Ask Ryan and Hannah: What to Do with a 529 Plan If College Isn’t the Plan (DF#189)

Ryan Maruyama [00:00:04]:
Aloha folks, and welcome back to Degree Free. We are back with Ask Ryan and Hannah or Ask Degree Free. If you would like to get your question answered, just like how Dana got her question answered today, you can go to ask.degreefree.com and ask your question there. You can either write your question or you can do a video just like how Dana did here, please. I mean, you can ask us any questions, but the video is better. We can see what you look like. We can see your face. We know that we're talking to somebody and not just bots, which we get a lot of ask.

Ryan Maruyama [00:00:32]:
Degreefree Com to get your question answered. And let's jump into today's question from Dana.

Dana [00:00:38]:
Hey, my name is Dana. I live in North Carolina. We have a five year old girl and both my husband and I are not glued to the idea that she go to college. Neither of us use our degrees. We totally agree with the fact that you can get a great career and not have to go to college. But both sets of our parents expect their grandkids to go to college. That's just the way that it is. They don't see how they could get a good job otherwise.

Dana [00:01:06]:
And so they have both started the $5.02 9 savings plans for their grandchildren, including our daughter. And we're not sure what the best way to use that money is and what happens if they don't go to college. Should we recommend them put that money into a high yield savings account instead? I'm just curious on your thoughts about it. Thanks.

Ryan Maruyama [00:01:32]:
Dana, thank you for this question. This is actually a question that we get not super often, but it is a question that comes into our sphere just due to the nature of the work that we do. I mean, for the people in the launch program, for the families that come to the launch program, there are so many families that started five twenty nine plans thinking that their children were going to go to college. It might not be so much the grand parents did it, but a lot of times it was the parents when they were young, really young, we had a little bit of extra money and we put that aside in the 05/29 plan. And we were just like, well, college is the way to do it. And college is the way that it's going to go because of that. I want to save up money tax free or at least the earnings on it are tax free. But now that their young adults and their children are in the 16 to 20 year old range, and they're starting to see the value of college now, unlike how they did when they were very, very little fifteen years ago, twenty years ago.

Ryan Maruyama [00:02:26]:
And now they're really starting to wonder whether or not college is worth it and whether or not it's worth the the price, even though they have all of this money set aside. A question that we get is this question. Like I said, not a lot because we're not financial advisors, but we do get it enough before we get started on the answer disclaimer for this. I mean, we are not financial advisors and this is not financial advice. This is literally just for informational purposes. The goal of this episode is for you to listen to it and for you to know your options and for you to know the next person that you need to talk to, at least this is your basis. If you are like Dana and you have no idea where to start, let us just point you in a couple of directions. Let us just give you a little bit of information for you to go ahead and do your own research.

Ryan Maruyama [00:03:10]:
And then at the end of the episode, I'll tell you the people that can help you with this 100% and take you down the road, especially if this 529 has a lot of money in it. The average 05/29 plan, and you and I were just talking about this, what is it? $35,000

Hannah Maruyama [00:03:24]:
So the average is $30,295 as of 2024. That is the current average sitting in most five twenty nine plans in The United States.

Ryan Maruyama [00:03:34]:
I guess before we get started with that, we should define what a five twenty nine plan is. And before we get there, it makes me think when we first got this question and I was thinking about it, it really jogged back memories for myself when I still thought that college was the only way and I didn't have kids and I didn't really have a girlfriend at the time. I thought I should open up a five twenty nine for my future kids. Hey there. I hope you're enjoying this episode of the degree free podcast. At degree free, we wanna help everyone thrive and succeed without needing a college degree. And the only way to truly reach everyone is with your help. If you're getting value out of this episode or if this is your second, third, or fourth episode that you're tuning into, if you could just ship this to a friend, just click that one button and share it with someone in your contacts or on your stories.

Ryan Maruyama [00:04:21]:
It would mean the world to us. And more importantly, get our message out to more people who need help getting out of their current situation. If you could do that right now, that would mean a whole lot. Because I had a little bit of money extra, you know, I've always been good at saving money and I had a nest egg of money and I was like, well, I'm not really doing anything with this. And if I put this in the market and I let this compound over time, then when my kids are older, whenever that is twenty five years from the time that I was thinking about it, maybe thirty years from the time that I was thinking about it, well, that's going to be a lot of money. Then I could then use, I changed the beneficiary to their name, and then I can use that money to help pay for college. And that was the whole thought process behind it. So I was thinking about opening one up before I even had kids.

