1 00:00:00,000 --> 00:00:02,340 INTRO: Hi, I'm Ed Slott and I'm Jeff Levine. 2 00:00:02,460 --> 00:00:06,090 And we're two guys who just love to talk about retirement and taxes. 3 00:00:06,120 --> 00:00:10,050 Look, our mission is simple to educate you the saver so that you can make 4 00:00:10,050 --> 00:00:14,160 better decisions because better decisions on the whole lead to better outcomes. 5 00:00:14,190 --> 00:00:16,500 And here's how we're going to do that each week. 6 00:00:16,590 --> 00:00:21,270 Jeff and I will debate the pros and the cons of a particular retirement strategy 7 00:00:21,270 --> 00:00:25,890 or topic with the goal of helping you keep more of your hard earned money. 8 00:00:26,040 --> 00:00:29,680 Yeah, but we won't know which side of the debate we're taking until we flip a. 9 00:00:30,180 --> 00:00:33,630 Winner of the coin flip gets to pick which side of the debate they want to argue. 10 00:00:33,660 --> 00:00:37,950 And both of us will have to argue in favor of our respective positions, 11 00:00:38,190 --> 00:00:40,500 whether we agree with them or not. 12 00:00:40,500 --> 00:00:43,770 At the end of each debate, there's going to be one clear winner. 13 00:00:43,980 --> 00:00:47,640 You a more informed saver who can hopefully apply the merits of 14 00:00:47,640 --> 00:00:50,790 each side of the debate to your own personal situation, to decide 15 00:00:50,790 --> 00:00:52,740 what's best for you and your family. 16 00:00:52,800 --> 00:00:55,860 So here we go, welcome to the great retirement debate! 17 00:01:02,010 --> 00:01:05,190 Ed Slott: Welcome everyone back to the great retirement debate. 18 00:01:05,250 --> 00:01:07,440 I'm Ed Slott, along with Jeff Levine. 19 00:01:07,860 --> 00:01:08,490 Hey Jeff. 20 00:01:08,850 --> 00:01:10,440 Jeff Levine: Hey, I, I like the intro today. 21 00:01:10,440 --> 00:01:11,580 Welcome everyone back. 22 00:01:11,580 --> 00:01:12,990 Like you're speaking like Yoda today. 23 00:01:12,990 --> 00:01:13,560 This is good. 24 00:01:13,560 --> 00:01:14,280 Instead of welcome back. 25 00:01:14,669 --> 00:01:17,640 Welcome everyone back to the, this is I'm gonna have to do 26 00:01:17,640 --> 00:01:18,960 our entire podcast, like Mmm. 27 00:01:19,729 --> 00:01:20,020 Okay. 28 00:01:20,729 --> 00:01:21,630 That type of voice. 29 00:01:21,630 --> 00:01:22,740 What you, what you saying? 30 00:01:22,740 --> 00:01:25,440 Ed Slott: I think they heard some of the other debates and they're coming back 31 00:01:25,440 --> 00:01:29,970 for more, because I hit a lot of the questions that we see from both financial 32 00:01:29,970 --> 00:01:34,229 advisors and consumers, and they wanna know how to make the right decision. 33 00:01:34,650 --> 00:01:35,250 Jeff Levine: It's true. 34 00:01:35,310 --> 00:01:35,640 It's true. 35 00:01:35,640 --> 00:01:36,990 Well, I got a good one for us today, Ed. 36 00:01:37,170 --> 00:01:37,440 All right. 37 00:01:37,440 --> 00:01:40,560 So obviously we know the cost of education. 38 00:01:40,560 --> 00:01:44,640 Like the cost of healthcare has risen quite precipitously over recent decades. 39 00:01:44,645 --> 00:01:48,780 And one of the questions that I get quite frequently is should I use a 40 00:01:48,780 --> 00:01:53,205 Roth IRA or a 529 plan if I wanna save for my, my child's education 41 00:01:53,205 --> 00:01:56,605 or my grandchild's education, what, what's the best place for me to save? 42 00:01:57,405 --> 00:01:58,439 Ed Slott: Oh, that's a good one. 43 00:01:59,189 --> 00:01:59,609 Jeff Levine: All right. 44 00:01:59,609 --> 00:02:04,379 Well, let's flip a coin as is our style and let's see, uh, what do you want, ed? 45 00:02:04,379 --> 00:02:05,579 You want heads or tails? 46 00:02:05,584 --> 00:02:05,999 I think heads. 47 00:02:06,600 --> 00:02:07,499 You always take heads. 48 00:02:07,499 --> 00:02:07,919 All right. 49 00:02:08,369 --> 00:02:10,440 Uh, the, and, uh, let's see here. 50 00:02:10,445 --> 00:02:10,919 We'll flip. 51 00:02:12,285 --> 00:02:13,455 It is, uh, heads ed. 52 00:02:13,455 --> 00:02:14,745 You wanna take the side of.. 53 00:02:14,955 --> 00:02:16,065 Ed Slott: Oh I'm gonna go with the Roth. 54 00:02:16,065 --> 00:02:16,785 My favorite. 55 00:02:16,935 --> 00:02:17,655 Jeff Levine: I'm shocked. 56 00:02:17,655 --> 00:02:19,215 You went with the IRA strategy. 57 00:02:19,215 --> 00:02:19,605 All right. 58 00:02:20,055 --> 00:02:20,505 Very good. 59 00:02:20,535 --> 00:02:24,375 Well, since, since, since you got to pick and you won, you can kick us off. 60 00:02:24,435 --> 00:02:25,155 Why? 61 00:02:25,455 --> 00:02:30,070 So again, situation here, someone's thinking about you know, I wanna 62 00:02:30,070 --> 00:02:32,980 save, they already decided that they want to, like, it's a goal for them. 63 00:02:32,980 --> 00:02:35,559 They wanna save towards education of a loved one. 64 00:02:35,980 --> 00:02:40,510 Why would you choose a Roth IRA over a 529 plan? 65 00:02:40,510 --> 00:02:43,940 And just at a high level before, before you can make the argument, 66 00:02:44,200 --> 00:02:45,469 for those who aren't aware, right? 