When to Stop Contributing to a 529 Plan (13:45)
Determining the Future Cost of College is a First Step
Broadcast Retirement Network’s Jeffrey Snyder discusses the cost of college and when to stop contributing to a 529 Plan with Financial Samurai’s Sam Dogen.
Jeffrey H. Snyder, Broadcast Retirement Network
Good morning, welcome back to the broadcast Retirement Network. This is BRN AM for Monday, July 29th, 2024. And our top story today, when to stop contributing to a 529 plan.
Joining me now to discuss this and a lot more, Sam Dogen is the Financial Samurai. Sam, Mr. Samurai, so great to see you. Thanks so much for joining us on the program this morning.
Sam Dogen, The Financial Samurai
Hey, thanks for having me, Jeff.
Jeffrey H. Snyder, Broadcast Retirement Network
Yeah. And before we get started, we’re going to talk about 529s and in particular overfunding and over contributing and how not to do that. But tell us a little bit about financial samurai.
I know you founded the site, the organization back in 2009.
Sam Dogen, The Financial Samurai
Yeah, I started it July 2009 at the depths of the global financial crisis. I was working at Credit Suisse at the time and I was wondering, am I going to be the next one to get let go? And so I said, it’s now or never to try something on the side, something new.
I came up with the idea of financial samurai in 2006 after graduating from business school at Berkeley. And then once the financial crisis hit, I was like, let’s go, let’s start. Instead of smoking or drinking, I was like, let’s start a site to write out my fears and concerns to get through this tough time.
And it’s been going on ever since, three articles a week since July 2009.
Jeffrey H. Snyder, Broadcast Retirement Network
It’s great. And like I said, I’m a big fan. I’ve been following you for a long time.
And the article that I thought was really important and I wanted to talk to you about was around, I guess, overfunding or stopping contributing to a 529. Let’s talk about that. So can you overfund a 529 plan?
Sam Dogen, The Financial Samurai
Well, I would say given the cost of college is so high right now. Most families cannot overfund their 529 plan because I’m not sure most families can figure out and eventually meet that future cost. Right now, for the cheapest public college for four years, living expenses, room board, all that stuff, tuition, it’s about $140,000.
Expensive public college can go about $200,000. The UCLA per year is like $45,000, $48,000. And then for cheaper private colleges, we’re talking $240,000 right now and about $400,000 all in for four years.
So if you have a baby this year, in 18 years, in the year, what, 2042, the expensive public college will cost about $500,000 and the expensive private college will cost about $950,000. And so given where we are in terms of the median retirement balances of households, it is unlikely to match, save that amount to match to pay for all four years of college. However, there is a point where you might be able to overfund it.
And if you do overfund it, thankfully, new laws have passed that says, well, you can roll over about 35,000 of that to a Roth IRA. So that’s good. And the other thing you can do is change beneficiaries so that if you have money left over, you can change it to like a grandchild or some other person that you care about.
Jeffrey H. Snyder, Broadcast Retirement Network
I’m sorry, I didn’t mean to interrupt you. I was going to ask you, do you think based on what you, your research, the 529, does that represent probably the best way for most Americans to save or not just, yeah, most Americans to save for a college education? Is that the best tool that people can use today?
Sam Dogen, The Financial Samurai
It’s the best tool we have right now. And I say that because you contribute after tax money, but it gets a compound without that tax burden at the end, because you can withdraw that money and pay for all qualified college expenses without paying any capital gains tax. So if you plan to save and invest for college anyway, you might as well utilize the 529 plan vehicle, which can be opened up in basically any type of online brokerage account.
Jeffrey H. Snyder, Broadcast Retirement Network
And you can find, you can participate in any 529. I mean, you can research these. I mean, there’s a college savings network, I think, that’s out there that provides.
There are other organizations, Sam, that actually score the different 529 plans. And Sam, they’re very similar to what a lot of Americans are familiar with, which is the 401k.
Sam Dogen, The Financial Samurai
They’re similar but different. So it’s more similar to, I would say, the Roth IRA, because you’re contributing after tax money. With a 401k, you’re contributing pre-tax money and then you pay the capital gains tax afterwards.
Right. So, yeah, there are a whole bunch of 529 plans sponsored by state. You don’t have to stick with your own state.
And then each state has different laws where it allows for some type of credit. Unfortunately for California, there’s no type of credit. But you can do the research and you can choose which plan is best for you.
Jeffrey H. Snyder, Broadcast Retirement Network
And do you think, you know, because I’m in the industry, I’ve known about the 529 plan for probably 30 years. You’re knowledgeable. You know about the 529 plan.
Do you think most American families are aware of the 529 plan and its benefits? Or do they need a bit more education when it comes to these plans and how to use them? And in particular, some of these newer provisions that I think were part of Secure?
Sam Dogen, The Financial Samurai
Well, I think most families don’t contribute to a 529 plan and they don’t know about the benefits. So we definitely need to educate families more, especially given how expensive college tuition is today and will be in the future. Again, I’m just modeling out 5% increases in college tuition room and board every year for the next 18 years.
And I’m getting to this 500,000 all in for four years for public and almost a million all in for private. And I don’t I don’t think families understand how expensive college will be. And I’ve been fighting back against this crazy rise in college tuition costs for the past 20 years.
And it’s only gotten worse because of internationalization and the desire for status and connections. It’s a super competitive world out there. And so you’re seeing a lot of the repercussions of expensive college today where you have underemployed college graduates or unemployed college graduates.
There’s a rising percentage of young adults living with their parents, something like 20, 25 percent now, whereas in the past it was only about 10 percent. So you are seeing these problems arise because a family is not planning ahead enough, not utilizing that five to nine plan to save enough for college.
