How to Create Huge Tax Savings Funding Your Kid’s College (& FIRE on Time!)

Summary

BiggerPockets Money Podcast Summary Episode: How to Create Huge Tax Savings Funding Your Kid’s College (& FIRE on Time!)
Release Date: May 9, 2025
Hosts: Mindy Jensen, Scott Trench
Guest: Amberly Grant

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1. Introduction

In this episode of the BiggerPockets Money Podcast, hosts Mindy Jensen and Scott Trench, along with guest Amberly Grant, delve into the intricacies of funding children's college education while maintaining financial independence and pursuing FIRE (Financial Independence, Retire Early). The discussion centers on maximizing tax savings through strategic financial planning, particularly focusing on tools like FAFSA and 529 plans.

2. Understanding FAFSA and Financial Aid

Amberly Grant opens the conversation by emphasizing the importance of the Free Application for Federal Student Aid (FAFSA) in determining eligibility for federal grants and loans. She clarifies that FAFSA is not only for grants but also essential for accessing federal student loans and numerous scholarships.

Amberly Grant [02:40]: "FAFSA is not just for free money, for grant money. It's also to determine what your kid will need for federal student loans."

Mindy Jensen shares her frustration with FAFSA, noting that despite knowing she doesn't qualify for aid, completing the form is mandatory.

Mindy Jensen [03:48]: "You have to fill out the whole form, which is really annoying when you already know that you're not going to qualify."

3. UTMA vs. 529 Plans

The hosts and guest compare the Uniform Transfer to Minors Act (UTMA) accounts with 529 plans. Amberly explains that while UTMA accounts are treated as child assets and significantly impact FAFSA calculations, 529 plans are parent-owned and only account for 5% of assets in FAFSA assessments.

Amberly Grant [07:00]: "A 529 account belongs to me, the parent, and my child is just a beneficiary of the account. Therefore, it's only weighed at 5%."

Mindy expresses concerns about UTMA accounts, highlighting the risks of assets being heavily weighted and automatically transferred to children at age 21.

Mindy Jensen [11:10]: "I don't see a use case for it [UTMA over 529]."

4. State-Specific Benefits: Focus on Colorado

The discussion highlights the significance of state-specific benefits for 529 plans, with Amberly pointing out Colorado's advantageous tax deductions.

Amberly Grant [22:00]: "In Colorado, we can use the 529 account contributions as a tax deduction on our yearly taxes."

Scott Trench adds that while some states like California offer no tax deductions for 529 contributions, Colorado stands out with substantial benefits.

Mindy Jensen [39:53]: "There are some states that have absolutely no benefits. Colorado for 2025 has a $25,000 deduction or if you're single, or $38,000 if you're married, filing jointly."

5. Funding Strategies: Lump Sum vs. Yearly Contributions

Scott advocates for a lump-sum contribution to 529 plans to maximize tax-free growth over time, suggesting that an initial investment can significantly compound by the time children attend college.

Scott Trench [19:08]: "I would put in about 75 on day one, essentially, and just let it rip for the next 15 years."

Conversely, Amberly recommends a balanced approach, cautioning against overfunding and allowing flexibility in case children's educational paths change.

Amberly Grant [20:44]: "You might go 10 years in and realize you have a kid who's super handy with plumbing... So you might want to back off of contributing those extra years to that account."

6. Personal Perspectives and Anecdotes

Mindy Jensen candidly shares her current situation, admitting that she hasn't saved for her children's college education, which contrasts with Scott's intent to fully fund his daughters' education and Amberly's moderate saving strategy.

Mindy Jensen [37:33]: "I do have a friend who... ended up asking people instead of giving us any gifts because we don't need anything. We're in our 30s. We're established. We actually asked them to contribute to our children's 529."

7. Overfunding and Penalties

The hosts discuss the consequences of overfunding 529 plans, including a 10% penalty on the growth portion of withdrawals not used for qualified educational expenses.

Amberly Grant [24:42]: "If you overfund the account, any dollar in that account is going to be weighed... it's something to pay attention to."

Scott emphasizes the importance of precise funding to avoid penalties while still leveraging tax advantages.

Scott Trench [22:32]: "I can pull out the 100 grand and use the 200 gain to pay for all of the college expenses... but with the gain, there's a penalty."

8. Flexibility in 529 Plans Use

Amberly highlights that 529 funds can be repurposed if a child chooses not to pursue traditional university education. Funds can be transferred to vocational schools, other beneficiaries, or even returned to the contributor with certain penalties.

Amberly Grant [22:47]: "You can put use some of it towards a vocational school... or you go back to school yourself."

9. Community and Expert Advice

The hosts encourage listeners to engage with experts and the community for tailored advice, acknowledging that individual circumstances vary widely.

Mindy Jensen [48:47]: "Do you know of a 529 expert... please correct us. [e-mail] [e-mail] [e-mail]."

10. Conclusion

Mindy wraps up the conversation by emphasizing the importance of researching state-specific 529 plans and considering individual family circumstances when planning for college funding.

Mindy Jensen [53:30]: "Set up your 529 plan and give that out to all your friends and family. If you're thinking about giving our child a gift, this is a great place to do it."

The episode concludes with the acknowledgment that while there are various strategies to fund children's education, it's crucial to balance these plans with overall financial goals and flexibility.

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Key Takeaways:

• FAFSA is essential for accessing both grants and federal student loans.
• 529 Plans offer significant tax advantages, especially in states like Colorado.
• UTMA Accounts heavily impact financial aid calculations and transfer control at age 21.
• Funding Strategies should balance between lump-sum investments and yearly contributions to maximize growth while maintaining flexibility.
• Overfunding 529 Plans can lead to penalties, so precise planning is crucial.
• Flexibility in using 529 funds allows for adjustments based on children's educational paths.
• State-Specific Benefits play a pivotal role in maximizing the effectiveness of 529 plans.

