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 representative 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.
Announcer:
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’ve got James joining me today. Nice stroll up the hill today, other than little construction going on out there.
James Nelson:
A little? Yeah, a lot of construction. Tired of hearing the noise outside, but it’ll be nice when it’s done.
Nate Kreinbrink:
And the office shaking from them pounding and breaking up the concrete from the road there?
James Nelson:
Yeah, it’ll be nice when it’s done though.
Nate Kreinbrink:
But no, it’s a exciting time of the year. I know a lot of the area schools had their graduation last weekend, so for the seniors graduating, exciting time for them as they transition into the next phase of whatever their life’s journey is going to be. I know a lot of the elementary, middle school, grade schools, those type of levels are finishing up this week, I’m pretty sure most of them are, so exciting time.
Nate Kreinbrink:
Summer’s almost here. I know I can probably speak for the majority of people out there who have kids in the school systems, teachers in any district that you are, this summer, I think, is going to be a much appreciated unlike any other summer. It is just to say, hey, we made it through the year. Take a deep breath and let’s see what the next months bring.
James Nelson:
Yeah. Clear your head for a couple of months and hopefully next year gets back to a little bit more normal school year.
Nate Kreinbrink:
No. James and I always talk about as far as what we’re going to talk about on these shows and we try to talk about topics that are kind of relevant or topics that we’ve seen in multiple meetings that maybe came up as far as questions that either prospects or clients have. Last week, Andy and I, Andy Ferguson with NelsonCorp Tax Solutions, was on and we talked a little bit of taxes and it was kind of a good timing period with the end of the tax season. This year, the tax season was extended a month, ended last Monday, May 17th, so we kind of discussed some of the things that people should start be thinking as they transition from the tax preparation phase, where you basically just turn your stuff in and report what was happened in the past, to the tax planning phase, where you kind of look forward and say, how can I help my decisions?
Nate Kreinbrink:
Another relevant topic that James brought up and I think hits perfectly is UTMAs, 529 accounts, and saving for children going into the next phase and what is the best revenue or the best avenue as far as to put money into a way for these kids. There’s a lot of questions that always come up with it. I know people always ask what can I be doing, what can I be doing, but understanding the different tax benefits, the different ways that they’re accounted for, is extremely important when you make that decision to decide which avenue is the best one for you to actually accomplish what you want to do.
James Nelson:
Yeah. I think the 529 plan gets most of the attention.
Nate Kreinbrink:
Right.
James Nelson:
That’s the most common, people talk about that probably the most, and yet what we’re talking about is saving some money on a tax favorable basis for a child, grandchild, down the road that may use this money for college expenses. Now that’s the 529. The UTMA, a little bit more flexible as far as what the money can be used for.
James Nelson:
Now, when you go to the 529, you generally have a couple different flavors, the first one being the state 529 plans. I think every state in the United States has their own 529 plan and the benefit of that or using the state plan is the tax benefit. So you put money into a 529 plan through your given state, you get a little bit of a deduction on a state level. So that’s kind of nice if you’re going to save the money.
Nate Kreinbrink:
Might as well take advantage of that deduction.
James Nelson:
Yeah, exactly. Might as well take advantage of that deduction and use it, assuming that the state has a decent 529 plan.
James Nelson:
The other option is through, generally, a lot of fund companies. The big fund companies have their own plans, which you can go direct with some of the big names that everybody’s heard of. The idea is there that you may have a few more investment options. You’re not going to get the tax benefits because it’s not a state plan, but you may have a few more investment options. That’s what we weigh. When Nate and I are sitting down with people, that’s what we weigh. What option works best for a person’s situation? How long do we have until that grandchild or child is going to school? All of those timelines and circumstances matter to help us make a recommendation one way or another.
James Nelson:
So the 529 plans are nice. They grow on a tax deferred basis and the money comes out tax-free. If they’re used for qualified educational expenses, that’s books, room and board, tuition, obviously, all of those type computers, all that type of stuff that goes for college expenses, that money can come out of the 529 plan. You don’t pay any taxes, there’s no penalties to worry about, if it’s used for those higher education expenses.
James Nelson:
So anyway, nice option. Again, there’s kind of two flavors, the state being the more tax advantage route and then the direct route is maybe a few more investment options. You just kind of have to weigh those decisions on your own.
Nate Kreinbrink:
Right. I think, as James said, I mean the 529 plan gets all the, I guess, the publicity, I think, as far as saving for secondary educations, saving for college, putting money into an account when the kids are very young, letting it have that tax deferral and have that tax benefit, again, as long as it’s used for those qualified educational expenses.
Nate Kreinbrink:
You mentioned the UTMA accounts and that’s kind of a little bit different animal as far as how money can go into there, who basically owns that account, and when the actual beneficiary or the child takes ownership of that account. With a 529 plan, if you set up an account for a minor child, so you want to put money away for them for a secondary education, you technically are the owner of that account, that child is the beneficiary of it. So you control when that money goes out as far as to them, whatever age group.
