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

Mindy:
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 BiggerPockets Money podcast. My name is Minty Jensen and with me today, not only is my college planning co-host Scott Trench, but also Amber Lee Grant is joining us too.

Scott:
Thanks, Mindy. Great to be here. We look forward to laying out the textbook approach to planning for college for your children. College savings BiggerPockets 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 the FAFSA and the 5 29 and all the tools for saving for college. Thanks for joining us again today.

Amberly:
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:
Alright, before we get into the show, I’ve got a quick question. How many I hours did you spend last month? Listeners chasing down your rent payments, sorting through piles of receipts or filling in spreadsheets. If the answer is way too many, then I need to tell you about Base Lane. A trusted BiggerPockets Pro partner Base Lane is an all-in-one banking and financial platform built specifically for real estate investors. Base Lane automates your rent collection and uses AI powered bookkeeping to auto tag transactions for instant cashflow visibility and reporting without doing any manual expense tracking. Plus, they’ve got a ton of other features like recurring payments, multi-user accounts and free wires to save you more time and money. L financial busy work means more time to scale your portfolio with confidence. Sign up [email protected] slash bp and claim your exclusive $100 bonus to kickstart your path to becoming a pro. Now let’s get back to BiggerPockets money.

Amberly:
Before we get into this conversation, I want to add a disclaimer for today’s episode. As you’ll hear in the episode, we several times mentioned 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, SAI. What are the really important distinctions between these two? Not much. Okay, let’s get into it. With that in mind.

Mindy:
Okay guys, I am super excited to get into this topic of funding my kids college. Alright, Amber Lee, 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:
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:
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. 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 make stuff. I mean I guess you could. What are they going to do?

Amberly:
No, it’s a federal form.

Scott:
Yeah, it’s like mortgage fraud. So Mindy, you have strong opinions on mortgage fraud. I believe

Mindy:
I have very strong opinions against mortgage fraud. Don’t do it. So I guess you have to fill this out and 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:
So Amberly, give us an overview. What are the ways, what are these kind of cutoffs and how do you ballpark whether you’ll be able to qualify for some of these student aid programs?

Amberly:
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 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 able to fund or the government isn’t going to give them free money for their kids’ college. There are things you need to pay attention to and structure your accounts appropriately so that you can decide what the waiting is and maybe just 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 a hundred thousand dollars house that you have gifted them before they went to university, the government is going to say 20% of that asset is going to be able to be used to pay for college every single year. Meaning that a hundred thousand dollars asset, 20 grand of it’s going to go towards the amount that the government is calculating that you have to pay for university as an adult. Your personal assets are also weighed to see how much the government’s going to allow you to take in grants or student loans, et cetera. And for you as an adult, it’s 5% and this is where that conversation around UTMA or a 5 29 account comes into play. A-U-T-M-A, 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 to 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 student loans that 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’re going to get all that cash 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 called a 5 29. This one is state specific in regards to what you can put into it. If you get tax 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 5 29 account 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 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 for the government to understand if you’re going to get free money from a grant or you just use that money to pay for college. Like Scott you were saying, you’re going to anticipate that your income and assets are going to be so high that 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:
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/biggerpockets money and make sure that you’re subscribed to this channel. We’ll be back with more right after this.

Scott:
Thanks, Mindy. Looks like we added 529 listeners during that break. To everyone who’s listening to the BiggerPockets Money podcast, welcome back

Mindy:
The UTMA versus 5 29. It sounds like UTMA is not really what I want to do. Is there a use case ever for the UTMA over a 5 29 plan?

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

Mindy:
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 a 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 Mindy.

Scott:
Nah, I never want to Fraternity case race for example.

Mindy:
You weren’t the captain of every sports team that you played on.

Scott:
Yeah, those days are long gone now. I live a very suburban life. Mindy. Well, let’s go back to this discussion here because I’m going to use it from a personal standpoint. I asked for 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 an 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 versed 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 5 29 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 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 starting assumptions that I have for this. What are your reactions to those assumptions? Do you agree or disagree with them or would you challenge or push back on any of them?

Amberly:
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 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 students. I don’t actually think that prepares ’em for the real world. So I am also funding university for my kids, but I’m doing it 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 5 29 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 bar. 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 Uhoh, you may be setting them up for failure.