Notable Quotes:

• Amberly Grant [02:40]: "FAFSA is not just for free money, for grant money. It's also to determine what your kid will need for federal student loans."
• Mindy Jensen [11:10]: "I don't see a use case for it [UTMA over 529]."
• Scott Trench [19:08]: "I would put in about 75 on day one, essentially, and just let it rip for the next 15 years."
• Amberly Grant [20:44]: "You might go 10 years in and realize you have a kid who's super handy with plumbing..."
• Mindy Jensen [53:30]: "Set up your 529 plan and give that out to all your friends and family."

This comprehensive discussion offers valuable insights for parents aiming to fund their children's education efficiently while aligning with broader financial independence goals.

Transcript

[Mindy Jensen]

College debt and paying off that debt is a huge part of many of our guests money stories. Scott, Amberly and I each have two children, although they vary widely in age. Amberly and Scott have kiddos who are under three years old, while I have one heading to college in August and another heading there in another three years. Want to hear the kicker? I technically don't have anything set aside for my kids college. Today we're talking about paying for college and several different ways to go about it. Hello, hello, hello and welcome to the Bigger Pockets Money Podcast. My name is Mindy Jensen and with me today not only is my college planning co host Scott Trench, but also Amberly Grant is joining us too.

[Scott Trench]

Thanks Mindy. Great to be here. We look forward to laying out the textbook approach to planning for college for your children. College Savings Bigger Pockets is a goal of creating 1 million millionaires. You are in the right place if you want to get your financial house in order because we truly believe financial freedom is attainable for everyone no matter when or where you're starting, including if you want to fund the maximum, the most expensive college education that exists for children at any point in the future. Amberly, thank you so much for joining us today. We look forward to learning from you. You are an expert on FAFSA and the 529 and all the tools for saving for college. Thanks for joining us again today.

[Amberly Grant]

Thank you. I had the privilege of having to experience all of this firsthand and working in the financial aid office, so I'm quite versed.

[Scott Trench]

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[Amberly Grant]

Before we get into this conversation, I want to add a disclaimer for today's episode. As you will hear in the episode, we several times mention efc. After we recorded this conversation, I chatted with a friend and found out the EFC has actually been replaced with the student aid index. What are the really important distinctions between these two? Not much. Okay, let's get into it with that in mind.

[Mindy Jensen]

Okay, guys, I am super excited to get into this topic of funding my kids college. Ooh. All right. Amberly, you are one of the most knowledgeable of the three of us. I know that you can fund college, and that's about it. I think Scott is second most knowledgeable. I want you to brain dump all of the things that you know about funding my kids college. I mean, someone's kids college. Go.

[Amberly Grant]

Well, you first have to create an account, Mindy, if you want to fund your kids college, and I'm not doing that for you. Okay. When it comes to university, there are two ways of thinking. Well, three ways of thinking about it. You can get funded by the government grants, which is going to be considered free money. You can be funded by government loans, private loans, of course, as well. Or your parents, or you as a student can foot the bill. When I think about paying for college, the first thing I think about is how do I get those free grants. And so I want to talk a little bit about assets and how those are applied to both you as an adult or your child. So the FAFSA is what matters.

[Mindy Jensen]

FAFSA stands for Free Application for Federal Student Aid. My child, because of my net worth, does not qualify for any federal student aid of any kind. I filled out. You have to fill out the whole form, which is really annoying when you already know that you're not going to qualify. So we filled it out, and you have to fill it out. Honestly, you can't just, like, make stuff. I mean, I guess you could. What are they going to do?

[Amberly Grant]

No, it's a federal form.

[Scott Trench]

Yeah, it's like mortgage fraud. So, Mindy, you have strong opinions on mortgage fraud?

[Mindy Jensen]

I believe I have very strong opinions against mortgage fraud. Don't do it. So I guess you have to fill this out and like, to the best of your knowledge, and at the end of this very lengthy form, then they tell you, yeah, no way, Mindy. Which was nice, but I already knew that.

[Scott Trench]

So, Amberly, give us an overview. What are the ways? What are these kind of cutoffs and how do you start? How do you ballpark whether you'll be able to. To qualify for some of these. These student aid programs?

[Amberly Grant]

Well, first, I want to Say what FAFSA is for. FAFSA is not just for free money, for grant money. It's also to determine what your kid will need for federal student loans. And that's important as well. And you need to fill out FAFSA for a lot of scholarships that you can apply for as well. So. So though you are forced to fill out that form, you need to for multiple reasons. And I actually come from this as a perspective of fire perspective because most people who are working towards becoming a millionaire are not going to be the fund or the government isn't going to give them free money for their kids college. Right. There are things you need to pay attention to and structure your accounts appropriately so that you can decide what the weighting is and maybe, just maybe you might actually get some free money. So one thing to note, I'm just going to go over just what is available there and then we can talk about the numbers. When a child has assets, they're weighed very heavily in the eyes of the government when it comes to what's called an estimated family contribution or an EFC for a child. If they have $100,000 house that you have gifted them before they went to university, the government's going to say 20% of that asset is going to be able to be used to pay for college every single year. Meaning that that hundred thousand dollar asset, 20 grand of it is going to go towards, you know, the amount that the government is calculating that you have to pay for university as an adult. Your personal assets are, are also weighed to see how much the government's going to allow you to take in grants and, or student loans, etc. And for you as an adult it's 5%. And this is where that conversation around UTMA or a 529 account comes into play. A UTMA, which is a Uniform Transfer to Minors act, is a child asset. So some people use that to fund the university. But the thing is you have remember that that is now going to be weighed. Any dollar in that account is going to be weighed at 20% for any grants or like student loans that your, your kid can get, which is something to pay attention to. Also for UTMA account it is automatically transferred to your child at 21. So if you've got like a hundred thousand dollars in there and you have an irresponsible child, they are going to get all that cash at, you know, at 21 years old in one lump sum. And so it's something to pay attention to again with that specific account. Then there's what's called a 529. This one is state specific in regards to, you know, what you can put into it if you get tax deducted deductions for it. In Colorado we can use this. Any amount we put in there we can put as a tax deduction on our yearly taxes. But a 529account belongs to me, the parent and my child is just a beneficiary of the account. Therefore it's only weighed at 5%. When we're looking at, you know, your estimated family contributions for your FAFSA application, any over contributions for your child as a beneficiary can be used and moved into. I'm going to use the word moved into. But a Roth IRA, if they've been the beneficiary for 15 years up to about $30,000 is the limit right now. So those are just the two accounts that you can fund a child's college and both of them will be used like to for the government to understand if you're going to get free money, quote unquote from a grant or you just use that money to pay for college. Like Scott, you were saying, you know, you're going to anticipate that your income and assets are going to be so high that you're not going to be able, your kid will not actually qualify for any grants. But those are the two accounts that people are talking about and those are just the differences between the accounts.