67 00:02:45,469 --> 00:02:50,029 Roth IRA, simply being the individual retirement account that is, uh, tax free. 68 00:02:50,029 --> 00:02:52,399 If you take it out in retirement provided you've met certain 69 00:02:52,399 --> 00:02:54,349 restrictions, no tax break going in. 70 00:02:54,739 --> 00:02:56,929 Uh, but you get a tax break on the way out. 71 00:02:57,230 --> 00:03:01,730 Whereas the 529 plan is a specific account that is dedicated for the purpose 72 00:03:01,734 --> 00:03:03,109 of education, which we'll talk about. 73 00:03:03,109 --> 00:03:04,879 So, so why choose the account? 74 00:03:04,879 --> 00:03:07,039 That's not actually for education. 75 00:03:08,135 --> 00:03:10,560 Ed Slott: Because a Roth IRA can be for anything. 76 00:03:10,560 --> 00:03:15,239 And what most people don't know about roths first in an ideal situation, 77 00:03:15,239 --> 00:03:18,000 you don't touch a Roth account until. 78 00:03:18,600 --> 00:03:22,290 The purpose it's intended for, for retirement, because you want to get 79 00:03:22,590 --> 00:03:27,300 the most years of that, of tax free income tax free accumulation, but 80 00:03:27,300 --> 00:03:28,890 let's say you need it for school. 81 00:03:29,040 --> 00:03:33,090 It provides an excellent funding vehicle because most people 82 00:03:33,090 --> 00:03:34,860 are not aware, even though. 83 00:03:35,049 --> 00:03:39,700 The first thing people might say, but if, if you take it out early for education, 84 00:03:39,939 --> 00:03:42,309 won't there be a tax or a penalty? 85 00:03:42,549 --> 00:03:50,859 Generally not, contributions to Roth IRAs can always be withdrawn tax and 86 00:03:50,859 --> 00:03:54,309 penalty free for any reason at any time. 87 00:03:54,309 --> 00:03:55,149 I'll say that again. 88 00:03:55,149 --> 00:04:00,760 The original contributions that could be currently in 2022, 6,000 89 00:04:00,760 --> 00:04:06,674 a year or up to 6,000 a year can always be withdrawn at any time for 90 00:04:06,674 --> 00:04:09,795 any reason tax and penalty free. 91 00:04:09,915 --> 00:04:13,125 Jeff Levine: And when you say contributions, you just to, to clarify 92 00:04:13,130 --> 00:04:14,355 here for those listening, right? 93 00:04:14,359 --> 00:04:17,805 We're talking about fresh money if you will going into a retirement 94 00:04:17,810 --> 00:04:22,155 account money, that's never been in a retirement account before a a as 95 00:04:22,155 --> 00:04:25,815 opposed to let's say a conversion where you're taking existing retirement 96 00:04:25,815 --> 00:04:28,635 account money and then switching it or moving it into the Roth, right? 97 00:04:28,635 --> 00:04:32,085 This is just brand new money, fresh into the Roth that was in your bank account. 98 00:04:32,085 --> 00:04:32,734 Let's say before. 99 00:04:33,174 --> 00:04:33,924 Ed Slott: Right, right. 100 00:04:34,275 --> 00:04:35,474 Uh, contributions. 101 00:04:35,745 --> 00:04:38,715 And you never have to worry about tax or penalty on those. 102 00:04:38,924 --> 00:04:42,614 Now I said on the contributions earnings on these accounts, they're 103 00:04:42,614 --> 00:04:47,294 a different story, but under these complicated rules of which money comes 104 00:04:47,294 --> 00:04:52,249 out first, the earnings really will not be much of an issue, especially if 105 00:04:52,249 --> 00:04:56,210 the Roth IRA is just starting to grow because those funds come out less. 106 00:04:56,479 --> 00:04:59,929 What I like about the Roth is the flexibility. 107 00:04:59,934 --> 00:05:02,059 You don't have to use it for education. 108 00:05:02,270 --> 00:05:04,249 You can use it for anything you want. 109 00:05:04,249 --> 00:05:06,320 You could bet it on a horse if you want to. 110 00:05:06,320 --> 00:05:07,759 So there's no, don't do that. 111 00:05:07,759 --> 00:05:09,140 That's not my recommendation. 112 00:05:09,409 --> 00:05:11,749 Unless it's that 80 to one shot there. 113 00:05:11,749 --> 00:05:13,830 I would've put my Roth all the way in. 114 00:05:14,219 --> 00:05:16,200 If I had a time machine, but I don't. 115 00:05:16,560 --> 00:05:16,979 All right. 116 00:05:16,979 --> 00:05:21,450 If you don't know what I mean, go check the Kentucky Derby from earlier in 2022. 117 00:05:21,930 --> 00:05:26,159 Uh, other than that, you can put it in anything you want or use it for 118 00:05:26,570 --> 00:05:28,799 anything you want, including education. 119 00:05:29,039 --> 00:05:32,520 So it may be a good funding vehicle if you need the funds. 120 00:05:32,520 --> 00:05:37,409 Anyway, as I said, you're generally better off obviously using Roth IRAs for the 121 00:05:37,469 --> 00:05:41,530 intended purpose to hold to retirement, because if you use it early, you won't 122 00:05:41,530 --> 00:05:46,180 have as much later, but if you need the funds, you have ultimate flexibility. 123 00:05:46,180 --> 00:05:50,200 You don't have to worry about a, a lot of arcane rules that 124 00:05:50,470 --> 00:05:52,240 Jeff will tell you about now. 125 00:05:52,240 --> 00:05:55,960 And I want to hear why he says, uh, all of this is okay. 126 00:05:56,410 --> 00:05:59,770 Jeff Levine: Well, I think what I'm looking at saving for education, 127 00:05:59,830 --> 00:06:01,870 the big deal here is, is educate. 