Loading summary
Transcript101 lines
- [00:00]
A
Welcome to the AICPA's Personal Financial Planning Podcast. This is Kari Sinnett. On behalf of the AICPA Personal Financial Planning Division, the home for professional personal financial planners, we're happy to bring you thought leadership from experts in tax, retirement estate practice management, investment risk management, and today education and client relationships. Be sure to Visit us@aicpa.org Pfp to find more resources and tools designed to help you deliver premier financial planning to your clients. All right, I'm excited about today's guest. Dr. Riskin serves as Chief Learning Officer for the Investments and Wealth Institute and his research and professional expertise focus on advice management, advanced education planning. That's what we'll be talking about today. Tax and wealth transfer planning for high income and high net worth individuals. He's also the founder and Chief creative officer at VisiWealth, vice president at Riskin and Riskin Managing Member at Riskin Wealth Management, and sits on the Advisory Council for the American Institute of Certified College Financial Consultants. He's the author of the Advisor's Guide to Education Planning that is well used, both the first and second editions, which are published by the aicpa. One of the most popular guides we have. Ross has been the recipient of the 40 under 40 award for both investment news and CPA practice. Advisor has received the Standing Ovation in Personal Financial Planning Award from the aicpa, one of the highest awards, and the Accounting Educator of Excellence Award from the Connecticut Society of CPAs. All right, and also, you're up for knighthood in the United Kingdom. No, I'm just, I'm teasing. Ross, thank you so much for being with us. I'm excited to talk about education today. I hear it's valuable. It's one of the things that maybe sometimes gets set to the side, but maybe it shouldn't. Why is education planning so valuable in today's financial planning environment?
- [02:20]
B
Yeah, it's a great question. Thanks for having me, Carrie. Super excited to be here as well. It's so valuable because it continues to be one of those areas that the demand for it is high and there really still is a big knowledge gap and a service gap in what advisors know all the ins and outs of the different strategies. And it's really one of the few ways that provides an opportunity to really work across generations. And so what I mean by that is a lot of times the sweet spot is, you know, maybe working with those clients that are in their 40s to 50s and they have kids that are approaching college age that really provides critical exposure to that group. But at the same time, it provides early exposure to actually working with the next gen.
- [03:00]
C
Right.
- [03:01]
B
Getting to understand the children of your clients. What are they interested in studying? Are there ways where you can connect them to your network, especially if you're working with a diverse client group? And the other part of it is it actually provide some unexpected exposure, maybe even to the generations above, right, to the grandparents. And there may be some unique upstream planning opportunities. Is that something that's come up, especially in light of the potential sunset of tax cuts and Jobs act and let's see what other provisions are out there that either come up or go away, that it's one of the few things that really connects it where everyone cares about education. It matters to next gen clients. It matters to those older clients and grandparents. That's one of the things they're so focused on, is making sure their grandchildren and their heirs are set up for success.
- [03:45]
A
Wow. There's a lot to unravel there. And I expect, being the financial planning expert that you are, that there might be different strategies that you approach for those different categories of people that you just described. Is it one size fits all or. Ross, how do you. How do you approach the. The particular person who's sitting in front of you?
- [04:08]
B
Yeah, it's a great question. It definitely is not one size fits all. I think it's one of those things where the education planning process has become increasingly complex and during a time where people are really seeking and desiring simplicity.
- [04:22]
C
Right.
- [04:22]
B
They want straightforward recommendations. They want to say, hey, I'm putting money in this vehicle, investing it this way. And can that be said? It. Forget it. And it's just not the case. We're firm believers in a multi savings vehicle approach and we're going to talk a lot about 529 plans today. And there's. They become even more flexible and able to help clients save for not only higher education goals, but even pre college goals as well. And even getting into the opportunity to roll excess funds over, maybe repay student loans or kind of move beneficiaries around. So great flexibility there. But it really is important to think about, you know, what is the main goal of the client. And I think when we're talking about those individuals that maybe the funding is the important piece of. Let's say you're working with clients that have younger kids and you're trying to figure out, well, okay, well, how much do we need to save and where do we need to save? One of the important things to do right off the bat is figure out who is actually going to be involved in the funding process.
