Birmingham, Alabama-based financial guru Jeff Roberts, who was recently named one of the top private wealth advisors in the nation by Barron’s®, came on Yellowhammer Radio to lay out the facts so people can decide for themselves.
The full conversation with Mr. Roberts can be heard on the Yellowhammer Radio podcast or in the video above, and a lightly edited transcript of his interview with Yellowhammer’s Scott Beason can be read below.
Subscribe to the Yellowhammer Radio Podcast on iTunes. Learn more about Jeff Roberts’ private wealth advisory practice at JeffRobertsAndAssociates.com.
Scott:
What are we talking about today, brother?
Jeff:
I had an experience with a client that got me thinking about a good topic for us. We talked last week about gifting and we’re going to continue that just a smidge. One of my clients was talking about some year end strategies and gifting and he has some grandchildren and he likes to make contributions to their education plans on their behalf. There are some unique opportunities that are available for people in Alabama specifically and it’s worth us talking about. We’re going to discuss 529 Plans today. I’m going to give you an overview, everybody knows that I don’t come on the show and make recommendations specifically. I try and talk in general categories and make this educational. So by no means today am I saying that you’re the same and everybody needs to rush out and get a 529 Plan to educate their kids. Because it may or may not be appropriate for each individual but this is just one strategy and something to consider. As a basis to build our conversation on a 529 as a vehicle that you can contribute money to and there is not tax savings by putting money into the plan. But if you put it into the plan and let’s assume the money grows in the 529 plan if the money is used and taken out down the road for college education expenses, specifically qualified college education expenses, tuition fees, room and board, that sort of thing. Then the taxes that you would normally pay on the growth of that account disappear. Meaning, not only is it tax deferred while it’s inside, it’s tax free when the money comes out and is applied for qualified tuition, fees, room and board, college education expenses. So it’s a cool strategy for people to accumulate money on a tax favored basis over time.
Scott:
Now, is that tax favored on the state level and the federal level?
Jeff:
You just keyed me up perfectly. You led me right into a great point. Okay, so 529 plans are typically offered out of a state. For example, Alabama has one and Tennessee has one, South Carolina has one, Massachusetts has one. Many states, most states have a 529 offer. If you purchase a 529 from the state where you’re a resident some states allow that plan not just to be federal tax free but also state tax free. So if you live in a state where there is a state tax, like Alabama, and you purchase the Alabama 529 Plan not only is it federal tax free it is state tax free in Alabama. It is a unique component to the Alabama plan specifically that allows both federal and state tax free. Does that answer your question?
Scott:
It does. Since the plans are set up by the state I guess the federal government kind of commissioned them, “Hey y’all can go doe these things and not have to pay a federal tax on it.” What if you moved here from Tennessee and you started one in Tennessee is that something that they would need to come and talk with you about?
Jeff:
It is and it may make sense to change it may not. But to the point, if you’re here in Alabama now but you had one in Tennessee then there may be a benefit to bringing it to the plan in Alabama to avoid that extra state tax. There’s pros and cons to doing that and that’s something that we could work on an individual basis but it may very well make sense from the state tax provision here in Alabama. Now, there’s a couple other things to consider on 529 Plans. Let’s think about it in this particular scenario that I always use with a client. The client is a grandfather, he has children and then he has the grandchildren and he’s trying to help out his kids by contributing to his grandchildren’s education plan and they have a 529 set up. Now what’s unique about the Alabama plan is this, if he contributes $5,000 into his granddaughter’s 529 plan, in Alabama he is allowed to deduct that $5,000 contribution on his state tax return. So it can lower literally is Alabama state tax by $5,000 contribution, or his taxable income I should say.
Scott:
So Alabama will let you put the money in as tax deductible?
Jeff:
The money you put in is tax deductible up to $5,000 per person that ‘s deducting it. Let me give you an example, so my client put’s $5,000 in for one granddaughter. He get’s to take that $5,000 off his Alabama income to pay less in taxes. His wife could put $5,000 into the other granddaughter’s 529 Plan and she too get’s to take the $5,000 off their Alabama income. So as a couple they are able to deduct $10,000 off of their Alabama income, as an individual they could just do $5,000. Does that make sense?
Scott:
Yeah, absolutely it does. You’re helping us guide through the mine field I guess.
Jeff:
Now let’s assume that in one case that he has 4 grandchildren and he wants to contribute $5,000 to each one. This is a potential strategy and I always recommend that when you’re talking about tax or gifting and estate issues you should consult your CPA or a state planning lawyer or tax lawyer. But if he wanted to give $5,000 to one granddaughter and his wife gives another one $5,000 then they’ve kind of maxed but if they wanted to do another $10,000 that was going to be split between 2 more grand kids he could gift the $10,000 to his son and daughter-in-law, let them receive that gift and then they can put it into respective 529’s if they wanted to and then take that off of their Alabama tax return. Does that make sense? So they can do it at their own level at the grandparent’s level, gift dollars to the kid, let the kid’s make contributions as well. So there’s some pretty unique estate planning strategies, tax reduction strategies and college education saving strategies that can all wind up into one comprehensive plan.
Scott:
See that’s one of the things, Jeff, that when you come on this show that I have learned from you is that there are ways to do things that probably shouldn’t be have been so difficult but the government did it that I just don’t think I would ever know. I don’t think if I was talking to someone like you I wouldn’t know that you could do the $5,000 from the grandparents, $5,000 from the grandmother, a gift to the children who put it in the grandchildren’s accounts. Those are strategies that are all proper but without people like yourself I would not have any idea. People are always talking about how the wealthy don’t pay as much, well the wealthy many times don’t pay as much because they have folks like you and you’re making yourself available to all of us to give us that kind of advice to help us get ahead.
Jeff:
That is very much the goal. When using certain tools for example like a 529 Plan we are speaking on it today even thought it can sound great it may or may not be the right decision for everyone. The cool thing about 529 Plans is that even though you’re child is here in Alabama if they go to some school outside of Alabama, who want’s to imagine that, but if they did the tax benefits still stay the same. A lot of people are under the perception that in a 520 Plan my kid has to go to a school in Alabama for me to benefit from the 529 tax free status and that’s not true. You could be in Alabama, your child could go to the University of Tennessee and you still get the same tax benefits if they went to Alabama or Auburn.
Scott:
Heaven forbid that you do that.
Jeff:
But that’s the basics and again, lot’s of things to consider and as always we tell people if you’re taking these types of steps get advice from somebody that can help. If we can help in anyway you can look us up at JeffRobertsandAssociates.com. We’re happy to help.
