Episode 17 – How to save for a child’s future with WA529
Episode transcript:
[musical intro]
Jenny
Well, welcome back to Fund Your Future with DRS. And of course, on the program, we talk about all sorts of savings goals for retirement. And a great one we’re talking about today is how to save for college. Seth, yeah…
Seth
Yeah, I’m super excited. We have Luke and Jackie from the Washington Student Achievement Council Washington 529 program here to talk to us all about everything, college savings, what options are available. I’m hoping, Luke, you can just tell our listeners a little bit about what Washington 529 is and what 529 plans are in general.
Luke
Of course. And first of all, thanks for having us on to help get the word out to help clear up misconceptions for people, helping people think about when their kids or grandkids are young, how they can be setting them up for future academic success. So, the state of Washington offers two 529 plans. So that’s the WA 529.
And what a 529 plan is, is a tax advantaged savings vehicle for people to save for future college costs. So any money that you put into a 529 plan grows tax free and remains tax free when you use it for a variety of after high school education expenses. So we’re starting to shift more towards after high school rather than college.
So it helps people see that these programs are really diverse and how they can be used. You can use it for college, community college, technical and trade school, even apprenticeship programs. Now they’re very broad in their usage. You can use them to pay for tuition fees, room and board, books and supplies. And so again, the idea is that a family is making a commitment at a young age to start saving for their young child’s future academic pursuits and with the ultimate goal of reducing future college debt.
And in the state of Washington, we have two programs. One is called the Guaranteed Education, Tuition or GET Program that may be familiar to many families. That might be the most familiar program because it’s been around for 25 years. DreamAhead is newer. It’s been available since 2018, unlike GET, which is a defined benefit program, it’s a prepaid tuition program.
DreamAhead is a set of investment options. But again, they both share the same tax benefits and ultimately help families save for future college expenses and reduce the need for student loans in the future.
Jenny
Yeah, I love this idea of being able to pay for college, you know, 20 years from now with today’s prices.
Luke
Exactly. So, the GET Program really is that model of it’s called prepaid tuition, meaning the state guarantees that if you buy a year’s worth of tuition today, that that will keep pace with the University of Washington or Washington State University, whether you’re using it ten, 15 or 18 years into the future. So, you pay a set price today. And no matter whether it doubles or triples or less, you know, if it goes up over time, you’ve already prepaid that there’s no more out of pocket.
You have to pay if you choose a Washington state school. Now, a lot of people get confused and like, “well, that sounds pretty limiting. I can only use that in the state of Washington.” But really, and we’ll get in more into the specifics of these programs. But the nice thing is GET and DreamAhead both can be used at a variety of academic settings that we talked about across the country, not just limited to Washington.
And we can get more into the specifics of how that works. But ultimately, it provides a lot of flexibility for families to send their student off, even though today we don’t know where a student ultimately go or what they want to pursue.
Jenny
That’s great. Who can contribute to a 529 plan? Can I just contribute money for my own child? Or what if I don’t have children, but I have a niece or a nephew?
Jackie
Yeah, that’s probably one of the biggest questions that we get from grandparents, you know, is “who’s putting money into this account and who’s ultimately responsible for it.” And the beauty of it is that anybody can contribute. You know, we always try to get people to remember that this is a savings account. So the more the merrier. Right.
And it’s a great gift. I mean, when we’re telling families about, you know, how the idea of our children, grandchildren, I’m a grandparent now. So the I think of in terms of grandchildren, right. We’re thinking about what their future is going to be about. Any gift amount that goes into an account for a child isn’t going to lose its usefulness in the future.
Right. And you buy toys for the grandkids. Right now, we spend a lot of money on buying toys and things. And tchotchkes that the grandkids are going to love to have to play with in the here and the now. But when we start thinking about what this can do for them in their future, they may not be thinking, “Oh, I’m going to thank Grandma for this right now, or grandpa for this right now.”
But they are certainly going to be grateful when they get to graduating from high school and thinking of that, what their career fields are going to be later and what education they need to pursue later on. And that money’s going to come in handy so anybody can make a contribution to the account. Probably the key things that people need to know in doing that is what is the plan that my grandchild or my child has, Right?