- [05:17]
C
Right.
- [05:17]
B
So a lot of the times I think the advisor, we kind of default to thinking it's just the parents, but the reality is, well, there may be grandparents involved or maybe there's an aunt or uncle and they didn't have children, but they want to actually help out with their nieces and nephews as well. So it's getting on the same page with them. I've encountered too many, too many times there have been conversations and, you know, especially around, you know, holidays and gatherings or maybe things come up of saying, you know, grandma, grandpa says, hey, you know what, we'd like to put $50,000, you know, towards Johnny's college education. But they don't ask further questions to figure out, well, is it $50,000 being invested right now that can maybe grow to maybe a couple hundred thousand dollars 15, 20 years later? Or are they saying that 15 or 20 years later when he goes to school, they'll chip in $50,000 because maybe they've anchored to that number because maybe that's what they actually paid for their own kids, you know, 20 years ago. And it just will not buy the same. It just won't. It's going to be fewer dollars chasing more goods.
- [06:19]
C
Right.
- [06:19]
B
The impact of inflation. So getting on the same page of that really impacts the funding goals.
- [06:24]
C
Right.
- [06:24]
B
So if you know that if you have $50,000 to start with now versus $50,000 in 15 years, it changes the amount of money that you're going to need. Got into these different accounts when you're running your time value money calculations.
- [06:36]
A
That makes so much sense. Nana has a good heart. But let's, let's put some things down so we know exactly what that means.
- [06:46]
B
Exactly.
- [06:46]
C
Yeah.
- [06:47]
B
And, and then once you get past that and figure out, okay, great, there's this. I, we know who's on the team for actually setting, setting aside funds and going to contribute to these goals for our kids and grandkids. Then it comes up, well, how do you actually select different savings vehicles? What are some of the factors to think about? And so we like to think about four different things. The first is operational flexibility. So it's understanding, well, how do you actually open an account? How do you close an account? Who's the owner of the account, Who's a beneficiary? How do you change those things around? How do you get money into an account? How do you get money out of an account when you actually need it to pay for these expenses? And then we move into investment flexibility.
- [07:22]
C
Right.
- [07:22]
B
Can I make investment changes whenever I want or am I limited? You can I invest in whatever I want or am I limited to what the plan allows? Are there limits to how much I can actually put in an invest or not? Does that vary state by state or vehicle by vehicle? And then tax efficiency is a big thing, right? That's kind of the third factor. Are there any income tax benefits or putting money in? Is there any tax deferral benefits? Is there tax free distributions if I use for qualifying expenses? And then the financial aid efficiency piece, right. Is this asset even going to be assessed in the financial aid formula? If it is, is it an asset of the student, which is more detrimental than being an asset of the parent? Or is it maybe not assessed at all? Or do we have to worry about if we take money out, it gets assessed as untaxed income later on? So those are really the four factors. And so we see different savings vehicles just rank higher in each of those categories. But it's worth bringing up a client because then you get, you really get down to what do they value, what's most important to them? If you have somebody that wants more investment flexibility, well, maybe having everything in a 529 plan isn't the best route because you're limited to what you can invest within those plans. Maybe it's a 529 plan with a brokerage account or with an UPMA account or with a covered L if they're below income thresholds for that. So I think that's a great way to kind of frame it. Figure out how those savings vehicles rank and what aligns best with what your clients are trying to achieve.
- [08:43]
A
And it sounds like also factoring what is the particular state that this is set up in and what state tax benefits perhaps go with that. Am I hearing that correctly?
- [08:56]
B
You're absolutely right. And so I think that comes up to the next question is let's say, okay, we've evaluated all that and we're choosing a 529 plan. The next logical question is, great, which plan are we going with our in state plan? Are we going with an out of state plan? And so there's a couple factors that everybody should really be aware of there that goes into the calculus of deciding that. The first is figuring out, well, what's the amount you're looking to put in each year and how does that compare to any state income tax benefit that may be provided?
- [09:25]
C
Right.
