This is the fourth of a series of five posts that will last through this week. This series will teach you the fundamentals of financial planning, through a fake conversation, I, as a financial planner, have with my client, (and childhood hero) Rocky Balboa.
The goal of each post, is for you to learn a different aspect of financial planning. Each part of the series, will take you through a different stage of Rocky’s life. Luckily, there were five Rocky movies made (I blanked Tommy Gunn from my memory), so each stage will correspond with each movie.
Background: Rocky just beat Heavy Weight Champion Clubber Lang (Mr. T) to regain boxing’s top ranking. Unfortunately, not all is great. His best friend, Apollo Creed, was just killed by Russian boxing sensation, Ivan Drago in what was supposed to be just an exhibition match. Rocky has seen how the death of Apollo has impacted Apollo’s family, and wants to make sure his family is taken care of, in case something happens to him.
Tip: When reading the Rocky portion, make sure to speak in your best Italian Stallion accent.
RJ: Good morning Rocky, thanks for coming in today. How are things?
Rocky: Well…you know about Apollo?
RJ: I’m very sorry to hear about your best friend, Rocky.
Rocky: Thanks. That’s actually why I called you. I want to keep on fighting, it’s who I am. Adrian is scared somethings going to happen to me. I want to make sure, if something does, that Adrian and Rocky Jr. got money, you know?
RJ: I understand. I had a chance to look over your finances and they look good. However, there are still a few opportunities for us to take advantage of them.
RJ: First things first, when we’re talking about taking care of your family if something were to happen to you, life insurance is the first thing that comes to mind. We went over this previously, and you have adequate coverage. Second, with your profession, it’s important that you have some type of disability insurance policy. This type of policy covers you in case you get hurt and are unable to perform your job. Lucky for us, this is supplied by the World Boxing Association. It’s an expensive benefit, but one worth having because you’re the only income earner in your household.
Rocky: Yea…I want Adrian at home taking care of Rocky.
RJ: Once you have life insurance and disability insurance, there are many different directions you can go. Since you have a young kid, I think it’s beneficial that we start some sort of savings program for his education. What are your thoughts on college?
Rocky: Well…I want Rocky Jr. to go to college, you know?
RJ: Have you thought about how you’re going to pay for this?
Rocky: No. That’s what I pay you for.
RJ: Good point. Looking over your situation, my next recommendation for you is to start a 529 College Savings Plan.
Rocky: A 529 what?
RJ: A 529 College Savings Plan allows you to contribute your money into an individual account, designated for postsecondary education. In other words, Rocky’s education expenses after high school. Contributions and earnings are allowed to grow tax deferred and be withdrawn tax-free, if used for qualified educational expenses.
Rocky: What’s a qualified education expense?
RJ: Great question. Qualified education expenses include:
- Room and Board (full-time students only)
- Books, Supplies, and Equipment (Even necessary computers and software)
Rocky: How about investments? What can I invest in?
RJ: Another good question. The investment options of a 529 College Savings Plan is similar to that of a 401(k). The main difference is that each individual state administers their own 529 College Savings Plan. Each state chooses their own investment provider and works with that provider to offer a variety of investment choices. Just like an individual companies 401(k) plans, each state’s plan is very different from the next.The good news for you, is that you can invest in any state’s plan, even if you’re not a resident of that state.
Rocky: Do I get a tax deduction?
RJ: There is no Federal Tax deduction for contributions to a 529 College Savings Plan, unlike you get with Traditional IRA contributions. However, some states do allow their residents to receive a state income tax deduction, as long as they invest in their state’s 529 plan.
Rocky: Sounds like a good deal. How do I start?
RJ: Well, it depends. First, we’re going to research what the state of Pennsylvania (where Rocky lives) offers and if residents of the state get a state income tax deduction for having their 529 College Savings Plan in-state. Next, we want to compare that to other’s states plans. Taking a good look at the investment options of other states, while keeping a close eye on the investment fees.
Rocky: I got another question, what if Rocky doesn’t go to college?
RJ: As the owner of a 529 College Savings Plan, you have total control over the investments, and more importantly total control of the beneficiary. Unlike other college saving options such as the UTMA, the beneficiary has no right to the money. Although, you have to keep in mind gift tax consequences, you can change who the beneficiary is at any point in time, to another member of the family with no income tax consequences.
Rocky: OK. This sounds like a good deal. I want to start one.
RJ: Alright. I’m going to look into the state of Pennsylvania’s plan first. Then, I will compare that to a few other options. I will call you in a few days and we can get started. Sound good?
Rocky: Sounds great.
RJ: Hey Rocky, one more thing. Good luck in the Ivan Drago fight. You going over to Russian, means a lot for this country. I have a feeling this fight will help end the Cold War.
In case you missed, here’s the rest of the series:
Photo by: Yury Cotez