What is the account number and where do I send this money? And when they know those three things, they can actually choose a variety of different ways to make that contribution. Lots of people still like to write a check and send that money and stick it stamp on that envelope. Right? But we have a large number of people who like to use their own bill pay service.
They like to have that control on their end, but they may automate that and have it done on a regular basis. I’m a grandparent now, so I’ve got three grandchildren and that was one of the first things I did when my kids set up their accounts for their kids was to automate any savings that I could give them.
And I have the flexibility of deciding what works for my budget, right? So if I want to spend $25 a month, I’ll send 25 a month. If I want to boost it up on the holidays and send 100, I’ll send them 100. But the whole idea of that is that it’s a great gift for the future because it’s not going to lose its usefulness, it’s not going to break, and it’s going to find its opportunity to really give those kids a boost and not taking out too much student loan debt in the future.
Luke
And I’ll just interject really quickly that we also recognize the importance to kids — I have a three-year-old — of getting those toys, too. So these things are mutually exclusive. So we like to talk in context of like, you know, you can make small contributions over time just thinking about it in ways where you can make room for that act of saving.
We know toys are important, too. We know, you know, books and a variety of other things are going to be important. So we’re not advocating by any means that, you know, Santa Claus isn’t coming anymore.
Jackie
Oh, absolutely not.
Luke
It’s that we can add more to that. And like Jackie said, be future looking and thinking about that gift that does keep on giving. It takes a village to raise a child. And so that that’s the best thing. The more family members you can get involved in this act of saving and those consistent efforts, it’s going to really make an impact for that child in the future.
Seth
I really appreciate that clarification. So you mentioned different ways people can set up payments. Could I just have it come straight out of my paycheck?
Jackie
You can payroll deduction and some employers also referred to it as payroll direct deposit is a common feature for a way that people like to make ongoing contributions. And the thing to remember is that it’s post-tax. So it’s not a, you know, pretax dollars that goes in. So it’s going to be post-tax like a Roth IRA and then money goes into the account and it’s a convenience option.
So a lot of employers have to be certain that this is a opportunity that they really want to put their time and energy into too. Not every employer will do that. A lot of them are really, you know, paying attention first to how many the interest level in doing that. But then the money goes automatically into the GET or the DreamAhead account of that particular employee for their children or grandchildren that they choose to do that with. So yeah…
Jenny
I think that’s super great because it’s obviously you’re not getting the tax benefits, but it’s still it’s very convenient to be able to, to save money for my child’s college program or grandchild’s program.
Jackie
The tax advantages is on those earnings, right? We can’t forget that part. And, you know, as this is growing in value, that nobody’s paying taxes on that. And then the purpose is that when they use the money for educational expenses in the future, then it remains untaxed.
Luke
Yeah, I was just going to add that the great thing to for state employees is that all state agencies use employees of all state agencies have access already to payroll deduction through these programs and many employees within school districts. And what we’d encourage is if your employer doesn’t have that set up already to contact your office, contact your payroll department, and it’s easy to set up.
Jenny
And this can obviously be for any child in the state of Washington. What about if I have nieces and nephews that live in another state like Texas or California?
Jackie
Yeah. And so with the GET program, there is a residency, an initial residency requirement when opening up the account. So with GET specifically, either the owner of the account or the student who’s the beneficiary of it has to be living in Washington state at the time the account is opened. But moving can happen and it often does right?
So the student doesn’t have to stay living here and neither does the account owner. And certainly, anybody who’s gifting can be living anywhere that they want to. They don’t have to specifically live in Washington to contribute. Now with DreamAhead and that type of 529 plan, the student beneficiary, the owner can be living anywhere at any time. There’s no expected residency requirement on those types of 529 plans and enrollment is open year-round.
Those have the DreamAhead type the traditional 529 plans. Yeah, right. So grandma lives here, grandkids lives somewhere else. Grandma can certainly open an account for those kids and even vice versa. If the grandkids live here and grandma lives in Texas or something, you know? So there’s a lot of options. And I think one of the key things in that is really helping people to understand what 529 plans are and the benefits of 529 plans and then kind of start from there and start making decisions about how they’re going to do that.