[Mindy Jensen]

My dear listeners, we want to hit 100,000 subscribers on our YouTube channel and we need your help. While we take a quick ad break, please hop over to YouTube.com bigger pockets money and make sure that you're subscribed to this channel. We'll be back with more right after this.

[D]

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[Scott Trench]

Thanks Mindy. Looks like we added 529 listeners during that break. To everyone who's listening to the Bigger Pockets Money podcast, welcome back.

[Mindy Jensen]

The Utma versus 529. It sounds like UTMA is not really what I want to do. Is there a use case ever for the utma over a 529 plan?

[Amberly Grant]

I haven't seen one. I'm sure there's one and I'd love for our listeners to tell us you know what they see that use case for. I do not see a use case for it.

[Mindy Jensen]

Okay, it doesn't sound like a good idea when it's weighted 20% versus 5% and they get it at age 21. Like you said, they could be very irresponsible. Thinking back to 21 year old Mindy, of course I was perfect, but I can see how that would not quite like 21 year old Scott. I bet was a little more wild than 21 year old.

[Scott Trench]

Mindy Nah, I never, I never won a fraternity case race, for example.

[Mindy Jensen]

Just you weren't the captain of every sports team that you played on.

[Scott Trench]

Yeah, those days are long gone now. I live a very suburban life. Mindy well, let's, let's go back to this this discussion here because I'm going to use it from a personal standpoint. I asked for this, this particular podcast out of selfish reasons. I want to think through this decision now that I've had a new baby daughter on this and I'm super privileged to learn from you. Amberly as an expert on these items, I start with a couple of really high level assumptions, right? I have a two and a half year old and a one month old at this point and my belief is that a couple of items one, I do not wish to transfer wealth to either of them heavily in advance. I may change my mind at some point in the future, but I do not want to do that now and begin the process of in a tax advantage way doing that. That may be a mistake later in life, but that's just not my intent at this point. So I'm a little averse to that UTMA gift in the context of that philosophy. Second, I want to pay for college for them and that includes up to and including them attending a very expensive private university if that's what they choose, covering full room, board of tuition and some pocket spending money. Some people may criticize or call that lavish, but that is my choice and that's what I want to plan for in the context of my child's education. I also don't want to overfund a 529 plan, for example, and have too much allocated to college savings because I believe that while there's every reason to believe that college could cost just as much or more relative to inflation, I'd actually bet frankly that it's going to cost less relative to inflation than it does today college by the time my children are of of college age because I believe that some shakeups are coming to the federal student loan program and people are getting smarter about the ROI of college in a general sense. So those are the kind of the starting assumptions that I have for this. What are your reactions to those assumptions? Do you agree or disagree with them or do you challenge or push back on any of them?

[Amberly Grant]

I wouldn't be paying for my entire kids college. I also think that the room and board I want my kid to have a job like in college and beyond and I find it's a very interesting thing when people want to protect their children through university to only be quote, unquote, students, because I don't actually think that prepares them for, for the real world. So I am also funding university for my kids, but I'm doing it up to a certain amount that I've decided on. And it's not actually reflective of necessarily the college that they're going to go to because I know that some of it they can reuse for a Roth IRA if they need to. And I think that's a really nice, flexible way of using a 529 account. But I have lived in college towns. I have partied with college kids, and I noticed that the kids who have everything paid for. I lived in Tucson, Arizona. I worked at Frog and Firkin, which is the college. I worked in the Office of Student Aid at the community college. And I find the kids who have everything paid for room, board, food are some of the most irresponsible, not only students, but also with money in general. So I hesitate when I hear you say that. I think, oh, you may be setting them up for failure.

[Scott Trench]

My parents paid for college room and board. I worked during the summers on there. But I, I, that's, that's what happened for me. And you know, I certainly behaved irresponsibly in college and some of the opportunities from college also set me up for, I think, things later in life that kind of led me to, to the career trajectory that I, that I had there. So I can see it both ways there. I think it depends on the, the individual on there. And again, like, I, I, I completely respect and understand that. And I think that that's a, that's a conversation that happens in so many households here with so many different conclusions being arrived at by different folks. I love it.

[Mindy Jensen]

And I think you're an anomaly, Scott.

[Scott Trench]

Why is that?

[Mindy Jensen]

I think more, more people are of Amberly's example. They, if they are, if everything is paid for, they don't have any skin in the game. They're not going to appreciate it as much. They're going to take it for granted. You are, because I know you. You're, I've known you for 10 years. You are just an anomaly in general.