Ryan Maruyama [00:05:06]:
The way that it shook out is, is I'm really glad that I didn't do that because of what we're going to go over today, which is it gets really complicated once you have, especially if you have a sizable amount of money in there, it gets really complicated trying to back that out in a tax efficient way. So for those that don't know what a five twenty nine plan is, the five twenty nine plan is very simply it's a tax advantage savings account for education expenses. You put in after tax dollars into this savings account. So there's no tax savings to you in the year in which you put money in because you're putting after tax money in. So let's just say that after tax, you take, whatever it is $5,000 And then you put that into a 05/29 savings plan. And this year that we're recording, this is 2025. I put that in for 2025. I'm not going to get a tax deduction for saving there.

Ryan Maruyama [00:05:55]:
That's not how it's tax advantage. It's tax advantage when you pull it out for one of the qualified expenses and the qualified expenses are going to be things like college tuition, college fees, room and board. There's no cap on the spend because college is super expensive and they know it. And that's literally the reason why they set these five twenty nine plans up. They set these five twenty nine plans up with the governments in cahoots, right? With the college industrial complex. And they are trying to make it so that you spend more and more money and they divorce you from your money. And you've already made the purchase decision, just like how I would have made the purchase decision for my children before they existed. If I had opened up the five twenty nine plan, I would have been like, well, I already have, let's just say that I put in $20 in there and I let that grow and I put in $5 every year and let it grow and grow for twenty five years.

Ryan Maruyama [00:06:43]:
By that time I wasn't even thinking about having any kids, so I wasn't even like, no idea. So just for idea, twenty five years, let's assume that's when my kids would be old enough to then attend college. That would be a lot of money. And at that time it'd be like, well, I have all this money. I might as well just go spend it. That is just also one of the ways that colleges have inflated their pricing and the government has helped them to do so. But anyway, there's no cap on the amount of spending. Would there be But anyway, there's no cap on the amount of spending with the reason why that's relevant is I'm going to go into for the K through 12 tuition.

Ryan Maruyama [00:07:12]:
There is a cap on spending and it's up to a $10,000 a year. So you can use the $5.29 tax advantage account for private school for a K to 12 tuition. It's just only up to $10,000 a year. You can also use them for certain certified trade schools, apprenticeships, and vocational programs, and then up to $10,000 for student loan repayment.

Hannah Maruyama [00:07:31]:
It's pretty wild that you can't use it for student loan repayment and that there's there's a cap on K through 12 education. So you can tell that the real design of this program was to exactly, as you said, make people decide that their children were going to go and buy college degrees when they turn 18, regardless. I have seen and heard stories of people who have sent their kids into again, and co signed student loans over $20,000 and a five twenty nine plan. They're like, well, it's there. And then they send their kids to college, even though one, their kids don't need to go. And then two, they're going to take out more money than they even have, but they're just hung up on this comparatively minuscule amount of money. That's locked up in a five twenty nine plan and they don't want to in quotes waste it, even though they're actually going to waste far more money and far more time digging their child into debt because they're trying to use what's basically a coupon because the last time that a five twenty nine plan covered a bachelor's degree was in the 1980s.

Ryan Maruyama [00:08:24]:
Yeah. Well, it's a penny wise pound foolish for those scenarios. I can see the argument that if they put in the maximum contribution every single year from the time that the child was zero or in my case, if you put it in your name before your children was born and then you change the beneficiary, which is one of the things that we're going to talk about Dana in here. Cause that's one of the options that we have to do with the money that's already in the 5 20 9. I realized that very few people will be able to do this because even the average is 30 something thousand dollars and the average isn't really good with money. So what I mean is that there's not very large outliers there driving up the average of the $5.29 plan. So this is gonna be for outliers, but if you're listening to this podcast, you're already an outlier. I

Hannah Maruyama [00:09:05]:
just don't want to say so the max I've realized that when I just said I was talking about the average amount that's in a five twenty nine now as of 2025 is the last time that could have covered a bachelor's degree would have been in the 1980s. The max you can contribute over a lifetime to a five twenty nine plan is half a million dollars. So if you've done that, then obviously there's a different calculation for you because it's different because the money is quite literally set aside and there are very few, it's complicated to spend it in other ways, but we're going to get into that.

Ryan Maruyama [00:09:29]:
The thing is even if you did have that, which is what I was going to say, and the college is paid for, you've already funded it and the growth exploded it over the twenty years. If you did that, your child still has to spend their effort and their time on college. It still might not be a good idea. Even if you do have the money, it still might make sense to go ahead and do some of the other alternatives that we're going to be talking about here. But anyway, I just wanted to go for those people that are completely lost at the beginning of what a five twenty nine or a five twenty nine plan is. That's what I want to talk about. It is a tax advantaged account where you put after tax dollars and the savings and the growth over time that is tax free. And that is where the tax quote advantage comes out.