128 00:06:01,875 --> 00:06:05,740 Like, have you looked at the cost of education over the last few decades, ed? 129 00:06:05,740 --> 00:06:06,130 It is. 130 00:06:06,310 --> 00:06:09,410 I mean, you have, you have two daughters of your own who went to school, 131 00:06:09,410 --> 00:06:11,285 that was pretty expensive, right? 132 00:06:11,825 --> 00:06:12,935 Ed Slott: Very expensive. 133 00:06:13,115 --> 00:06:15,915 Jeff Levine: And the most you can put into a Roth this year is how much. 134 00:06:16,410 --> 00:06:17,340 Ed Slott: 6,000. 135 00:06:17,430 --> 00:06:21,510 Jeff Levine: I'm not sure that saving $6,000 a year is gonna cover it forever. 136 00:06:21,840 --> 00:06:27,630 And so one of the benefits, the real big benefits of the 529 plan relative to 137 00:06:27,630 --> 00:06:33,360 the Roth IRA is that in large respects, there, there is no contribution limit. 138 00:06:33,360 --> 00:06:37,190 Now there are gifting limits you can give annually. 139 00:06:37,190 --> 00:06:43,190 So this year you can give, uh, $16,000 a person for 2022 without 140 00:06:43,195 --> 00:06:45,289 using any of your lifetime exemption. 141 00:06:45,289 --> 00:06:50,270 If you're a couple you can give twice that amount or 32,000 be gift splitting. 142 00:06:50,510 --> 00:06:54,230 So you can, but, but that's not the limit on how much you can give. 143 00:06:54,235 --> 00:06:58,310 In fact, uh, there are special benefits of the 529 plan where you can front 144 00:06:58,310 --> 00:07:04,059 load five years worth of contributions or five years worth of gifts I should 145 00:07:04,059 --> 00:07:08,825 say, even though you don't, uh, you just don't give over the next four 146 00:07:08,825 --> 00:07:12,365 years then, but you can front load five years worth of gifts and not have it 147 00:07:12,365 --> 00:07:16,595 use any of your lifetime gift exclusion or lifetime estate tax exemption. 148 00:07:16,595 --> 00:07:17,405 They're one and the same. 149 00:07:17,674 --> 00:07:21,740 Of course today, that's not even a big deal for most people anyway, the estate 150 00:07:21,740 --> 00:07:25,310 tax exemption and gift tax exemption this year is, you know, more than 12 151 00:07:25,310 --> 00:07:28,250 million per person for a married couple. 152 00:07:28,250 --> 00:07:30,260 We're talking about more than 24 million. 153 00:07:30,620 --> 00:07:35,150 So effectively you, most people will never, ever have to worry about how 154 00:07:35,155 --> 00:07:40,580 much they're putting in to a 529 plan, and the plans themselves effectively 155 00:07:40,580 --> 00:07:44,960 allow you to contribute as much as you want until you reach the maximum amount 156 00:07:44,960 --> 00:07:49,685 allowed by the plan, which in some states, Ed, I don't think this is a particular 157 00:07:49,685 --> 00:07:53,525 coincidence is as high as $529,000. 158 00:07:54,010 --> 00:07:55,985 So, you know, that's a lot of money. 159 00:07:55,985 --> 00:07:59,345 If you, you could put into a, a plan in those states, like 160 00:07:59,345 --> 00:08:01,895 $500,000 and let it grow. 161 00:08:01,925 --> 00:08:07,525 Now, obviously not everyone has $500,000, but if we're planning on saving for, uh, 162 00:08:07,655 --> 00:08:09,485 you know, for multiple children, right? 163 00:08:09,485 --> 00:08:15,370 Remember the Roth IRA doesn't expand if you have more than one 164 00:08:15,370 --> 00:08:17,230 child or more than one grandchild. 165 00:08:17,230 --> 00:08:21,520 So you've got a family with three kids putting $6,000 away per year. 166 00:08:21,909 --> 00:08:23,380 I don't know that that's gonna cut it. 167 00:08:23,740 --> 00:08:27,520 That's where the 529 plan holds a major edge over the Roth IRA. 168 00:08:27,900 --> 00:08:32,370 Ed Slott: Well, I'll give you one there, but you are talking about the funding 169 00:08:32,430 --> 00:08:37,860 and who puts the money in, uh, most children are not gonna have $80,000 170 00:08:37,860 --> 00:08:43,320 laying around that's your, uh, 16,000 a year for the five years front loading. 171 00:08:43,320 --> 00:08:46,500 So it's going to come mostly from grandma and grandpa. 172 00:08:46,505 --> 00:08:47,490 That's why I see it. 173 00:08:48,435 --> 00:08:53,155 And that's a good, that's a good reason to do it on your side because I found 174 00:08:53,155 --> 00:08:57,325 grandparents in dealing with clients over the years, they are hesitant to 175 00:08:57,325 --> 00:09:02,695 give away money to young children, but they love giving it away if 176 00:09:02,695 --> 00:09:05,005 it's going for its intended purpose. 177 00:09:05,005 --> 00:09:08,545 If they know they can put 80,000 away for school, they 178 00:09:08,545 --> 00:09:10,315 love that that's their legacy. 179 00:09:10,315 --> 00:09:12,985 They know their money will go for the intended purpose. 180 00:09:13,285 --> 00:09:17,035 But back on my side where you say it's limited to 6,000, again, 181 00:09:17,035 --> 00:09:18,665 I'm going to the funding source. 182 00:09:18,980 --> 00:09:23,030 If we use the same grandma and grandpa, uh, are the ones paying the bill. 183 00:09:23,210 --> 00:09:27,230 They may have their own Roth IRAs that have marinated for a while. 184 00:09:27,235 --> 00:09:33,020 Meaning they have the five years and the 59 and a half, so they could withdraw. 