A listener asks:
“We’ve been saving for college for our three kids age 7, 9, and 12 for several years using 529 plans that are time to our kids’ high school graduation. Up until now we thought we were doing well. This past year we had a great year and saved almost $60,000 for college, and also put away some for retirement. But now, we’re thinking about switching to a private school that would cost almost as much for all our kids as what we saved last year. And we’re probably not saving enough as it is to be able to afford the most expensive colleges. What should we do? Should we consider getting more aggressive with out allocation to try to warn more return? Should we forget IRA contributions and focus more on college 529s?”
First of all, thanks for tuning in!! Below are the topics discussed in the video:
- Congrats on saving so much last year! Obviously, education is an important goal for you.
- You will be paying for this now and in the future. Recognize that it’s an expense. Don’t get too caught up in the accounts, savings, and logistics. First and foremost, it’s a large expense that will come from savings and salaries.
- Contribute to your 529 for state tax savings, depending on your state. If you are not contributing for the future, you can still run current expenses through the 529 (contribute and take back out).
- If you are confident that you will spend your 529 for college, leave it invested in there.
Tune in to hear more!
Find out more about Mike at https://www.mortonfinancialadvice.com and connect at https://www.linkedin.com/in/mwsmorton/
Transcript
Welcome to real financial planning, broadcast on WK, Excel, and available wherever get your podcasts.
Matt:I'm Matt Robinson and I'm joined always by Mike Morton of Morton financial advice.
Matt:Mike, how are doing
Mike:doing great, Matt, wait, what happened to the big intro with all the station radio numbers and where everybody's listening?
Matt:You want to hear all the station stuff we're on WK XL broadcast out of Concord And Manchester.
Matt:The Manchester broadcast is relatively new, but it's right in the middle of the FM radio dial.
Matt:It's like prime real estate, it's location in real in radio, it's the same thing.
Matt:in the middle of the the radio dial in Manchester, the biggest
Mike:Is that true?
Matt:Oh yeah.
Mike:Do you want to be right in the middle?
Matt:Oh, Yeah.
Matt:You don't want to be up on the end.
Matt:You want to be in the, and we're on 14:50 AM because people are still listening to to am radio.
Matt:It's amazing how many people we reached tens of thousands people on radio people dismiss.
Matt:Older technologies.
Matt:They shouldn't, a Lot of people still listen to radio.
Matt:And by the way, if you're listening to us on the radio
Matt:we really do appreciate you.
Matt:Thank you for listening and thank you subscribing to the Capitol close-up podcast or the investing for entrepreneurs,
Mike:financial planning
Matt:financial planning entrepreneurs.
Matt:podcast with Mike Morton, the reason I'm by the way, on the name of Mike Morton's podcast, is these considering changing it?
Matt:you should just make it not the Facebook.
Matt:Just make it Facebook.
Mike:Yeah, that's what to do.
Mike:PA it's just the podcast.
Matt:the podcast.
Matt:Oh yeah.
Matt:Everyone will listen or no, just call it podcast.
Matt:It's the snakes on a plane version of
Mike:at plane.
Mike:this about
Matt:know exactly what I'm I'm going to get here.
Matt:It's like going to a restaurant called on a plate.
Matt:All right.
Matt:So
Mike:a plate.
Matt:we're on a great run of listener questions before I read this week's listener question, Mike, let's remind people if you're listening to this and want to submit a question for Mike Morton.
Matt:do you you do?
Matt:How can email what's the email.
Mike:Financial .
Matt:There There you You can also look up beyond politics with Paul Hodes and Matt Robeson Facebook page.
Matt:That's where you can find the overall beyond politics slot.
Matt:This show fits that four to 6:00 PM every weekday hour, where we are on we're on other times as well.
Matt:Okay.
Matt:So keep those questions coming, but I've got a really good one here.
Matt:And.
Matt:Let's just read it.
Matt:Okay.
Matt:The listener writes, been saving for college for our three kids, age nine, and 12 for several years, using 5 29 plans that are timed to our kids.
Matt:high school graduation up until.
Matt:now.
Matt:We thought we were doing well this past we had a great year and saved almost $60,000 for college and also put away some for retirement.
Matt:But now we're thinking about switching a private school that would cost almost as much for our kids as what we saved last year.
Matt:And we're probably not saving enough as it is to be able to afford the most expensive colleges.
Matt:What should we do?
Matt:Should we getting more aggressive with our allocation to try to earn more return?
Matt:Should we forget?