[Scott Trench]

Well, look, I, look, I, I think, I think that it's fair to say I took it in college to a certain degree on those, those items in there. And, and that certain of Amberly's criticisms are, are correct there. They might be correct for some of my, my friends as well. I Want to speak for them. But then I, I look at it and I see, I see folks of all different types and backgrounds succeeding in a variety of ways. I can point to friends that are doctors, lawyers at big firms in there and, and all, all in between. And so again, I think, I think it's a wonderful debate on it. That's just, I just have a, I would just push back and say, and say there's multiple ways to think about each of these circumstances. And I would like to plan for the option to pay for the entirety of my girls college education on there. And that is my plan. That may change at some point in the future, but that is the base case that I have going into the planning process on it. So I think it's a great pushback and discussion. Completely respect it while still maintaining my stance that I want to, I want to plan on that.

[Amberly Grant]

I. So let's talk about how you would actually fund that. Right. And I do want to give credit to people in general. We, I think we all have our wild days and then we all, you know, settle down into good lies, whatever that looks like. So I should give some people some credit here.

[Scott Trench]

Not everyone did. Not everyone.

[Amberly Grant]

Yeah, I, I know I've got the examples. You, I've got the doctors, the lawyers and then the people who just never got out of it. Right. But what I guess what I'm really trying to say is that I like that you worked through, through summers. I think that's a really important thing because university not, is just not about payment, but it's about life experience. And so I think as long as we can set our kids up for life experience as well as the education process, that's great. So let's talk about how you can fund that. First of all, you have to decide what you think university will be worth in that time frame. So our case, we decided that when each child is born, we're giving them $10,000 to start their account. And in Colorado, since you live in Colorado, college invest is the way that you're going to do that. It's a specific website that you need to use so that you can actually get those tax credits. Turns out I didn't know that in the beginning and I used, I did it through fidelity, through 10 grand in there. And I cannot claim that unfortunately on my taxes because you have to go through this one specific website. From there I have determined that I'm going to fund each college, each child's College up to $85,000 because my children have the option of going to college in Canada as well as the United. So I figured that's a good amount to cover four years at CU Boulder in the business program just for the unit, like just the university part, not room and board, because I figured that will be something else that we can determine later. And so then Now I'm putting $1500 a year on top of that, $10,000 until they're 20 years old. And that will cover the up. That will be the $85,000 I'm going to need to cover what I am willing to cover for both of my children. And that's how we did the calculation is essentially what's that future value? We want it to be around 80 to $100,000. And then we worked backwards with a lump sum because I like lump sums. I like to just throw it all in there and then slowly accumulate after that. What do you think, Scott?

[Scott Trench]

Yeah, I think, I think that that makes, I think that makes sense. I would say the 529 maximum is, is $29,000 for a married couple to contribute to a single child. So you could do that each to each child there for each child. And I believe you can contribute up to five years at once. You cannot contribute then for the next several years on that, but you can contribute up to five years on that. So that's a big pile of money. It's almost 150 grand. On top of that, that program that you discussed, Amberly, the college invest, I believe gives you a $1,000 match for the child for five years, or at least they were doing that with my first child. I don't know if they're still doing that today, which is an awesome benefit and what makes sense to. So I want to back into basically a, let's call it a $75,000 per year estimate for Foley Bird and tuition and room, board and books per child at an expensive private institution. I want to be able to fund that on there. I believe that will be overkill. But if I was planning on that, that would be what, like 300 grand? A little bit over 300 grand. So I would want to put in, you know, they'll double every seven and a half years. So I'd want to put in about 75 on day one, essentially and just let it rip for the next 15 years. Because the advantage of the 529 is the tax free growth. So max it out all at once. Boom, done in there. What do you think about that? Is that the right plan? Is that, is that, is that the right way to think about it in your opinion, Amberly?

[Amberly Grant]

Again, I love lump sum. So yes, except for one thing to think about. You may have a kid that you realize is really not going to go to university. So you don't know your kid's full personality yet. We can kind of see them right like from the beginning. But that's something that you want to be careful of is if you're going to do that huge lump sum in the beginning and essentially let it ride. You might go 10 years in and realize you have a kid who's super handy with plumbing because they're helping you with house rentals, whatever it might be. And that university might not be the way for them. So you might want to back off of contributing those extra years to that account. But I don't see any problem with that because again, I like the lump sum method and then slowly putting money towards it afterwards. It just depends on how you're, how you are okay with not using that money. And the great thing with a 529 is you can transfer it to someone else. Say your one daughter is like you know what dad, I am going to become a plumber and I'm not going to do this. You can put use some of it towards a vocational school. So maybe she uses about 75,000 doll thousand dollars of it. But then you've got the other 225 000. Maybe you save it for their like her children or you give it to a cousin or something like that or you go back to school yourself. But just know that it may be overfunded with, especially with that large of an amount.

[Scott Trench]

Okay, a couple, couple other questions can I use let's say, let's say you know I love my debt funds right. And hard money lending on here. I know they're very. That most people are like what the heck, I'm not ever going to touch that. But, but let's say I put you know, 75 in or 100 in into these accounts and I'm able to put it into a debt fund or hard private Note that generates 10% simple interest. Can I use that interest to pay for preschool for example, or summer programs or those types of things on an interim basis on a tax with tax free dollars.

[Amberly Grant]

Yeah. So you can send them to Preschool. You can use 529s to send them to preschool. I'm sure there's a whole list on the government website. I don't want to speak out of. Turn on what you can and can't use it for.

[Mindy Jensen]

I just looked up can direct a 529 plan. And I'm seeing no everywhere.

