If you have children, you have likely added the number, “529” to the list of ubiquitous IRS regulation codes that you know. You might even randomly discuss this IRS code with other parents while watching youth soccer games. While most of the articles on 529s focus on how and where to open accounts, little attention is given to optimizing, accessing, and using the funds. We want to remedy this by sharing some key considerations:

Which Educational Expenses Can be Paid From Your 529?

529 funds can only be used for “qualified” educational expenses. If your student is attending K-12 secondary school, account owners are permitted to use up to $10,000 per year for tuition only. However, once your student heads off to college, the list of qualified expenses expand significantly, including tuition/fees, housing, meal plans, and technology. If your student is fortunate enough to earn scholarships, that can help the funds in your 529 go even further.

What Are “Non-Qualified” Costs?

It’s important to note that many college costs are non-qualified, meaning the account owner cannot use 529 funds to satisfy those expenses. The following are some non-qualified expenses include:

• College application and testing fees
• Travel and transportation costs
• Extracurricular costs like fraternity and sorority dues
• Everyday living expenses

How to Withdraw and Use the 529 Funds

Since it is the account owner’s responsibility to prove that 529 withdrawals are used only for qualified expenses, proper record-keeping is critical. For those larger items such as tuition/fees, housing, and meal plans, it is usually possible to direct your 529 plan to remit payment directly to the school’s finance department which ensures a clean record of withdrawal and usage. If the account owner withdraws funds to the beneficiary (your student), maintain pristine records, such as receipts, for purchases so that there is an audit trail.

Importantly, the academic calendar is different than the annual calendar. Funds withdrawn in one calendar year should be used in that calendar year. Be sure to understand each school’s financial deadlines and plan accordingly. In all cases, make sure the fund manager has at least 10 business days to process a withdrawal request.

Finally, some students have 529 accounts that are owned by their grandparents. If the student is applying for or has accepted financial aid, there are strategies to minimize or eliminate the potential negative impact of withdrawals from the grandparent-owned account.

What if You Need More Funds or Run Out?

One of the great features of 529 accounts is you can roll over funds between the accounts of all your children. If you have three children and three funds, you can rest easy that even if you fund them equally, you can address the fact that all three will have different college expenses. Or, if one student ends up not needing any of their funds, you can change the beneficiary to one of their siblings. If you are in the enviable position that there is money left over, then you have a start on graduate school or an initial contribution for their future children.

Conclusion: When the Time Comes, Learn the Withdrawal Rules

Keeping up with all the college bills can be a challenge. If you take the time to learn the withdrawal rules and processes for your 529 plan before your student heads off to school, you can eliminate the headaches that can be part of paying for all the expenses related to sending your kid to college.  You’ll have peace of mind as well as the time to enjoy your student’s new adventure and future successes. As always, you can reach out to our team with any questions.

As dedicated readers know, over recent months we’ve published “chapters” of Rick Hill’s 50-plus years in the finance industry, and many of you have asked, “Can we get Rick’s entire story all in one place?” The answer is a resounding “of course!”  So here it is…all together…Wharton Business School through founding Hill Investment Group. Stay tuned. Rick isn’t finished adding to his lessons.

READ THEM HERE

As our clients know, we seek to eke out every last basis point of potential return for you. So, while we balance the ideal combination of factors to achieve the highest odds of excess return, we also seek to minimize all costs, expenses, and taxes which eat into an investor’s net return. There are a couple of ways this plays out:

Evaluating Asset Managers

When evaluating asset managers, we scrutinize their trading practices to implement their strategies cost-effectively. If they don’t have reasonable trading procedures, their trading costs will be higher and, ultimately, lower the return of your investment.

Reducing Trading Fees

Just like our fund managers, we want to make sure that we are trading cost-effectively to be good stewards of your hard-earned capital. The most recent step in this effort was transitioning much of our recommended portfolio from mutual funds to ETFs, mainly to eliminate fees for trading mutual funds.

At Hill Investment Group, we are not satisfied with just better; we are always working towards finding the best solution we can find for you.  The change from mutual funds to ETFs is a savings win, but we were eager to take it one step further.

Eliminating Hidden Costs

You may not know that ETFs have their own unique hidden trading costs. Like stocks, ETFs trade with a bid-ask spread. That means that, for example, market makers may buy an ETF at $9.99 and sell it to another investor for $10.01. The market maker earns a nice $0.02 profit/share, and the buyer and seller pay the cost.

We wanted to make this better. So, for ETF trades of over a certain size, rather than trade on the exchange with a limited short-term supply, we deal directly with the banks. We get the banks to compete for our business and bid against each other. This can shrink and nearly eliminate the market maker’s profit. This competition and direct access yield better prices than we could otherwise get on the exchange.

For example, we recently rebalanced one of our clients’ portfolios which resulted in purchases of various ETFs. The table above outlines the ETFs we bought, the price we would have gotten if we went to the market (Offer Price), and the price we executed at (Execution Price).

Conclusion: Details Matter

In just one day, using this trading strategy, we saved this client over $1,300 in trading costs. This one example is just one of many ways we fight for every basis point —the details matter and are part of the HIG difference.