Matt:IRA contributions and focus more on college, five to nines.
Matt:All Right.
Matt:So look without revealing too much personal information to the listeners here.
Matt:I'll tell you why.
Matt:I love this question, Mike, you and I both have three kids.
Matt:so I relate a little bit to the idea of you've got three kids and it seems no matter how much you save, You might not saving enough for college.
Matt:I guarantee you I've looked at at some of the numbers.
Matt:I am not saving enough for college.
Matt:Very few people are saving enough for college.
Matt:College is going to cost an astounding amount at current So to me, what I really like about this question is regardless of the particular reason that you might have new expenses or maybe less income, your situation has changed.
Matt:And you're already a little bit behind the eight ball, as most of us are when it comes to college savings.
Matt:But now you're going to even further back.
Matt:What do you do?
Matt:I love the setup.
Mike:So there's a lot in here to discuss, cause there's is shifting, to the private school.
Mike:And so I can tell that's a question using the five to nines saving for but also maybe there on private and there, and then the IRA's getting more aggressive.
Mike:And so I do want to take of the here, I do.
Mike:I agree with you, Matt overarching.
Mike:You got three kids.
Mike:Congratulations on having that
Mike:commiserate
Mike:Congratulations I don't know
Matt:I now like my kids who occasionally listen to this podcast to put, to hit that forward that 30 seconds skip on the other hand.
Matt:Wow.
Matt:Kids a lot.
Matt:And also you see all this gray hair for to watch us on video.
Matt:My goodness.
Matt:But anyway, go on.
Matt:Yes.
Matt:Congratulations on your three children.
Mike:And also congratulations on saving so much.
Mike:Holy smokes.
Mike:You here in question, you saving almost 60,000 for college and putting away some for retirement, probably great savings rate and a lot of money that you put away last So that's awesome.
Mike:And really great job and probably been doing that for a while.
Mike:Saving up.
Mike:And so that's tremendous, so you deserve on back, just for that alone.
Mike:Thinking about future, setting aside resources for the future is just great and supporting your kids their educational journey.
Mike:That is that's wonderful.
Mike:So obviously it's important value to you and it's wonderful to be able to do those kinds of So that's really to recognize at the start.
Mike:Now let's talk about the big picture.
Mike:There are, we always have expenses and we're going to want to pay for So in this situation, wanting to pay for So saving and now a change that there's private school public school is not maybe what you need or what your kids need.
Mike:so you're thinking that switch and paying private school which is obviously very expensive as well.
Mike:So we real.
Mike:In our expenses.
Mike:And want to cover those, you're going to be paying for those.
Mike:the an obvious statement.
Mike:But to get at is if are going to pay $500,000 college, and you're going to pay a $500,000 60,000 a year for private school for eight years, so maybe 500,000 for private school, you're going to be paying that money from.
Mike:it has to come from your earnings, from your income.
Mike:It has to come from your savings, whether five brokerage accounts, whatever it is, if want to do, if that's a goal you have, support your kids' education, just recognize that the high level, the first to understand we're going to be paying for that from somewhere, immediately borrowing money, paying from five to nine, paying from brokerage accounts, paying from your salaries and income.
Mike:It's to be coming from some.
Mike:And so that's to affect the longterm picture.
Mike:Now that said, of course, in this question is the logistics, how, best way of doing that?
Mike:Should I use to Should invest in this way?
Mike:I use my IRAs?
Mike:We're going to talk about those logistics as well, but I, first of all, that you're to be a significant amount of of money for expense that's important to you.
Mike:And it's to to come out of somewhere.
Matt:So Look I think that there's a lot I identify with in what you just said, because to me personally, you do ask the question of what's the money and I I have a my, my old roommate.
Matt:Back from college, used to say he's economist and from an economist standpoint, there's there's really only spending they're now or spending in the future.
Matt:So you save to spend on something in the future.
Matt:And so it's.
Matt:The question of how do you set those priorities So it really resonates with me.
Matt:When you say look, the money's coming from somewhere, you're, going to be spending now, or you're saving it that you can spend it on this important thing later.
Matt:It makes sense.
Matt:And to me personally, nothing more important than investing in your kids' education.
Matt:Yeah.
Matt:I'm all good.
Matt:But how do you do that
Mike:Yeah.
Mike:So the reason I say that upfront and make that recognition because we get caught up in the logistics.
Mike:And that's the question here at the end I more in my five nines?
Mike:Do I use the five to nines for private school?
