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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 indexes 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. 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. This is Nate, James joining me again for another beautiful Iowa wintry Wednesday morning. It wasn’t too bad out there today, I know they were calling overnight to have, last night before I was going to bed talking a little bit about icy roads or some conditions coming in. I don’t think we quite got too much, which isn’t a bad thing. We definitely got our fill of it.
Crazy time of the year. Also been a crazy time in the Nelson household. Prince of Peace boys’ basketball team advancing to the state tournament, the first time in what? 25 years or whatever? Exciting time I know for everyone involved with that, and with your guys’ involvement as well.
James Nelson: Yeah, it’s been fun. We’ve been close so many times. We had two sub-state losses when John and I played in high school, and a couple … or one after and one before, just before we were there, too. So we’ve been close four or five different times in recent years. They were finally able to do it and it’s fun to go to the games and see a lot of old teammates and classmates, and everybody’s jumping on board again. It’s going to be fun next week out in Des Moines.
Nate Kreinbrink: It’s an exciting time and it’s obviously, I mean for Jerry, the coach. With as many years as he’s been there, as much time and effort that he’s put into it, and I know he’s said in there, I read in a couple of the articles he said, “There’s been so many good teams along the way that just haven’t advanced to that state tournament.” It takes so much to get there, people don’t understand as far as just one break here, there, an off shooting night, one call, one miss.
So for him, for all the time and everything that he’s put in, it’s a huge honor for him and I feel great for him as well to be able to get that opportunity.
James Nelson: Absolutely. He’s been extremely loyal to the school and has been a great coach. He’s got quite the winning percentage, too. He’s got a lot of wins over his career and yeah, we couldn’t be more happy for him too.
Nate Kreinbrink: I know they play Monday. I don’t think they quite know exactly what time yet. There’s a couple of the other teams that had some games canceled over the weekend. I think the finished up last night, if I believe.
James Nelson: Yep.
Nate Kreinbrink: So today I think you should be able to learn that time. But again, wishing them the best of luck representing the Clinton area out at the state tournament. It’s always an exciting time.
James Nelson: Yeah, we can’t wait! We’re looking forward to it.
Nate Kreinbrink: [crosstalk 00:03:14] games and watch a little bit.
James Nelson: Yeah, exactly! I want to get in there and play.
Nate Kreinbrink: Today’s program, James and I were kind of talking yesterday afternoon a little bit as far as what we were going to go into. We recently listened and were involved in a conference call regarding college planing. This is a topic that continuously always comes up. Obviously if you’ve looked at the cost of the secondary educations anymore, whether it’s a two-year, four-year, those costs continue to increase.
Having a plan in place, being able to start saving or how you’re going to look to attack that for when that time gets here. I know with me myself, having a sophomore in the household, those are real decisions that we’re looking at starting the college planning process. It’s definitely overwhelming, so understanding that there are different options out there, understanding what you’re looking to put away, when you’re looking to use this, has different consequences. We’ll get into a little bit of the different types of planning, or the different types of vehicles that you’re able to put money into.
Some of the other things, whether it’s the FAFSA form, whether it’s looking at some maybe alternative options that people oftentimes overlook, to again any way that we can reduce that ticket price, per se, as far as going to college and being able to come out on the back end with as little to no debt as possible. That’s the ultimate goal. So again, the earlier you start planning, the better off you’re probably going to be.
James Nelson: And it’s just like healthcare costs. It just keeps going up.
Nate Kreinbrink: Exactly.
James Nelson: I mean, the last 10, 15 years, just pencil it in. Anywhere between five to 10% increase each and every year, and no signs of that slowing down. So yeah, it is a huge number. We have a lot of clients that are either parents or grandparents that are looking to us to help make those decisions. There’s two accounts that we really look at these days.
The 529 plan is one, that’s probably the most talked about and the account that most people are familiar with relating to college expenses. And then there’s a UTMA account. That’s a taxable account in the … It’s a custodial account. It’s in the parents’ name technically for the benefit of the child. When they become, in the state of Iowa age 21, the money’s turned over to them.
Those are the two main accounts. 529 plans are great. If it’s the state plan, the Iowa state plan, each state usually has their … I think almost every state has their own state-driven 529 plan. You get some tax benefits, you get a state deduction, not on the federal level but the state level. So if you’re putting some money in for a grandchild or a child, a little bit of tax benefit for you today.
