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Money Minutes for Doctors #14 - The 529 Plan

Welcome to spring in New England…typically a time when many high school seniors, and their parents, will be well on their way to planning the final summer before heading off to college and the next (challenging) chapter of parenting. Part of the challenge is developing a “plan” to approach the financing of what will prove to be some of the most memorable and definitive years of their children’s lives. One option that has received a tremendous amount of attention in recent years is the “529 Plan”. Simply stated, a 529 Plan is a state-sponsored investment plan that enables people to save money for a beneficiary to use toward higher educational expenses. Of course, the nuances of the 529 go much deeper…and to help us navigate those waters, it is our pleasure to welcome back Ms. Katherine Vessenes, JD, CFP®, RFC, Founder and President of MD Financial Advisors.

Katherine blog pic.jpeg

About Ms. Vessenes:

Ms. Vessenes works with over 300 physicians and dentists from Hawaii to Cape Cod. Her firm uses a team of experts to provide comprehensive financial planning to help doctors build their wealth and protect their wealth while reducing taxes now and in the future. Katherine is a longtime advocate for ethics in the financial services industry; and has written three books on the subject of investment strategies. She has received many honors and awards including: numerous tributes from Medical Economics as a top advisor for doctors, multiple 5-Star Advisor Awards, honored as a Top Woman in Finance, in addition to being selected to be on the CFP® Board of Ethics. Katherine can be reached at: Katherine@mdfinancialadvisors.com or 952-388-6317. Her website: www.mdfinancialadvisors.com.

Quick Summary:

What is a 529 Plan?

  • A designated plan, each state has one, that allows anyone (parents, grandparents etc) to contribute after tax money to save for college and then the money can be pulled out tax free in the future

  • Allows you to avoid capital gains tax on the earnings as long as used on an approved college/university

  • Does cover vocational schools, a few international schools are also included

  • Various plans offer more or less benefit and fees are variable

  • If total value of fund not used on child #1 then can be passed on to subsequent children and even to grandchildren

  • Can use any state plan, do not need to live in that state, and can be spent at any college, not limited by the fund location

  • Tax savings best if you are in a high earning speciality (i.e orthopedic surgery/plastic surgery) AND started saving when child young (just a few months of age)

Downsides:

  • If student applying for financial aid all of the 529 goes to the college, compared to a brokerage account where calculations differ and only portion of account goes to college

  • Investment options within the plan vary significantly from state to state 

  • Various states have different funds and costs so need to be savvy and choose best plan

  • Significant tax penaities if money taken out and not used for college expenses, a non-liquid investment strategy

  • 529 funds likely to get less robust returns than brokerage accounts.

Saving for college can be a collective approach with combination of accounts… 

How much to contribute?

  • Perform a College funding analysis.  

  • Goal to save for 50% of college.  Very few doctors can afford private primary and secondary school along w college and still be able to retire.  Plan for 50% and the reminder comes from cash flow, loans, etc. 

  •  Determination of the amount is based on local state universities (or if parents have specific educational goals) as inflation of college tuition is over 7.5% per year, much more than average inflation rate. 

  • Think of college as an investment, a great education that can be used to support themselves and then ask “Is it worth that?”