Scott:
My parents paid for college room and board. I worked during the summers on there, but that’s what happened for me and 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 led me to the career trajectory that I had there. So I can see it both ways there. I think it depends on the individual on there, and again, I completely respect and understand that and I think that 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. And I think that

Mindy:
This, I say you’re anomaly, Scott.

Scott:
Why is that?

Mindy:
I think more people are of Amber Lee’s example. 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, I’ve known you for 10 years. You are just an anomaly in general.

Scott:
Well look, I think that it’s fair to say I took it for granted in college to a certain degree on those items in there and that certain of Amber Lee’s criticisms are correct there. They might be correct for some of my friends as well. I want to speak for them. But then I look at it and I see folks of all different types of backgrounds succeeding in a variety of ways. I can point to friends that are doctors, lawyers at big firms in there and all in between. And so again, I think it’s a wonderful debate on it. I would just push back 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. I want to plan on that.

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

Scott:
Not everyone did, not everyone.

Amberly:
Yeah, I know I’ve got the examples to you. I’ve got the doctors and lawyers and then the people who just never got out of it. But I guess what I’m really trying to say is that I like that you worked through summers. I think that’s a really important thing because university 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 timeframe. 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 did it through Fidelity, through 10 grand in there and I cannot claim that unfortunately on my taxes you have to go through this one specific website. From there I have determined that I’m going to fund 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 States. So I figured that’s a good amount to cover four years at Boulder in the business program, 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 $1,500 a year on top of that $10,000 until they’re 20 years old and that will be the $85,000 I’m going to need to cover what I’m 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 a hundred thousand dollars 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? Yeah,

Scott:
I think that makes sense. I would say a 5 29 maximum is $29,000 for a married couple to contribute to a single child. So you could do that 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 mine. It’s almost 150 grand on top of 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, 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 burden, 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 and that’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 5 29 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 the right way to think about it in your opinion? Amberly

Amberly:
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 ’em right 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 are okay with not using that money. And the great thing with a 5 29 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 use some of it towards a vocational school. So maybe she uses about $75,000 of it, but then you’ve got the other 225,000. Maybe you save it for their 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:
Okay, couple other questions. Can I use, let’s say I love my debt funds and hard money lending on here. I know that most people are like, what the heck? I’m not ever going to touch that. But let’s say I put 75 or a hundred in into these accounts and I’m able to put it into a debt fund or 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 with tax-free dollars?

Amberly:
So you can send ’em to preschool, you can use five 20 nines 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:
I just looked up, can you self-direct a 5 29 plan and I’m seeing no everywhere.

Scott:
Okay. No, but 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 afterschool activities in some capacity or summer camps or those types of things during that period as well, which would be a tax advantage way to fund some of those things at an interim basis leading up to college. Is that right?

Mindy:
5 29 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 for a list of all of these things that you can use it for. It’s not just limited to college.

Amberly:
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. What we think, oh, as a $3,000 apartment, we got this, it’s going to be out of the 5 29. It’s legally what the college states, what room and board should be based on their area and the university sets that price. So you can’t just go ball out, you can only take out what 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 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. 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:
Got it. Okay. And that’s just on the gain. So if I put in 75 or a hundred grand and it becomes 300,000 later in life, I can pull out the a hundred grand and use the 200 gain to pay for all of the college expenses for example.

Amberly:
I believe that’s the case. Alright,

Scott:
We’ve got to take one final ad break and we’ll be back with more in a moment.

Mindy:
Welcome back to the show. I want to point out right here that every state is different. We have 50 United States plus Washington DC which has its own set of rules. So all of these things that we are talking about kind of apply loosely to all states, but also the 35,000 or 38,000 Scott that you said that’s specific to Colorado. We have a document from a link to a Fidelity article that talks about all the different states and what the benefits are. California has no benefits, no tax deduction, no income credit, nothing Colorado for 2025 has a $25,000 deduction or if you’re single or 38,000 if you’re married filing jointly. So it looks like Colorado is one of the best states to be contributing to a 5 29 plan in.

Scott:
And Colorado has reasonably high taxes too. It’s a flat tax of 4.55% on income and capital gains in there. And I did look this up, you cannot use in most cases the 5 29 plans to pay for preschool for the most part. So it’s really only for private K through 12 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 thanks to tuition for educational expenses.