Ryan Maruyama [00:10:12]:
It is when you're pulling it out for one of these qualified expenses. And that is where the tax advantage and that's where the tax savings come from. But for Dana's specific situation, there's a couple of things here that I want to talk about. The first thing I'm going to talk about is her grandparents, your daughter, Dana, your parents have funded your daughter's five twenty nine plan and there's money that's already locked up in there. And she didn't go into how much money is in there or whatever, but that's not super relevant even, but we are going to talk about the options that we can do with that if your daughter decides to go degree free. And then the second thing that I want to talk about is a question that she didn't really ask, but I feel like it is also an option for a lot of people, or it is something that is thought from a lot of people from the point of passing down money and legacy your parents now and you say, look, I'm not sure if she's going to go. I'm not sure if she is. I'm not sure if she isn't.

Ryan Maruyama [00:11:04]:
And then if you are sure she's not going to go, then you just say, I'm sure a positive she's not going. So if they're actively contributing to the five twenty nine plan now, what else could they be doing? That wasn't in your question, but that's what we're going to take a stab at. We're going to talk about the monies that's locked up in the five twenty nine plan now, and then we're going to talk about some of the different alternatives that your parents can do to help your daughter. They're thinking about passing down money, some other ways that they can do it. And the first option that we could do is the alternatives that we were talking about is not just college that you can spend on the five twenty nine plans. There are certain trade schools, apprenticeships, and vocational training, certified online programs, or even boot camps, K to 12 tuition up to $10,000 a year. This is where you're going to have to do your own research here. And you're gonna have to figure out if there's any program that you are thinking about enrolling your daughter in, when it comes to the payment, you are going to ask them, do you take $5.29 money? And for the most part, I'm painting with super broad brush here.

Ryan Maruyama [00:12:03]:
If they take $5.29 money, you're going to know because

Hannah Maruyama [00:12:06]:
they'll tell you you have to be a credit. It's this whole thing.

Ryan Maruyama [00:12:08]:
It's a part of their marketing to you. Like most programs, I guess it's part of their marketing. They'll have a plastic where like you can use five twenty nine money because they're going to want to market that because

Hannah Maruyama [00:12:17]:
the money's already spent,

Ryan Maruyama [00:12:18]:
right? Their money's already spent. It's locked up and they know that as a company and they're just like, I want to make it easier for you to give me that money, even though it's like not really your money, but it totally is your money. Anyway, for most of those things you're going to know before you get on the sales call with them or before you get on the consultation with them that they take it. But even if you don't know, you're going to want to just be like, do you take $5.29 money? And then you'll figure it out from there. The second option, that's not just changing from trade school apprenticeships, those types of things. The second option that we can do here instead of just spending the money on another qualified purchase, you could just change the beneficiary to somebody else who is going to use the money. So if your daughter doesn't need the funds and you have another son or you have another daughter that can use it, and that is going to go into those types of things, you can have your parents change the beneficiary to your other children. And if you're being really nice and you don't really need the money, then you could change it to a niece, a nephew, one of their other grandchildren that is going to use it.

Ryan Maruyama [00:13:25]:
That is an option. I'm not saying it's a good one.

Hannah Maruyama [00:13:28]:
It's the one you want to use, but it's there.

Ryan Maruyama [00:13:30]:
The money will no longer go to your daughter, but it is there to do it. And, beneficiary changes. And this is what I was talking about when I was thinking about doing it. Beneficiary changes are tax and penalty free. So like I said, for those that are thinking about going to college, I don't know why you blew listening to this podcast, but maybe if you do and you don't have any kids, you can start your five twenty nine plan under yourself or under your spouse. And then when they become of age or before they're an adult, you can then change the beneficiary really easily over to them. If you would like them to have the monies, you could do that. Now there's two more options.

Ryan Maruyama [00:14:02]:
And I think that this is closer to what you wanted, Dana, but I wanted to give you the first two simplest options, which is to just use it for a qualified expense and then just change the beneficiary.

Hannah Maruyama [00:14:12]:
But, yeah, these fit a little bit better. I think the spirit of what she was asking

Ryan Maruyama [00:14:15]:
for

Hannah Maruyama [00:14:15]:
is what else can we do?