- [09:25]
B
So we know over 30 states provide state income tax deductions or credits for contributions that go in and a Handful of states actually offer state tax parity, which means if you're a resident of a state such as Pennsylvania, you can actually get a state income tax deduction regardless of what plan you decide to make contributions to. Which is great. So that's the first thing is to figure out how much you're looking to put in versus the deduction. Because if you have somebody that's looking to put in, you know, $50,000 or a large amount, but they're only getting a state income tax deduction of $4,000, well, that's not really a driving factor. It provides some benefit, but not a lot. The second thing to look at is the effective state income tax rate.
- [10:02]
C
Right.
- [10:02]
B
The same thing. Maybe you're in a state that has a limited amount that can go in and receive a state income tax deduction, but you may be living in a high income tax state, so it actually is more valuable. Then the third piece are what are the rate of return expectations? And that really ties to the fourth is time horizon.
- [10:18]
C
Right.
- [10:18]
B
So it ends up being the case where the further away from the goal you are, the more important the tax free growth element is.
- [10:26]
C
Right.
- [10:26]
B
So you're more focused on, you have time on your side to invest. So you're more concerned with, well, what am I investing within the plan that actually can outweigh the benefit of receiving a state income tax deduction? However, the closer you are to the goal, so if you're working with clients that are late stage funders, the value of the state income tax deduction is going to outweigh the value of any tax deferred growth because you just don't have time on your side.
- [10:50]
C
Right.
- [10:51]
B
Those allocations are going to be much more conservatively invested. You're not going to have high returns. So you basically have to treat the state income tax deduction you receive as a rate of return. And it could be more valuable the closer you are to the time horizon.
- [11:04]
A
Wow, that makes a lot of sense. Now what happens on the off chance the family is like, okay, we want to fund this particular beneficiary, this future student, but if there's any left over, we wanted to go to student number two, who has a different time frame, maybe even 10 years of difference, and what if it still doesn't get used now we have an extended time frame, maybe to a grandchild out there. How do you handle that unique situation where there might be enough to last through one or two children and have some leftover?
- [11:50]
B
Yeah, it's honestly, it's a great problem to have it's, it's because that's because these 529 plans, they're one of the best legacy planning vehicles, right? Because you can have that opportunity where you fund it initially and then to your point, you can change the beneficiary to another child or grandchild just being mindful of making sure that beneficiary is someone within the family and they're in the same generation or generation above in order to avoid any transfer tax, income tax consequences of those changes. And at the same time you don't have to worry about things like you do with like a covered L, right? A covered L, education savings account. You have to get those funds out of there by the time they reach ages 30, right. You don't have to worry about with a retirement account where you have RMDs to worry about or even in the case of inheriting IRAs, you have, you know, 10 year rule and some other things there. These assets can really live on within the 529 plan. And you just have to manage the strategic changes in account ownership and the beneficiary side of things. And so I think that also comes back to checking what state plan you're dealing with, right? I think some added level of complexity comes into play here if you have people in different states, right? Because then you may have some restrictions on, well, hey, if you live in this state and now you're going to be an owner in another state, some plans may have some restrictions around that. Most are pretty flexible what you do with it. But it's really going to be timing the changes of beneficiaries understanding that hey, maybe there is a case where a gift is being made, right? But it's going to be a gift being made from the current beneficiary to the new beneficiary if you are going to continue to go down generation. So just managing your lifetime exemption, managing any GST consequences there. But it's a super flexible what they can be used for. And to your point, maybe after the second change there are no kids or grandkids, you know, then you can be strategic about taking the money out and managing tax brackets, right? Because a part of the distribution that comes out is part earnings, they have to worry about some income tax consequences and potentially a penalty. But the other part is basis that you don't have to worry about. So you'd be really strategic with that. Or maybe there's opportunities to pay down student loans of another family member, right? Maybe it's not paying for college right now, but almost repaying some of the expenses. We know that provision came out like the $10,000 lifetime limit for that. Or maybe it's rolling the excess over into a Roth IRA for that beneficiary. If they're more concerned with retirement planning as opposed to creating a true legacy planning vehicle.
- [14:08]
A
Absolutely. Ross. I thought I was just going to save some money for my future college student. You've shown me already what a complex financial planning situation this actually is. And I think a lot of CPA financial planners out there are starting to hear, wow, this really unwraps a deeper conversation. It unwraps legacy intent, education intent, and then interplay with retirement goals. There's a lot going on in here. What else do we need to know?
