Financial expert Derrick Kinney discusses 529’s and how to prepare for a child’s education and Sharon Ramage joins us to discuss how you maneuver the taxable side of divorce.

Episode Transcript

Intro:

Welcome to the Practical Tax podcast, with tax attorney Steve Moskowitz. The Practical Tax podcast is brought to you by Moskowitz, LLP, a tax law firm.

Disclaimer:

The information contained in this podcast is based upon information available as of date of recording and will not be updated for changes in law regulation. Any information is not to be considered tax advice or legal advice and does not form an attorney/client relationship. Further, this podcast may be construed as attorney advertising. You should see professional consultation for your individual tax and legal situation.

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Chip Franklin:

Well, welcome to the Practical Tax Broadcast with tax attorney Steve Moskowitz. I'm Chip Franklin. We've talked about this in the past. If you had a kid that was five or six years old, would you jump in and start saving for college right then? Is that the best-

Steve Moskowitz:

No. I would save on the day he was born. When he or she were born, I would be making the first deposit.

Chip Franklin:

Yeah. Let's get into that too. In fact, let's start with our first guest. Derrick Kinny is a financial expert, author of Good Money. You've seen him on Fox News, Fox Business, Bloomberg, CNBC. Right down the line, everything. He's one of the top financial experts around the country. Nice enough to join us here with Steve Moskowitz, tax attorney Steve Moskowitz, on Practical Tax. Derrick, hello.

Steve Moskowitz:

Hi.

Derrick Kinney:

Hi, Chip. Hi, Steve. Great to see you both.

Steve Moskowitz:

Great to see you too. Thanks.

Chip Franklin:

So, you probably heard what Steve said. Would you agree that as soon as you start to think about having kids, you should start that savings?

Derrick Kinney:

I agree with him completely.

Steve Moskowitz:

Yeah. Actually, Chip, I agree with that. When you start thinking about it is when you start making the deposits. Don't even wait til the birth.

Chip Franklin:

Okay. Well, let's back up a little bit, and talk about the different ways to do it and the tax implications. The 529. If I understand that correctly, a lot of states, if not every state, has an option where you can ... Well, Steve, why don't you explain it to me so I don't mess it up?

Steve Moskowitz:

You were doing just fine, Chip. You never messed anything up. Basically, this is an incentive. The government gives all kinds of incentives for people to do things, because if you don't, eventually people look to the government and say, "You pay for it." So what you have here is an opportunity for people to put money away, and you can save some taxes. Not on the deductibility, but on the income tax you would've paid on the earnings. And then what they do is, in a recent change in tax law, they got more generous. Because it's not just for college anymore. It's kindergarten on up. So this is a way that parents, grandparents, interested people can set up an account for the child, and then you take advantage of the education. And education is so important to so many people, and this is something to help pay for it. Derrick, what do you think about that?

Derrick Kinney:

Yeah. I agree. It's interesting, because you want to think strategically. You mentioned the 529 now being able to use K through 12, and you can pull out to $10,000 per year. Whether it be private school, a charter school, it gives parents more options. But what I like about it is, is people work with someone like Steve, or they work with an estate attorney, et cetera. And they recognize that, "Look, I'm going to have an estate problem. These are ways people can use to help solve that problem and be the good person in their family." In the 529, they could give $16,000 per student per year, which reduces their gift tax. So picture, when the second spouse passes and there may be gift taxes due, this can reduce that. Plus, if you're married, the spouse can give 16,000. That's like $32,000 a year, that you can really stockpile a nice college savings fund very, very quickly.

Steve Moskowitz:

Also, you can even throw in a bigger payment, if you want, on some special deals. So I won't get too much into technicalities, but grandpa and grandma says, "Boy, we'd like to put some money away." You can put away even more than that if you want.

Chip Franklin:

Oh, well, that's an interesting point. So I wasn't fortunate to have grandparents leave us money, but a lot of my friends did, and their kids. If the money-

Steve Moskowitz:

That's why you made your own, Chip.

Chip Franklin:

Yeah. Kids or money?

Steve Moskowitz:

Both.

Chip Franklin:

What if the amount the parents give exceeds what the child spends in college? Well, how do you treat that money then?

