11.26.24 BEST OF: Saving For College: 529 Plan Update / Upside Down Car Loans

Happy Thanksgiving Week! Please enjoy this Best Of episode. Clark returns December 2nd with new ways to Save More, Spend Less and Avoid Getting Ripped Off! Clark has news for parents and grandparents saving for a child’s college education. Also in this episode, reversals in the auto industry are landing many existing car loans underwater. What to do if you are upside down in a car loan. 529 Plan Update: Segment 1 Ask Clark: Segment 2 Upside Down Vehicle Loans: Segment 3 Ask Clark: Segment 4 Mentioned on the show: Use the 529 Grandparent Loophole to Maximize College Savings Best 529 College Savings Plans By State Rollovers From a 529 Plan to Roth IRA: What to Know Target Date Funds: Clark’s Favorite Retirement Investment How To Find and Choose a Financial Advisor Car values plummet, putting car loans underwater More car owners are underwater on loans because of lower trade-in values What Is Gap Insurance? Definition, How It Works, When to Buy How to Buy a Used Car in 7 Steps Clark.com resources Episode transcripts Community. Clark.com Clark.com daily money newsletter Consumer Action Center Free Helpline: 636-492-5275 Learn more about your ad choices: megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

• 0:01Speaker 00

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• 0:29Speaker 01

  Your sausage McMuffin with egg didn't change, your receipt did. The sausage McMuffin with egg extra value meal includes a hash brown and a small coffee for just $5, only at McDonald's for a limited time.

• 0:42Speaker 02

  Pricing participation may vary. Promotion pricing may be lower than meal pricing.

• 0:45Speaker 03

  I am off on adventures, so this is a best of edition of the Clark Howard Podcast. I hope you enjoy it. I want to wish you a very happy Thanksgiving. Have an enjoyable holiday week.

• 1:05Speaker 03

  It's great to have you here on the Clark Howard Show. You know, our mission is to serve you with advice and information that empowers you so you can make better financial decisions in your life. Up first today, there's new news on saving for a child or grandchild's college education and future. And later, the car market is going through a dramatic reversal of what happened with the supply chain disruptions in COVID. And there are both winners and losers from this.

• 1:44Speaker 03

  Need to tell you how to play the car game for the rest of '24 and even more potentially in '25. So what I want to talk about first is the way you save for a child's college education has become even more tilted towards 529 plans. 529 plans are federally approved, it's a code, the 529, section 529 IRS, who knows, whatever, that allows you to save for a child's college tax-free and spend the money for eligible college expenses tax-free.

• 2:29Speaker 03

  Now, as we've had a number of questions, starting in the fall of last year, there's also something where if you have a child in your household and you're not sure if that child's going to go to college someday, there's not a risk of you getting hit with massive tax and penalties because you can convert the money over time, up to 35 grand under current law, once your child's an adult, into their own Roth IRA and give them a big, big booster shot towards building financial security in retirement. But there's also another thing that's changed with the new FAFSA.

• 3:10Speaker 03

  That's the form you have to fill out for determining eligibility for financial aid for college. And that is that grandparents historically have been the funders of a lot of money for kids' college. But the way financial aid was figured for college, grandparent assets in a 529 transferred to a kid, grandkid, really, really hurt them for financial aid through their college years. There were all kinds of strategies where a grandparent would wait to use any of the money from the 529 until a kid was a junior, grandkid was a junior in college, and all these weird workarounds.