Ryan Maruyama [00:14:17]:
For her daughter. The first one, spending on other qualified expenses could also benefit her daughter, but the second one changing the beneficiary would not. The third option, if we didn't want to spend it on qualified expenses and if we didn't want to change the beneficiary. Now the third one is going to be to roll it over to a Roth IRA. If your daughter doesn't use the funds, the Roth IRA, you can roll over the maximum contribution amount for whatever year that is. So like for 2025, I believe that you can roll over a maximum of $6,500 this year, but there's a caveat here. And the caveat is that your daughter must have earned income and that earned income needs to be in excess of 6,500 Or let's just say that this year, 2025, she gets a part time job, but she starts that part time job in December. And that part time job only pays $10 an hour, and she makes a thousand dollars on the books in December.

Ryan Maruyama [00:15:12]:
She will only be able to roll over a thousand dollars whatever the amount of money that is on her W2 or on her tax return says that is the money that you can roll over from the 05/29 plan into the Roth IRA.

Hannah Maruyama [00:15:26]:
And I think that this is a more recent addition amendment to the way that they let people use five twenty nine money as well. I think it's in response to the fact that people are going, I'm not going to use this for college. So what can I do with it? And I do think that's partially why this is a very recent development that you could do this before you were not allowed to do this. I think it was two years ago, they made this change. And the other thing is that because your daughter's five. So another way this could look, I know this sounds kind of crazy and it's niche, but if you were to do some like baby modeling or something like that as a child, like your child is in an old Navy photo shoot and she makes $5,000 you can roll over 5,000 of that. You can roll over $5,000 to the Roth with a lifetime max of $35,000

Ryan Maruyama [00:16:05]:
So there's a couple of caveats that, oh, as well as getting into it much more, which is what makes this stuff really complicated. But that said it is a tax advantage account. There is some sort of complications that need to happen. The 05/29 plan, the account must be open for at least fifteen years. She's five now. If they put that money in when she was zero and she has to wait another ten years anyway. Ten years, fifteen years old, which makes sense, which lines up with, if she gets a job in ten years, then perfect. Then whatever she makes, you take all of the winnings in ten years, you let that the stock market do its thing.

Ryan Maruyama [00:16:43]:
Let the five 20 nine plan do its thing and have the compounding, compounding, compounding. Then when she gets to be 15, 16, when she's starting to earn income, then you start rolling it over to the Roth IRA and that doesn't have to come out of her paycheck. The other thing is that the contributions with made within the last five years are ineligible. So another way to say that is that only contributions made five years or earlier need are eligible to be rolled over. So if the account is fifteen years old, let's say you contributed a thousand dollars when she was one years old, zero years old, and now she's 16, has only grown until some amount. And then now when she's 14, 15, you contributed more. Those contributions when she's 14 and 15, those would not be eligible to roll over. There's an age limit on the monies that you put in.

Ryan Maruyama [00:17:42]:
Those are the two for the $5.29 plan.

Hannah Maruyama [00:17:44]:
The overarching thing that I got when we looked into this more was just how ridiculously complex all of these things, all of these rules are. And that's kind of what leads to option four.

Ryan Maruyama [00:17:55]:
So the last thing that I wanted to say about option three is that for those super savers out there, the rollover from the five twenty nine to your Roth IRA. And then, so for those that don't know what a Roth IRA is as well, that is another tax advantage account. It is very similar to the five twenty nine plan, except is it individual retirement account? Once again, as I said, in the beginning of the episode, you're taking after tax money. It's not going to lower your taxable income, your daughter's taxable income in that year. You're just going to say she made $6 this year. And if she put it into a traditional IRA for illustration purposes, she would lower it by the contribution amount that she put into her IRA. And then so she would take the tax savings. Now the tax savings she gets now, it grows and grows and grows and grows.

Ryan Maruyama [00:18:42]:
And then she takes it out later and that's when she pays the taxes on it. Whereas the Roth IRA, she is going to take the tax hit. Now she puts in after tax money, and then it grows and grows and grows and grows basically for free forever. I mean, it's the way that I like to think about it because I'm simple and I'm dumb. And so, like I just said, like, oh, that's free money forever. You pay it once, you pay the man once, and then you put money in and then it grows free forever. And then your Roth IRA, I don't even want to say ages anymore. By the time that your daughter's actually able to take it out, she'll have to be like 90 because of the life expectancy is just getting more and more and more.

Hannah Maruyama [00:19:16]:
And they keep raising their retirement age too.