[Scott Trench]

Okay, so no, but I, I would have to find some sort of other investment that was reasonably available via publicly traded securities or standard brokerage investment accounts. But I could conceivably use simple interest proceeds from that and something fairly safe and use that to fund preschool or after school activities in some capacity or summer camps or those types of things during that period as well, which would. Wait, have, which would also be, which would be a tax advantage way to fund some of those things on an interim basis leading up to college. Is that right?

[Mindy Jensen]

529 plans can be used for college and secondary education, elementary or secondary school, K through 12, tuition and fees, books and supplies, student loan payments, room and board, things that a student would need, like a computer or Internet or things like that. I am looking at, looking for a list of all of these things that you can use it for. It's not just limited to college.

[Amberly Grant]

And Mindy, when you caught talking about room and board, we have to be very careful with that because it's not room and board like what we think, oh, it's a $3,000 apartment. We got this. It's going to be out of the 529. It's legally what the college states what room and board should be based on their area. And the, the university sets that price. So you can't just go ball out. You got to, you can only take out what's the university says is appropriate for room and board. The other thing though, you have to remember, Scott, that you can just take that money out. Say you overfund it, we're going back. Your, your kid's a plumber and you overfund it, you can take your contributions out, but it's the growth on the contributions that you're going to pay a penalty on. And if that 10 penalty is no bother to you because you want the cash, then you just take it all out and you go do whatever you want with it afterwards. Right. So just remember that with all of these things, though, there's tax advantages to keeping it and growing it in these accounts. We still have access to our money. We just have to pay for it.

[Scott Trench]

Got it. Okay. And that's just on the gain. So if I put in, you know, 75 or 100 grand and it becomes 300,000 later in life, I can pull out the 100 grand and use the 200 gain to pay for all of the college expenses, for example.

[Amberly Grant]

I believe that's the case.

[Scott Trench]

All right, we've got to take one final ad break and we'll be back with more in a moment.

[D]

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[D]

Aaron, the ad guy here. Yeah, that's right. I do all the ads for BiggerPockets and you might be saying to me, Aaron, the ads are too long or Aaron, there's far too many ads. You know what? Come get me then. You think you're so tough. If you can tag me while I'm unawares, I will remove every single ad from the Bigger Pockets network. You have my word. But never going to catch me. You know why? Because I have the SimpliSafe home security system and I've got multiple locations I can go to with it installed there too. Just try and get past my high tech sensors that detect break ins, fires and floods, or indoor and outdoor cameras to keep watch day and night. There's no way you're getting past my 247 professional monitoring that I only pay like a dollar a day for. And they even said if I don't like my system that I could get a full refund with SimpliSafe 60 day money back guarantee. But that'd be crazy because I love it so much and they love us so much that they're doing 20% off any new SimpliSafe system with F Protect [e-mail] pockets that's simplisafe.com pockets there's no safe like Simply Safe. Another safe ad in the books.

[Mindy Jensen]

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[Scott Trench]

And Colorado has reasonably high taxes too. It's a flat tax of 4, 4.55% on income and capital gains in there. And I did look this up. You cannot use in Most cases the 529 plans to pay for preschool for the most part. So it's really only for private K12 tuition. And the things that I think the spirit of it, regardless of what the letter might say in many cases is it's got to be for tuition essentially or the directly related things to tuition for educational expenses.

[Amberly Grant]

I was not lucky enough to have a 529 plan. How I ended up paying for college was out of pocket. Applying for 20 scholarships and using, you know, the FAFSA grant money because I was 24 years old. And that's the other thing to note for kids is that once you're 24 years old, you are no longer dependent of your parents. So Scott, in your situation, maybe your kid's like, hey, I'm gonna go travel the world for a couple years. Maybe dad, you can help fund that. And then they're gonna go to university a little bit later at 24. All of a sudden now it's only my assets that are going to be used towards my contributions for university. And that's something really great to note. But here's the thing. A lot of people are like, well, I'm just going to emancipate myself from my parents at 18 and then I can, you know, not use their income on the FAFSA application. But that's not easy. The only, some of the only ways you can really not be considered under your parents for FAFSA under 24 is if you've been in the foster care system if you're homeless. So you need to have a really good case for, you know, being removed from your parents income. And it is super hard because I looked into it when I was going to university at like 22. I started it, I stopped it, and then I went back at 24. And that was the thing that I no longer needed any contributions from my parents, which were zero anyways, so it didn't matter. But that's just something to note for people that if you go a little bit later, you no longer tied to your family.

[Scott Trench]

Makes sense. And I think most people listening to this podcast I'd imagine are thinking about how to fund college in a nearer term setting with the, you know, with facing the reality that because they're listening to a show like BiggerPockets Money, they're likely more likely than not to not qualify for a lot of FAFSA at that point in time. And so it's planning to pay the full price. And how do you mitigate those things? There's so many options around it, around state schools and community college credits and all these different, you know, working through there on there and having a clear decision with that. I'm starting with the most extreme kind of yes, I'm ready. I am planning years in advance to be able to have the option to fund private school tuition, but believe it's unlikely to come to that. And by the way, I don't think I will go all the way to that 75,000 per child in there. I think I'll start with something like closer to 35 to 50 because I believe that there's another risk of overfunding the account because of all those other options for college. And I believe that if I just don't fund use those funds for that, I can just buy real estate or something else with that. Not quite get the same level of perfect tax advantages in terms of being able to sell the assets that you know from educational purposes, but have a lot more flexibility with that wealth later in life.