Seth
So we’ve talked a lot about putting money into the plan. It’s the same with retirement, Jenny, and I’ve talked about this a lot on the podcast about all the questions that come about, about getting money out of the plan and all the uncertainty about what’s life going to look like in ten or 15 years from now. So could you just talk a little bit about what options people have when they’re taking money out of the plan?
If they don’t spend all the money, all those sorts of questions that I’m sure you get every day. Yeah.
Jackie
And that is the ultimate goal, right? You’ve been saving the money and the goal is to get the money out now and pay for those expenses in the future. So the process itself of requesting a distribution, and that’s what we call it, when they’re ready to take the money out and start using it for qualified expenses. So the distribution process can be a variety of different options for the account owner.
So the account owner may want the program to pay a school directly for tuition or fees or on campus room and board. And then in many cases, families will pay expenses out of their own pocket or use the sources that they have to pay those expenses. And then request reimbursement from the program, in which case the program will then return funds back to the account owner or even the beneficiary if they want the money to go to the beneficiary.
So those are decisions that the family, like the student themselves, has made, some decisions about where they’re going and all this and then together as the parent or the grandparent, the family, they’re figuring out that process of when they want to request a distribution and how they want that money to be distributed. But it really is as simple as a bill pay process is right now.
You log into your account and you tell the program what you want to do, and then the money will follow the path that you have designated for it. We don’t ask the account owner or even the student to produce receipts for the program. In fact, they should be keeping those copies for themselves. So if there was ever an audit by the IRS, then they would be able to produce the documentation that, you know, this was the distribution I requested and here’s the corresponding expense that it that it related to.
Luke
And that is another nice feature about the plan. We do produce tax documents, a 1099 Q anytime someone makes a distribution, but there’s not a reporting requirement to the IRS so long as it’s used for qualified expenses.
Jenny
So what if there’s …what if there’s money left over or someone decides not to go to college?
Luke
Yeah, it’s a great question. It’s one we get a lot because as we talked about it, if our goal is to help as many families as possible, save from as young of an age of possible for their kids, we know that, you know, again, I have a three-year-old. I don’t know what she’s going to be doing.
I might have all sorts of ideas about what and she may already have a lot of what she wants to be doing. Currently she wants to be a scientist at a museum based on a book we’re reading as a family. As cool as that sounds, we don’t know what her academic pursuits are going to be. So yeah, she may decide that something, you know, colleges and for her she may end up getting a scholarship that helps her pay for a lot of college and not need all the funds we saved.
And so yeah, that’s obviously a concern for families up front. What happens to my money? The good news is with these programs, you know, the tax benefit is tied to education, but as we talked about, that’s very broadly defined. That’s not just your typical four-year university experience. It can be you can save it for graduate school. Say if you got a scholarship for your undergraduate or if that kind of that track is not for a student.
There’s community college, there’s technical school, a trade school, apprenticeship programs. So, I always encourage families to think, you know, take a pause if their student needs a gap year, not sure what they’re going to do and think about how might they use it in ways that, you know, they wouldn’t necessarily expect off the top of their head that they can use these funds for.
They might be surprised at how wide the usage is. And then ultimately, if that student can’t find a way to use those funds, you can transfer it to a family member or a sibling or a cousin. And over the years, 529 plans continue to get better and better as far as giving families flexibility. The most recent cool enhancement is that starting in January of 2024 any unused funds in a….well, I shouldn’t say “any” because there are some limitations….
But unused funds and a 529 plan can be rolled over into a Roth IRA account for that student beneficiary to jumpstart their retirement. And so that’s a great way. Again, let’s say, you know, you have that magic windfall and a student gets a full-ride scholarship and they don’t end up needing to tap their GET or DreamAhead account to pay for school in the near future, you’re going to be able to transfer those funds to get a jumpstart on their retirement.
Seth
Yeah, I really love that Roth option as a new option for people to think about. There’s always a reason people come up with not to save money. You know, it’s just very normal human nature. We see this all the time with retirement savings. And, you know, if somebody isn’t going to pursue education after high school, but they’re going to start a business, they might not be able to put money into a retirement account when they start working.