Mike:I save into the Can I not, I more aggressively?
Mike:We up the details, but.
Mike:recognize You're going to be spending $500,000 on private education.
Mike:You're gonna spending $500,000 on college education for kids.
Mike:Yeah, no joke.
Mike:Kids fairly expensive, so that is going to come from somewhere and we're going to do the we can to maximize tax savings growth and investments to be able to afford that that's the logistics and tactics.
Mike:Okay.
Mike:But don't too up in that at start first this is important.
Mike:We're going to spend this money now in the future to support these goals in this case, the education of our.
Mike:All right.
Mike:So now let's dig into some of the specifics, the how can we save as much as possible from a tax perspective by using five nines or set yourself for future success?
Mike:Your own retirement to come play here.
Mike:gets lots of questions that.
Mike:Should I save in five to nine?
Mike:Should I save for my retirement?
Mike:We're definitely going to dive into that a little bit.
Mike:And then the other thing was oh, we consider being more aggressive with our allocation to try earn more returns?
Matt:All right where do you you want to start?
Mike:I'm going to start with the five to nines.
Mike:One thing you can do is run current expenses through a five to nine account.
Mike:if are over to private, school, All right.
Mike:And you're in public school, don't have any education expenses, that to nine is, would qualify for because your are only and 12 in the public school system.
Mike:But now you're going to private school.
Mike:You can cover from five nine.
Mike:It can be used for $10,000 a year per child to cover tuition K through 12.
Mike:So it could be private school tuition, $10,000 child can be used from a five to nine.
Mike:Okay.
Mike:So you've got some money in to What's
Matt:Why is that?
Matt:better?
Matt:so that would be better than letting it sit there
Mike:Yeah.
Mike:Hold on a
Matt:continue to Oh Yeah.
Mike:Yeah, Yeah, no good question.
Mike:So what I said was you could use your 5 nine so maybe you've got a a hundred thousand, you said, oh, you saved 60,000 last year alone.
Mike:So you probably have well over a hundred thousand in there for three three kids.
Mike:And got money in there.
Mike:Should you use the money the five to nine pay school?
Mike:Or should you use save to save that college?
Mike:So let's tackle that I will.
Mike:first consider running current.
Mike:I said running current expenses through the five to nine, this is an account funding priority.
Mike:We had this on the podcast about a ago.
Mike:Definitely go back check out.
Mike:But this is like number two, current expenses through the to nine.
Mike:What I mean is you can take 10,000, add it to the five to nine and then spend 10,000 of the five to nine.
Mike:Then the same year.
Mike:And you may get a tax for your contributions to the five to nine.
Mike:So if you run current expenses, even if you didn't say this situation, doesn't you, but have current expenses think about running them through a 5 29 for the state deduction states like Virginia, you could save a thousand bucks, right, right off doing So instead of paying 10,000, you're really only pay at nine.
Mike:get a thousand dollars state tax So you have look up the details of your state, you can do that.
Matt:that's
Mike:would definitely start there.
Matt:Look, I, I w there, there are limits to how much you can contribute.
Matt:To a 5 29, but I'm gathering that the amount of expenses in this case.
Matt:Although I I want to, I do want to keep this general, because obviously this, general type situation could apply to lots and lots of listeners are trying to save for college and are looking at their expenses and perhaps new expenses.
Matt:And whether it all matches up.
Matt:at what point do you worry about bumping up against those five to nine
Mike:So there are contribution limits and it's really around gifting rules.
Mike:So gifts right now last year was 15,000 per person that you could gift without any tax consequences.
Mike:if have two parents, in per child because it's per the beneficiary.
Mike:It's a gift completed gift nine.
Mike:So you can do up to 30,000 as to.
Mike:Per beneficiary.
Mike:Okay.
Mike:In the five to nine.
Mike:So again, the question here, you might want to all that 30,000 the future college expense, but you might be able to use 10 of it the current.
Mike:Put the contribution in the five to nine and spend from the five to nine, let's the two.
Mike:if you put money into the five to anyway, you're getting your state tax deduction.
Mike:So now let's about Mike, already putting in 60,000 a year, so getting my good deduction, for those contributions, should I spend the money from my five to nine on current expenses?
Mike:Or should I save it for college expenses?
Mike:The answer there is, again, going back to, you're going to the.
Mike:Okay.
Mike:So we want to be of much balance you in the five to nine.
Mike:you expect you're going to use that all for college.
Mike:And I really want be pretty going to all of it for college.