Nate Kreinbrink:
Now, the benefit of that is you’re able to change the beneficiary should you so choose. So again, you put one of your grandchildren on it, they go through college, there’s still a little bit money leftover, you can change that beneficiary to another grandchild and be able to use it for them.
Nate Kreinbrink:
Again, with the UTMA accounts, it’s a little bit different is that the account is set up and the child or the minor will take ownership of that account whenever they get to the age of majority. That age of majority varies by state. Some of them are 18, 19, 21, I believe is some of the oldest ones. So once that individual, that child, hits that age of majority, they have to take that money out and it’s 100% their child’s. You don’t have necessarily a choice where you can control it. They own it. They own the assets in it. You oversee it until they get that age of majority, but then they take ownership of it.
Nate Kreinbrink:
So again, the way that that that is handled, I think, is a misconception, as far as people don’t necessarily understand who owns it, when they take ownership, how it’s controlled. So understanding that will help make a decision whenever you choose which path to maybe go to.
James Nelson:
Right. We always say the 529 plan has a few more strings attached, where the owner, being generally the parent or the grandparent, can really decide when the money’s released versus the UTMA, which Nate just described as basically a liquid and available account at 19, 20, and 21, depending on the state. That’s a huge difference.
James Nelson:
The other difference, I would say the largest difference when people are trying to weigh these options, what route do I really go, everybody, not everybody, most people bring up, hey, what if my kid doesn’t go to school?
Nate Kreinbrink:
Absolutely.
James Nelson:
What if I’ve got all this money in a 529 plan and they don’t go to school? Well, Nate brought up a good point, you could change the beneficiary if there’s another child in the family, somebody that may be going to school later on. The oldest child doesn’t decide to go to school, but he’s got two younger siblings, that’s always an option. It’s just changing the beneficiary.
James Nelson:
The other thing is, again, kind of leaning back towards the UTMA, that doesn’t need to be used for higher education. That could be used for anything. The beneficiary there could buy a car, they could put a down payment on a house, they could do whatever they want with that money. So if that’s a big concern and that’s kind of a sticking point where somebody may not be able to get past that and say, hey, I don’t like the idea of having all this money in a 529 plan, don’t have any siblings, we’re not going to change the beneficiary, if I liquidate this thing and it’s not used for higher education expenses, I’m going to pay taxes and a penalty, if that’s a sticking point, then a UTMA account is a little bit more flexible, a little bit more generous as far as where that money can be spent. Again, that’s just part of the discussions that we’re having with clients, trying to feel them out and figuring out what the best route is to go.
Nate Kreinbrink:
Right. I think another question that always comes up that maybe slows down people from putting money into 529 plan is, as James said, what if my kid does not go to college? Well, what if they get a scholarship and they don’t necessarily need that money in there, whether it’s an academic scholarship, athletic scholarship, whatever the case it may be? However, there’s a provision that allows you to take out every year the amount of scholarship that you were granted or that you received from your 529 plan without any penalty and going into it that way.
Nate Kreinbrink:
So again, if they get a scholarship, you’re able to then access that amount every year of what scholarship amount was awarded to you from that 529 plan without any penalties granted on there. So again, you’re not going to get penalized if they get a academic scholarship or a athletic scholarship or whatever the case may be. You are able to access that. So again, it doesn’t prohibit you from getting those and not being able to access that money.
James Nelson:
Yeah, that’s a nice carve-out. Because that’s happened where, like you said, somebody gets a nice scholarship, oh no, we don’t need the money anymore. Well, that carve-out has really saved some people in the past.
Nate Kreinbrink:
Again, it may be taxable to you on the gains just like any other, maybe, retirement account would be as far as taking money out. You just avoid that penalty from taking it out for not an educational expense like it was used for.
James Nelson:
Right. Right.
Nate Kreinbrink:
So again, different options, but as always, I think it’s still important to continue to look at these options as far as putting money away for them. We have a lot of clients that have said, “Hey, we don’t even get our kids gifts, really, necessarily, for Christmas anymore because they have a lot of stuff.” So they just take money and every year they put a little bit into one of these type of account to, again, start building that up for future use for those child that they’re going to be able to benefit from.
Nate Kreinbrink:
So again, understanding the different options is extremely important. They still have a very important place when you’re looking at the overall financial picture. You have questions, you have anything that goes with this and you may be thinking about it, let us know. Give us a call. We’d be happy to sit down and kind of go over the different options specific to you and see which choice is best.
Nate Kreinbrink:
Did want to mention real quick that every Friday at NelsonCorp Wealth Management is “Wear Jeans for Charity.” Money raised in the month of May will be donated to the Hometown Heroes Banner Program.
Nate Kreinbrink:
James, as always, time goes fast, but I 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 again 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 representative 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.
Announcer:
For more information, visit our website at www.nelsoncorp.com.