- [14:40]
B
Yeah, I think one of the things to also keep in mind around funding limits, right. I think some people and some advisors look at that and say, okay, great, well, I live in a state and the funding limit is $575,000, let's say. I think that's one of the highest out there for state. Keep in mind, that's just contributions, right? So that doesn't mean the account can't grow past that. So some people believe, oh, well, that's the most could ever be. That's not true. Imagine funding that much money in a 529 plan and then leaving and letting it grow for the current generation, even next generations. You could accumulate millions of dollars in those plans. And on top of it, that's on a state by state basis. So that doesn't mean you can't also max fund another 529 plan in another state for that same beneficiary. So, like, you can really put a lot of money into this great legacy planning vehicle. I think something else to keep in mind is the use of trust to actually fund a 529 plan. That's where properly allocating GST exemption comes in. And that's where you can really properly plan for not having to worry about any generation skipping, transfer, tax issues later. Is if you have a Trust, own that 529 plan and you allocate GST properly to it. And you brought up another great point on the retirement planning. It's a balancing act. And I think that's something that it's so difficult and challenging. I mean, retirement and education, those are the top two priorities really for almost every family across the wealth continuum. And I think one of the interesting things, even with the newer ability to be able to roll excess funds from a520 plan into a Roth IRA is is that a lot of that discussion has been around, okay, setting up a Roth IRA for the beneficiary. But the reality is it may make more sense, especially if we get more clarity, for the beneficiary to maybe change back to the parents. And the parents use that money to put money in their own Roth.
- [16:24]
C
Right.
- [16:24]
B
Just by definition, money that goes to save for college is money that is not being allocated towards their own retirement. And we in the advisor community know that saving for retirement needs to take priority over saving for college. Yet clients operate and act in the total opposite behavior of that many times.
- [16:41]
A
It turns out they're human. Yeah, it turns out they're human.
- [16:44]
C
Right.
- [16:45]
B
Exactly. Exactly. So I think being able to do that balancing act and also frame that for clients in both a quantitative way but also a qualitative way. So that's like one thing we've done a lot and, you know, done some visuals on this on the visual side of things, of just kind of showing a matrix of clients to clients to show them, hey, look, are you on track for saving for retirement, reaching your goals? Are you off track? And then at the same time, well, how does that match up with what type of student are we dealing with?
- [17:09]
C
Right.
- [17:09]
B
So not every advisor is talking to the student or the parents to say, well, how do they do. Did they do on the standardized testing? How do they do gpa? What do they want to study? How motivated are they? And that kind of helps plot the student, the parent, to figure out, well, what's the priority? Is it looking at a school that's the best fit for the student because it's a great investment? Or are we looking at the school that's the most affordable because the parents can't afford to borrow, you know, take away from the retirement savings, that goal to actually meet this goal. And so that helps kind of show it in a different way and brings the student element into it, where if you have a student who they don't score well, they're not really motivated, they don't know why they would go to college. Well, the parent shouldn't be the primary person funding that.
- [17:49]
C
Right.
- [17:49]
B
There are options for students to borrow, to go the community college route and then transfer. And there's a lot of different options when it comes to paying for college. Not so many when we're talking about paying for retirement.
- [18:00]
A
That's so true. Most grandparents are not looking to fund somebody's retirement, happy to contribute to some education. And really knowing that entire landscape as the financial planner helps you put the client at ease about how do we accomplish these multiple interlaced goals.