185 00:09:33,715 --> 00:09:38,235 Any part of their Roth IRAs and their Roth IRAs may be, uh, 186 00:09:38,235 --> 00:09:39,885 hundreds of thousands of dollars. 187 00:09:39,885 --> 00:09:44,115 And they might love to use that for education, getting it out, tax free. 188 00:09:44,415 --> 00:09:47,415 So I think more we're talking about who's putting the money in. 189 00:09:47,415 --> 00:09:51,615 So on the Roth side, we're not really limited to 6,000 a year, 190 00:09:51,620 --> 00:09:54,765 unless you're only talking about the student putting that money in. 191 00:09:55,355 --> 00:09:57,105 Jeff Levine: That's that's a, that's a, a fair point. 192 00:09:57,105 --> 00:10:00,735 I would, I, I would say though, that one of the things that would concern me 193 00:10:00,735 --> 00:10:04,545 about, or not concern me, I would say, but one of the, the downsides of using 194 00:10:04,545 --> 00:10:06,795 let's say a Roth is all that taxation. 195 00:10:07,305 --> 00:10:12,285 And while you do have federal taxation on the 529 planned 196 00:10:12,285 --> 00:10:17,265 contributions, there's no tax break for those many states do allow a. 197 00:10:17,725 --> 00:10:22,855 Deduction for 529 plan contributions again, not, not the distributions we're 198 00:10:22,855 --> 00:10:25,375 talking about here, but putting money in, which is what you were just talking about. 199 00:10:25,945 --> 00:10:29,125 If I'm putting money into a Roth, I'm paying tax on all of that, both 200 00:10:29,125 --> 00:10:32,515 at the federal and if I live in a state with estate income tax at the 201 00:10:32,515 --> 00:10:36,925 state level, the 529 plan may allow me a really nice tax benefit at the 202 00:10:36,925 --> 00:10:40,765 state level, thereby effectively subsidizing the cost of that education. 203 00:10:41,595 --> 00:10:42,720 Ed Slott: Yeah, that may be true. 204 00:10:42,720 --> 00:10:47,490 But the, the, the point you're making that to have, like I said, grandma and 205 00:10:47,490 --> 00:10:50,970 grandpa possibly having hundreds of thousands in their Roth, they had to pay 206 00:10:50,970 --> 00:10:55,620 tax all those years, but that's in the past, the money they have is already. 207 00:10:56,165 --> 00:10:59,825 If it's held, like I said, for retirement, let's say they're in their seventies. 208 00:10:59,825 --> 00:11:02,795 So they have the five years of 59 and a half let's say. 209 00:11:03,215 --> 00:11:07,175 Any part of those funds that they may otherwise be leaving to 210 00:11:07,180 --> 00:11:11,585 grandchildren who no longer get the stretch IRA under the new rules can 211 00:11:11,590 --> 00:11:14,285 be dumped right in to education. 212 00:11:14,435 --> 00:11:20,885 It, it can come right out as a gift and still way under the, uh, gift limits. 213 00:11:21,215 --> 00:11:25,325 Uh, especially if they take it out of the Roth, there are no limits. 214 00:11:25,325 --> 00:11:29,915 You talked about a $16,000 annual gift limit, but if they 215 00:11:29,915 --> 00:11:33,365 take it out of the Roth, first of all, that's income tax free. 216 00:11:33,370 --> 00:11:36,635 Assuming, you know, they have the five years and 59 and a half it's 217 00:11:36,635 --> 00:11:40,175 a qualified distribution means no tax and penalty on anything. 218 00:11:40,535 --> 00:11:43,535 If they take it out of the Roth that's income tax free. 219 00:11:43,925 --> 00:11:47,945 And if they take that money that they took out and made a check directly 220 00:11:47,950 --> 00:11:53,075 payable to the, for tuition to the school directly from them to the 221 00:11:53,075 --> 00:11:58,525 college or university, there is an unlimited amount that they can give. 222 00:11:58,525 --> 00:12:00,505 They're not limited to 16,000. 223 00:12:00,505 --> 00:12:04,045 That's a special gift exclusion that most people don't know about. 224 00:12:04,315 --> 00:12:09,205 It's unlimited and it can be given to an unlimited number of people. 225 00:12:09,205 --> 00:12:11,995 So you talk about the expansion of the Roth. 226 00:12:12,295 --> 00:12:15,445 It could be used that way if they have enough in the Roth. 227 00:12:15,445 --> 00:12:20,575 And the other thing, uh, my argument against the 529, we've already seen 228 00:12:20,575 --> 00:12:24,835 people who have been using these things and they can't use them up! 229 00:12:25,045 --> 00:12:27,320 They did so well, there's too much money in there. 230 00:12:27,320 --> 00:12:30,350 And what if the kid, you know, is a dropout like bill gates 231 00:12:30,350 --> 00:12:31,740 and doesn't even go to school? 232 00:12:32,325 --> 00:12:34,995 Jeff Levine: Well, at least at that point, you could take out the money from the 233 00:12:34,995 --> 00:12:37,935 5 29 plan without a, a penalty, right? 234 00:12:37,935 --> 00:12:42,405 You, you you'd, at least the, if you get a scholarship, then you'd have the ability 235 00:12:42,405 --> 00:12:44,655 to, or, or, well, dropout is one thing. 236 00:12:44,655 --> 00:12:47,055 Ed Slott: If you got a scholarship, I know, God, God forbid, right. 