← HerMoney with Jean Chatzky
HerMoney with Jean Chatzky
"My kids don't need their college savings anymore. Can I keep the tax benefits?"
00:23:06
Everything you wanted to know about saving for college without sacrificing your retirement.
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C
Ask them directly are you acting as a fiduciary in this conversation? And ask about compensation. Commission can create conflicts of interest even if the recommendation is permitted. And this isn't about assuming bad intent. I will say there are a lot of great advisors out there that trying to do the right thing every day. However, you want to make sure you have a really clear understanding of who you're talking to, how they operate, and what standard they're being being held to at that moment.
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D
Hey everyone, it's Jean Chatky and it's time for Mailbag Now. We talk a lot on this show about the rules of personal finance. Max out your 401k. Don't touch your retirement savings. Put on your own oxygen mask before helping others. And those rules exist for a good reason, because the math is pretty clear. You can borrow for college, but you can't borrow for retirement. But here's what the math does not account for. The moment your kid gets into their dream school or tells you they can't afford to take an unpaid internship, or is choosing between what seems like two very different futures based on what you can and can't afford to do in those moments, and the voice telling you what you should do goes quiet. And that tension between what you know deep down is the right financial move and what you feel as a parent just takes over. This is something I hear about all the time. Many of you are trying to support your kids while protecting your own futures and feeling guilty that it's so difficult to do both Today we are getting into all of it. The trade offs, the emotions, the strategies, and how to make a decision that you can actually feel good about. We've got questions about what to do with 529 college savings accounts when your kids no longer need them, how to put a sudden financial windfall to work when you're already doing a lot of things right, and how to navigate college costs so low after a divorce. To help us work through your questions, we are joined by a very special guest. Lacey Garcia is founder and CEO of Trust Willow, a personalized advisor matching plat that connects women and their families with vetted fiduciary financial advisors. These are folks who are legally required to act in your own best interest and they've been specially trained in working with women's financial lives. Lacey, it's always so great to have you here.
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C
Jeanne, always so lovely to join you. Thank you so much.
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D
Before we get into our listener questions, I want to get into something that's been in the news recently because I think it affects so many of the people listening. There has been a major change to what's known as the fiduciary rule, and I want to make sure that our listeners understand what it means for them. So my understanding is that the fiduciary standard, which is the legal requirement that says an advisor must act in your best interest if they are a fiduciary, that it no longer applies to every interaction that you might might have with a financial professional. So if somebody sits down, for example, to talk with an advisor just once on a phone line about an IRA rollover, that advisor might not be bound by the same standard as someone they work with on an ongoing basis. Can you walk us through what's the fiduciary rule? What changed and what does it mean for everyday investors? How do we protect ourselves?
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C
Jean, your understanding is correct. The fiduciary rule has been an ongoing back and forth over the years. And the simplest way to think about it, where it stands today is here, what you said. Not every financial professional that you talk to is legally required to act as a fiduciary at all times. So there are two standards at play. A fiduciary standard, which means the advisor must act as a in your best interest even if it doesn't benefit them, and a suitability or best interest standard, which means that recommendation just has to be appropriate, not necessarily the best option for you. So some important things to be aware of. Certified financial planners or CFP professionals must act as fiduciaries at all Times meaning they have to place the client's best interests first. And this is part of the CFP Board's ethics and standards of conduct for all CFP professionals. But where it gets tricky, as you highlighted, is those one time interactions with other advisors, such as an IRA rollover. So you might sit down with that financial professional for that single conversation, get a recommendation, make a big financial decision without realizing that person may not be operating under a full fiduciary obligation at the moment. So here's what you can do to learn more about your advisor that you're working with. First, ask them directly, are you acting as a fiduciary in this conversation? And ask about compensation. Commission can create conflicts of interest, even if the recommendation is permitted. And this isn't about assuming bad intent, I will say there are a lot of great advisors out there that are trying to do the right thing every day. However, you want to make sure you have a really clear understanding of who you're talking to, how they operate, and what standard they're being held to at that moment.
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D
So if you ask them, are you
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operating as a fiduciary? They have to give you an answer.
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C
Yes.
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E
Okay. I mean, that seems fairly simple, right? And if you hear that the answer is no, then I think the thing to do, because a lot of people go through this process of rolling over an IRA just on the phone, right? They pick up the phone, they call the firm that their 401k is with, they roll it into an IRA and they have to put that money into investments. I think if you hear that the person that you're talking to is not a fiduciary, maybe the thing to do is to take the recommendation, but go get some other advice so that you know where you want to put the money.
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C
Exactly. That's what we would recommend.
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D
All right. Sounds like a plan to me. I am hugging all the time from my listeners. So we've got some questions. You ready to dive in?
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C
Yes.