- [18:22]
B
Absolutely. And to your point, it comes back to the conversations that you're having with clients. And I can speak from experience. I've been doing this a long time. And anytime somebody comes in, especially the higher net worth, higher income individuals, they, they are very focused on what's happening education wise for their kids and even more so the added complexity. There's a lot of times they're looking at private school even before college. So now you're dealing maybe with 30 to $50,000 per year even for kindergarten and first grade and second grade, like major expenditures for these families because they care about that. That's what really matters to them. Everybody has their own individual education and college funding philosophy. And so I think that's one of the most important things to get out of a, out of that first meeting with a client too is tell me about your journey. Oh, well, I went to private school and my parents paid for that or my grandparents helped out and maybe the other spouse oftentimes is well, I went to public school. I never had that experience. I turned out just fine. So everyone usually has their different especially when talking with couples. But it's one of the things you can get them on the same page because ultimately they all want to do what's best for their own kids and children. And then I alluded to this before, just talking about that unexpected exposure to upstream planning. That's usually what, what, what that really means is it gets you another phone call, gets you another meeting with another interested party who could be a potential client of yours. And now you're working with three generations for one family. And how stick, you can't get stickier than that when it comes to building relationships for long term comprehensive plan, that's truly comprehensive planning. I mean we throw out that term and we usually assign it to oh, we're doing all these investments, retirement, all these different things. But really comprehensive is, it's not only tax planning for you, but it's understanding the implications of your kids when you pass assets onto them or if you move them upstream and then assets get inherited back down to receive step up in basis. So that's true. Comprehensive planning and education planning is one of the best ways to deliver that.
- [20:13]
A
I think the general public perception of tools like the 529 is well that's a great tool for college. And maybe some of the lesser known features are things like what you just mentioned private school and can't you even like pay off some amount of loans and think what are some of the other benefits that are maybe that second level conversation when you find out they're actually that one of their kids is in private school in sixth grade.
- [20:43]
B
It's a great question. It absolutely comes up. You know, that was one of the, the things that was added as part of tax Cuts and Jobs act is the K through 12 tuition only, right. $10,000 per year to use for those private school expenses. Now that maybe helps out with a little bit if you're located where I am in the northeast with the, with the cost of some of these K through 12 schools. But it's still a valid conversation. And still that's. What are we talking about? Five, six or not even. What is it, eight years old here? You know, seven, eight years old. And people still don't know about that. So I think we take that for granted of, oh, we've known about that for a while. But your client, if they had kids who weren't even born yet when Tax Cuts and Jobs act came out, they don't care and they don't even know about that. So something is always going to be new to somebody even if we think it's old hat to us. So The K through 12 is huge. And yes, mentioned the student loans or that's $10,000 to, that's a lifetime limit that can be used to repay student loans for a beneficiary. But guess what, the $10,000 limit also applies to each sibling of the beneficiary. So if you deal with larger families, now you're saying, well that actually can go a long way.
- [21:48]
C
Right.
- [21:48]
B
If you have a larger family, five or six siblings, there's 50 or 60,000 that could be used to repay student loans. But one of the biggest caveats to not ignore that and forget about, we often do because especially in the we're so focused on the federal side of things. Hey, what's the federal income tax implications of this that we forget about the state side?
- [22:06]
C
Right.
- [22:06]
B
The reality is not every state conforms to those federal laws. So you may have a client where hey, they want to take out money and use it for K through 12 tuition, but they live in a state where it's a non qualified expense. So even though it's a tax free distribution on the federal side, not only do they have to worry about paying income taxes to the state on their earnings, but if they receive the state income tax deduction, they may have to worry about recapture provisions.
- [22:28]
C
Right.
- [22:28]
B
Paying back a tax deduction they maybe got five or 10 years ago because they didn't understand the compliance issues there. So that being said, there's more options and more tools available ways to use these vehicles to accommodate different needs of clients at different stages of life. And it's our job as advisors to know those nuances to understand what's going to work better for this client and not kind of group them all in this one bucket. Really take an individualized approach.
- [22:57]
A
It really speaks to the value of the CPA financial planner who's going to have top of mind tax compliance issues that could hit five, ten years down the road and to just have that conversation. In fact, everything that you are unwrapping for us shows the value of having a deep conversation. Russ, how do you get this conversation started? If you are the run of the mill CPA financial planner doing financial planning and really haven't dived deep yet into education, how do I get started in, you know, having a fraction of the expertise that you do?