237 00:12:47,235 --> 00:12:49,935 I was just kidding about the dropout, but maybe the kid doesn't go to 238 00:12:49,940 --> 00:12:51,375 school, you know, there's a big move. 239 00:12:51,375 --> 00:12:53,955 A lot of people wondering is college worth it. 240 00:12:53,960 --> 00:12:55,584 You hear what's going on around there. 241 00:12:55,584 --> 00:12:59,385 And they say, maybe I should, you know, get a trade or go into my own 242 00:12:59,385 --> 00:13:01,065 business and there's a lot of that. 243 00:13:01,365 --> 00:13:02,265 Now when people.. 244 00:13:02,265 --> 00:13:04,575 Jeff Levine: Well, there's been at least a, so I'll push back and say, 245 00:13:04,580 --> 00:13:09,105 at least there's been an, an expansion recently for, uh, for more vocational 246 00:13:09,405 --> 00:13:13,665 types of uses for 529 plans, even outta the secure act, which was a law 247 00:13:13,695 --> 00:13:17,205 passed just a, a few years ago, there there's an expanded ability to do that. 248 00:13:17,205 --> 00:13:21,255 Plus if your child doesn't use it, uh, and you have other children 249 00:13:21,255 --> 00:13:22,815 or you have grandchildren, one of. 250 00:13:22,920 --> 00:13:27,300 The nice things like a Roth IRA always belongs to the, to the 251 00:13:27,420 --> 00:13:29,370 individual who creates the Roth. 252 00:13:29,370 --> 00:13:29,610 Right? 253 00:13:29,610 --> 00:13:33,960 The I and the IRA there stands for individual a 529 plan can 254 00:13:33,960 --> 00:13:37,380 actually be shifted within, you know, effectively an unlimited 255 00:13:37,380 --> 00:13:38,850 number of times within the family. 256 00:13:38,855 --> 00:13:42,720 So you can go brother to sister, you can go child to parent, you 257 00:13:42,720 --> 00:13:44,040 can go parent to child, right. 258 00:13:44,070 --> 00:13:47,220 Uh, and you can change the beneficiary of those accounts. 259 00:13:47,430 --> 00:13:51,000 So that some point, like if it's not that one child, maybe it's someone 260 00:13:51,000 --> 00:13:52,530 else who ends up using that money. 261 00:13:53,270 --> 00:13:57,015 Ed Slott: But the deal breaker for me, if the money's left over and not used 262 00:13:57,015 --> 00:14:01,755 for the qualified education bills, you can have a tax, so there goes your tax 263 00:14:01,755 --> 00:14:04,995 advantage and possibly a 10% penalty. 264 00:14:05,295 --> 00:14:10,335 So to me, uh, even exposing somebody with a 10% penalty is a 265 00:14:10,335 --> 00:14:12,225 deal breaker and the problem is. 266 00:14:12,425 --> 00:14:15,455 For the people funding this thing, these things, which I think you would 267 00:14:15,460 --> 00:14:19,835 agree is not likely the student, but more likely a parent or a grandparent 268 00:14:19,835 --> 00:14:20,225 Jeff Levine: Agreed. 269 00:14:20,375 --> 00:14:24,600 Ed Slott: They have to know these things, the, the build up of these plans. 270 00:14:24,600 --> 00:14:28,685 They have to know these things while a child may be 5, 6, 7, 8, 9 years 271 00:14:28,685 --> 00:14:33,630 old, uh, you know, hoping they go, uh, every grandparent and parent, 272 00:14:33,630 --> 00:14:36,540 I think, hopes their kids go to college, but what if they don't? 273 00:14:36,900 --> 00:14:41,340 And there's just too many rules in that area where I think the Roth is just 274 00:14:41,340 --> 00:14:44,070 open-ended you have the most flexibility. 275 00:14:44,490 --> 00:14:48,390 And if it comes down to giving it to the child for education, rather than 276 00:14:48,390 --> 00:14:52,350 leaving it to them, as I said before, I think most grandparents would like the 277 00:14:52,350 --> 00:14:57,140 idea or even parents, but I'm assuming grandparents would more likely have 278 00:14:57,300 --> 00:14:59,425 distributions that will be tax free. 279 00:14:59,425 --> 00:15:02,005 Cause they've met the five years and 59 and a half. 280 00:15:02,365 --> 00:15:06,595 I think they would like giving while they're alive to see that their gifts 281 00:15:06,595 --> 00:15:10,195 went to tuition every year, rather than just leaving them the cash at 282 00:15:10,195 --> 00:15:15,655 death and wondering, you know, every, every person I spoke with ever that 283 00:15:15,655 --> 00:15:19,345 was thinking of leaving large sums to young kids like grandparents, always 284 00:15:19,345 --> 00:15:21,295 wondering if they're going to squander it. 285 00:15:22,595 --> 00:15:26,435 Jeff Levine: Well, in that case, maybe we use a trust and have the trust own 286 00:15:26,435 --> 00:15:28,655 a 529 plan or something like that. 287 00:15:28,655 --> 00:15:31,145 But I'll give you, I'm gonna, I'm gonna, I'm gonna drop 288 00:15:31,205 --> 00:15:32,795 another one on your head here. 289 00:15:33,215 --> 00:15:34,535 What's education. 290 00:15:34,535 --> 00:15:37,175 How much is it gonna cost in, in 20 years? 291 00:15:37,595 --> 00:15:38,015 Ed Slott: Two. 292 00:15:39,195 --> 00:15:39,415 Jeff Levine: Two? 293 00:15:40,085 --> 00:15:40,865 Ed Slott: Too much! 294 00:15:40,985 --> 00:15:41,885 Jeff Levine: Ah, too much. 295 00:15:41,885 --> 00:15:42,485 Yes. 296 00:15:42,635 --> 00:15:43,445 Well, how much? 297 00:15:43,985 --> 00:15:45,065 Ed Slott: Way too much. 298 00:15:45,125 --> 00:15:45,695 Jeff Levine: Okay. 299 00:15:45,695 --> 00:15:46,145 All right. 