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D
Hi, Jean and Lacey. I opened Vanguard Coverdell ESAs for both of my kids about 20 years ago. I want to just define this for everybody who's listening. A Coverdell, like a 529 plan, is a form of Education Savings account. So this person opened Coverdell Education Savings Accounts. They write, it was honestly one of the best, best financial decisions I ever made. My son's account has about $5,000 educational expenses. So I'm trying to figure out my options. Can these funds be rolled into a Roth ira? And if I do nothing, what happens? Do they just Keep growing as mutual funds. What are my options for keeping these funds tax protected?
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C
It's a great question. This is not a wait and see situation, but more of a. You have a window to act thoughtfully. So can you roll it into a Roth ira? Yes, but not directly. If you withdraw the money and then contribute to a Roth, that's treated as two separate events and trigger taxes as well as potentially a 10% penalty on the earnings if it's not being used for education. Roth contributions are still subject to annual limits and income eligibility. Since education is not the primary focus. Can roll a Coverdell ESA into a 529 plan for the same beneficiary or a qualifying family member. 529s have more flexibility today that they can be used to. They don't have age limits like Coverdells and they offer flexibility to roll to a Roth, but they are subject to limitations and you might have to move money between beneficiaries. So there are other options as well. So I would recommend talking to advisor who can best advise on your specific situation.
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It sounds to see that is a really good suggestion. We're talking about a sizable sum of money here and so you don't want to misstep. One thing I do want to point out is that the 10% penalty that you talked about sometimes isn't as big a deal as people think it is. It's not a 10% penalty on the entire withdrawal. It's a 10% penalty on the profits. So if of that $65,000 you contributed 45 and $20,000 was profit, then the 10% penalty is on the $20,000. $2,000 is still nothing to sneeze at. But it's not a 10% penalty on the entire 65,000. So just something to keep in mind.
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It's an important clarification. Thank you, Jean.
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Sure. This one's from an anonymous listener. She says hello. We are officially done with daycare payments starting in June. And we just paid off my husband's student loan early. Sounds like time for a party. Yes, it feels like a huge Milestone. We're both 37 with a combined gross income of $155,000. Two young kids and a lot of financial boxes already checked. My husband's a teacher, so summers and school breaks are. We're maxing out our 403 contributions at 9% with a 5% employer match contributing $200 each month to 457 accounts. And I put an additional $200 a month into a pre tax Supplemental retirement account through work. We're also putting $200 a month into each child's 529. Our retirement advisor says we're on track to retire comfortably at 59. And we'll sponsored health insurance in retirement, which is a huge relief. No kidding. On the debt side, we've got 75,000 left on our mortgage at 3.5% and $18,000 on my car loan at 0% interest. Both cars are in great shape. We've got $21,000 set aside for home repairs, $31,000 in emergency savings. That's in a high yield savings account. And we carry supplemental term life and disability insurance. So here's our happy with daycare gone and the student loans paid off, we suddenly have an extra $2,000 a month. Should we put more toward the kids college funds? Increase our 457 contributions? That's retirement. Or do something else entirely? I just want to stand up and cheer for this woman.
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C
I know you're in such a great position. I mean kudos, right? And I think there's no wrong answer here. But I would recommend that protecting your future self should be a priority. So even though you're already doing a lot of retirement and doing it well, this potentially should be at the top of your list because there's no backup plan for retirement. You're already on track. But this could be your chance to go beyond meeting that goal. And you know, once you've sort of taking care of your future self, there isn't a single right next move really. It comes down to what matters most to you right now. Your priorities, your values. Maybe it's giving your kids a bigger head start. You mentioned the $200 contribution to 529. Maybe you're increasing that. Maybe it's having a bigger cash cushion. Although it sounds like you are in good shape there. But maybe there's just a few things to make everyday life feel a little bit easier or even more fun experience wise. This is much more about what you want your life to feel. And if you're unsure, that's okay too. You know, we recommend speaking with an advisor who can help you get clear on your financial priorities. You know, making sure they have a plan that's aligned with your values and your priorities and so that you can feel more confident and empowered because it sounds like you're really doing a great job and just keep you going on your path.
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D
I totally agree. One of the things that I would do is with that retirement advisor, run the numbers on your retirement and make sure that their idea of how much you'll spend in retirement lines up with your idea of how much you'll spend in retirement and what you want to spend it on. And then I would just sort of think about those things that you've wanted to do but maybe haven't done right. Are there special trips that you want to take? Are there things that you want to do to celebrate with your parents or other extended family? Are there other items on your bucket list that are going unchecked? My perspective this year, Lacy, is definitely colored. I am at the age where I am seeing friends get sick and sometimes even die. And I know that life is short. I know that we have to take every opportunity to get the joy that we so deserve. And it's clear to me that this writer deserves a lot of it. So make sure that you are living as well as saving we're going to take a quick break, but don't go anywhere. We've got a question from a listener who is navigating the complicated costs of college after divorce. You know what's funny about tax season? It's one of the only times a year most of us actually sit down and look at our full financial picture. What came in, what went out, and where on earth the rest went. And every year a lot of us think, I wish I had been paying closer attention to this all along. That is exactly why I love Monarch. Simplify you finances with Monarch. It's the all in one personal finance tool designed to make your life easier, bringing your entire financial life together in one dashboard. Feel aware and in control of your finances this tax season and get 50% off your Monarch subscription with Code Hermoney. Achieve your financial goals for good with Monarch, the all in one tool that makes money management simple. Use code hermoney@monarch.com for half off your first year. That's 50% off@monarch.com code hermoney I've been doing a little spring reset with my closet lately. Less about adding more, more about adding better. Fewer pieces, better materials. The kinds of things you reach for every single day. And that's why I keep coming back to quints. I recently picked up the Mongolian cashmere T shirt in black and it's so soft, so classic. The kind of piece that works just as well at dinner as it does running errands on one of those in between spring days when you have no idea what to wear.
