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As college costs continue to rise, parents continue to search for ways to lower the pain in their wallets from getting a college degree.

What could be better than having the money saved to pay for college?  How about having help from Uncle Sam?  But with so many choices, how can you most effectively accomplish the twin goals of paying for college and saving your retirement nest egg? I discuss many in my College Planning Service.  Here is a little primer on some popular options.

With a qualified tuition plan, like a 529 Plan, you have a tax-free incentive to save for college.  For years the investment industry has promoted the benefits of saving for college using these qualified tuition savings plans.  But are they really the best or most beneficial option for you and your student?

WHAT IS A QUALIFIED TUITION PLAN and CAN IT HELP YOU?

Created under the Small Business Job Protection Act of 1996, qualified tuition savings plans (QTP) include a number of options that provide tax incentive savings for college savings.

The most popular of these options is the 529 Plan (named after the section of the code where they appear).  But there are two varieties of these plans and understanding the differences may help you avoid some costly mistakes.

Generally, a QTP is an investment vehicle that allows someone to set aside money that can be used towards the expenses incurred at an eligible school or college. It can be used to cover the tuition and fees of an undergraduate degree or vocational program.

Two Options

There are two key options:  a prepaid tuition plan or an investment plan.

Prepaid Tuition Program

With this option, you can set aside a predetermined amount that the program manager agrees to use to cover the expenses for a particular time period.  These options are limited to certain schools.  And the school contractually accepts the amount set aside to cover the expense with the funds set aside.  If a participant chooses not to attend, then the market value may be withdrawn (subject to limitations) and used at another school.  But the value of the account may not be enough to cover the actual expense.

College Savings Plan

This is the classic version of a QTP.  Money is invested for a particular beneficiary but can be used at any eligible school or program.  The biggest difference is that the investment burden falls on the shoulders of the participant.

The Upside

Investing in a 529 means that your student-beneficiary can  withdraw the funds tax-free when it comes time to pay college costs.  In some cases states offer a tax deduction for setting money aside (but not in Massachusetts).

Problems to Consider

A common complaint: It limits withdrawals to cover only eligible expenses. The money invested into the account is restricted to “qualified” expenses specific to your education. While this list is broad, certain school-related expenses may not be eligible.

If money from a 529 account is used on something not qualified, the investor is subject to income tax and a ten percent early distribution fee.

  • Limitation on investment choices: You are limited to the plan menu offered by the state sponsor.
  • Limitation on investment changes or rebalancing: You can only switch investments once per year.  Or you can enroll in an auto-rebalancing feature (quarterly, semi-annually or annually) but there may be a cost.
  • Fees and expenses may be high: In addition to the underlying mutual fund expenses (about 1% – 1.5% for actively managed funds), there is an advisor and state management fee. These can run about 1% to 1.5%. (A cheaper alternative involves low-cost Exchange Traded Funds). And in some cases, you may be paying a commission for the purchase of shares.
  • Financial aid eligibility may be impacted:  Assets held in such plans are assessed by financial aid.  If you have a large enough balance, you may reduce your odds for receiving financial aid. The titling of the account can be critical to helping avoid this potential problem.
  • Improper tax planning: If you’re in a low enough tax bracket (marginal rates under 15%), you may not benefit as much compared to the costs of the plan.  These plans are better suited for those in higher tax brackets. And for estate planning purposes, they are ideal for grandparents looking to move large amounts of money out of their estate for the benefit of the living.

 

Need Help Understanding Your Options?

 

Exclusive College Planning Service Helps Parents with Costs

Need Help Financing College? Don’t Just Get a Loan. Get a Plan

 

 

 

COLLEGE HELPLINE:  978-388-0020

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Recently, a blog visitor was searching on the term “EE Savings Bonds,” “Tax Free” and “parochial school.”

Evidently, this visitor has a child in a private elementary or secondary school.  With good planning and generous help from family and friends, he has a number of EE series savings bonds in the child’s name.

Given the tax breaks available for certain higher-education expenses and the increasing costs of private elementary and high schools, it’s a very valid question.

The answer:  No.

Unfortunately, there is no tax advantage for cashing in EE Savings Bonds to pay for private or parochial school tuition and expenses.

The Internal Revenue Code does provide a tax-free incentive to cash in Savings Bonds for qualified higher education expenses subject to certain adjusted gross income limits.  These qualified education expenses are broadly defined and include tuition, fees and certain equipment incurred in pursuing a post-secondary school degree or vocational program. Theses expenses must be incurred at an eligible institution of higher learning which includes virtually all accredited public and private colleges and vocational programs in the US as well as certain participating programs overseas.