300 00:15:46,325 --> 00:15:47,105 But do you know? 301 00:15:47,535 --> 00:15:52,065 Ed Slott: Well, I don't know, but I know it's escalating and, uh, and 302 00:15:52,065 --> 00:15:53,985 we may even hit a pushback point. 303 00:15:53,985 --> 00:15:55,755 Again, this is all a prediction. 304 00:15:55,755 --> 00:15:57,405 We don't know where it's gonna be in 20 years. 305 00:15:57,405 --> 00:16:00,105 I know you're trying to make a point, but at some point it's gonna 306 00:16:00,105 --> 00:16:03,345 go up against the ceiling and it's not gonna be affordable for people. 307 00:16:03,765 --> 00:16:06,705 Jeff Levine: Well, I think we're probably already starting to see some of that, but, 308 00:16:06,885 --> 00:16:08,475 but we don't know what the future holds. 309 00:16:08,475 --> 00:16:12,135 And one of the, the really nice things about a 529 plan is they come in 310 00:16:12,135 --> 00:16:16,545 two flavors largely, so far, we've talked about effectively the education 311 00:16:16,545 --> 00:16:22,425 savings plan version, like almost the retirement account version of a 529 plan. 312 00:16:22,605 --> 00:16:26,595 But many states have prepaid tuition plans, right? 313 00:16:26,595 --> 00:16:29,535 Where you effectively can lock in the cost today. 314 00:16:29,535 --> 00:16:30,675 You can know what you're paying. 315 00:16:30,675 --> 00:16:32,655 You know, child is born today. 316 00:16:32,655 --> 00:16:38,685 You can start that now and, uh, and get it going for them and you 317 00:16:38,685 --> 00:16:42,405 have locked in effectively the cost of that education in the future. 318 00:16:42,555 --> 00:16:46,365 So even if there are dramatic spikes in, in the education costs, as we've seen 319 00:16:46,365 --> 00:16:51,045 over the last few decades, you are not going to have to worry about the unknown. 320 00:16:51,045 --> 00:16:55,495 You will lock in a rate that you can effectively again, what, 321 00:16:55,495 --> 00:16:58,735 you know, we don't know what future rates will be for college. 322 00:16:59,005 --> 00:17:02,215 Uh, but we do know what it would cost today to get into one of those plans 323 00:17:02,425 --> 00:17:08,710 and so you can cap your cost for that student using a 529 prepaid tuition 324 00:17:08,710 --> 00:17:13,450 style plan, where with a Roth IRA, you will be completely at the mercy 325 00:17:13,870 --> 00:17:16,480 of what, uh, of what the future holds. 326 00:17:16,510 --> 00:17:16,990 Ed Slott: That's true. 327 00:17:16,990 --> 00:17:20,500 Actually, I, I, so I've seen that situation firsthand. 328 00:17:20,740 --> 00:17:27,520 Somebody who, uh, roomed with my daughter in college, her parents, you know, when 329 00:17:27,520 --> 00:17:31,780 she was born, put away in one of these lock in plans, the prepaid plan, they 330 00:17:31,780 --> 00:17:33,430 probably paid a lot less than you, right? 331 00:17:34,035 --> 00:17:37,785 Well for a number of reasons, but for one of the reasons they locked 332 00:17:37,785 --> 00:17:40,965 in it at some ridiculous number, I think it was under 10,000. 333 00:17:40,965 --> 00:17:42,225 Like it was bizarre. 334 00:17:42,735 --> 00:17:47,025 Uh, the other reason was, uh, the resident of a certain state and all of that stuff. 335 00:17:47,025 --> 00:17:49,800 But, uh, But that was unbelievable. 336 00:17:49,830 --> 00:17:51,180 They locked in that rate. 337 00:17:51,180 --> 00:17:55,500 So, uh, that's another point, uh, good point for 529s, but I'll throw 338 00:17:55,500 --> 00:17:58,560 something else at you, which I'm sure will be a softball for you. 339 00:17:58,590 --> 00:17:59,460 We didn't cover it. 340 00:17:59,820 --> 00:18:04,470 Uh, the Roth, I said, have no problems, especially for financial aid. 341 00:18:04,475 --> 00:18:07,260 They're not included the Roth itself. 342 00:18:07,260 --> 00:18:10,889 The account itself is not included on that application. 343 00:18:11,040 --> 00:18:13,110 Yet 529s are. 344 00:18:13,800 --> 00:18:14,470 Jeff Levine: That's fair. 345 00:18:14,870 --> 00:18:20,090 But if you take money out of the Roth IRA, even though it's a tax free distribution, 346 00:18:20,420 --> 00:18:25,760 that income will be added to the FAFSA form as income and, and that could 347 00:18:25,760 --> 00:18:29,840 make, uh, that could, that could have an even significant, a more significant 348 00:18:29,840 --> 00:18:32,390 impact on reducing aid in the future. 349 00:18:32,660 --> 00:18:37,520 So effectively, if you're going to use the Roth as your funding source, if you're 350 00:18:37,520 --> 00:18:41,930 looking for any sort of student aid, you may not actually be able to tap the Roth 351 00:18:41,930 --> 00:18:47,205 until the child is gonna be a junior in school when you're past the time that, uh, 352 00:18:47,445 --> 00:18:53,145 the, the FAFSA form, the income reported on the FAFSA form would impact the aid 353 00:18:53,145 --> 00:18:57,255 eligibility, which means you've gotta come up with income for the first two years, 354 00:18:57,255 --> 00:18:58,875 where, where you gonna come up with that? 355 00:18:58,875 --> 00:19:00,945 Are you gonna pay for it out of income? 