And then that money grows and comes out tax free, assuming it’s used for qualified educational expenses. Tuition, room and board, books, that type of stuff. The other one, the UTMA account, maybe not as advantageous. It’s a taxable account, so any gains buying and selling in the account are distributed and tax due on that. Probably not a huge issue unless there’s a lot of money in that account. But there’s a little bit more flexibility. The UTMA account is theirs, they can buy a car with it, they can go on vacation with it. They can do whatever they want with that money. There’s not quite the restrictions as a 529 plan.
Kind of two different avenues, two schools of thought. If somebody doesn’t think a child or grandchild’s going to school but they want to hold some money back for maybe a first home purchase, vehicle purchase, whatever, UTMA account may have it’s place. Otherwise, if it’s strictly for college, a 529 seems to be the place where you get the most bang for the buck.
Nate Kreinbrink: Right, and I think that’s important to understand those differences up front, but then transition into the back end when you’re going to actually need to use those assets that are in whichever account that it is that you put them into. That comes down to basically the FAFSA form and understanding how to fill out the FAFSA form, understanding that different assets are basically accounted for differently when you put them onto that form.
Parents assets are counted less as opposed to assets that are in the child’s name. That comes into again, when I say percentages, they basically determine how much you’re going to be able to pay based on your other assets that you have. If we can have assets that are in the parents name that aren’t going to be accounted for as much on there, you may be eligible for more financial aid from the school or whatever avenue that may come into. As opposed to assets that are directly held in the child’s name, the student’s name, they’re going to be accounted for at a greater percentage on that form, and thus may not be eligible for as much financial aid.
So again, all this kind of stuff ties together what you do up front, how that’s going to impact you when you actually get to those days where you’re going to be filling out those forms where you’re sitting in the financial aid office, understanding they give you … This is the sticker price, fill out this form, it was this, now it’s this. How can we reduce that? Your commitment as far as what you’re going to be responsible for for paying for.
Another avenue I know that doesn’t get as much credit but still does have some, I think, space in this avenue is Roth IRAs. Setting up a basic custodial account for a child as they continue to grow, you put money into there. If they don’t need it for college or for secondary education, they’ve got a kick start on their retirement planning.
Again, when you take money out of the Roth to be able to use it for education, it is treated just like any of the accounts, it’s treated differently on the FAFSA form. Retirement accounts don’t count, but income that you take out of a Roth that’s used for that is … it’s treated on that FAFSA form as income for the child, essentially raising their commitment and then reducing the amount of financial aid that they may potentially be eligible for.
Am I saying that they shouldn’t be used? No. We just may want to wait to take money out of that account until your junior or senior year to be able to pay for it after you’ve finished your last FAFSA form, then take it out so whatever it is, you’re not basically treated negatively when you fill out that FAFSA form and the financial aid that you’re eligible for.
James Nelson: Yeah, I think that’s a great point. Roth IRAs, they’re not talked about enough.
Nate Kreinbrink: Right.
James Nelson: They do have their place. One more item that I forgot to mention, with the new tax law changes 529 plans can be used for elementary, middle school, high school-type education too. So we’ve got a couple, we mentioned Prince of Peace earlier in the segment. I mean, there’s a couple private schools in this area. If parents needed that money, they can now, thanks to the new tax law changes here within the last year and a half, they can take that money out of the 529 plan and pay basically any education with that money.
That may be an advantage to some, maybe not to others. But anyway, that’s kind of an important change and a lot more people nationwide, we’ve seen those numbers go up that people are dipping into those college savings accounts to pay for high school courses.
Nate Kreinbrink: I think too, it’s also important just to understand what else is all out there. A lot of times, people think of applying for scholarships to go to, whether it is college after their senior year. It’s the $250 ones, it’s the $500 ones or whatever at your local bank, your whatever. Whatever the case it may be, and again I’m not discounting those at all because you get a couple of those, any little bit that you can take off of there, definitely helps your cause.
Understand what those use, a lot of times those are only a one-year gift that you can use, so then the following year you’re back up to the higher amount. But I think it’s also important for people to look at the institution that they’re going to and see what other opportunities they may have there.
I know when people think that, they always think athletic scholarships or academic scholarships. But often time, these schools have so many other opportunities, other scholarships, other grants out there for different activities that you may be able to get involved in. Just somewhere along those lines.
A lot of times as long as you keep a certain GPA or keep a certain honors or whatever it may be, those continue for all four years of your college. I think that’s important to again understand what else is out there, do your research, take a little time, because again, if we can finish this thing, get that diploma with as little to no debt as possible? You’re going to be much better off as we transition into the real world. And then again, start that conversation.
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