[Amberly Grant]

Anyways, on that note, it's always important to give people permission. You do not need to pay for your kids university, you don't need to pay for the room and board. You need to secure your retirement because they, they can borrow against university. You cannot borrow against your retirement. And I think that's just a big thing, especially in the United States that people feel very guilty about and you shouldn't. Like you said, Scott, you saw people succeed with college being funded without it being funded. I've seen people succeed with college being funded without it being funded. I'm an example of that. You're an example of that. We're both on this podcast and we had very different routes to getting here. So I think it's really important Just to remember that there is no right way of doing this.

[Scott Trench]

Absolutely. And I love, I love that. And I think a lot of people out there, I think a lot of people will completely agree with what you're saying and I think a lot of people will share my mentality of I would delay my retirement in order to fund my kids college education if it meant them getting into the best school or the best opportunity that we thought was available at that point in time. Not everybody shares that, but a good chunk of people do I think. And that was the way I was raised and the privilege my parents gave me. And that's something that I was, I would absolutely sacrifice and delay for if it came to it on that. And I think that that's a requirement for many people's planning, but not everybody's. Mindy, what are you doing with all this? Your kids are much closer to college age and this problem is right that right around the corner for you.

[Mindy Jensen]

It's nice that you called it a problem. Scott, you are absolutely right. I was living in Illinois when my oldest daughter was born and then we moved to Wisconsin where my youngest daughter was born and, and in Illinois I started doing research on their 529 plan and either misunderstood or misread what was going on or maybe their rules changed. I read it to be if you put money in and you don't use it for college, you lose it all. You can keep the contributions but the growth was all wiped out. And I have since been told that that is not true. And I was very happy that that wasn't true. But then, you know, my kids go to college in August so this is, this is a bit more of a, an immediate concern for me. Although Carl and I have done very well with our investings, we can absolutely afford to pay for college for her. I do have a friend who told his kids, I will pay for your college. And then his kids didn't apply for any scholarships and, or grants or you know, anything. And he was kind of stuck footing the whole bill. So I have shared with my kids that I am going to pay the equivalent of CU Boulder, which is about $30,000 a year. That is what, that is what I will pay for you and anything above is coming out of your pocket. And she heard that to be, okay, fine, I'll just, you know, I'll pay, I'll get scholarships or grants or whatever loans and I'll pay it off when I get a job. And one of the colleges she was looking at was $80,000 a year. Her chosen major is she needs at least a master's, maybe a doctorate in it. And she, when I, when I showed her, you know, you're, you're willingly taking on $50,000 a year in student loan debt. When you graduate with your four year degree, you're going to have $200,000 in student loan bills. And she's like, well, yeah, but I'm going to get a job that pays $100,000. I'll be able to pay that in two years. And I'm like, like, I know you listen to me talk about money all the time. We never had the conversation about what is fica. You know, she's not had a traditional paycheck yet. And that was a, that was really eye opening for her and it changed the way that she looked at college. Am I going to end up paying for her college? Most likely. But I wanted her to choose a college that wasn't $50,000 extra in, in bills. I currently have as much saved for my kids college as you have saved for my kids college, Scott. So Great big fat $0. Amberly, we're gonna, you're gonna double what we have saved and we have all collectively saved $0 for my kids college.

[Scott Trench]

I think like, let's, let's just zoom back out here, right? We're all in bigger pockets of money. Everyone listening to this is listening to bigger pockets money by definition. Brilliant breakthrough insight by me on that particular point. But you know, like, you know the obvious sol. Pursuit of fire gives you options to spend general. The wealth you build in a general sense, however you want. And there's not real, like if you, if you build multiple millions of dollars in net wealth, net worth, you can buy a mountain home or you can buy a college education, right? So from it. And I think that that's the point. I'm gra. That's actually the problem I'm grappling with here is because overfunding the 529 plan comes with a penalty on it. It's not, it's not the end of the world, 10% penalty from a withdrawal. That's not, not for those, those purposes, plus the tax, plus the realization of the gains or the income on that. But it's a penalty. It's an issue there. And you don't want to overfund it by a huge amount because the alternative is just building wealth in a general sense, right? You could take a loan, you could buy a rental property, pay it off like Brandon Turner came up with a couple years ago and just refinance it and you have no taxable event at that point, for example. So there's other ways to fund college here. And the 529 is more powerful than even that strategy because it's truly that the income is truly not taxed on that front. When depreciation runs out, whatever, you can still use the gains tax free to pay for these qualified education expenses. But again, there is an issue of overfunding it and the best solution is to just have so much wealth that you can easily afford paying for that and your fire lifestyle, which is where you're at Mindy on there. So I do think that's such an obvious breakthrough, an obvious own site, but also the, you know, fundamentally part of the strategy.

[Mindy Jensen]

Well, yes, but it's tax deductible depending on your state. There are some states that have absolutely no benefits. Alaska, California, Florida, there's it. It says they're not tax deductible. You don't get a tax credit for contributing to the 529 plan. As I'm reading this, and please correct me if I'm wrong, it's been established several times on this show that I do not know what I'm talking about when it comes to a 529 plan. But with regards to this, it seems to me that it makes more sense for you to put this money someplace else in a different type of account than to put it in here. If it's not tax deferred, is it. Does it just grow tax Deferred in.

[Scott Trench]

All 529 plans, it's post tax contribution and it grows tax deferred.

[Mindy Jensen]

I don't think it's all post tax contribution. There's. There's no tax deduction in Alaska. There's no tax deduction in California.

[Scott Trench]

On the state level there can be state tax deductions, right. But the federal level, the federal one is like all the planning for me, 80 20, the planning is on federal taxes. I pay way more to Uncle Sam than I do to the state of Colorado. Right or wrong on that. And so that's the strategy. The strategy is how do I avoid paying Uncle Sam for this stuff? And the 529 plan is an excellent way to do that for educational expenses. So the goal is to fund exactly the right amount or just under the right amount needed to fund all future educational expenses for or my children. And then potentially whatever, if the future years bring additional generations, whatever that those are funded and available for it. But not to the point where I am foregoing the ability to use that wealth productively in other aspects of my life either for my enjoyment, my kids enjoyment, charitable donations, whatever around there. That's the goal. I think of all the college planning.