Derrick Kinney:

Well, in terms of the 529, if it's used for college and education, then there's no penalties. If it's used for other things, sometimes they put in there a 10% penalty, or it can be actually moved over to another sibling as well.

Steve Moskowitz:

Yeah. That's That's the one I was going to suggest.

Derrick Kinney:

Is the main thing.

Chip Franklin:

Oh. Interesting. Can a grandparent give money for education? Can you do a 529 for trade school education, for other ... If I wanted to go back to law school or something, could a 529 still apply that started 50 years ago? Or they're not 50 years old. But, I mean, how long does it go, and how many different uses does it have?

Derrick Kinney:

Steve, you want to take that one?

Steve Moskowitz:

Yeah. So the bottom line is, that's fine. The whole idea here is to encourage education. So, the bottom line is ... And also, if you do this as part of the estate plan, Chip, what you were talking about before, is getting money out of the estate. So, the whole idea is to go ahead and use the money for education. And sometimes you'll have this situation. The child is born, and the parents and the grandparents set up a big fund. And then the kid says, "You know what? I finished high school, and I'm going to be a rock musician, and I don't want to go to school." You just transfer the account to somebody else. So here, the government's very generous in what they allow, and this is something ... It's a combination. Yeah, it's good for estate planning, but also it's good for helping people out. And education's a good thing, or at least most people would agree that it is.

Chip Franklin:

The situation you mentioned probably happens all the time. What if there's not another sibling to transfer it to? What happens to the money then?

Steve Moskowitz:

Well, there may be somebody. But eventually, if you say, "You know what? Nobody wants to go to school, or I need the money back," then and only then do you start have to worry about the taxability. Derrick, you were going to say something?

Derrick Kinney:

I was going to agree with that. Ideally, you want to have another sibling, and this is where it's possible to over-plan. Where you might think, "Well, if I'm going to have three or four kids, I need to have this amount of money." You may want to take it child-by-child, and have a strategy unique to each one. But as Steve talked about, hey, the moment that child is born, begin putting a strategy in place. But also, you want to blend that in, I think, with some non-529 money that's more flexible. Where if there were to be even a business opportunity that they wanted to invest in as a parent or grandparent to really help this child get a headstart, that could be a way to compliment this planning as well.

Chip Franklin:

Does the money in the 529 earn interest for the parents, or grandparents, or whomever?

Derrick Kinney:

Well, it's inside. I think of it like a bottle. You can put anything in the bottle you want, but inside that wrapper it's tax-deferred, and it comes back out tax-free. You get to choose how aggressive or conservative the money's invested. So whether it's a mutual fund family, or different stocks or bonds, you get to custom tailor. Even some cases they're age-based, where they're more aggressive when they're younger and they get more conservative the closer they get to using the money.

Steve Moskowitz:

You see here, the tax thing here is, although the initial contribution isn't tax-deductible, you're not paying taxes on the earnings. So wouldn't you rather have what you would've given to the IRS given to your kid, or a grandkid, or a nephew, or whomever? That's one of the tax benefits of it. Not to just get it out of the estate, but to not pay the tax on the income.

Chip Franklin:

That's interesting, because I was thinking about this. I know that every state has peculiarities to their 529. Right? Or is this a federal program?

Steve Moskowitz:

It's federal, and the states jump in [inaudible 00:08:11].

Derrick Kinney:

That's right. Yep.

Chip Franklin:

Okay. What if I'm living in Ohio, and my son, God forbid, wants to go to Penn State after all that? Can I take that money from there and then take it over to another state?

Steve Moskowitz:

Is that before or after disowning him?

Chip Franklin:

Man, you nailed it right there. That's for sure.

Derrick Kinney:

And there's a huge tax penalty for that decision too.

Chip Franklin:

No, seriously. Is the money generally just for any school, or does it have to be a state school? Because I recall it being just for state schools when I heard about it 20 years ago or so.

Steve Moskowitz:

Okay. So what happens is, the big taxes are federal. That does vary from state to state. So I know this show goes out through all over the country. So basically, what I would say is, you want to talk to your tax advisor about that one.