Ryan Maruyama [00:19:18]:
Yeah. So eventually be able to take it out. And we're hoping that when she takes it out at those stipulations of whatever the Roth IRA withdrawal limits are at the time, she will then take it out. It's free money and it's tax free. Okay. So that for the super savers out there and Dana, if you're a super saver for your child and, or if your child is then a super saver as well, what I mean by that is they have all this excess money and they want to put more money into their Roth IRA. They will not be able to, for that year. The rollover from the 05/29 to the Roth IRA is going to be the contribution is going to count towards the contribution limit for that year.

Hannah Maruyama [00:19:55]:
If you're going to do it, it would be advisable to do it when they're really young and their earnings are not that high because they're not going to be earning enough really to make a serious dent in a contributing to their Roth anyway.

Ryan Maruyama [00:20:05]:
Once again, this is not financial advice. If I were to do it and this was my child, that's exactly what I would do, which is I know that at 16, 17, 18, they're not going to have a lot of money and their expenses are really low. And the discrepancy between their income and their expenses is probably going to be very little, especially if you're making them pay rent or something like that. And they go out and they have to buy their own food, things like that. If that's the way that you decide to handle the money and everything like that, they're not going to have a great discrepancy between their income and their expenses. And that discrepancy is the amount of money that you can save anywhere. At those years when they have a very small discrepancy, that is when the value of rolling over the $5.29 really, really, really makes sense. And especially considering then once it's in their Roth IRA, it's locked up forever pretty much without taking more penalties and things like that, which they really don't want to do.

Ryan Maruyama [00:21:00]:
But it's locked up and then it can grow until

Hannah Maruyama [00:21:03]:
Kingdom come.

Ryan Maruyama [00:21:04]:
Yeah, exactly. But I just wanted to put that caveat out there for those people that have a lot of money or their kids make a lot of money. The rollover from the 05/29 plan is going to count as that year's contribution. So option four is super simple. It is just withdraw the funds. If none of the above options worked, if the first three were just like, Nope, that doesn't make sense. I'm not going to do this. I'm not gonna do that.

Ryan Maruyama [00:21:27]:
I'm not gonna do this. Like I said, I think the rollover to the Roth IRA is probably where I would settle and that, and that's probably where it would make sense. And you can just do that. Oh, sorry. I didn't say the max lifetime cap that you could do it is at 35,000. As long as they have earned income over 6,500 for five years, basically as long as they have that five, six years, then they'll reach the lifetime cap and it'll be super simple. And then you'll have to have that amount of money in your 05/29 plan anyway. But assuming that you have more than that in your 05/29 plan, and now you're like, okay, you have a hundred grand, you did the 35,000 over five years, six years.

Ryan Maruyama [00:22:01]:
And now you're like, okay, well, what do I do with the rest of this $65,000 Well, option four is kind of where we're at, which is you could just withdraw the funds.

Hannah Maruyama [00:22:09]:
Just take it out.

Ryan Maruyama [00:22:10]:
Right. Exactly. I mean, the other thing is to change the beneficiaries, you can just change the beneficiary into infinity. And so you could just give it to your daughter when she's an adult and just say, like, this is for your kids.

Hannah Maruyama [00:22:19]:
Yeah. She can always just keep changing it too. Everybody can. So you could hand it down if it's not needed.

Ryan Maruyama [00:22:25]:
Right. Exactly. And so you just give it to her and they'd be like, well, it's not really useful to educate her on like what it is and then be like, this is for your kids. And now it's going to grow and grow and grow and grow whether or not that's a good idea. I'm not sure. Just why I just wanted to let you know that that is an option.

Hannah Maruyama [00:22:37]:
The other thought that I've had while talking about this as well, is that if you want your child to get the most of a five twenty nine plan and you really want to make sure they're using it for something that they actually need to use it for. Not that they're going to college and they're gonna take out additional loans because they're going to college at 18 and they don't know what they wanna do, and they're just trying to spend the money that's in there. You could also just advise them to wait until they're 25 because when they are independent from you, the cost that they will pay for a degree will come down dramatically because it's no longer attached to your income. Because of that, when they turn 25, all of a sudden, they're independent and the amount of money that they'll have to pay for tuition, the amount of things that are available to them will make the cost shoot through the floor. At that point, you may be able to get a much higher impact for your five twenty nine, as opposed to sending your child to college directly after high school, when there's only, there's a 75% chance, they're not even going to end up working in their field of study. Whereas when they're 25, their brains are fully formed and they've got some life experience. That money is going to have a much higher impact and it's going to be much better used by your child with a much more formed brain. So I would say that if you're hell bent on using it for your child's college tuition, have them wait until they're sure that they need a degree and what the degree should be in in order to actually benefit them.

