529 PLAN CHANGES 2020 - YouTube

In this video I'm gonna talk about the 529 plan changes for 2020 now first I'm

going to go over a brief overview of how the 529 plan can benefit you and then

I'm gonna talk about three important changes to the 529 plan that's going to

be the apprenticeship homeschooling and the student loans and I'm gonna show you

how they're going to benefit you and then how you can work a 529 plan into

your education or college or apprenticeship homeschooling any of the

above saving strategies but before we do that there your first time at our

channel or you haven't subscribed click on the subscribe button at the bottom my

name is Travis Sickle certified financial planner helping you reach your financial goals.

so let's start off talking about how the 529 plan works so

the 529 plan is a type of account it's not an actual investment the investments

inside of here depend on what 529 plan that you choose so starting with this

side they go in after tax so you've already got your paycheck is coming from

your checking or your savings account it's already been taxed and it's going

into the 529 plan now it's a pending on what type of 529 plan or which state's

plan that you choose will depend on what investment options you have inside the

529 plan now those investments will grow tax deferred and tax-free as long as you

take them out for qualified expenses now that is why we have tax-free on this

side so they're going in after tax and then they're gonna grow hopefully

they're gonna grow and then they're gonna come out tax-free as long as you

use them for qualified expenses and that is what's changing some of the changes

that have been made to the apprenticeship the homeschooling and

student loans are now falling under qualified expenses which we're going to

get into in a little bit but that is the benefit of the 529 plan now let's go

through a quick example so you can really see the math behind a 529 plan

and where the real value is so let's assume that we're gonna save for 17

years so I'm gonna put 17 years up on the board and I'm just using an

arbitrary number you could used 18 years 10 years it doesn't really

matter I'm just going to use 17 years assuming that you're starting to save

right when your child is born and we're gonna save $100 per month at a rate of

return of 8 percent now you might be looking at 8 percent and saying wait a

second you can't get 8 percent every single year it's just an example so if

you see 8 percent it's just an example and I think you'll understand in just a

minute so let's take out the financial calculator and show you exactly what

that looks like so if we're doing 17 years and I'll put a link in the

description at the bottom of the calculator that I'm using but it's just

a simple financial calculator there's plenty of calculators out there that you

can use so we're going to use 17 years we're gonna get an 8 percent rate of

return we have nothing saved we're gonna save $100 per month and that is gonna

work out to be forty-three thousand one hundred and eighty dollars so

forty-three thousand one hundred and eighty dollars now from this math we can

figure out quickly by multiplying 17 years so we could take how much we

actually put into the 529 plan so it's 17 years times 12 months times the $100

and that is going to be 17 years times 12 times 100 and that is going to work

out to twenty thousand four hundred dollars now the reason I wanted to

figure that out twenty thousand and four hundred dollars is so we can figure out

how much growth is inside of this 529 plan so if we take the forty-three

thousand one hundred and eighty dollars and subtract our 20 thousand four

hundred dollars we're gonna get twenty two thousand seven hundred and eighty

dollars so that's twenty two thousand seven hundred and eighty dollars now

this is the benefit of the 529 plan that these dollars are not going to be

taxable now if you ran this math and only saved it to this plan for a few

years the growth rate would be significantly smaller relative to how

much you actually put into the plan so it's really important that you start

these plans as early as possible in order to maximize the

amount of tax-free dollars or avoiding the taxation on the growth so that is

really important that you run this math to figure out exactly how much you're

saving so you really understand the value of the 529 plan now if we had only

done this over a few years even if we put the full of twenty thousand four

hundred dollars into the plan in one at one time but only let it grow for two or

three years it's not even going to be close to twenty two thousand seven

hundred eighty dollars that this grew over over a 17 year period

now if I compare that to only saving for five years let's see what that looks

like so I'm gonna say five years same one hundred dollars and we're gonna

still get that eight percent rate of return now of course you can see the

math on this is going to be smaller than this but what I want to show you is the

ratio of how much you're putting into the 529 plan versus the actual growth

portion to it and I'll explain why I'm showing these numbers in just a second

but let's say five years eight percent we have nothing saved receiving the one

hundred dollars that's gonna be seven thousand three hundred and forty eight

dollars so seven thousand three hundred and forty eight dollars and over that

time frame so that's what it grew to and over that time frame we can do five

times twelve times the $100 and that's going to be six thousand dollars so we

can see right there we have one thousand three hundred and forty eight dollars

now if we just do some math right here and we say okay well we know that twenty

thousand is what we put into this side and it grew an additional twenty two