Education Savings Bond Programs are described in IRS Publication 970 and can generally be found on page 60 and also on Form 8815 “Exclusion of Interest From Series EE and I US Savings Bonds Issued After 1989.”

The better bet for this parent will be to hold onto the Savings Bonds until after the child is enrolled in college.  Because of certain financial aid requirements it may actually be best not to sell them during the student’s high school senior year because of the base year calculation of the Expected Family Contribution.

For more specific help in developing a tax and financial aid plan, consider my exclusive College Planning Services.

Call the College Planning Helpline at 978-388-0020.

Exclusive College Planning Service Helps Parents with Costs

Need Help Financing College? Don't Just Get a Loan. Get a Plan

 

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If you have two years before your student enters college …

 Test Prep

Every tenth of a point added to a student’s GPA may save thousands of dollars in loans that won’t have to be paid back later because colleges will give preferential aid to good students.  So now’s the time to consider test prep courses for the SAT.

 

Business Interest

Financial aid is based on the parents’ tax return from the base year (the year before the student enters college).

So any strategies (including tax strategies) that can lower the reported family income may help improve odds for financial aid. If you have any interest in running a business on the side or working as an independent contractor (i.e. real estate agent or MLM distributor, for example), now  would be the time to start.  That’s because most businesses will show losses during the first couple (or more) years which can help lower the Adjusted Gross Income and improve odds for financial aid.

 

Real Estate Strategies

Use home equity if you have any.  The possible “triple play advantage” for this option is clear:  1.) in most cases there is a tax deduction for the interest, 2.) you temporarily reduce the equity in your property and lower your asset value which lowers your potential family contribution and 3.) as a secured loan, the interest rate is low compared to other options.

Another late-stage planning technique is to use the proceeds to buy an immediate annuity.  This can shelter the capital and the payout can be used toward the mortgage payment. For details on this strategy, call for a College Cash Flow Planner Model.

 

FOR MORE PERSONAL TIPS, CALL STEVE @ 978-388-0020 or 617-398-7494

Exclusive College Planning Service Helps Parents with Costs

Need Help Financing College? Don't Just Get a Loan. Get a Plan

 

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Bonds are not the stodgy, boring things that most investors think of even though there’s no army of talking heads on financial news shows talking about them.

They are a huge market (about double the value of stocks as noted in my last post). They are an essential part of our economy.  Most companies cannot function without easy access to credit.  In fact, the shock and uncertainty that followed the collapse of some of the largest banks pretty much brought the economy to a standstill and contributed mightily to the Great Recession.

But that doesn’t mean that there isn’t money to be made in this asset class. Savvy investors of all stripes need to consider the value of bonds in a well-diversified portfolio.  And how you build that portfolio will help lower risks and costs and ultimately mean more money in an investor’s personal bottom line.

Whether someone is retired or not, bonds can provide income and potential capital appreciation (and depreciation if not hedged properly).

Bonds are a key part of an income-producing strategy (dividend-paying stocks are another asset class useful for this as well).

What is a Bond Ladder?

Essentially, a bond ladder describes a strategy to manage fixed-income investments by staggering the maturity dates of the various investments.

Some may be familiar with CD ladders: You select a series of bank certificates of deposit and stagger their maturity dates so that every six months, for example, a CD matures and you can reinvest the proceeds.

The advantage of this is that in a rising interest rate environment the investor is not locked out  of getting a higher rate on new money.

As with any fixed income investment, the disadvantage is that in a falling rate environment money that matures gets reinvested at a lower rate.

To minimize this impact professionals focus on the concept of “duration” which is a measure of how sensitive a bond (or any fixed income investment) is to changes in interest rates:  The lower the duration, the less sensitive and vice versa.

Mutual funds may publish an implied “duration” measure but it is not accurate because the fund, unlike the bonds themselves, is perpetual.

So to minimize risk to a fixed income portfolio, an investor (with the help of a competent financial professional) can create a custom portfolio.  And unlike a passive index fund, this custom portfolio can be built using bank CDs of staggering maturities for the near-term money coupled with a variety of bonds (corporate, US Government and municipal issues) with their own staggered maturity dates.

To mitigate the risks posed by higher interest rates caused by inflation or other political influences, the mix can also include “floating rate” bank notes. These are essentially bank loans to companies that adjust. Think of them like adjustable rate mortgages but to fund company operations  instead of real estate.

To add diversification to the mix, one can add closed-end funds that can be bought at a discount. These funds are professionally managed and offer an opportunity for price appreciation but at an expense ratio that is typically far lower than a conventional open-ended bond mutual fund.