• 3:55Speaker 03

  And now, the process no longer discriminates against grandparents saving for a grandkid's college education. And truth be told, a lot of grandkids schooling from any kind of private school

• 4:15Speaker 03

  All the way into college, grandparents end up paying in many cases, a good chunk, if they can afford it, for a grandkid's education because the parents may not have the resources. So the 529 plan is the right way to do it. Now, having said that, if you've never heard me explain this, it's really important for you to know. 529 plans are sponsored by the states. Many of the state plans are much better than they used to be. And there are really some great plans now. No commissions, very low costs. But there's also some real

• 4:55Speaker 03

  dirt in 529 plans. Some really terrible ones where you have to go through a commission salesperson and you can end up with less money for a kid or grandkid's college than what you've contributed over the years because of these giant commissions and ongoing huge expenses you're charged in the plans. So a 529 plan by itself is not automatically good. You have to pick the right plan. And we each year go through all the plans commission free. We only, only recommend commission free plans because you don't need a salesperson

• 5:39Speaker 03

  for a 529 plan. They're pretty simple. We each year put together a list of the best 529 plans in the country. And if you're looking at a plan that's not on our list, do not put your kid or grandkid's money into it. And on our guide, we walk you through how you put the money in a 529 plan and where I recommend the money be invested, what funds inside that state plan. Some state plans on top of your contributions being tax-free, your earnings being tax-free.

• 6:15Speaker 03

  They also offer a state tax credit or deduction simply for contributing to the 529 plan. So this is a great tool to save for college. Never, ever, ever fall for the life insurance con. There are life insurance agents that will try to convince you that the best way to put money aside for your child is in a life insurance policy? No, no, no. What do you think I think about that?

• 6:48Speaker 04

  Think, no, okay.

• 6:49Speaker 03

  I think, I think, no.

• 6:52Speaker 04

  Lawrence in Texas says, I'm going to Singapore and Thailand in May. I need a newer phone soon. And I was wondering if I would be able to get a better price in Thailand on the same model, whether it's a Samsung, iPhone, et cetera.

• 7:05Speaker 03

  My experience, no, I looked last year at electronics prices. My son and I went and looked two different places because he thought he'd find a bargain. And they were actually more expensive than they were here in the United States. So I

• 7:20Speaker 04

  Wouldn't the electricity, like, wouldn't that be different?

• 7:23Speaker 03

  That doesn't matter.

• 7:24Speaker 04

  Doesn't matter.

• 7:24Speaker 03

  Doesn't matter. It's just the phones were not a better deal. There, there are a lot of Chinese brands that are what are called white label phones. That if you're just looking for a rocket cheap phone, you can get phones so dirt cheap and in Thailand. But if you're looking for a brand name Samsung or iPhone, you're going to find your best deals here in the United States.

• 7:53Speaker 04

  Michael in Georgia says, I have been a member of a local-based credit union for 32 years with a regular checking account and savings account. Several years back, they offered a special program for the children of members to open savings accounts with the stated goal of encouraging kids to save for college and long-term goals. I recently went back to check on the status of the accounts and was told by the credit union that they had a few months back closed both accounts due to inactivity. They took 100% of my kid's savings account money through new monthly inactivity fees they initiated. We were not notified of these actions at all. I don't understand how they can do this. A minor savings account should not require regular activity and regardless, my own account is certainly very active. I expect this from a monster mega bank,

• 8:38Speaker 04

  but not my credit union and feel that they are not the customer oriented institution they were in the past. Do I have any recourse?

• 8:46Speaker 03

  So, Michael, first of all, you're not a customer. You're an owner. You're a member of that credit union. Your kids were members of that credit union until the credit union kicked them out. You've been with that credit union for a generation and a half, 32 years. And once a year, there's an election of officers. You also can go to a meeting and speak at the meeting because this is wrong. This is not the way that your kids should be treated. If the whole idea was to encourage them ultimately that they would be lifelong members of a credit union and boot them out. I'm also curious how you could

• 9:30Speaker 03

  have never gotten statements that would have shown the balance declining month by month. The only way I could think that could happen is maybe you moved at some point in your kids' young years. The statements stopped coming because of change of address. But definitely, you don't deal with the bureaucracy at the credit union. You go talk at a meeting where members may have to get on the agenda, but you want to bring this up because this is a credit union hurting itself and its future. And if those youth accounts no longer are worthwhile to the credit union, emptying them and kicking the kids out is a bad way

• 10:14Speaker 03

  to handle it, obviously.