thousand seven hundred and eighty dollars so that ratio is roughly 52% so

we'll just say fifty percent plus that is the benefit that we're getting out of

saving over this long time frame but a shorter time frame of five years we were

putting in six thousand we're only getting one thousand three hundred and

forty eight so if we do the 1348 / the 7348 that's

only gonna be eighteen point three five percent so we're gonna say less than

twenty percent of our total port of our total investment was growth so that

really that right there and don't don't worry about this a hundred dollars or

that we only put in six thousand and we put in so much more over here it's the

percentage of the growth relative to how much we put in so you can see that a

longer time frame you're gonna have a much greater percentage of money working

for you now why did I choose these numbers this is basically saving for

college and this would be basically saving for elementary school so five or

six years into it that's what you're going to do so the benefit even if you

use it for something like K through 12 which you can today it's still not going

to be as great of a benefit is if you have that money in there along time if

you have nowhere else to put that money that might be the right strategy for you

but it's really important when you're looking at these types of accounts

whether the 529 plan or even retirement accounts and it's gonna be the time

that's going to be the biggest benefit when you're investing so it's not

necessarily always the rate of return every single year it's every single year

it compounds it continuously grows so that is the 529 plan and hopefully this

makes it a little clearer on the benefits of the 529 plan so now let's

jump into some of the benefits or the changes for 2020 so the three changes

that I'm going to talk about just now are gonna come from the secured act

which just got signed into law on December 20th of 2019 now that is it

stands it's an acronym the secured act and it's the setting every community out

for retirement enhancement act of 2019 or the secured act now this has been

around for a while but it finally got signed into law on December 20th and the

first one I want to talk about is the apprenticeship expansion or the 529 plan

expansion for apprenticeships now the expenses previously were not covered but

now they are which is a huge benefit for 529 plans especially if you're not

really sure we're your beneficiary you're selling your

daughter your grandchild your grandson granddaughter or whatever wherever

they're gonna go when they're 1 2 & 3 we have no idea are they gonna go to

college or they're just going to go into the workforce now if they get an

apprenticeship is another qualification another reason why a 529 plan might make

a little bit more sense so here's exactly what it says it says the

treatment of certain expenses associated with registered apprenticeship programs

any reference in the subsection of the term qualified higher education expenses

shall include a reference to expenses for fees books supplies and equipment

required for the participation of a designated beneficiary in the

apprenticeship program registered and certified with the Secretary of Labor

under Section 1 of the National Apprenticeship Act so basically what

that means is a lot of these expenses will probably qualify now how would you

know you just need to make sure that the program is a part of the Department of

Labor that it's an approved program how would you know that you can look on the

apprenticeship a.gov website so I'm gonna pull it up for you

there's actually some pretty interesting stats on here - so apprenticeship

dot-gov so if you go here you can actually see the approved apprenticeship

program so I'm in Tampa Florida so I'm just going to put in Tampa or I can just

check off my current location I suppose and then click on search and it will pop

up with the apprenticeship programs or the approved apprenticeship programs

that you can use and of course it has to have the outline of which expenses it

will cover so if they are equipment or other things that you're dealing with it

just has to be approved by the program so just because you go out and buy a

bunch of equipment for your apprenticeship you need to make sure

that it is actually required and that's in writing so make sure you have the

documentation behind it before you go out and make a mistake and go buy

something that isn't qualified so it just has to be required and it's a lot

like colleges where they have to require if you if you want to write off your

your laptop or use the 529 plan for any of that

type of equipment it just has to be required by the university so it's the

same thing with the apprenticeship program and you can scroll down and you

can also see if you go back for a second if I scroll down we can see the stats on

apprenticeships so since January 1st 2017 there's six hundred and sixty-two

thousand new apprentices it's quite quite a lot and then you can see the

average salary after the apprenticeship is completed seventy thousand is pretty

impressive and then a ninety four percent basically a retention rate of

employment after the apprenticeship so this could be a huge benefit especially

with all the student debt that everyone's talking about in the contrary

and the media and how difficult it is in some of the going to some of these

universities and coming out with degrees that really aren't worth what they cost

to obtain maybe the apprenticeship is the route that you can go and just

knowing that you have that option of an apprenticeship over a university and you

can still cover the cost in the 529 plan is maybe one more step to use a 529 plan