[Mindy Jensen]

Yes. But I'm on Fidelity's website right now and it says tax Benefits to contributors 529 plan contributions are removed from their taxable estate in 2025. Contributors can give up to $19,000 a year without counting against the lifetime gift tax. But with the super funding or accelerated gifting strategy, a contributor can give up to five times that yearly limit in a single year without triggering the gift tax as long as they don't surpass $95,000 in contributions over five years. But while 529 contributions are not tax deductible federally, many states offer tax benefits on state income tax return. It seems to me that that there's still a benefit for creating a 529 plan, but depending on what state you're in, those benefits are significantly reduced. Like Colorado is a great one. We're all three in Colorado. It's an awesome state for us to be funding our 529 plans. Here's a question maybe Amberly knows the answer to. If I create a Colorado 529 plan, can that money be used for a California college?

[Amberly Grant]

Yeah, it all the the reason why Colorado matters is because it's for those tax deductions. And like we said, you know, Colorado offers a state tax deduction so that you know anything you contribute up to a certain amount that you can then deduct it. The thing with the 529 account is that grows tax free. Like you don't get taxed on it when you take the money out for college specific needs. Right. That are outlined that we talked about before and outlined on the government website. And so that is. It makes sense, Mindy, when you're saying if you're in California maybe it doesn't make sense to contribute to a 529 but it does because you're going to have benefits down the line for it. Not at this moment in time.

[Scott Trench]

Fine.

[Amberly Grant]

So you might not want to overfund it there because it's. You're not really getting anything for it in this day and age. But like Scott said, maybe getting to the limit or putting some money in and then us as fire people because we have a bunch of cash behind us. Then we just throw cash at the problem later on. Right. And then we're not worried because we are over optimizers. And so Scott's sitting there Twiddling his thumbs being is it going to be 300,000 or 330,000? I don't know. So instead of doing that, you can say hey, I'm going to make it 300k, put that the limit. And then you know, anything that that comes above that, I can also contribute in that. Contribute in that year that I need to pay it. I think you need to have. I have to check that one actually out that there may be some sort of wait time between what you can contribute and what you take out. But anyways, you can still contribute when you're getting closer and you know what university they're going to go to. And then you can fund it a little bit more then for those tax advantages if you have them, you just might not get the growth.

[Scott Trench]

I mean the Colorado benefits are nice, but the big one is the tax free growth on a federal basis for the gains. Right. Like that. If I invest $50,000 now and by the time they're in college it's worth $200,000. That $150,000 cap gain is tax free. Right. Both at the federal and state level. So that's at the highest bracket. A 25%, a 25% boost to that wealth there. And that's why this is important. And that brings me back to the whole philosophy of the ideal strategy in it's a privilege to be in this position would be to just put plop 50 grand in as soon as your kid's born and maximize that amount of time to compound and never put another dollar in at that point and time it perfectly with the amount you need at college. Right. Obviously that would assume that college does cost exactly 200 grand at that point in time with it. But that's what I feel like is the optimal bet in this particular case. But there's so many ways that also you can, I mean not everyone can do that. But if you contribute, if you kind of midnight philosophy, how early can I fund this plan with the minimum amount and then stop on there if that's your goal. For example, because of the way that the account is structured in there. If you overfund it again, there are options to take to use those things in some limited capacity for things outside of higher educational expenses. But. But there are also penalties and a little bit of pain in the rear to really reallocate the dollars to other life purposes. So I think it's important to fund it accurately in my view in there. And it's not one of those things I really want to maximize and swell out Swell out as much as possible. So Amberly, what are you doing at the end of the day? Could you remind us one more time with it? Was it the 10,000 per child?

[Amberly Grant]

Correct? Yeah. I do want to say that I am in that great privileged place that I can just throw some money at one of the most expensive times in our lives of having a new kid. And I actually was like, okay, I've got 10 grand sitting in an account that's not doing anything. I'm throwing that at my first kid. And then I figured I had to be fair and do that towards my second kid. So I started saving for that as well. So I do $10,000 when they're born and then I do $1,500 a year that I just do in like quarterly increments because I don't know why. There's no reason for it until they're, I think it's 18 and that should get me to about $85,000.

[Scott Trench]

Awesome. And then yeah, with my oldest Katie on there, just that 1500 note in Colorado, there's that matching program. If you put a thousand in, you get a thousand dollar match at least for her. I'm not sure if that will also be applying to my, my second in there, but obviously take the free money in there in that match. That's a great, great benefit.

[Amberly Grant]

Yeah. Scott, for that one, were you over the limit? Because I believe that there was a household income limit on that or maybe I was, I'm wrong.

[Scott Trench]

I qualified at the time so, and they haven't disqualified me at this point. I have not been asked for an item there, but I would absolutely, if I did not qualify, give back that money. I did not. I, I, I, I really haven't done my, done a tremendous amount of deep diving into that, that one. So and I was surprised I was getting a thousand dollar gift. So I'll check that one out. If anybody from Colorado knows how to, how to, how to declare that I, I am not attempting to take a benefit that I am not eligible for, please on there.

[Amberly Grant]

So yeah, and Scott, I think they have limit, they've lowered it sadly in the past few years. So it was a thousand dollars. It was a thousand when my kid was born as well. And I didn't even know about it because I had put the money into fidelity and had no idea about this college invest thing. So I was looking into it as well. And to tell you the truth, I think I just disqualified myself from it. And that's a terrible way of doing it because I didn't even apply. And I know that they have leftover funds for these types of things. So I should just double check again with my kid. And I don't even know if there's an income limit. I just, I had made that assumption and I think now it's like 500 instead of the 1,000, maybe 750. So womp, womp.