By combining these elements, an investor may be able to lower the overall risk from interest rate movements, from default risk of individual components and from the impact of a “run on the bank” when others are selling (NAV risk).

And the overall cost of putting this together is cheaper than many mutual funds.  The cost to buy or trade an individual bond is typically included in the yield offered without any additional charge.  CDs do not have any added cost.  And for US Treasurys there may be a nominal fee (less than $3 per bond or example).

A knowledgeable financial professional can have access to hundreds of bond brokers.  By being independent and not beholden to any one broker’s inventory, an adviser can access offerings from multiple sources, find the best price and terms and lower an investor’s costs.

Depending on the total assets in the bond portfolio, the cost for professional management to monitor and make changes can typically run between 0.4% and 0.7% of the portfolio which is well under the cost of many mutual fund options.

For help putting your personal portfolio together, call Steve Stanganelli at Clear View at 978-388-0020 or 617-398-7494.

 

 

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Social Security benefits can be complex to calculate and understand for almost anyone who doesn’t work at Social Security or do this every day.

And the bottom line impact can be huge in terms of cash flow and potential tax liability.

Special Rule for 1st Year Retirees

You may be interested in knowing that there is a special rule for the first year you retire.

Sometimes people who retire during a year already have earned more than the yearly earnings limit. That is why there is a special rule that applies to earnings for one year, usually the first year of retirement. Under this rule, you can get a full Social Security check for any whole month you are retired, regardless of your yearly earnings.

So for the months that you did not work or earn less than the maximum, you will receive your full benefit but not have the SSI benefit reduced.  If you are retired and under Full Retirement Age, you are considered “retired” if your earnings are under $1,180 for that month and are not for all intents and purposes performing work as “self-employed”.

And the earnings test is limited to earned income above $14,160 in a year.  This number does not include dividends, interest, capital gains or IRA distributions.  Only if your earned income is above the limit will there be a reduction of benefits ($1 less in benefits for every $2 earned above).

In the year that you reach your Full Retirement Age (FRA) which is also known as Normal Retirement Age (NRA), the calculation is a little different.  Benefits are reduced $1 for every $3 earned above a different limit. If you were born between in 1945 or 1946, your FRA is 66 and that limit is $37,680.

Taxing Social Security Benefits

Now taxation of benefits is a different issue. During the last tax season, I had a few individuals who came in and didn’t realize that their benefits needed to be reported on their taxes.  They were more than shocked when they found out that their benefits were taxable and the refund that they thought they were getting was never going to happen.

Everything is added in including municipal bond income (which is otherwise and usually non-taxable).  Then up to 85% of SSI benefits may be taxed at your current rate if it is above certain exemption limits.  These start around $25,000 for a single taxpayer and around $32,000 for joint filers.

If you are married filing separately, you will likely be subject to taxes on the benefits without the help of an exemption.

To avoid a surprise when you file your taxes, you may want to get help in calculating your potential tax liability.  And if necessary file a Form W-4V to have a portion of your benefits withheld to defray your tax liability.

For more specific help with financial planning issues related to this or other issues or help in preparing your taxes, please call or email me and we can arrange to help.

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For most families, paying for college for their kids rivals buying a home as the largest investment that they will ever make.

College is viewed – and rightfully so – as a key to a better future.  Even as the cost of college continues to escalate at a pace almost double the inflation rate (nearly 5% per year compared to the historic average of nearly 3% for CPI), there is still a high and growing demand for higher education services.  The proportion of high school graduates who enroll in a degree program within one year of graduating from high school has grown from 49% in 1976 to 66% in 2006-07 according to the College Boards “Trends in College Pricing 2008” report.

Going to College:  Still Worth It

Generally, it is still worth the investment.  According to the US Census Bureau, those with a college degree on average will earn a median income of nearly twice that of someone with a high school degree. And other research indicates that those with a college degree historically have lower and shorter periods of unemployment.  (This may not seem like it as we go through the ongoing impact of the Great Recession but there is data supporting this).

Colleges know this and as a result price their “product” according to this demand for more educational services. One result is that without consumer pressure the colleges are pricing their “product” at whatever the market will bear.  And that price tag continues to go up. At last count, a four-year degree at a public university was around $16,000 per year for all tuition and fees. For private schools this number falls into the $34,000+ per year category.

To pay for this some parents will do almost anything and make almost any sacrifice sometimes to the detriment of their own financial health. So how do we balance the long-term investment in our children with the long-term investment in our own retirement?

Do you want to pay less for your student’s college education? Do you want to find a better way to balance paying for college without sacrificing your retirement nest egg? Be an informed consumer. Wrong, outdated or misguided information about paying for college or qualifying for financial aid just compound the problem for many families.