356 00:19:00,945 --> 00:19:04,155 That could be a huge hit to someone's income for the year. 357 00:19:04,155 --> 00:19:08,670 And if not that, where else are you now putting, you know, are you now subjecting 358 00:19:08,670 --> 00:19:13,740 that child or student to loans that, uh, that you may not have wanted to saddle 359 00:19:13,740 --> 00:19:15,180 them with for those first two years? 360 00:19:15,180 --> 00:19:17,630 What, like what becomes the game plan there? 361 00:19:17,990 --> 00:19:22,080 Ed Slott: Well, I think we can both agree on while we're talking about 529s versus 362 00:19:22,080 --> 00:19:27,630 Roths we're doing that to eliminate the uncertainty of student loans, because 363 00:19:27,630 --> 00:19:29,430 we know that's just going up the wrong. 364 00:19:29,460 --> 00:19:30,450 That's a disaster. 365 00:19:30,810 --> 00:19:32,430 I mean, there's just no coming back from that. 366 00:19:32,885 --> 00:19:35,315 Let me ask you a question, cause I'm not even sure about this. 367 00:19:35,315 --> 00:19:39,065 You said, uh, that the, the Roths, when the funds come 368 00:19:39,065 --> 00:19:41,195 out are subject to the FAFSA. 369 00:19:41,254 --> 00:19:46,565 But what if, uh, for, for student aide but what if it's coming out of grandma and 370 00:19:46,570 --> 00:19:48,905 grandpa's Roth, is that still affected? 371 00:19:50,220 --> 00:19:54,270 I'm not sure myself, but you were saying it affects it if it's coming out of 372 00:19:54,270 --> 00:19:58,710 the student's own Roth, but I'm saying it's less likely under my scenario. 373 00:19:58,715 --> 00:20:02,370 It's more likely the big money's coming out of grandma or grandpa's Roth. 374 00:20:02,580 --> 00:20:04,410 And would that have that same effect? 375 00:20:04,440 --> 00:20:05,310 I'm not sure. 376 00:20:05,520 --> 00:20:05,820 Jeff Levine: No. 377 00:20:05,820 --> 00:20:06,060 No. 378 00:20:06,060 --> 00:20:09,690 If it's it's grandma and grandpa's Roth, it would not grandma and grandpa would.... 379 00:20:09,690 --> 00:20:11,570 Ed Slott: Right, that was the point I, I wanted to make. 380 00:20:11,570 --> 00:20:14,000 So it's not as much of a concern. 381 00:20:14,360 --> 00:20:18,680 And if the child has that much in their Roth, then maybe it is a concern. 382 00:20:18,680 --> 00:20:21,530 But again, we have to look at who's paying the bills. 383 00:20:21,740 --> 00:20:24,920 I think what the kind of bills we are talking about for education, 384 00:20:24,920 --> 00:20:29,180 which we both agree are escalating, will be lot more than likely 385 00:20:29,180 --> 00:20:31,370 coming from somebody else's funds. 386 00:20:31,730 --> 00:20:33,620 I mean, uh, you agree with that, right? 387 00:20:33,830 --> 00:20:35,900 Jeff Levine: Well, not, not the student probably, but I 388 00:20:35,900 --> 00:20:37,460 mean, look, some students are. 389 00:20:37,520 --> 00:20:38,030 Great. 390 00:20:38,030 --> 00:20:40,910 And they would save it for themselves, but we're really, I think we're talking about 391 00:20:40,910 --> 00:20:46,700 here a family decision, but a parents five, a parents' Roth IRA distribution 392 00:20:47,000 --> 00:20:52,580 would certainly impact their child's, uh, their, their child's saving cause the 393 00:20:52,585 --> 00:20:54,590 parents' income goes on the FAFSA form. 394 00:20:55,430 --> 00:20:58,160 Ed Slott: Right, but that's why I'm talking about grandma and grandpa, 395 00:20:58,190 --> 00:21:01,610 because from what I see, that's the more likely funding vehicle. 396 00:21:02,715 --> 00:21:03,195 Jeff Levine: That's fair. 397 00:21:03,375 --> 00:21:08,235 Ed Slott: Larger Roth IRAs and there are Roth IRAs can be withdrawn tax free. 398 00:21:08,445 --> 00:21:08,775 Jeff Levine: Yes. 399 00:21:08,805 --> 00:21:08,985 Yeah. 400 00:21:08,985 --> 00:21:12,855 If, if for the grandparent that would be a major edge to the Roth IRA. 401 00:21:12,855 --> 00:21:15,525 If it's for the parent, it would be a little bit more of, 402 00:21:15,555 --> 00:21:17,745 uh, of a difficult situation. 403 00:21:17,980 --> 00:21:19,480 Ed Slott: And more, even more difficult. 404 00:21:19,480 --> 00:21:20,440 So let's bring it down. 405 00:21:20,440 --> 00:21:22,990 If it's, if we're talking to the student alone, I don't 406 00:21:22,990 --> 00:21:24,790 even know if that's practical. 407 00:21:25,180 --> 00:21:30,160 Uh, if the, if it was the student's choice between a Roth and a 529, I 408 00:21:30,160 --> 00:21:33,550 think like we do it on these programs. 409 00:21:33,550 --> 00:21:34,480 That's a coin flip. 410 00:21:35,530 --> 00:21:37,120 Gotta get the money from somewhere. 411 00:21:37,420 --> 00:21:37,720 Jeff Levine: That's it? 412 00:21:37,750 --> 00:21:40,960 Well, if you're able to do it, kudos to you, cuz it's not easy if 413 00:21:40,960 --> 00:21:42,310 you're a student, that's for sure. 414 00:21:43,400 --> 00:21:47,450 Yeah, well, Ed I think we've covered a lot of great information 415 00:21:47,450 --> 00:21:51,680 today for those thinking about the various ways to save for college. 416 00:21:51,680 --> 00:21:53,780 And of course these aren't the only two ways you could also 417 00:21:53,780 --> 00:21:55,710 save in a taxable account. 