With Richard Polimeni, Chair of the College Savings Foundation and Director of Education Savings for Merrill Lynch
Steve had a conversation about saving for education with Richard Polimeni, the Chair of the College Savings Foundation, a leading nonprofit organization helping American families pay for higher education. Richard is also the Director of Education Savings for Bank of America Merrill Lynch, responsible for managing their $12 billion 529 plan college savings business.
Understanding 529 Plans
Steve asked Richard to briefly explain what a 529 plan is. Richard answered, “A 529 plan is simply a tax-advantaged account where parents, grandparents, other relatives, or even friends can put money away for a child’s education. It’s a lot like an IRA or retirement account, but instead of the money being for retirement, it’s earmarked specifically for education. 529 plans have recently been significantly broadened. You used to only be able to use the money for post-secondary education—college or a trade school. But now you can also use up to $10,000 a year from a 529 plan to pay for k-12 schooling, including private school or a religious school.”
The main tax advantage of a 529 plan is that, although contributions aren’t tax-deductible, once you put money in the account, then it grows tax-free, like a Roth IRA, and you don’t have to pay any tax when you withdraw the money, as long as you properly use it for education expenses. If you had put $10,000 into a 529 plan in 2016 and invested it in an S&P 500 stock index fund—even if you never contributed another penny to it—you’d have about $17,000 now, and that $7,000 gain would be completely tax-free at the federal level. State laws vary, but more than half the states offer some kind of tax break as well.
Steve also asked Richard to tell listeners what his organization, the College Savings Foundation, does. Richard explained that the College Savings Foundation is a nonprofit organization with a two-pronged mission: “One, to educate the public about the importance of saving for education and make them aware of tools like a 529 plan. Secondly, we work with legislators on both the state and federal levels to promote legislation to improve education funding programs, to make things better for students and parents.”
Richard said that one of the best recent changes in 529 plans is the emergence of online gifting programs. In the past, if a friend or relative wanted to contribute to your child’s 529 plan, they had to know the account number, what specific plan you have, in short, it was somewhat difficult. To counter that, a number of 529 plans have developed online gifting tools, similar to a crowdfunding platform, where anyone who wants to help you or your child can easily make a contribution without having to know all that information. You can just go to one of these websites and set up a page for your child and then give those who want to contribute the link to that web page where they can make a donation. They don’t have to have all that detailed information.
Steve asked about 529 plan gift cards. Richard said, “That’s another recent innovation. A company called Gift of College offers a gift card that you can buy at retailers such as Target or Barnes and Noble. Just like any other gift card, you can buy them in various amounts—$25, $50, $100. Then, when a student receives the card, they just go to the Gift of College website to redeem it, and the money is credited directly to their education savings account.”
Picking A 529 Plan
Finally, Steve asked about the 529 plans that different states offer. Richard explained that there are a number of different plans, but they all fall into one of two basic categories. The first is a direct plan, where you can just go to a website and open an account on your own. The other option is what’s called an “advisor sold” plan offered through professional financial advisors. Because there is such a variety of plans, getting some help from a financial advisor is probably a good idea.
Most people aren’t aware that you aren’t limited to just the plans that your state offers. For example, a Florida resident can open a 529 from the state of Utah or any other state of his or her choice. Richard’s advice: “If your in-state plan doesn’t offer a tax deduction, then you might be able to find a better plan elsewhere.”
Steve added a word of caution, saying, “Looking at the fees charged by the plans or the investments in the plans is something that’s important to do. As with any other investment, fees can make a big difference in the actual return on investment you get.”
Find out more about education savings plans and get help by visiting the College Savings Foundation.
Disclosure: The opinions expressed are those of the interviewee and not necessarily of the radio show. Interviewee is not a representative of the radio show. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances. The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by the radio show.
Steve Pomeranz: With the holidays behind us, the idea of gifting is still fresh in our minds, so why not give something meaningful for the new year?
Richard Polimeni is Chair of the College Savings Foundation, which is a leading nonprofit helping American families save for higher education. He’s also the director of education savings programs for Bank of America Merrill Lynch, responsible for managing Merrill Lynch’s $12 billion 529 college savings business. Welcome to the show, Richard.
Richard Polimeni: Thank you, Steve. Pleasure. Thanks for having me.
Steve Pomeranz: My pleasure. Student loan debt is soaring. It’s $1.6 trillion, and saving for a child’s higher education is climbing to the top of the wish list for many parents. We’re not going to talk about any particular plan today. We’re just going to look at a broad range of them, but there are so many ways to set up these plans. But first, briefly describe what a 529 plan is and what it does.
Richard Polimeni: Sure. 529 plan is simply a tax advantage account where parents, grandparents, or even friends and relatives can put money away for a child’s education. So it’s a lot like an IRA or retirement plan, but instead of the money being earmarked for retirement, it’s earmarked specifically for education. Prior to a couple of years ago, 529 plans could only be used for postsecondary, so college, trade schools, et cetera, but more recently the code has been broadened and now you can also use the assets for up to $10,000 a year to pay for public, private, and religious school for K-12 education as well.
Steve Pomeranz: Okay. And by the way, tell us a little bit about the College Savings Foundation, too.