Too often families are under the mistaken belief that there is nothing that they can do but suck it up and write the check.  Or there is the dream of the big money athletic scholarship.  Or they mistakenly think that there is no financial aid.

All of these beliefs are dangerous to your family’s financial health. The key is having the right information and help to navigate through the minefield that is college funding and financial aid.

Myths about Financial Aid

1. Not Enough Financial Aid is Available.

During the 2009-2010 academic year, students received about $168 billion in financial aid.  This included the entire spectrum of aid such as grants, scholarships, Work Study, low-interest and government-subsidized loans. The largest proportion of this aid is in the form of loans.  Despite the budget woes in Washington, there is still money available for college through these programs.

2. Only students with good grades get financial aid.

Not true.  Colleges are seeking diversity among their classes.  Admissions officers are looking to have students from every socio-economic demographic represented.  And every student has some special skill to add to the mix. The key here is to match up the right student with the right school.  Is it better to be a big fish in a little pond or a small fish in a big pond?  Someone who is a “B” student but with a particular aptitude in a subject might have better odds of getting into a smaller school and be offered aid than the valedictorian competing with every other valedictorian applying to Harvard.

3. You have to be a minority to get financial aid.

Again, this is false.  Financial aid comes in many forms.  Loans are awarded based on the Expected Family Contribution (EFC) which is influenced by family size, parental income, and number of kids attending college at the same time. Loans are need-based and are color-blind.

4. I won’t need government help.  I’ll get scholarship money.

While you may have a talented student who excels in a particular sport, extracurricular activity or is gifted academically, hope is not a plan.  Consider the fact that National Merit Scholarships are very prestigious but can be  double-edged sword.  A student may receive the scholarship but receive no other aid from the school leaving the parent or student to foot the entire remaining bill.

Remember that College Planning is NOT just saving FOR college. It is not just saving in a 529 Plan.  College Planning is tailored to an individual family’s needs and is focused on SAVING ON the cost of college by using all the strategy tools in the financial aid tool box:  savings, investments, taxes and EFC reporting.

5. I make too much money to qualify for any aid or be able to do anything to lower the cost.

False.  This is the biggest myth of all and the most dangerous.  While a family with significant income may not be eligible for needs-based aid, there are dozens of strategies available that may lower the cost of college.  And even with a short amount of time until school, there are ways to lower the Expected Family Contribution (EFC) before filing a financial aid form.

  • Knowing how and where to hold your assets may help you qualify for more aid.  Hint:  Retirement accounts are a great way to kill two birds with one stone.
  • Checking your ego at the door when completing the FAFSA can help qualify you for more aid.  Be careful how you report the value of home or business equity or your stock portfolio.  Most people overestimate because they don’t know this one tip.

6. I have a child entering college next year and it’s too late to do anything.

Absolute nonsense.  I can literally rattle off at least 12 cost-saving tips including transfer credits, AP testing and proper use of home equity.  There are another dozen ways to lower your EFC and 10 different ways to save in the most tax-efficient way.

For one early retiree I showed him one strategy that netted him more than $9,000 in free, no-strings aid from Babson College for his college freshman son.  For another, I showed him tax strategies that will save him the cost of one year of tuition at Colby College for his soon-to-be freshman.

BOTTOM LINE: The Less You Know, the More You Pay.  The More You Think You Know, the More You Pay. The More You Know, the Less You Really Pay.

Pay Less for College with a Personal College Plan

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Tax Tips for Handling Real Estate in Divorce

Case Study:  First-Time Buyer Credit & Divorce

In 2008, Chris and Jenny purchased a home that qualified for the $7,500 first-time homebuyer credit.

They were married at the time of purchase and applied for the credit on a joint return.

In 2009, they divorced and Jenny received the house. Chris gave up ownership in 2009 and filed Form 5405 stating that he transferred the house to Jenny incident to the divorce [Form 5405, Line 13(e)].

In 2010, Jenny sold the house at a gain of $9,300.

Who repays the credit and how much?

Since Jenny received the home in the divorce, she has to repay the credit. In this example she must repay the entire $7,500 because her gain from the sale was $9,300.

The $9,300 gain was calculated by reducing the basis of the home by the $7,500 credit. If the gain had been less than the $7,500 her repayment would be limited to the amount of the gain.

If she sold it for a loss then none of the credit would have to be repaid.

According to the instructions to Form 5405, Line 13(e), the spouse who owns the residence after the divorce is responsible for the repayment, if any, of the entire first-time homebuyer credit.

Jenny will file the Form 5405 in 2010 and fill out Parts III and IV to repay the credit.

ViewPoint Newsletter for June

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