Jeffrey H. Snyder, Broadcast Retirement Network
You talked about the expense of college, and I want to ask you, I’ve seen some polling, some numbers. Is is college and forgetting Ivy League, the best of the best, is a college education still worth it, knowing that the cost could be close to a million dollars in, what did you say, it was 18 years from now?
Sam Dogen, The Financial Samurai
In 18 years. I’m going to say the value of college is declining because everything can be learned online for free nowadays. YouTube, blog posts or books are a low cost way to learn.
The problem people have is synthesizing that knowledge and taking that knowledge and doing something with it. Right. And in this very competitive world, a lot of people can do the same job, but it’s being able to have that opportunity.
So unfortunately, college is almost like a necessary evil because of the price. I’m saying because of the evil, right? You need that degree for that networking.
But I’m going to bet that over the next 18 years, college is going to devalue further and more people are going to be more industrious and figure out how to do things on their own and have those actionable skills that employers want. If you have those skills, employers will hire you. And I think the need for college will slowly decline.
Jeffrey H. Snyder, Broadcast Retirement Network
Sam, what about the community college? I feel like that is a I believe that’s kind of an underrepresented tranche of the higher education. I mean, there’s a lot of value there that you can pick up with a two year degree.
And look, I have to be honest. I went to business school. I didn’t go to some high end business school, but I went to business school at night.
When I came out of college, Sam, I didn’t know what I wanted to be. And I felt like, you know, and thankfully I had parents that were able to help me pay. But I feel like a lot of people, when you’re 18, 19, 20, I don’t think you really know what you want to do unless you’re really, you know, unless you really know, unless you really know.
Sam Dogen, The Financial Samurai
Yeah, I think community college is great. It’s either going to be free or definitely under five thousand dollars a year. So it’s very affordable.
You do it for two years during that time when you’re 18, 19 or 20 years old, potentially after high school, you figure out your life in a low cost way while hopefully being able to live at home and save on those living costs. I think those two years where people don’t know what they want to do, community college is fantastic because you can always figure things out in a low cost way, do well and transfer those credits to a low cost state school or to a private college, especially if they give you scholarships and grants.
Jeffrey H. Snyder, Broadcast Retirement Network
So, Sam, let’s finish our conversation this morning. Let’s talk about starting a five to nine. When is the best time?
So assuming that either I’m going to have a child or there’s going to be a new child in my family or I’m the guardian of a child, whatever, when is the best time to start the five to nine? Is it as soon? Is it before the child is born or right after the child is born?
What do you start this five to nine journey?
Sam Dogen, The Financial Samurai
Yeah, ideally, you started right before the child is born and, you know, your child will be born and then you have hopefully 18 years to compound and contribute so that by the time they are eligible to go to college or graduate high school, you’ll have enough money saved up to at least pay for some of that college. You don’t have to pay for all of the college, but it would be nice to have enough to pay for at least the first year and then pay as you go with your cashflow if you’re still working, try to start it ideally the year, I would say like three months before birth or that year of birth and give your time, give your money time to compound.
Jeffrey H. Snyder, Broadcast Retirement Network
And Sam, a lot of employers now, you know, we were talking in segment one about how the five twenty nine maybe isn’t so well known, but a lot of employers now are in some way incorporating the five to nine or at least knowledge about the five to nine. A lot of employers now offering retirement plans. Does it have to be an either or?
Because you could do the retirement, you could do the planning for your child’s education or, you know, for your nephew or niece’s education. But but what about sacrificing your own retirement? There’s a balancing there, I guess, is my point.
Sam Dogen, The Financial Samurai
Yeah. So I think at the end of the day, you got to take care of yourself first. Right.
Put on your seatbelt first and then put on the seatbelt of your loved one next to you. So I think everybody should try to max out their 401k plan if possible. I think it’s twenty three thousand dollar contribution for twenty four.
It keeps on going up five hundred thousand dollars every couple of years. Try to do your best to max out your 401k, because that is important for your retirement. And that is pre-tax money.
So that lowers your taxable income as well. And then after that, what’s left over? Try to contribute to your five to nine plan.
You know, at the end of the day, we’re all working, saving and investing for something. So if you are a parent, your most important duty is to protect your child, love your child and educate your child. And so saving for college or for a private grade school, whatever it is, is a priority for all parents.
So you have to prioritize saving for college. And one of those ways is through the best way is probably through a five to nine plan.
Jeffrey H. Snyder, Broadcast Retirement Network
Yeah, well, certainly well said, Sam. Thanks so much for joining us. Really appreciate you taking some time out of your your day.
And we look forward to having you back on the program again very soon.
Sam Dogen, The Financial Samurai
Hey, thanks for having me, Jeff.
Jeffrey H. Snyder, Broadcast Retirement Network
That wraps up this episode of BRN AM. Have a topic of interest, someone you think we should talk to? Drop us a line.
And don’t forget, for all the latest curated news and lifestyle wellness, finance, tech, so much more, all in one place. Check out today’s edition of our daily newsletter, The Morning Pulse. Want to search our archives, check out our latest content and visit our website.
Hey, we’re back again tomorrow for another edition of BRN AM. We’ll have a very special guest and another important topic. Until then, I’m Jeff Snyder.
Stay safe. Keep on saving. Don’t forget, roll with the changes.
And now it’s your opportunity to co-create content around any topic on the first lifestyle and wellness network, reach a global audience through our platform and co-own exclusive branded content. All of our programs are available on demand and also as audio only podcasts. So you can take us on the go.
Broadcast Retirement Network available anytime, anywhere and on any device.