- [23:34]
B
Yeah, I think there's a couple of different ways. I think it's definitely consuming a lot of the content that your group is putting out through the AICPA, the PfP division that advisors Guide to Education playing I'm biased. I helped write that. So I have to say that's good. No, it's good. It is good. So it's a good primer there. But getting on webcasts, going to conferences, I try to. I've been involved at the Engage conference for a number of years. I'm always trying to do new sessions there on education planning related topics. Also, as you mentioned, I'm on the advisory board for the AICCFC so Certified College Financial Consultant designation which really, when that was set up, you had to be a CPA to go through and do it because. Because that program is really built on that tax planning knowledge compliance foundation because it just, it involves so many things that we're actually dealing with. You know, not, not to go down another rabbit hole, but another thing I thought about is you just mentioned the importance of the tax compliance piece really is the distribution planning.
- [24:27]
C
Right.
- [24:27]
B
That's a lot of times we spend so much talking about the theoretical of we'll put money in here and we'll invest it this way and. But that's years away from the. When the actual bill comes due. But that's where you as a CPA advisor can really add value is now it's time to pay the bill. Where do we take money from first and how do we do that?
- [24:46]
C
Right.
- [24:46]
B
It's a great preview to retirement income planning and a lot of CPAs are kind of missing the both there. They're not as involved there because they just say, oh, you have a 529 plan, but maybe there's a grandparent 529 plan as well. And maybe there's a Coverdell, maybe there's a brokerage account in upma. So it's understanding how all of those vehicles play together. And where do you take from first to optimize the tax efficiency of these vehicles?
- [25:09]
C
Right.
- [25:10]
B
Or you may say, oh, take money from the 529 plan. What do you have to worry about? Well, making sure that the distributions are occurring in the same year, the expenses are actually incurred. So it's a fully tax free distribution. But maybe you have a client that they also qualify for the American Opportunity Tax Credit. What do we know about that? You can't double dip. So if you only used 529 plan funds to pay all those expenses, you will not be able to claim the credit or you claim the credit and a part of the distribution is taxable. So it's really understanding the interplay of all those things to provide the best guidance and it requires you to be proactive.
- [25:45]
C
Right.
- [25:45]
B
I think that's one of the great things. There's almost every month there's something to be talking with clients about education, planning related.
- [25:51]
C
Right.
- [25:52]
B
We know that in the fall. Okay, we know this now, there were delays the past couple years, but we know next year like FAFSA and CSS Profile are going to be in October. Student loans usually begin repayments in November. People may be receiving award letters December to January. They have to make decisions by May like new loan rates come out July 1st. It's almost every month there is something to be talking with a client about or bringing up to. And I think something I can't overstate enough is the importance of talking to your clients and telling them what you're thinking about, even if it doesn't apply to them.
- [26:24]
C
Right.
- [26:24]
B
There's so much value in saying, hey, you know what, I just went to this conference, the ASAP Engage conference and I sat in on these sessions that have some unique planning opportunities and strategies that I'm going to explore for you. I'm not sure if any of them are going to work for your situation now, but I'm taking a look at that for you. Just sending an email or message like that, people don't understand how much value that adds. That's you're taking a proactive approach to it. They're checking out for me. They have to wait for me to reach out to them with a question builds trust and builds time on your side that clients know you're working even when you're not contacting them constantly.
- [26:55]
A
Well, and it sounds like from the client's point of view, my advisor is thinking about me even when I'm not thinking about them. They're thinking about my future. They're thinking about what new information is going to benefit me. And just having that perception of the work that you are doing behind the scenes is so valuable.
- [27:16]
B
A hundred percent.
- [27:17]
A
Talk about client satisfaction, right?
- [27:19]
B
Yep. Absolutely. Yep. And client engagement too.
- [27:22]
C
Right.
- [27:22]
B
I think that's the other part of how do you get clients engaged with it? And the other thing it shows is when you send a message to a client that says, hey, look, there's things coming out with the financial aid forms. I noticed that this school, you know, they've changed their aid distribution policies. I know your son or daughter's looking at this school. They may want to consider this school as well. What the client hears is my advisor is calling me and asking me and thinking about my kid. For the parents of us out there, like that's all we care about. That's like the main thing we do is not they're looking out for me, but really it's saying is, well, I would love for this person to work with my kids. And they're already taking that initiative before they're even a paying client.
