Expert Interview: Evan Shorten on 529 Plans

It’s never too early to think about saving for your childrens’ education! Today’s expert in Evan Shorten, who will be explaining a little more to us about the workings of 529 saving plans!

Evan Shorten, CFP® has been assisting people with their finances for over 18 years and founded Paragon Financial Partners in August 2009.
Evan is a CERTIFIED FINANCIAL PLANNERTM professional. He holds a Bachelor of Science degree in Business Administration, Management from California State University, Northridge and earned a certification in Personal Financial Planning from U.C.L.A. Evan holds the following securities licenses 7, 9, 10, 63, 65 and maintains a California Insurance License in health and life insurance. He is also a member of the Financial Planning Association, www.fpanet.org, an organization that requires a commitment to the highest standards of professional competence, ethical conduct and clear, complete disclosure for financial planning professionals.

Prior to founding Paragon Financial Partners, Evan was a Vice President and Sr. Account Executive with Fidelity Investments Private Client Group in Los Angeles-Century City, California. During Evan’s 11 plus year tenure with Fidelity, he assisted in the client management and portfolio strategies of $1.96 billion dollars.

Evan’s biggest driver in helping people comes from his innate desire to educate people. Evan is married, has two children and resides in the West San Fernando Valley. He enjoys early morning trips to the beach with his family and traveling.

L: Let’s start with the basics- can you explain exactly what a 529 account is, and why they are a good way to save for college? Are they appropriate for families with all income levels?

E: A 529 plan is an amazing vehicle that is tax advantaged and designed to encourage savings for future higher education costs. There are two different types of 529 plans: prepaid and savings. Prepaid plans permit one to buy tuition credits at today’s rates, however, to be used sometime in the future. Prepaid plans performance is based on the tuition inflation rates. Savings plans differ in that the performance is based on how the underlying investments perform, which is typically made up of mutual funds. These savings plans are typically run by a mutual fund company with a variety of different investment options that are allocated either as age-based or on a specific asset allocation that can be static. In general with the age-based plans, the asset allocation will be more aggressive for younger children and become less aggressive for children nearing college age. A main benefit of using a 529 account is based on the tax deferred growth that the plans offer. And if the money is used for qualified educations expenses, the potential growth is considered tax free. Further, 529 plans are not subject to income levels, so people can shelter large amounts of money in these plans without being restricted by their income. However, one would need to be cautious that they do not exceed the plans limit (in most cases over $200,000) or create a gift tax. Each parent can contribute $13,000 per child ($26,000 for a couple per child) and pay it ahead for five years or $65,000 ($130,000 for a married couple) at once. In short, these plans have amazing benefits.



L: Is there a certain amount of money needed to initially open a 529?


E: Most programs set their own guidelines for minimum initial contributions and additional amounts placed in the plan. I have seen them as low as $50 initial investments with a monthly automatic investment of $15 per month and as high as $2,500, which is typically waived with an automatic investment.

L: How can a family decide which plan is the right one for them? Are there many to choose from?


E: There are many choices. There are features that are common among all state-sponsored 529 saving plans which include, tax deferred growth on any investment earnings (which means you do not have to pay taxes annually on the growth), federally income tax free distributions for qualified higher education expenses, and flexibility on how the money can be used among the expenses of tuition, books, room and board and other higher education expenses at most accredited colleges in the U.S. and at eligible foreign programs.
Other things to take into considerations would include:
*In state tax benefits such as a state tax deduction.
*Investment options
*Fees and expenses (i.e. the underlying securities fees and the account management fees).
*The investment performance of the plans.
Ultimately, you want to make sure the fees are reasonable and the investment options are plentiful with good performance for the risks you will be taking.


L:When do you recommend families begin saving for their children’s education?


E: Compounding interest is an amazing benefit when you have time on your side. Point being, I recommend parents to begin saving for education cost as soon as possible. Like saving for retirement or other big goals, I suggest contributions be made on a consistent basis, as if it were a bill that is due.


L:It has been said that 529 plans are actually not advantageous for those with multiples, because it can affect the amount of financial aid offered- why is that? Is there any way around that?


E: Households who save for the education of their kid’s college expenses can reduce their child’s eligibility for financial aid. Setting up the account in the name of the Participant or Owner compared to the account being set up under the Uniform Transfer to Minor Act (UTMA) can help reduce the effects of this implicit tax. However, another way to around this is if the parents will be over the age of 59 ½ when the kids go to college, the parents can fund a Roth IRA (with certain income limits), have the money grow on a tax deferred basis while distributions may be tax free and not have these assets considered when applying for financial aid. Financial aid does not take into consideration assets as home equity or accumulated in retirement accounts. Another consideration could be having the money in 529 saving plans in the name of a grandparent or someone else that will not be affected by this financial aid consideration.

L: Can other family members contribute directly to a relative’s 529 account? Are there requirements as to how much is deposited each month?

E: Anyone can contribute money on behalf of a beneficiary. Relatives, friends, colleagues, acquaintances and even complete strangers can contribute to a child’s 529 savings plan. If you are looking to make an automatic contributions, different plan have different requirements, however, you will find it quite flexible. I have even seen them as low as $15 per month.


L: Can the account be transferred to another child if the need arises?


E: You can change the beneficiary on your 529 savings plan account to eligible family members of the original beneficiary without incurring federal income tax and the 10% federal penalty tax. Family members are considered a person who has one of the following relationships with the original beneficiary: (1) son or daughter; (2) stepson or stepdaughter; (3) brother, sister, stepbrother or stepsister; (4) father, mother or an ancestor of either; (5) stepfather or stepmother; (6) son, daughter of a brother or sister (7) brother or sister of a father or mother; (8) son or daughter-in-law, father or mother-in-law, brother or sister-in-law; (9) spouse of the individuals listed in (1) – (8) and the spouse of the beneficiary; and (10) any first cousin.

L: Are there penalties for withdrawing money before the intended time? What if, for some reason, a child decides not to attend college, or gets a full scholarship- how will that affect the account?


E: If the money is redeemed from the 529 savings plan for anything other than a qualified education expense, the earning will be taxed a 10% penalty by the IRS and ordinary income taxes on the growth of the account that has been distributed at the income tax level of the person that is disbursing the assets. If there is a scholarship awarded, you can contact the IRS and see if they are willing to waive the 10% penalty for the redemption of the assets or a non-qualified expense. However, it is unlikely that they will waive the any taxes dues on the growth of the account, if any.


L: Besides a 529 plan, what other methods of saving for college do you recommend parents use?

E: In addition to 529 plans, parents can use Educational Savings Accounts (ESAs), however, the contribution limits are limited contributions per year. Further, I have seen people use permanent life insurance as a resource to fund college planning based on the cash value that can be built up over time and if the parent does not make it to see their child reach or complete college, the resources of the death benefit may fill the left over financial need. Life insurance is a much more expensive way to save for college, however, depending on the overall family needs, it may be appropriate for a portion of the family’s financial life planning needs.


L: Are there any other resources that you recommend that parents use to find useful information on planning for college?


E: Yes, there are many places you can go to find answers to some of your most pressing questions. Web sites such as:
http://www.blogger.com/www.savingforcollege.com and http://www.blogger.com/www.529s.comare great sites that can provide additional information. Also your tax advisor and Certified Financial Planner® professionals will be a great resource. And of course, I welcome your readers to reach out to me for guidance and advice on their financial life planning needs.

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