Richard Polimeni: Sure. The College Savings Foundation is an organization, it’s a nonprofit organization and the mission is really simple. It’s one, to educate the public and make them aware of the importance of saving for education and the tools, like a 529 plan, as well as working with legislators both in the states and in Washington to help make sure these programs remain effective tools, and we try to promote legislation that broadens the scope of these plans and make them better for the American consumer.
Steve Pomeranz: So a 529 plan allows you to put money aside, the money will grow tax-deferred, and if you use it appropriately as designed in the law, the money or the returns are actually tax-free sometime in the future. So there’s a huge benefit to using these plans to save, and they’re offered in many different shapes and sizes and varieties. I want to talk a little bit about that, but before we do, I’ve noticed in the material that you sent to us that there are some clever gifting ways now or ways to gift funds for these plans that I hadn’t really seen before. Tell us about that.
Richard Polimeni: Sure. We’ve been seeing more and more programs coming up with gifting programs and innovative tools to help make it easier for friends and family to contribute. Prior to a couple of years ago when you open the account, it’s easy, you have money transferred from your bank account or you send in a check and it’s pretty straight forward. But when you want to … a grandparent or an aunt or uncle or a friend to contribute to the account, it got a little bit tricky because they needed to know the account number, what plan you were in, sending a check, and so it just wasn’t an easy process. And so what a lot of 529 plans have done over the years that’s created different, I’ll say online gifting tools, crowdfunding platforms and so forth to make it much easier.
For example, just like people use crowdfunding now for various donations and so forth, many of these plans have their own a website where you can go in and customize a website or a webpage for your child and then you can send the link out in an email or social media platforms. When you’re sending out invites for a birthday, for example, or a bar mitzvah, you can send a link so you can say, “Hey, listen. If you don’t want to bring a gift to little Johnny’s birthday, you can contribute to his education by clicking on the link,” and by clicking on that link, they come to a page that will let them contribute the 529 for the child. And they don’t need to know what 529 plan the child’s in, they don’t need to know the account number, and they can generally contribute via either credit card or direct debit from their checking or savings account, so it’s really simple.
Steve Pomeranz: That sounds really exciting. Now, we go to the store and we’re looking for a gift and we buy a gift card to Target or whatever it may be, or just an American Express card so it can be used anywhere. And now is there something similar in some of these 529 plans where you can actually buy a gift card that would make it very easy for grandparents?
Richard Polimeni: Absolutely, and that’s been another innovation over the last few years. A company called Gift of College actually does have a gift card that you can buy in many retailers today, such as Target, Barnes and Noble, and many other retailers throughout the country, and that gift card is just like any other gift cards you buy. You can buy it in various denominations, and when you give that gift card, what it does is the recipient goes into the website, and then from there again, they can have that $50, $100, whatever that gift card is worth, credited directly to their college savings account. And if they don’t have an account open yet, they can even open an account through that site.
Steve Pomeranz: Oh, that’s beautiful. A lot of children get a lot of presents during their birthdays and sometimes the parents say, “How many toys does a child need? I’d really like to have something that was more significant to be given that could actually help the child out in their future.” And I love this idea of having a kind of an electronic birthday card sent out where people can actually give a gift or have a physical card where they can send it and be redeemed to be put in their account. That’s terrific.
What are some of the other programs out there? I know that almost, I guess every state in the union has its own 529 plan available.
Richard Polimeni: That is correct. Virtually every state, I believe, with the exception of Wyoming, every state basically does sponsor a 529 plan. Usually, they’re available both on what we call direct basis, so if you wanted to do it on your own, you can go into a website or call an 800 number and open an account, or you can go into what we call an advisor-sold plan, where if you’re working with a financial advisor and want some help and guidance with your investment options, you can go that route as well.
In most cases, you can use any of the 529 programs available. You’re not limited to your state. However, many states do offer an in-state tax deduction, and usually, those contributions are only for the in-state plan, so we do recommend that you first look at your in-state program, see one, if there is a tax deduction and if so, then take a look at the details of the plan and make sure it’s a good plan, it has investment options that you like, the performance is good, the fees are reasonable and so forth, and then certainly use that plan. If your in-state plan doesn’t offer a tax deduction and you might think there’s a better plan out there, then certainly you can avail yourself to any of those programs.
Steve Pomeranz: Looking at the fees charged by the programs or the investments in the programs is I think an important feature that anyone setting one up or who currently has a program wants to look at. Many of them have extra fees kind of tacked on. Many of them don’t. Many of them use index funds. Some use actively managed mutual funds, so you really want to look more deeply and try to find the program that has the least cost because cost is going to make a big difference as the years go on.
My guest Richard Polimeni, and Chair of the College Savings Foundation, which is a leading nonprofit helping American families save for higher education. Richard, thank you so much for joining me.
Richard Polimeni: Thank you for having me, Steve. Appreciate it.
Steve Pomeranz: As you know, my mission is to always educate my listeners and remind you week after week, segment after segment, that we love your questions because we do. These are complicated times, which makes for complicated topics, and I’m always here to answer them. So if you have any questions about your portfolio, your kids, your kids’ kids, your retirement, or your 401k, how to take better care of your family, anything financial on your mind, I’m here with over 35 years of experience and I’d love to help you in any way I can, so go to stevepomeranz.com and go to the Contact section and let me know what you think and let me know how we can help you. That’s stevepomeranz.com.