- [27:58]
A
Wow. Exactly. That's so powerful. My wife and I have four kids. And if an advisor said to me, you know what, congratulations on, you know, let's say Dawson getting into the University of Nebraska. But here's something to think about for Dawson. Well, both my wife and I, our hearts are tied to. We hope that he does well in the future. And now my advisor is thinking about that as well. There's nowhere else I would want to point Dawson in the future except to that advisor who already knows the history, knows my values. And I'm hoping as a client that Dawson becomes the next generation of client for that advisor. What? Great insight, Ross. What else is in your basket there?
- [28:45]
B
That too much? No, but I mean, look, I love that story. You give that example is 100% correct. I think even going back to the, hey, the distribution planning, the paying for college. I think one thing I noticed has been a big misstep or an oversight is actually the investment planning during college years.
- [29:04]
C
Oh, wow.
- [29:05]
A
Yeah.
- [29:05]
B
I think because most people default to using. Especially if you're using five torrent plans, target enrollment portfolios.
- [29:10]
C
Right.
- [29:10]
B
So it's good that we have these, they, they used to be more popularly known or what was more popular used were age based portfolios, which sounded good in theory, but they're actually not that great if you have clients that their goals are maybe changing.
- [29:23]
C
Right?
- [29:24]
B
So maybe you had somebody who set up a 529 plan and they're in an age based portfolio. So the allocation changes. Hey, the older the student gets, the closer to the goal. It becomes more conservative, less weighted in equities, more weighted in fixed income in cash. But if the client comes and says, hey, you know what, our son's having troubles in this school, we're actually going to move him to this private school, we're going to look to tap those sons earlier. And if you don't make that allocation, that allocation still assumes those funds are going to be used at age 18, when in reality the client may need them at age 14.
- [29:52]
C
Right.
- [29:52]
B
So you're overweighted, you're overaggressive in your allocation there. The other thing to keep in mind is every state varies. And so a lot of clients, even the DIYers, even advisors kind of default sometimes, right? Because they're not actively managing those funds. They may say, okay, well this client's moderate, so they're going to be in the moderate age based portfolio. They vary state by state. So you can have a moderate portfolio in one state could be the equivalent of an aggressive allocation in another state. So there's all differences between states. But the biggest issue that people need to be aware of, especially now in the past couple of years, is what about the allocations? When you're in college, you're going to be approaching college, right? And so we did some research on this. I did a paper last year and looked at these and it varied from I think it was 30 to 50% of target enrollment portfolios for either you're going to be enrolled in 2024 or you're already in college, lost money. Think about it, you're in distribution mode, which means capital preservation is the most important thing to you, right? We're not looking for growth here. We're looking to make sure the funds remain there and earn a little bit. And couple this with the fact that we're in a high interest rate environment where you could be getting 4 to 5% guaranteed principal returns in a 529 plan, tax free. So I urge people that if you have clients and they are in school right now, or they're going to be in school in the fall and they're thinking and planning on using 529 plan funds. Go look at those investment allocations there, see what the guaranteed principal options are returning. Because if they're returning 4% or 5%, that's likely what you want to suggest. And get them out of age based portfolios where fixed income allocations have not done well in the past. You still have equity exposure which you don't really need during this three to five year window for payments. So that's, I would urge people to look at.
- [31:36]
A
That is brilliant insight, Ross. Leave us with a closing thought that we should be thinking about for education and what should we be doing as CPA financial planners to make this a bigger part of our practice?
- [31:51]
B
Yeah, I'd say get educated, get educated about education planning. I think we need to do the table stakes approach, which is understanding, you know, your time value money concepts using the tools you have in front of you that you're familiar with. But that's only going to get you so far. You really need to be looking at understanding financial aid distribution policies and not falling back into thinking, oh well, if school, I mean, we're, we're hitting the $100,000 a year mark right now.
- [32:18]
C
Right.
- [32:19]
B
But the silver lining to that is that means that how the aid formulas work, you're going to have individuals and families that make more money. High income earners may actually now qualify for need based aid. So now that brings up a whole new slew of conversations that you can have with those clients where in the past you kind of wrote them off because you're thinking, we're not even going to talk about that. They make too much money, they have too much in assets. But as schools get more expensive, more of those people get drawn in. So that's important to note. It's understanding that you have to start early, not only on the funding side, but even the financial aid side. It's the spring semester of the student's sophomore year in high school.