[Mindy Jensen]

It's still free money.

[Amberly Grant]

Heck yeah.

[Mindy Jensen]

And that's only for littles because I just looked it up and it said born January 1, 2020 or after. I did look up in Colorado the how long does the money have to be in the 529 plan before it can be used for expenses? And it said there is no limit. There's no time limit on how long it must be in the account before you can use it. So one thing I can do is start, start funding my going to college in August daughter because at least I'm going to be reducing my taxable income on money that I'm already going to spend. Do I wish I would have learned this 18 years ago? Sure. But it's better to learn it now than pay, you know, how many years of college for her after tax money when I could be using it before tax. So that came, that's something that came out of the this episode that I am really, really excited about and I want to reach out to our audience and say, do you know of a 529 expert or are you a 529 expert? I think that we should have some questions. If we misspoke or, you know, misunderstood a point that we shared here, please correct us. [e-mail] [e-mail] [e-mail] we would love to know what we got wrong so that we could correct it for the future.

[Scott Trench]

Yeah. And I think, I think the biggest criticisms of this episode or the big advice or the input from our community is going to revolve around the 529 plan as an estate planning tool and multi generational planning tool, which we did not get into and I'm frankly not thinking through right now. I am, I am, I am not worried about 60 years in the future using this account. That's not, that's not the primary purpose of why I would be planning to use it. I'm using it as a how do I plan for my two children's college education. As life progresses, I may update my plans and begin using the tool for different purposes, but I'm just not, I'm not there. Yet personally, with this, and I think many people who are thinking about the 529 are. Are really thinking about it more in the context of the. The college savings program piece for the direct descendants or direct generation following them.

[Amberly Grant]

I agree with that, Scott, because it's also planning so far in the future with something that is a little bit changing right now. We've got a lot of online education. We have different ways of that we are learning. And I'm not 100% sure that our kids will be using university the same way we did or even maybe going to university. So that's my. I didn't want to overfund mine.

[Scott Trench]

Yeah, another one here. And I know this. This is going to rattle some folks, but I'll throw it out here anyways, is there's a substantial rise in the last few years of homeschooling. This is not something that me and my wife are intending to do at any point. Maybe a year at some point in there would be the maximum that would. That would apply there. But with that rise, I wonder if some of these funds will be eligible for many activities related to those items there. So that's something to consider if you're in this camp of I'm either going to homeschool for a year or two or for a majority of it. I believe that would be a. I wonder if there would be more research to do to see if the 529 funds could apply to portions of the activities you might enroll your kids in, like if there's a science curriculum that they ought to do for eight weeks or whatever, that maybe there's something that would apply there. So something to think about for those folks.

[Amberly Grant]

That's a really good point because we have two boys. We have learned a lot about, you know, red shirting and all and homeschooling and world schooling. And we are definitely going towards that and for certain portions of their life, if it makes sense for them, because I happen to have one of those children who is extremely physical and, like, is constantly, like, helping us with our renovations and, you know, cleaning up all the time. And so I don't think he's gonna be sitting down in those school chairs for very long. And so we're trying to see what our options are. And it's a great idea to see if we can use funds for a 529 for the science class that happens in Boulder that a few of our friends go to. So. Thanks.

[Scott Trench]

You wonder how the. In my world, you just open question about how much harm is done or Benefit gained by missing eighth grade, for example, seventh or eighth grade. So, you know, that's the one part in my world, right? Rest, rest. There's a lot of it, just the other grades, I think. But those two were, those two are rough for a lot of kids.

[Mindy Jensen]

So, yeah, seventh grade, I could have skipped same. I am so glad the Internet didn't exist.

[Scott Trench]

When I was in seventh grade, the Internet existed. It made seventh grade bearable. Well, Amberly, thank you for sharing so much knowledge here. This is a great discussion. I love the, the different viewpoints that we all bring to this. I, I bet you that the money community will. Will Some, some will think about it more like me, some will think of it more like you, Amberly, and some will think more like you, Mindy. And so I think that this was, this was helpful. But this is, this idea of college education is going to be something that everybody who's grappling with fire is going to have, is going to grapple with. And there's a whole bunch of emotions and values that go into that decision and then how the tools apply in the context of those values and the, the goals can vary wildly.

[Mindy Jensen]

Definitely dive into your state specific 529 plan and get all the information that you can. I. Yeah, don't be like me, me now. Amberly, can I contribute to your kids 529 plan?

[Amberly Grant]

Yes. That's what we do, actually. So instead of gifts at baby showers, we actually put a link to the 529 for the future child and actually asked people to contribute for our wedding. We did the same thing. We got married after our first kid, Na Naji, and we ended up asking people instead of giving us any gifts because we don't need anything. We're in our 30s. We're established. We actually asked them to contribute to our children's 520. So you just get a link from your provider and then you. That link can go out and then it will send information when someone has contributed to that account. So you can send a thank you.

[Mindy Jensen]

Okay, so for all of you who have kids who are like, oh, I don't need another gift for Christmas or their birthday or whatever, set up your 529 plan and give that out to all your friends and family. Hey, if you're thinking about giving our child a gift, this is a great place to do it.

[Scott Trench]

That child will really appreciate elementary differential equations in 12 years.

[Amberly Grant]

100%.

[Mindy Jensen]

All right, that wraps up this episode of the Bigger Pockets money podcast. She is Amberly Grant. He is Scott Trench. I am Mindy Jensen saying gotta hop, sugar pop.