• 10:16Speaker 04

  Yeah. Joan in Illinois says, I need post-retirement advice, something I've not seen much of. What investment strategy would you advise for someone like me, a woman in her early 70s, still working enough at my solo business to bring in a little self-employed income? I downshifted substantially in the past couple of years, so it's now around 20 Thousand per year, which I plan to continue for a while. I've paid off mortgage, a good retirement base from social security and a small pension employer based resources and other savings. I'm not terribly worried about running out of money as I age, but I would like to protect my assets and hopefully get moderate growth over the inflation rate. My first priority is financial security for me and my partner, also in his early seventies during our lifetime, but I hope to leave some money to cherish friends and worthy causes

• 11:01Speaker 04

  after I'm gone. What's a good strategy for investing cash savings beyond putting into high yield savings accounts or CDs? For example, is there a reasonable percentage of cash that should be in index funds or elsewhere to generate growth?

• 11:16Speaker 03

  So

• 11:16Speaker 04

  You're not a financial planner.

• 11:17Speaker 03

  And you're asking me, I can only give this back of the envelope because the money you have in savings accounts and CDs, all you're trying to do is basically keep up with inflation. That's all savings do. It's not investing, but you don't have your money at risk. You know, you you put money in, you get a little bit more later for having put money in savings and CDs because of the fact you still have some income. You got the pension, you got social security, you've got this money in 401ks and IRA. Even in retirement, you need some amount of the money in the 401k IRA area in investments

• 12:03Speaker 03

  to help you overcome inflation's effects over time. Because you have these regular sources of income coming in, the money you've saved that is in retirement accounts needs to be a portion of a meaningful portion needs to be invested. Like even if it's just a third of it invested in a target retirement fund, since you're already semi-retired, it would be a target retirement fund, let's say 2025. And that way they're managing in the fund, a certain amount of money is in stocks, the rest is in a variety of instruments like bonds, whatever.

• 12:43Speaker 03

  So the risk is lower, but you are still getting a return that hopefully will outrun inflation over the years. And who knows how many years that could be, you could live another 30 years. That's why having some amount of your money in stocks is still very valuable. And that's why I like a target retirement fund current time 2025, because then it's managed for the rest of your life as if you are truly trying to preserve money and have it grow some as well. And that's where a target retirement fund would come into the mix.

• 13:25Speaker 03

  So again, that's just back of the envelope, very, very general. If you wanted very specific, you could hire a fee only planner to look at what you've got and give you recommendations. And you're paying an hourly rate for that. We have suggestions how to do that at Clark.com. Coming up ahead, the car market has whiplashed on us again. Big changes in the car market, some I've addressed recently. I want to tell you how it's affecting people who already own cars. That's coming straight ahead.

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• 15:49Speaker 03

  We had a perfect storm in so many ways with COVID. The after effects linger to this day. One of the things that has been really distorted now for four years is the vehicle market, the car market. And I just saw a stat recently that was shocking. People who are trading in a car or vehicle to get something new, almost one in four are upside down in that vehicle they're trading in. Meaning your loan is more than what the car is now worth. Because you've got to think what happened.

• 16:33Speaker 03

  If anybody bought a car during the COVID era, used or new, the prices you were having to pay were way inflated. And now, you know, cars depreciate over time. And values of used cars that were so, so inflated two years ago. You know, we had person after person saying, hey, this is a great country. I bought a car years ago and I just sold it used for more than what I paid for it when I got it. My oldest brother Gary, he and his wife had a car they bought used. A Kia Sportage was what it was called.