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That's quince.com hermoney Q-U-I-N c e.com hermoney we are back with Lacy Garcia from Trust Willow. We've got one more Lacy, this is from Rebecca. You ready?
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Yes.
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She writes hey there. I am recently divorced with a high school senior and I'm trying to figure out how to navigate college finances on my own. I'm the custodian of my daughter's 529 which has enough to cover about one year of in state college tuition, room and board under the new FAFSA rules. My ex spouse is considered the primary contributor. He'll be the one filling out the FAFSA. He earns 150,000 doll or more, which makes me think she won't qualify for much need based aid. The harder reality is that I don't expect him to contribute much, if anything toward her college costs. Are there financial planners who specialize specifically in college planning? Where would I go to get advice on navigating all of this? Any guidance is welcome. What do you think?
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C
Well, first I want to say that you are caring a lot on your own. You're navigating this major life transition and trying to make thoughtful decisions for your daughter. And I know how heavy this is and you're a great mom for thinking of this and I personally empathize as a divorced single mom. So I just, I really commend you and a few things to ground you as you think about the next steps. First, on fafsa, you're right. The rules changed. It now looks as though at the parent who provides more financial support, not necessarily the one the student lives with, which we know can be very tricky and create situations exactly like yours where aid eligibility doesn't reflect what's really happening from a financial standpoint. It's frustrating and you're not alone in that. Second, you're 529. Having one year covered is a great starting point. It gives you some flexibility. From here this becomes less about how do I cover everything and more about how do I build a plan about what's realistic. So back to your important question about are there financial advisors, financial planners who focus on education and yes, there are certified financial planners, lots of planners who specialize in college planning. And we at Willow work with a lot of advisors who are passionate about helping with situations just like this. So I can say as one data point, since Willow offers the free matching service, but there's also, you know, other resources available online. And I think I feel confident that you should be able to find an advisor, the right planner, who can help you with a situation like this for your specific financial needs.
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D
Great advice. I want to just add two things. Please don't assume that your child is not going to get aid. Your child may very well qualify for financial aid based on that income. The numbers are different than they used to be. It's also very, very school dependent. And one of the things that you're going to want to do is to cast a net in terms of the colleges that your child applies to. We want to qualify for as much as possible in terms of merit aid. Merit aid is the good kind of aid. It's the kind of aid that does not have to be paid back. And the way that you grab the most merit aid possible is by finding schools that really want your child to attend. So as you start looking at the landscape of schools, make sure that you are looking at schools that are looking for kids that for whatever reason, check a particular box that your daughter has. If your daughter plays the trombone, you want to find that school that is looking for a trombone player. If it's gymnastics, if it's swimming, if it's robotics, there are so many different ways to match up and different college counselors, maybe even the one at her school, can help you with that kind of search. The other thing to consider, and I don't know if this is possible for your daughter or if it's something that she would consider, but doing a year or two at a community college before you go to a four year school is a way to drastically cut the cost of college because you're looking at tuition that is generally so much less than a four year school that it's reasonable to think that if you do the first two years at a community college, you actually could cut the total tab in half. Not every child is up for that, not every parent is up for that. But it's just something to consider. So good luck and let us know what happens. Lacey, thanks so much for being here.
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C
Thank you, Jean, so much for having me.
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We are grateful for you and the entire Willow team and for everyone listening. If you want to connect with a fiduciary advisor who really gets women's financial lives, head to hermoney.com findanadvisor. You'll find the link in the show notes. And before we go, if you love today's episode. Please take a moment to to leave us a five star review on Apple Podcast. Your feedback means the world to me, but it also helps other women find the show. And if you're ready to grow your investing skills and make smarter decisions with your money, come join Investing Fix, our twice monthly Women Only investing club. Expert stock pickers bring ideas to the table and together we help build a portfolio. So since launching four years ago, we've built a strong track record and more importantly, a community of women who are learning and winning together. Tap the link in the show notes to check out Investing Fix today. Your first two classes are always free. Her money is produced by Hailey Pascalides and our music is provided by Video Helper. Thanks for listening and we'll talk soon.
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