Amberly:
I was not lucky enough to have a 5 29 plan. How I ended up paying for college was out of pocket applying for 20 scholarships and using 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-year-old, you are no longer dependent of your parents. So Scott, in your situation, maybe your kid’s like, Hey, I’m going to go travel the world for a couple of years, maybe dad, you can help fund that. And then they’re going to 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 not use their income on the FAFSA application. But that’s not easy.
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 being removed from your parents’ income. And it is super hard because I looked into it when I was going to university at 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 anyway, 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 are tied to your family.

Scott:
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 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 working through there on there and having a clear decision with that. I’m starting with the most extreme kind of, yes, 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 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 just being able to sell the assets that from educational purposes. But I have a lot more flexibility with that wealth later in life. Anyways,

Amberly:
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 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:
Absolutely, and 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. And 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 would absolutely sacrifice and delay for if it came to it on that. And I think 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 around the corner for you.

Mindy:
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 in Illinois. I started doing research on their 5 29 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 wasn’t true. But then my kids going to college in August, so this is a bit more of 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 or grants or anything, and he was kind of stuck footing the whole bill. So I have shared with my kid that I am going to pay the equivalent of Boulder, which is about $30,000 a year. 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 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 when I showed her 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 a hundred thousand dollars. I’ll be able to pay that in two years. And I’m like, I know you listen to me talk about money all the time. We never had the conversation about what is fica. She’s not had a traditional paycheck yet. And that was really eyeopening 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 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, you’re going to double what we have saved and we have all collectively saved $0 for my kids’ college.

Scott:
I think let’s just zoom back out here. We’re all in BiggerPockets of money. Everyone listening to this is listening to BiggerPockets Money by definition, brilliant breakthrough insight by me on that particular point. But the obvious solution here is the 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, if you build multiple millions of dollars in net worth, you can buy a mountain home or you can buy a college education. So from it, and I think that’s the point, that’s actually the problem I’m grappling with here is because overfunding, the 5 29 plan comes with a penalty on it. It’s not the end of the world. It’s 10% penalty from a withdrawal that’s not for those purposes, 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.
You could take a loan, you could buy a rental property, pay it off like Brandon Turner came up with a couple of 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 5 29 is more powerful than even that strategy because it’s truly, 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 breakthrough, an obvious insight, but also fundamentally part of the strategy.

Mindy:
Well, yes, but it’s tax deductible depending on your state. There are some states that have absolutely no benefits. Alaska, California, Florida, it says they’re not tax deductible. You don’t get a tax credit for contributing to the 5 29 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 5 29 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, does it just grow tax deferred in all 5 29 plans

Scott:
Post-tax contribution and it grows tax deferred? I

Mindy:
Don’t think it’s all post-tax contribution. There’s no tax deduction in Alaska. There’s no tax deduction in California

Scott:
On the state level. There can be state tax deductions, but the federal level, the federal one is 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 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 5 29 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 my children and then whatever, if the future years bring additional generations, whatever those are funded and available for it, but not to the point where I’m 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:
Yes, but I’m on Fidelity’s website right now and it says, tax benefits to contributors 5 29 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 Superfund 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 5 29 contributions are not tax deductible federally, many states offer tax benefits on state income tax return. It seems to me that there’s still a benefit for creating a 5 29 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 5 29 plans. Here’s a question, maybe Amber Lee knows the answer to. If I create a Colorado 5 29 plan, can that money be used for a California college?

Amberly:
Yeah. The reason why Colorado matters is because it’s for those tax deductions. And like we said, Colorado offers a state tax deduction so that anything you contribute up to a certain amount that you can then deduct it. The thing with the 5 29 account is that it grows tax free. You don’t get taxed on it when you take the money out for college specific needs that are outlined that we talked about before and outlined on the government website. So it makes sense, Mindy, when you’re saying if you’re in California, maybe it doesn’t make sense to contribute to a 5 29, but it does because you’re going to have benefits down the line for it, not at this moment in time. So you might not want to overfund it there because 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 and then we are not worried because we are over optimizers.
And so Scott’s sitting there twiddling his sons 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 300 k, put that the limit, and then anything that comes above that I can also contribute in that year that I need to pay it. I think you need 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:
I mean the Colorado benefits are nice, but the big one is the tax free growth on a federal basis for the gains, right? 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 both at the federal and state level. So that’s at the highest bracket, a 25% boost to that welfare. And that’s why this is important. And that brings me back to the whole philosophy of the ideal strategy. 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. 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 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 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:
Correct. Yeah, I do want to say that I’m 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 here 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 quarterly increments. 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. Awesome.

