used for the 529 plan is certainly a concern. But in reality, we just never see that come up all that often. It’s going to be used one way or another.
Nate Kreinbrink:
Right. And I think another part is what you mentioned earlier on is they’ve really relaxed and expanded the items that you’re able to use that money to used to.
James Nelson:
Right.
Nate Kreinbrink:
Used to just be for tuition. Now, it can be books, sometimes room and board, computers, that type of stuff. So again, if you’re in school, even if you get a scholarship, you’re still going to have expenses that are going to be associated with that schooling.
James Nelson:
Right.
Nate Kreinbrink:
So again, understanding that and being able to utilize it. Switching gears a little bit with either one of these two, there have been some times where retirement accounts, more specifically, a ROTH has kind of been brought up as a possible vehicle to put money away for kid’s future education. Again, if they don’t use it, then obviously, it’s for their retirement. But again, it has its benefits. There are instances where that does come into play, but there are a few little caveats, again, that go along with using the ROTH as far as what years you can use that and how distributions from a ROTH are treated when it comes to filling out the FAFSA form.
Nate Kreinbrink:
Again, if you take that money out and again, if it’s gifted to you, it is treated as income to the individual that is going to school. So again, if you’re in school currently and you’re still going to be in school next year to fill out another FAFSA form, the ROTH, although has its benefits in certain years, while you’re in school, distributions from a ROTH, although not taxable, are still treated as income when they have to fill out the FAFSA form in order to do that. So you would want to wait until a little bit later on, when maybe your last year of school paying for that last college bill as far as when those come into play. But there are instances where that does prove to be the most beneficial.
James Nelson:
In other words, that income will hurt you-
Nate Kreinbrink:
Yes.
James Nelson:
… as far as the FASFA form.
Nate Kreinbrink:
Absolutely.
James Nelson:
And again, all the more reason to delay. And that’s what we talk about, right? Where do we save it? And then how do we spend it? Those are two crucial decisions. And again, there’s a big difference, like Nate just illustrated, spending that Roth money in your freshman year and now, you’re kind of penalized from there on out versus, hey, maybe taking on a little bit more in the way of loans if you have to in those early years. Even though there’s some money kind of earmarked here when we’re talking about the ROTH, let’s use that money for junior and senior year so we don’t necessarily get penalized on that FASFA application.
James Nelson:
So again, very complicated and the rules continue to change. Every time we feel like you’re on top of it, something gets tweaked, something gets changed. So please feel free to give us a call if there’s any questions. But yes, this time of year, and even for those seniors in high school this year, it’s never too early to start planning for parents and students to continue to plan for come next year, their first year of school. This is the time to be doing that.
Nate Kreinbrink:
Absolutely. All good stuff. And I guess finish it up by wishing all the area students, high school, grade school, elementary, and of course, all the faculty and staff that goes along with all this, a very good year and hopefully it gets off to a great start and we can have a great year with that. But did want to mention real quick before we run out of time that every Friday, NelsonCorp Wealth Management is wearing jeans for charity. Money raised in the month of August will be donated to the MS Fest, which is sponsored by the Clinton MS Support Group. James, always appreciate you joining me today.
James Nelson:
Absolutely.
Nate Kreinbrink:
Again, Nate and James with NelsonCorp Wealth Management bringing you this week’s Financial Focus. Thanks for tuning in and have a great rest of your week.
Announcer:
Financial Focus is a production of NelsonCorp Wealth Management in Clinton and Davenport. The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. Any indices mentioned are unmanaged and cannot be invested into directly. Registered representatives, securities offered through Cambridge Investment Research Incorporated, a broker dealer member, FINRA SIPC, investment advisor representative, Cambridge Investment Research Advisors Incorporated, a registered investment advisor. Cambridge and NelsonCorp Wealth Management are not affiliated. Cambridge does not offer tax advice. For more information, visit our website at www.NelsonCorp.com.