418 00:21:56,520 --> 00:22:00,900 Some people use life insurance, uh, cash value, life insurance, as a tool. 419 00:22:01,050 --> 00:22:04,020 There are any number of ways in which to save for college. 420 00:22:04,230 --> 00:22:10,120 Uh, but ultimately we covered today two key areas, which are Roth IRAs and 529 421 00:22:10,140 --> 00:22:16,470 plans and both of them have the benefit of being tax free and penalty free. 422 00:22:16,775 --> 00:22:20,255 Now different ways the Roth gets there once you reach a certain age or as you 423 00:22:20,255 --> 00:22:24,185 pointed out contributions from the Roth at any time, for any reason, right. 424 00:22:24,185 --> 00:22:26,015 Can be distributed tax and penalty free. 425 00:22:26,195 --> 00:22:29,615 The 529 plan all the growth there is tax and penalty free. 426 00:22:29,615 --> 00:22:35,030 If used for qualified education purposes, the Roth IRA is more flexible, 427 00:22:35,030 --> 00:22:39,050 but that flexibility comes at a cost of limited contributions per year. 428 00:22:39,290 --> 00:22:44,180 So for a, uh, a parent or someone who doesn't yet have a, a large established 429 00:22:44,180 --> 00:22:47,450 retirement account, they may be limited as to how much they're able to put 430 00:22:47,455 --> 00:22:49,640 away for their child's education. 431 00:22:49,880 --> 00:22:53,930 Whereas on the 529 plan, there's effectively no contribution limit. 432 00:22:53,930 --> 00:22:56,420 Only the maximum amount that a plan will allow it to be in 433 00:22:56,420 --> 00:22:59,870 there, which are oftentimes in the hundreds of thousands of dollars. 434 00:22:59,875 --> 00:23:03,750 Well, more than anyone would wanna put in and ultimately, uh, we're 435 00:23:03,750 --> 00:23:07,980 talking about folks who are fortunate enough here in both situations to 436 00:23:07,980 --> 00:23:12,720 be able to save with the idea of these dollars going for retirement. 437 00:23:12,720 --> 00:23:16,260 One thing, Ed, while we, we may have taken opposite sides here. 438 00:23:16,260 --> 00:23:20,520 One thing I know, we agree on that's um, a related issue is that there are 439 00:23:20,520 --> 00:23:26,520 no loans for retirement and so if it's you or your child or your grandchild 440 00:23:26,520 --> 00:23:32,145 going to school or versus your retirement, prioritize your retirement. 441 00:23:32,145 --> 00:23:32,955 We agree on that one. 442 00:23:33,075 --> 00:23:36,045 Ed Slott: All right, nobody wants a mortgage on their retirement account. 443 00:23:36,375 --> 00:23:37,005 Jeff Levine: Indeed. 444 00:23:37,935 --> 00:23:38,925 it can't happen. 445 00:23:39,705 --> 00:23:44,205 Well, Ed, we come to the end today and as we always say, there are two sides 446 00:23:44,205 --> 00:23:50,025 to every coin, but your life and your important decisions are too important 447 00:23:50,025 --> 00:23:51,645 to be left up to that coin flip. 448 00:23:52,035 --> 00:23:53,835 And that's why one thing you and. 449 00:23:54,115 --> 00:23:58,645 Always agree on is making sure you're talking through these difficult and 450 00:23:58,645 --> 00:24:02,695 complex decisions with a knowledgeable financial or tax advisor so that 451 00:24:02,695 --> 00:24:06,535 you can weigh the pros and cons of different decisions against your own 452 00:24:06,535 --> 00:24:08,545 specific set of goals and circumstances. 453 00:24:08,550 --> 00:24:11,635 If you wanna continue the conversation with Ed and I we'd love to hear 454 00:24:11,635 --> 00:24:15,640 from you, you can reach out to Ed on Twitter at @TheSlottReport. 455 00:24:15,640 --> 00:24:20,120 That's @TheSlottReport with two Ts and you can reach me at @CPAPlanner. 456 00:24:20,170 --> 00:24:22,330 Again, that's @CPAPlanner. 457 00:24:22,570 --> 00:24:23,680 Tell us what we missed. 458 00:24:23,860 --> 00:24:27,430 Tell us if you have an additional idea on a benefit or a drawback from 459 00:24:27,435 --> 00:24:31,570 either the 529 plan or the Roth IRA that you think we should hit on. 460 00:24:31,940 --> 00:24:35,270 Or if you have an idea for a future topic, we'd love to hear from you too, 461 00:24:35,629 --> 00:24:38,990 until then thanks for listening to us, Ed as always, this one was fun. 462 00:24:39,350 --> 00:24:42,620 Ed Slott: Okay, Jeff, we'll see you all on the next episode of 463 00:24:42,770 --> 00:24:44,450 the great retirement debate. 464 00:24:47,370 --> 00:24:50,610 OUTRO: Jeffrey Levine is chief planning officer for Buckingham wealth partners. 465 00:24:50,670 --> 00:24:53,880 This podcast is for informational and educational purposes only, and should 466 00:24:53,880 --> 00:24:57,150 not be construed as specific investment accounting, legal or tax advice. 467 00:24:57,180 --> 00:25:00,090 Certain information mentioned may be based on third party information, 468 00:25:00,090 --> 00:25:02,970 which may become outdated or otherwise superseded without notice. 469 00:25:03,000 --> 00:25:06,210 Third party information is deemed to be reliable, but it's accuracy and 470 00:25:06,210 --> 00:25:07,680 completeness cannot be guaranteed. 471 00:25:07,800 --> 00:25:10,800 The topic discussed in corresponding arguments are those of the speakers 472 00:25:10,980 --> 00:25:13,770 and may not accurately reflect those of Buckingham wealth partners.