Mike:you are confident, you're gonna all college, it's going to grow and earn that five to 8% return for next years till the are in college and you get to spend it.
Mike:like, geez, I have a balance of thousand I know with a 5% growth that, college that I expect my child go to, we're definitely going to all that.
Mike:the money invested the fives.
Mike:to nine going let it grow and then you're going to see.
Matt:I see.
Matt:you find Because in this case we have three kids too, but if you find that maybe you don't spend all of it for one you do for another kid One kid goes to a more school than another.
Matt:You can actually transfer right between the kids.
Matt:So it doesn't matter as much, which of those accounts.
Mike:That's correct.
Mike:You can transfer.
Mike:So that's not really a big deal.
Mike:We got three kids.
Mike:We can definitely think it one big of money across those kids who get, you know which college go scholarships they get and things like that.
Mike:let's go should you use the current balance?
Mike:If you're confident you spend all of it college in future.
Mike:Go ahead and let it.
Mike:Go ahead and leave it invested if you're not sure then spend some of it now and save some of it for the future.
Mike:So use your current income to pay for the private school and maybe out five or 10,000 per kid from the five to nine to pay for the current private school to draw down your five to nine is is a little bit, let the rest to grow.
Mike:But draw down a little bit.
Mike:If you're not conscious.
Mike:That will definitely of it for college, Cause the point is you don't want to up with a a balance.
Mike:You have large cost private school and college for three kids, a very large We don't want to end up in 10 or 15 years with a balance in your five to nines.
Mike:You sacrificed right to from your income or your brokerage accounts or other things.
Mike:And then you'd end up with a balance in your five to nine.
Mike:That wouldn't make sense.
Mike:You definitely want to spend all your five to nine by the the kids are done college to support, and the college expenses.
Matt:So if you are confident about that and let's say the the situation is more along the I think a a lot of people find themselves in which is.
Matt:Outrageous costs of colleges, at the more expensive you might be looking ahead and saying, I'm never going to save enough.
Matt:What about the aspect of the question of, should I get more aggressive?
Matt:Should I tilt over into stocks in the allocation to see if I can maximize return, even though I'm taking some more risks?
Matt:What about that?
Mike:Yeah.
Mike:That's a really tough because it's very individualized.
Mike:I would air on.
Mike:No, probably just leave it in date, a lot of the five to nines have the college date and to be year olds be be less aggressive than your year olds account.
Mike:So the at different I would tend to start there, but depending on your particular situation, If you're willing to live with , potentially less, you could ratchet up the exposure.
Mike:So push out that target date, a lot of them let choose instead of a 50 50 portfolio, I'll be 75% stocks, 25% bonds, though the date for that 12 year will be closer to 50 50.
Mike:You can do but recognize, yeah.
Mike:Say or 70% of time you'll come out of.
Mike:But or 40% of the time would come out behind.
Mike:So the in your favor the stock market tends to up bonds.
Mike:So the are in your favor in five years.
Mike:If you're more aggressive have more money, knowing that there's a downside to, Hey, there's a or chance that you'll have a bit money.
Mike:we're talking on the margins 50 50 portfolio for that 12 year old or a 75% stock, 25% bond.
Mike:One of them better five years.
Mike:I don't know which I would say that the more like I just said has a slightly higher chance of having more money that's historically how it works, but I wouldn't stretch too much there or worry about it too much
Mike:because it's not going to change too much on the margins.
Matt:And what about the aspect of the and probably goes back episode, we did on account funding priority.
Matt:That was a great episode.
Matt:Really important because it seems like a luxury item.
Matt:It's oh, you have so much money, lying around.
Matt:I just can't choose which of my investments.
Matt:I, that, that wasn't really the of the episode at all.
Matt:It was, you have one more dollar, where do you put it?
Mike:Yeah
Matt:more dollars, where do you put it?
Matt:And I, so I could see a flavor in the question here of the inverse of this, which is do we need to, in a situation like this, where again, for college, this is the need is the future spending need.
Matt:That comes up So if you're in a situation where you're putting some away for college some way for returning Because college is coming sooner than retirement.
Matt:Should you be tilting even more toward the college side or should you keep things the way they are?
Mike:I would totally put it the other way.
Mike:I'm a big fan funding, your retirement over college expenses.
Mike:And the reason is there's a lot of different to pay for.
Mike:There's not a lot of different ways to pay for retirement.
Mike:There's you and maybe a social
Matt:And maybe social security.
Matt:right?