Ryan Maruyama [00:23:47]:
So I just wanted to go over option four, withdraw the funds. And I think most financial advisors and financial planners are gonna tell you that this is a horrible idea. So I want to say why they would say it's a horrible idea. The reason why it's a horrible idea is you pay a 10% penalty. And that is not just the taxes that you pay on the withdrawal, but it is an added 10% penalty for using it for an unqualified expense. So for example, you take out $10,000 from the 05/29 plan, withdrawing it to your daughter. Now her income in that year has to go up by $10,000 And so she gets taxed on that amount of money, whatever her tax rate is, her ordinary income tax is the exact same as if she worked more shifts at McDonald's and she made $10,000 more by working more shifts, the exact same amount of money, which for those listening is a really tax inefficient way to make money than being a W2 worker. And so she goes and she makes more money, the $10,000 and then she has to pay taxes.

Ryan Maruyama [00:24:50]:
And then on top of paying taxes on that, she then has to pay a 10% penalty for taking it out as well. So it is an extremely expensive and tax inefficient way of handling this whole ordeal. But let me be the devil's advocate here of why would make sense here. And once again, not financial advice, but thinking through it for myself, why would this make sense? Well, it would make sense to withdraw the funds if you're positive that you don't need it. Right? Obviously with a caveat that you don't need it, that you're not gonna use it on a qualified expense, that you're not going to change the beneficiary and that you've already funded the Roth IRAs and you've hit the $35,000 limit. You're like, okay, I want to use it. And maybe you've looked at the Roth IRA and you're here like, well, that doesn't make sense for my daughter. Maybe that as well.

Ryan Maruyama [00:25:31]:
Maybe you haven't done that yet. And you withdraw the funds. The reason why I think it would make sense, especially the earlier you do it, the better is because if they're still young, their tax bracket is going to be very low. You're going to take out money in a lighter, smaller tax bracket. And if they're in, if she's working a full time job and she's making like $10,000 a year, if you just take out $18. And once again, this is not financial advice, guys. If you just take out enough so that she remains in the smallest tax bracket, then it's not that big of a deal. She takes the 10% penalty.

Ryan Maruyama [00:26:03]:
It's the smallest penalty that she would take. And then she doesn't have to wait to 65. She doesn't wait to 67. She doesn't have to wait until 90 years old to use the money with the time value of money. She's able to use it right now to probably put towards the best investment that she could do at the time, which is like invest in herself and invest in skills.

Hannah Maruyama [00:26:23]:
And when we say education, we don't necessarily mean college. We mean education period. This could be a nutritionist certification or a BIM training program or that tech program that she wants to go into. Or if your child's like, Hey, you know what? I'm going to go to this data science bootcamp. There's a job guarantee. It's $9 and you're going to take it out. You could just pay the penalty because that's better than sending them to college.

Ryan Maruyama [00:26:41]:
Or if your child doesn't know what to do, you can come to the launch program as well. Look at our program. We don't accept $5.29 money. And I know there's knowing a lot of people in the skills learning space. A lot of them don't take $5.29 money either, even though it's some of the most efficient ways to learn skills, learn employable skills in my mind, assuming that you can have all of these conversations with the 16 year old, with a 17 year old, with an 18 year old, if you're able to have these conversations, you're already thinking about this at five years old. So you're going to have ten years or so ten to eleven years to really think about how you want to approach this and how you can educate your daughter to be a good steward of money. And if you think that she is, I think there's a very good argument for biting the bullet here. And just saying like, look, you're never going to make as little amount of money as now.

Ryan Maruyama [00:27:26]:
So you might as well take the hit now. And whereas let's say that you're older and you're in a much higher tax bracket and you're going to see much less of that money. If you're making a couple hundred thousand dollars a year, and then you take out the $30 granted, it doesn't really move the needle. Maybe the $30 doesn't move the needle as much as a $30 would move the needle here. But relative to the amount of money that you would make, that you would get back off that $30, you would get much less if your daughter ends up making a lot more money. Because that is going to be taxed at that higher tax rate. She might make only 14,000 with the 10% penalty. She might only make 14,000.

Ryan Maruyama [00:28:00]:
Whereas if you take it out in smaller increments while she's lower, and once again, talk to a financial advisor. It's easy enough to get, like, if your daughter's still on the ten forty EZ, which is a tax form for all those listening that don't do your own taxes. If we're still on the ten forty EZ, it's simple enough to like, look at the tax brackets and just be like, you looking at your pay stubs for this year, you made $10,000 Okay. Well then the next tax bracket is over here. Let's just take out whatever amount of money to get you to underneath this. And then we know that that's our exposure on this money. We're gonna have to pay a 10% tax on that. At least we know, and they're going to get more money than if you waited till she was making $200 a year and then she only makes that 40% of it or something like that, or 30% of it.