- [32:55]
A
Sophomore? Did you say it's sophomore of high school?
- [32:58]
B
Yes, that's the first income assessment year. So what you do from a tax planning perspective, from an income planning perspective, that will basically dictate what you're able to receive or the student's able to receive from a need based position for the next four years in school in college.
- [33:15]
A
And if we're not doing this education planning, we should make sure our middle schoolers are getting scouted by the professional leagues. Is that right?
- [33:25]
C
Yes.
- [33:25]
B
Nil. Planning will be your next, next area of specialization. No. And then the other, you know, and the last piece is don't forget about the student loan side of things like that. Obviously has been in and out of the news for a while. But you can approach student loans like you approach other types of debt. And that's kind of what we default to is oh, you have student loans, that's bad, pay them off as quickly as possible. When it's, hold on a second. Because you have loan forgiveness programs of which some of them are tax free. So that changes the dynamic entirely. Where even if you have a client, perfect example is this. You have a client where they maybe have three or four hundred thousand dollars in a 529 plan. And your thoughts are they, they're not worried about funding, they have enough money, you know, based on the schools the students look and how they're going to use it all. But if you have deeper conversations and understand that well, the student's interested in going into public service and they want to be in that field and maybe a less lucrative, from a financial perspective, well, maybe it makes sense to not spend all that money. Maybe it makes sense to go to choice B school, maybe spend $200,000 of the four take out loans and work towards tax free loan forgiveness. Then you can invest the rest for next generations. Other people in the family like that's a smarter way to approach it versus saying all student loan debt is bad. You know, you can't think of it that way. There's, there are cases where there, there are just other opportunities to add more.
- [34:43]
A
Value there really drilling down to the specifics of each person's situation. That's the big headline that I'm hearing that you're, you're sharing. Wow.
- [34:54]
B
Absolutely. And it's, and it is one of those things where you can't let clients rely on the water cooler talk or what their parents are doing. I mean everybody's talking, they're all talking about where their kids are getting into school. Like that they're, they're more than happy to share that if they get into the top school. But it's one of the only things where basically it's the equivalent to letting kids, hey, your kids are going to get their license. Would you let them go test drive a Ferrari or Lamborghini or a Porsche? You wouldn't yet that's what happens with college.
- [35:20]
C
Right, Right.
- [35:21]
B
Is like the most dangerous sentence. Joe messenger, you know, one of my colleagues says is well let's get in and we'll figure it out how to pay for it. That's the most dangerous statement. But that's so commonly believed so if you get everybody on the same page as you as an advisor, have those conversations early with the family and the student too, then you could be set up for success and could define that in a way that the student is satisfied because they understand what they're doing, where they're applying to, how it makes sense. Because maybe they're able to benefit from receiving money later to start a business or buy a house or something else versus it all going into an expensive undergraduate degree with maybe questionable returns.
- [35:57]
A
Yeah, that makes sense. Well, Dr. Ross Riskin, this has been an amazing and enlightening conversation about education. I'm actually going to take my wife out to dinner and we're going to go through some of these topics that you outlined for us today. So thank you for sharing with our community of listeners. Our hope is that you got a valuable takeaway as well, so check out our show Notes to find resources related to what Dr. Riskin is talking about, including the Education Guide. Great piece. And to learn more, visit the AICPA pfp section@aicpa.orgpfp now. We'd love to know your speaker and topic ideas for the future episodes, so send an email to financial planningicpa.org if you get value from this podcast. We would really appreciate your support by following the podcast in your favorite podcast app. Thank you for listening and I look forward to next time.
- [37:01]
D
This content is designed to provide illustrative information with respect to the subject matter covered and does not represent an official opinion or position of the AICPA or the association or cima. It is provided with the understanding that they are not engaged in offering legal, accounting or other professional services. If such advice or expert assistance is required, the services of a competent professional person should be sought. The aicpa, the association and CEMA make no representations, warranties or guarantees as to, and assume no responsibility for the content or application of the material contained herein, and especially disclaim all liability for any damages arising out of the use of, reference to, or reliance on such material.