Mike:Okay.
Mike:So have to be diligent about saving year in and year out your own retirement.
Mike:And I would also throw it the other way too.
Mike:You have much potentially, you've got a seven and nine and 12 year old.
Mike:thinking your retirement, you said is further out college.
Mike:So therefore the compound.
Mike:On the saving for retirement is going to work out in your where you can be more aggressive.
Mike:And take advantage of the higher growth of stocks with a longer time horizon and more common.
Mike:Then you can with college.
Mike:So no one's going to fund your retirement you.
Mike:so that's really important.
Mike:question here, the last one, should forget the IRA contributions focus five nine?
Mike:I it the other way and say, no, you want to max out your IRAs and five 20 nines come after.
Mike:the thing I would say is you can use, if you use a Roth.
Mike:IRA, You definitely want to max those out because you can use raw, you can take back contributions out of your Roth and for anything.
Mike:you could for college.
Mike:But you can use contributions for anything and you use the growth and earnings in a Roth IRA to pay for college expenses.
Mike:So it's another account that you could use for expenses.
Mike:I don't want you to, really want be for retirement, but if can fund a Roth IRA, I would definitely look at maximizing over the.
Matt:Although I'm guessing in this particular situation, if someone, in the question and said that they had a good year last year So, that does bring up the tax question, I guess
Mike:but be a backdoor Roth IRA.
Mike:So you can do a backdoor run.
Mike:Then do The other thing to look at there is your 401k is, you know we're weren't mentioned here, but a lot of those have Roth options.
Mike:And also I would look after tax contributions to your that you can roll over to a Roth side.
Mike:The point is the Roth side of things, the Roth side 401k, IRA's have more growth, potential, and retirement potential.
Mike:I would definitely look there.
Mike:And so then circling as well, Matt, I did want to make the.
Mike:It's hard to save for percent of college costs.
Mike:Are I are you confident?
Mike:You're going to spend that.
Mike:You're probably pretty confident like college costs are going way up.
Mike:So we just have to recognize that and okay, this is the amount of men of pre save.
Mike:Lot I work with, we start with one-third one-third one-third one-third I'm going to pre save maybe in my five to nines.
Mike:One third.
Mike:to pay my current income during those colleges.
Mike:Kids aren't at home and paying for those expenses, I'm paying for college expenses.
Mike:And then one third, maybe the kids, have some skin in the game by taking out some student loans or working or is.
Mike:And they're involved in their own college education.
Mike:I start there with a lot of clients and then we'll, morph that it's a good starting point to think about those.
Matt:That's helpful and know just of bringing it full circle.
Matt:And this is the part I find personally helpful is where you started, because what you just said is.
Matt:You have to start by go in a way you have to accept the fact that if you're enough first of all have three kids.
Matt:where all kidding aside.
Matt:I'm lucky to have kids and you're in the position of worrying Hey, they might go to expensive colleges Great.
Matt:Good for you.
Matt:That's awesome for them in their lives.
Matt:That's awesome for you.
Matt:You probably are not going to be able to pre save for all it.
Matt:So in that case, you can almost let go of stress of, am I going to to get there, get rid of my IRA?
Matt:Should I, put everything.
Matt:in, the Peruvian mining it's high risk, but boy, the returns would be great.
Matt:You should just embrace the fact that that's expense and it of goes back where we started, which is they're spending now spending in the future.
Matt:And so if you prioritize this spending need highly and is where you want to put your spending, then you'll find a way to make it.
Matt:work.
Mike:Yeah.
Mike:That's exactly Yeah.
Mike:I agree.
Mike:Going back to that and the logistics are important, but just don't, again, don't get caught up in them.
Mike:We do want savings if we can, we do tax-free growth we can.
Mike:But we're going to just end up spending spending this money the future.
Mike:recognize and just make the best allocations that work for you.
Matt:All right.
Matt:So to the listener, just make sure your kids say thank you.
Matt:often as And with that we'll stop there.
Matt:Great advice, Mike.
Matt:financial advice.
Matt:Thanks.
Matt:much.
Mike:Thanks.
Mike:Matt.
Mike:Thanks for joining us on financial planning for entrepreneurs.
Mike:If you like, what you heard, please subscribe to and rate the podcast on Apple iTunes, Google play Spotify, or wherever you get your podcasts.
Mike:You can connect with me on linkedin or mortonfinancialadvice.com.
Mike:I'd love to get your feedback.
Mike:If you have a comment or question, please email me at .