Ryan Maruyama [00:28:42]:
But yeah, that would be the last one here. Only caveat that I was able to find on this is that the penalty is waived. If your daughter Dana, if she receives a scholarship And the penalty is waived up to the scholarship amount. So that's the scholarship amount or if you do military service or certain disabilities or death. So we don't wanna worry about the

Hannah Maruyama [00:29:01]:
death one, but it yeah. Disabilities and military service are the big ones there for

Ryan Maruyama [00:29:05]:
sure. So Dana, those are the four options that you have for the $5.29 monies that's already in there right now that your parents have put in for your daughter.

Hannah Maruyama [00:29:14]:
So there's four options for scenario two, which is, should they continue funding this or move it into another vehicle?

Ryan Maruyama [00:29:21]:
Exactly. I just wanted to go over those other four options really, really quickly. The first option, I mean, it's simple enough, which is like, they should just continue contributing to the $5.29 plan. Why would they do that? If you are unsure of whether or not your daughter is going to go to college or not, if you're not sure if you want that flexibility to cover, you know, apprenticeships, vocational schools, so on and so forth. Or if you're just like, you know what, I'm going to do the five twenty nine plan. I'm going to do the Roth rollover eventually. Just keep contributing to it. That's fine.

Ryan Maruyama [00:29:50]:
The other option that I wanted to bring up as well, or like the other reason why it would make sense for them to just keep contributing to the five twenty nine plan is if you literally just didn't want to have the conversation with them of like moving it to some other vehicle. For some people, I think that's going to really resonate where you're just like, I just don't have that relationship with my parents or we just don't have that relationship with the money.

Hannah Maruyama [00:30:10]:
Or the in laws. And you're just like, I just don't even want to talk about this or you just don't know how the basis to do so.

Ryan Maruyama [00:30:15]:
And you're just like, you know what?

Hannah Maruyama [00:30:15]:
Just leave it alone. We'll have her pay the penalty.

Ryan Maruyama [00:30:17]:
Or just like, they're hell bent on her going to college. And that's how they want to pass down their fortune to my daughter. And I don't want to mess with it and I don't want to step on their toes or whatever it is. And so I'm just going to let them continue to contribute to the 05/29 plan, even though my daughter's not going to college. That's a totally valid as valid as anything else. If you just don't want to have that conversation with them. That's why I would see contributing to the five twenty nine plan continuing to, but from what your scenario, from what it sounds like your scenario is, I don't think that that's a good idea. I just wanted to go over some different options as well.

Ryan Maruyama [00:30:50]:
So the second options are going to be, these are just acronyms that you can go and look up. They get a little complicated, but I'll give you the thirty second highlight. The rundown basically is U G M A or U T M A. Those are literally the letters that you are going to go and look up. It's the uniform gifts to minors act and the uniform transfers to Minors Act. Basically the UGMA and the UTMA, they're super similar. The UGMA is like a savings account, basically, where you are the custodian, somebody else is a custodian of their money. And then when they're an adult, they change against to another custodian.

Ryan Maruyama [00:31:26]:
But this is a quick and dirty for people. So I'm gonna get some things wrong, but I'm gonna go cost over a bunch of other things. But the UGMA is limited to financial assets. So those are gonna be like cash, stocks, bonds, mutual funds, those types of things. And the uniform transfers to minors act. You can hold a broader range of assets in there. And so that's going to include things like real estate. Those are other things that you could do, which are they're basically a custodial accounts that you put money into or that your parents would put money into.

Ryan Maruyama [00:31:57]:
That's what you would look up. If you wanted to do that instead, the second one and a sub point to the UGMA, the UTMA for those that have not Dana, cause your daughter's five. But for those that have older kids that are already working and this is happening to you as well, your parents are like, Hey, I want to give them some money. How do I do that? If they're already working, they could give them money to put into the Roth IRA as as well. That is an option. So that's a little sub point. The second is just going to be a high yield savings account. Like you said, if you're going to continue doing that, that is it's a good option.