• 17:15Speaker 03

  They bought it with like, I think it had 15,000 miles on it. They drove it for several years, sold it with 60,000 miles on it, and sold it for only a thousand less than they paid for it when they got it. I mean, the car market was crazy with what was going on with used car values. I'm not telling you anything you don't know if you bought a used car or even new during the COVID cycle. So now the values are normalizing, which means they're going down. And so people get tired of the car they got. They dump it, trading it out on something else. And then what happens is you pay for the new vehicle

• 17:57Speaker 03

  and your loan also has a transfer of what they call negative equity. Added into it is the upside down of the used vehicle you're getting rid of. So now you're making two payments every month in that one. You're still paying off the vehicle you traded in and you're paying for the new one you got or the newer used one you got. That's ugly. So what happens if you're upside down? As much as you'd like those newer wheels or brand new wheels, if you're upside down on a loan, you keep driving what you got. No fun.

• 18:38Speaker 03

  I know it's no fun, but cars are so much more reliable than they used to be. It used to be, you know, a car hit 100,000 miles. It was going to be nothing but trouble moving forward. Today, nothing but trouble starts more often at 200,000 or 250,000 miles on the odometer. Even if you're tired of it, it's not necessarily tired of you. And the best answer with negative equity is you keep driving. Now, on the other hand, if you're looking for A newer used car or vehicle right now. The reality is the prices have become much more favorable than they were. Even though loan rates are higher, the prices have been coming down so much.

• 19:21Speaker 03

  Shopping for something today is much more favorable. Recently, we covered how to buy a new vehicle now that you're in control in the marketplace. And so many dealer lots are just overwhelmed with cars coming in. They don't have customers for, for new cars, except a couple of brands. So you now have real pricing power in the market again. But again, don't be tempted by that. If the vehicle you already have, you oh, oh, oh, on it so much more than it's worth.

• 19:59Speaker 03

  Chris, I was talking to a guy just last week who was in a, a bad accident. His car was totaled, the other car was totaled. Both drivers were injured. Somebody blew through a red light, T-boned him. He's, he's okay, has one cut healing on his head. But his wallet is not okay because he's so far upside down on his vehicle. So he's not going to be made whole. You know, the whole idea of insurance is to be made whole. And he was asking me about, how's this whole gap insurance thing work? Doesn't even matter if it's the other party's fault.

• 20:38Speaker 03

  You're only paid what your vehicle is worth at the time that the accident happens. And the good news, both drivers will recover fully physically. But his wallet's going to be hurt for a good long time.

• 20:53Speaker 04

  The gap insurance is something you buy when you're, since you mentioned it.

• 20:57Speaker 03

  When you're taking out, if you're taking out a loan, that's a long-term loan. You're going to be upside down in your loan for pretty much the life of that loan. And so gap insurance is an additional expense that you can actually shop around for that covers that gap. So if you do have your vehicle stolen, not recovered, or totaled in an accident, you're covered for that difference between the worth of the vehicle and it's down here in your loan that's up there.

• 21:30Speaker 04

  All right. Well, this one is very relevant from Solomon in Oregon. He says, "The inevitable happened. My 2018 Mitsubishi Outlander Sport with over 100,000 miles was repossessed by the bank. I'm okay with this because of my situation leading up to it. Now I have to wait to see what it will sell for and see what I owe. In the meantime, what are the best things I can do to rebuild from this? It's the first time I've had a car repossessed by the bank willingly."

• 21:58Speaker 03

  So Solomon, this is, this is really hard. And I'm not going to sugarcoat. When they wholesale that Mitsubishi, it's going to be a low price they receive for it when they wholesale it out. So you're going to get, build some junk fees and that gap. Normally, if you don't have the money, you're going to have to work out a payment plan with them for it. And I don't know what else led to it, but I will tell you if you, bankruptcy attorneys tell you that many of the filings they do involve post repossession judgments

• 22:36Speaker 03

  that people suffer over a car repossession or SUV repossession, whatever. And so if you are prepared, moving forward psychologically to just pay for it, you can negotiate what the payout is and the total amount. Cause any dollars they receive from you is more than they usually do when a vehicle is repossessed. You want whatever deal you reach, whatever payment plan, whatever total amount you'll pay, that must be in writing.