Scott:
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 dollars match at least for her. I’m not sure if that will also be applying to my second in there, but obviously take the free money in there in that match. That’s a great, great benefit.

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

Scott:
I qualified at the time 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. I really haven’t done a tremendous amount of deep diving into that one. And I was surprised I was getting a thousand dollars gift. So I’ll check that one out if anybody from Colorado knows how to declare that I am not attempting to take a benefit that I am not eligible for, please on there.

Amberly:
And Scott, I think 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. I had put the money into Fidelity and had no idea about this college investing. So I was looking into it as well, 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 had made that assumption and I think now it’s like 500 instead of the 1000, maybe seven 50. So Wamp wamp,

Mindy:
It’s still free money.

Amberly:
Heck,

Mindy:
And that’s only for Littles because I just looked it up and it said born January 1st, 2020 or after I did look up in Colorado, how long does the money have to be in the 5 29 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 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’ve learned this 18 years ago? Sure. But it’s better to learn it now than pay how many years of college for her after tax money when I could be using it before tax. So that’s something that came out of 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 5 29 expert or are you a 5 29 expert? I think that we should have some questions. If we misspoke or you misunderstood a point that we shared here, please correct us, [email protected], [email protected], [email protected]. We would love to know what we got wrong so that we could correct it for the future.

Scott:
And I think the biggest criticisms of this episode or the big advice or the input from our community is going to revolve around the 5 29 plan as an estate planning tool, a multi-generational planning tool, which we did not get into. And I’m frankly not thinking through right now. I am not worried about 60 years in the future using this account. 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 not there yet personally with this. And I think many people who are thinking about the 5 29 are really thinking about it more in the context of the college savings program piece for the direct descendants or direct generation following them.

Amberly:
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 that we are learning, and I am not a hundred percent 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:
Yeah. Another one here, and I know 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 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, I wonder if there would be more research to do to see if the 5 29 funds could apply to portions of the activities you might enroll your kids in. If there’s a science curriculum that they’ll do for eight weeks or whatever, maybe there’s something that would apply there. So something to think about for those folks.

Amberly:
That’s a really good point because we have two boys. We have learned a lot about red shirting 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 is constantly helping us with our renovations and is cleaning up all the time. And so I don’t think he’s going to 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 5 29 for the science class that happens in Boulder that a few of our friends go to. So thanks.

Scott:
You wonder how in my world, open question about how much harm is done or benefit gained by missing eighth grade, for example, seventh or eighth grade. So that’s the one part in my world, the rest, there’s a lot of just the other grades I think, but those two are rough for a lot of kids. So yeah,

Mindy:
Seventh grade I could have skipped same. I am so glad the internet didn’t exist when I was in seventh grade.

Scott:
Internet existed. It made seventh grade bearable. Well, Amberly, thank you for sharing so much knowledge here. This was a great discussion. I love the different viewpoints that we all bring to this. I bet you that the money community, some will think about it more like me, some will think more like you Amberly and some will think more like you Mindy. So I think that this was helpful, but this idea, this concept of college education is going to be something that everybody who’s grappling with fire is going to have 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 that the goals can vary wildly.

Mindy:
Definitely dive into your state specific 5 29 plan and get all the information that you can. Yeah, don’t be like me now. Amber Lee, can I contribute to your kids’ 5 29 plan?

Amberly:
Yes. That’s what we do actually. So instead of gifts at baby showers, we actually put a link to the 5 29 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 and we ended up asking people instead of giving us any gifts, because we don’t need anything, we’re in our thirties, we’re established, we actually asked them to contribute to our children’s five 20 nines. So you just get a link from your provider and then 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:
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 5 29 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:
That child will really appreciate elementary differential equations in 12 years.

Mindy:
100%.

Amberly:
Alright,

Mindy:
That wraps up this episode of the BiggerPockets Money podcast. She is Amber Lee Grant. He is Scott Trench. I am Mindy Jensen saying, got to hop sugar pop.