Ryan Maruyama [00:32:29]:
Once again, not financial advice, the downside with a high yield savings account is that you're missing out on a lot of the upside or the potential of upside with going with something like the fourth point, which is just a traditional brokerage account. What type of upside are you missing? Well, you're missing out on higher dividends, possibly if you go into dividend stocks or things like that, going up in value as well, which over time, depending on the asset that you have, but if you buy the S and P five hundred, as you buy SPY or something like that index funds, mutual funds, those types of things, and that just hold a very large broad basket of assets of different types of equities and things like that. You're going to miss out potentially miss out on the potential upside of that, but then you also miss out on the risk as well. And so high yield savings account, hopefully you can get something that's like 4% or so hopefully keeping up with the supposed, this is for those not watching. I'm using air quotes very severely here with the supposed inflation rate that we have here before percent supposedly beats their inflation rate for most people listening to this is that's not true.

Hannah Maruyama [00:33:29]:
It's okay. Then we'll just stick with the imaginary one.

Ryan Maruyama [00:33:31]:
Anyway, those are the four options of those four for my child. What would I do? I'd probably go the traditional brokerage account way, especially given Dana, your child, like if my child was five years old and just knowing that I have ten years, possibly fifteen years to reap some sort of upside there, but there's risk involved with higher risk comes higher reward usually. That is that just a quick summary for those that already have $5.29 plan money. There's four options that you can do. You can use it and that's using it for K to 12, up to $10,000 a year, certain vocational programs, certain apprenticeships, internships, those types of things. You could use that. The second thing you could do is change the beneficiary and you can just change the beneficiary to another loved one, another one of your children, or give it to her when she's old enough. And then just tell her to change the beneficiary eventually when she has kids.

Ryan Maruyama [00:34:24]:
And option three is you can roll it over to a Roth IRA, assuming that they have earned income. And then assuming that the account has been open for at least fifteen years, and then the past five years contributions are off limits. You cannot touch those. Those cannot be rolled over. And as of this recording, the limit is $6,500 And just remember for the super savers out there, that rollover does count towards that year's contribution. So if you go ahead and take the whole 6,500, you're done for your contributions. It's not like you can roll over from the $5.29 to your Roth IRA for 6,500, and then you can take another 6,500 and put it in for 13,000.

Hannah Maruyama [00:35:02]:
Yeah. You can only do one

Ryan Maruyama [00:35:03]:
or the other. I wish it was the case, but that is not the case. And then option four is just withdraw the funds. You're going to have to be very careful here because not only does it become earned income that she has to now pay taxes on, but then it also inquires a 10% penalty. It's a 10% haircut right off the top. So super inefficient

Hannah Maruyama [00:35:21]:
with the right understanding of what she needs, what she's trying to do, and where she's trying to get. If you know that now she's not going to have to pay out of pocket for something that she already has the money for, that's money well spent. Even if you have to pay a penalty to use it.

Ryan Maruyama [00:35:32]:
Yeah. Once again, I'm not a doctor. I just play one on the internet. Do your own research there. And then for those ideas to continue on with saving money, the contributing to the five twenty nine plan, if you just don't wanna have the conversation with them, that's totally valid. If you just don't want to screw a good thing up, I think that's probably the most valid actually.

Hannah Maruyama [00:35:49]:
You don't want a rocks boat. Fair enough.

Ryan Maruyama [00:35:50]:
Yeah. Right, exactly. And then there's the UGMA and UTMA. Go ahead and look those up. And then the second is going to be a high yield savings account. And then the third is just going to be a traditional brokerage account. Hopefully people are still watching. The last thing that I wanted to say is now who do you talk to about this? Who do you find more information about this? There are three types of people you can talk to about these types of things.

Ryan Maruyama [00:36:12]:
Financial advisors is first, estate planning attorneys is second, and there's tax professionals or CPAs is going to be third. For the financial advisors, you're usually going to want to look for fiduciaries. That just means that they're legally obligated to act in your best interest. The financial advisors, they can provide like a comprehensive view at in different strategies and different investments that are tailored to your family's goals. The estate planning attorneys, if your parents Dana are considering larger financial gifts, or if it is a large amount of money in the five twenty nine plan or in other gifts, those are good people to go to that give a comprehensive understanding of like the tax implications. Those people can help protect assets better through legal means. Then the CPAs can clarify the tax implications of different savings vehicles, such as gift taxes or the kiddie tax or something like that. Those are the three different people that you could reach out to to figure

Hannah Maruyama [00:37:10]:
out. Which option is the best one for you.

Ryan Maruyama [00:37:12]:
I hope that this was useful. This episode was made just for Dana. If you want an episode like this for yourself, go to ask.degreefree.com and ask us your questions. We give priority to those people that leave videos like Dana did. And so leave a video that is going to be a much better way for you to get your question answered. And that's pretty much it for this week guys until next week.