• 23:11Speaker 03

  And then whatever you agree to, you got to make the payments because otherwise the written agreement will allow a default judgment against you if you don't make the payments and then you're back to square one owing a much bigger amount. For you, if you need wheels going forward with that repo on your credit, what the smart move is to buy whatever junker car you can buy for whatever cash you can come up with and drive a car that you don't have a loan against to give your credit time to heal and your wallet time to heal. And Solomon, I'd love to hear from you later how you're doing financially.

• 23:54Speaker 04

  Okay, Chuck in Wisconsin says, my daughter lives in Manhattan without a vehicle and is moving to San Francisco and will be needing a car there. Are there typically price differences between New York City and San Francisco and Wisconsin when buying a car? Where would it be to her benefit to buy the car? On the East Coast, West Coast, or in the middle?

• 24:14Speaker 03

  So I love this question Chuck, because what's happened with the car market, I don't know if your daughter wants to buy new or used, but especially in the new car market, there are significant differences from metro area to metro area depending on the competitive nature of a market. An example, if your daughter is going to live in the San Francisco Bay area and is going to want a fuel efficient vehicle, an electric vehicle, plug-in hybrid, hybrid, anything like that, that is so in demand on the West Coast because of how expensive gasoline is on the West Coast. Electric or hybrid or plug-in hybrid will be much cheaper.

• 25:01Speaker 03

  Back east or especially in the Midwest where you're talking about in Wisconsin, then it'll be on the West Coast. You then have to factor in, you got to get it out to the West Coast. And hybrids are very strong in the marketplace. Electric vehicles are very weak in the marketplace right now. And the price of new and used electric vehicles in a lot of cases now below the cost of gas engine equivalents with gas being $5, $6 a gallon in the Bay Area. There's a big advantage to buying, if you're interested in price, buying a used electric vehicle to have out there. Again, not buying it on the West Coast unless

• 25:46Speaker 03

  there's a great rebate available in California, which could be a factor. So this is not an easy question to answer, but is best answered by using one of the car tools like CarGurus or Autotrader or something like that and see what prices are in different ZIP codes on different models. And you'll just got to take a lot of notes. You'll see the regional price differences for specific makes and models in different markets around the country.

• 26:19Speaker 04

  Does sales tax matter at all?

• 26:21Speaker 03

  No, because you register, you pay the tax in the market where you register.

• 26:25Speaker 04

  Yeah. Okay. Miranda in Georgia says, "My husband is considering a new job, which will require a lot of travel. The company offers a company car or a car allowance for use of his personal vehicle. From an employee perspective, which of these options would be most beneficial for my husband and what are some pros and cons?"

• 26:42Speaker 03

  Okay. So the easy button is driving the company car. You have to keep a log, usually of personal miles that you drive. Actually, you gotta do this in either case. There'd be some formula of imputed income you're billed for the personal miles. If your husband just drives the company car only on company business, then you don't have to worry about that. But if your husband drives an older car, it's almost always to his advantage to take the mileage rate as long as they're paying a good mileage rate. I forget what the IRS rate is right now, somewhere 57 and a half cents or something like that per mile.

• 27:25Speaker 03

  The employer will tend to offer whatever the IRS allowance is. If it's an older car that's heavily depreciated, then driving his own car would actually usually be the best deal. If your husband likes new wheels, or drives new wheels, or newer wheels, or an expensive car, then he's much better off with the company car. This is all dollars and cents based on the expectation of what he would be driving if it's his own transportation. You kind of know it's going to be a fleet car from the employer.

• 28:05Speaker 03

  So it's just what he would be happiest being in day after day as he's driving around for work. And those people who like fancy new wheels, never a deal on the reimbursement from an employer driving your own vehicle. I want to thank you so much for joining us on today's podcast. Hope you have a wonderful rest of your day. And remember what this is all about. It's about your personal control of your wallet moving forward, that you learn ways from us, how to save more, spend less, and avoid getting ripped off.

• 28:51Speaker 00

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