or another reason why you would want to stick with one so that is quite

interesting on the apprenticeship program the second change to the 529

plans is homeschooling you know first I wasn't sure what expenses could be

covered under homeschooling but if you're home schooling then you probably

already know that you're in a program that you bought the books you bought the

materials and that is the home schooling expenses that you can essentially ride

off so here is what it says on homeschooling the second provision

allows tax free treatment to apply to distributions

made for certain expenses in connection with a home school under the provision

distributions for certain homeschool expenses or treated in the same manner

as distributions for qualified higher education expenses and like

distributions for elementary and secondary school tuition are also

subject to an annual limit of ten thousand dollars in aggregate 529 plan

distributions per beneficiary for these purposes qualifying homeschool expenses

are those expenses with respect to a beneficiary which are incurred in

connection the home school and our for curriculum

and curricular materials books and other instructional materials online

educational materials tuition for tutoring or educational classes outside

of the home if the tutor is an instructor or unrelated to the student

so you can't circumvent taxation by just paying yourself out of the 529 plan and

that's be something that's not related to the beneficiary but that is really

valuable to someone who wants to go the route of homeschooling and use a 529

plan because they're getting education and they're having their beneficiaries

get further ahead so why not of course the 529 plan should be used for home

schooling so now it is now number three is student loans now this provision or

this change to the 529 plans is a step in the right direction

I always hoping it's gonna be a little bit more robust a little bit past the

limits that I'm gonna describe in just a second but in any case student loans now

qualify as a qualified expense for 529 plans so here's what it says for the

student loans the provision allows tax-free treatment to apply to

distributions of certain amounts used to make payments on principal or interest

of a qualified education loan no individual may receive more than ten

thousand of such distributions in aggregate over the course of the

individuals lifetime this rule allows the five to nine account holder to make

a student loan distribution to a sibling of the of the designated beneficiary

without changing the designated beneficiary of the account okay so

here's what this means 10,000 lifetime limit on the beneficiary so if you have

a 529 plan and the grandparent has a 529 plan your elder relatives have 529 plans

they can't all pay for the beneficiary the same beneficiaries alone the

beneficiary has the lifetime limit of $10,000 so that's it

now you could take that same 529 plan and basically what it's saying is if

there's additional dollars after you've distributed all the 529 plan money that

you're going to use for that beneficiary then

you can use it for other siblings without having to move it to another 529

plan so that's really in reference to changing the beneficiary on the 529 plan

and saying wait a second we don't need to go through all these hoops just to do

some more paperwork transfer the 529 plan just a sibling or something another

relative and then use it for their student loans you can just make that

distribution right out of the 529 plan for the beneficiary and the siblings so

there's no getting around this the beneficiary max is ten thousand and

that's a lifetime limit so there's no way to stack that but if you're trying

to figure out strategies for schooling and why would you use just ten thousand

dollars or how would you set this up well maybe you want to put some money

into a 529 plan maybe there's a dip in the market right before the beneficiary

is gonna go to college so you keep the money in in the 529 plan get a student

loan or small student loan under ten thousand dollars and then pay it off at

the end there's all these different hypothetical scenarios that might work

or if there's just money left over and one of the beneficiaries or one of the

beneficiaries siblings has a loan for whatever reason then they can use the

money for to pay down the loan so I don't know a whole lot of scenarios

where you can actually plan or would want to plan to put money into a 5-10

529 plan just to pay the student loan but since a lot of people have student

loans now and there are 529 plans out there so maybe they're gonna start using

those 529 plans that are just sitting there and they don't know what to do

with it maybe you don't know what to do with it

now you can put some of that money towards a student loan pay down some of

that principal and interest so here's the catch you can't take the

money out of the 529 plan pay the student loan principal and interest and

then write off that same interest on your taxes that kind of makes sense

you're getting the tax-free benefit so you're not going to get the deduction on

your taxes so no double-dipping in that regard but that's not a big deal

if you have the 529 plan you're paying off some of your student loans that's a

great benefit and hopefully as we move forward they expand it even further

quite frankly I don't even know why there's a limit if you could pay for

school directly why couldn't you just pay

whole lawn off because it's the same it's the same expense it really should

have been the whole amount to just get the money distributed so I don't know

maybe it's because a lot of the student loans are owned by the government and

they just want to make some more money who knows but that is a benefit a step

in the right direction to using the 529 plan and those are the changes so it has

a lot more flexibility today and there's a ton of different plans a last point

I'll make about 529 plans I've said it on other videos you don't have to use

your state's 529 plan and especially if your state doesn't have a benefit an

income tax benefit for 529 plans then you should shop around to the different

state plans because some plants they're not all created equal some are better

than others so do your due diligence find the plan that's right for your

particular situation one that you like the investments inside of it

it's basically what it comes down to has low fees good investments if you've

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