But you can then put this money into a Roth and get a head start that way. And I think it’s really taken away one more barrier for people to think about, you know, saving money early. And that’s one of the things one of things I wanted to touch on because I heard both of you talk about, you know, starting saving when kids are young and just like saving for retirement the earlier you start, the more advantageous it is.
But it’s also never too late. If kids are in high school and they’re just thinking like, oh, maybe I am interested in this apprenticeship program, but I need to set some money aside. This is a perfect vehicle to allow someone to or any number of people…I really like, I really like that thought as well.
Who can help me, you know, invest in my future.
Jenny
I love that idea too. You could have both sets of grandparents contributing or aunts and uncles or friends, friends of family.
Jackie
And you know, we have stories on that, too. I mean, we have heard from families who have a newborn and they’re like, hey, we’re going to baby shower. You know, how do we do this? How do we incorporate that into a baby shower? Or the other set of grandparents are doing something else for you, for these same grandkids.
How does this play into it? And, you know, it’s not everybody has to do the same thing because all of it in the end is going to be a resource for that child. So it is important to explore all the different possibilities and consider, you know, adding something else to the mix.
Jenny
So, Jackie, obviously, you’ve been with Washington 529, you said for 25 years?
Jackie
Mmm hmm.
Jenny
And you have two children that have now grown and you said you were able to save money for their college savings. And how did that go?
Jackie
It went great. You know, I was a single parent at the time. I started working for the program, two kids in elementary school and really understood from the get-go that, “hey, this is really important and this is pretty cool.” So I wanted to do this as well. So I started saving for my own kids and they’re five years apart.
And as it played out, one went on to pursue education in a college experience. The other one joined the military. And that you know what? That’s cool. That’s great. It was the direction he wanted to go and pursue. So I held on to that account and the money in that account for a while until we were certain what direction are you going to go, how long is this going to last?
And actually about that time he was he got married, had his own children open to his accounts for his own children. And I was actually able to transfer money from his account to their account to get that a head start for the grandkids. And these grandkids right now are six and four.
Jenny
Wow. So, you were saving all of the time that he was growing up. He goes to the military, he has his own children. And that’s the beauty of this program, is that the funds were now transferable down to his own children.
Jackie
And so and I really see that, you know, we talked earlier about this gift, and I really picture that as this gift to them. And there was a person that I had talked to another grandparent, and it was how important it was to them. And this lady said these words to me that really resonated. She said, “I feel like I’m gifting them their own future.”
And I was just like it caught in my head. And I was like, It’s exactly what that’s like, because I may not be here at that point in time in their future, but that gift will follow to them and they’ll know that. And that meant a lot to me to know that that’s what I would be able to do.
And it wasn’t like it was a lot all the time, you know? I saved what I could. Again, single parent, you’re living your life, you’re doing what you have to do. You have to live in your here and your now. And so I saved what I could. My family jumped on board when I told them it was important to me.
They did what they could, and it just became a group effort to do what we could. When we could, how we could.
Jenny
Yeah, that’s super. Thank you.
Seth
So I really appreciate that you’ve taken time. If folks have those questions, if they if they’re wondering, okay, this is something I want to learn a little bit more about, I think this might be something I’m ready to pursue or start to set up. Where would people go to get more information?
Jackie
Well, as always, the first place is our website. 529.wa.gov is the landing page with a great deal of information about both GET and DreamAhead. But we also have what we call our virtual learning center and it’s the Knowledge Cafe and we have a variety of different topics that we cover in a webinar.
We talk through all the different details, much like what we’re doing here today. We also, through the Knowledge Cafe, have what we call the Q&A with 529 sessions where we just have open mic time and people can ask any kind of question and we do that a couple of times a month. Our contact centers are a great resource.
We do a lot of outreach too- events, conferences, meetings. We do employer based lunch and learns, which has really picked up when COVID happened. A lot of employers were like, “Can you do it virtually?” Of course we can, you know, and take advantage of those things.
Luke
And yeah, we just try to be there and meet people where they’re at and equip them with the information. And it’s ultimately their decision to make the financial choice that’s best for their families.
Seth
Yeah, I really appreciate that idea of trying to help people think about where they’re at in life. You know, we talk a lot about saving additional for retirement through DCP. I could certainly see people thinking about like, well, “I need to prioritize my child’s education” and so great do that for the next 15, 20 years. And then once you’ve funded that, move on to saving for your DCP or for a grandparent, it might be the opposite.
You know, “I feel like I’ve got my retirements savings in check, and so now I’m going to move some money into a 529 program, or I can do a little bit of both at the same time.” I really want to prioritize all my savings, and it’s okay to also buy some toys.
Jackie
And to go on vacation. Yeah, yeah.
Jenny
Yeah.
Seth
All of those different savings priorities.
Jenny
Yeah, but I think also like retirement, it’s great because it allows you to set aside a little bit of money every month and over time that obviously grows into a very significant amount. Of course, with the way that the program grows your money as well.
Seth
I’m curious if there are any other takeaways that you want to make sure our listeners hear from you about. Washington 529 more specifically.
Luke
The things that we just always want to make sure families are thinking about is, again, as young as possible. Obviously it’s not too late. If you get a late start starting now is better than not starting at all.
Jenny
I love this idea of the baby shower gift like, you know someone who’s having a baby shower and you could say, “Hey, I’m going to tell them about the program and help them get an account set up.”
Luke
Exactly, exactly. It makes it great from anything from baby showers and kindergarten graduations, to birthdays, to holidays. It’s you know… so getting the family involved is a big part of it, too. And just making it easy on yourselves. Many hands make light work and then ultimately keeping in mind the big picture is like many families get overwhelmed and don’t kind of commit to that act of saving because they think about they hear about how expensive colleges and it can be paralyzing.
But we yeah, the thing to do is just break it down into manageable pieces. What can you comfortably afford today? What can you work within your budget? And then keeping in mind the fact that the agency we work for administers the financial aid for the state. And so we often talk to families about this pool of resources. You’re going to have to pay for a college experience that helps many more families get comfortable with the idea that no one source is likely going to pay for all of your college.
You’re not going to be able to pay it all out of pocket. Many families qualify for financial aid and don’t realize it, so we always encourage families to do that. The more you can save now at a young age, the more it reduces that reliance on future student loan debt. And we know that student loans are a reality for many families, even those who save with us.
But reducing them, that’s really what we’re trying to disrupt in the long run with these savings plans.
Seth
Yeah, it’s interesting because there are so many parallels to retirement as far as diversifying your income sources and making sure that you’re not putting all your eggs in one basket. And I think that it’s really it’s that’s a really just great point to think about.
Jenny
Yeah. But also how these small contributions add up over time. Yes. Yeah.
Jackie
You know, one other thing that can be very paralyzing to people is that they think they have to know everything there is to know. Yeah. Like right now and they don’t. And I know meeting with families kind of face to face, having that opportunity to dialog it out through and really get them to realize that one little step and if it’s $5, five turns to ten and ten turn, and whether you’re talking about retirement or a vacation or saving for education, all those things start with one small step and not to paralyze yourself into thinking you have to know everything before you get there.
Yeah, just start.
Seth
That’s exactly how you learn. That’s exactly you learn. You have to take the first step. Yeah.
Luke
And the last point that I’d like to just put out there too, is there’s really cool research out there about the psychological impacts of a savings account for a child that a student who knows that someone’s saving for their future education is more likely to go on to higher education and complete a credential so that right there, you know, and that makes sense.
If you take a step back and think about it, if you’re creating this college going mindset and conversation from a young age for your student. So it becomes more of a matter of like, where do you want to go? What do you want to pursue? Rather than getting to the other end of it, and you haven’t prepared like, “I’m not sure if we can even afford to do this.”
So that’s another goal is get the student to have some agency in this conversation about what they want to be dreaming about doing.
Jenny
Yeah, I think that’s a great point and it just opens up more of those doors and opportunities for them. Like you said, you don’t have to use it for a four-year college. You can use it for any sort of like education expenses, whether it’s two-year community college or anything like that. That’s super awesome. Just getting that idea of here you have these options and if not, you can roll it over to your Roth IRA account.
[laughter from all]
Seth
Awesome. Thanks.
Jenny
Yeah. Thank you so much for sharing. We really appreciate it. And I think this is fantastic information for everybody in Washington.
Seth
Yeah. Thank you.
[musical outro]
Disclaimer
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