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Posts Tagged ‘529 Plan’

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  If a participant chooses not to attend, then the market value may be withdrawn (subject to limitations) and used at another school.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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It’s never too early or even too late to start planning for ways to pay for college or post-graduate school.

Myths

There are a number of myths out there that can adversely impact your planning efforts:

1.) There’s not enough aid available;

2.) Only students with good grades get aid;

3.) My family makes too much money to qualify.

Reality

In reality, both “self-help” aid like loans and “gift” aid like grants and scholarships are available.  To increase your odds for getting your share there are a number of education-oriented and tax-oriented strategies you can use.

Some Tips When Applying for Financial Aid:

  • Fund Your Retirement— “Federal method” for calculating need usually does not consider retirement assets so put as much as you can into these accounts.
  • Reduce Assets Held in the Student’s Name—Parental assets are assessed at a lower rat: So buy the computer, dorm furniture or car in the base year (the year before filing the FAFSA) out of your student’s savings accounts.
  • Avoid Cash Gifts to Students—It’s Better for Grandma to Pay the School Directly: If you’re not qualifying for aid, at least it may help out her tax planning.  Better yet, take out the loans which are deferred until graduation and then let grandma help pay them.  This way you maximize your student aid without having grandma’s help count against the student.
  • Employ Your Child in Your Business and Use the Income to Fund a Roth IRA. The earnings won’t be subject to some of the typical payroll taxes because you’re employing family (restrictions apply) and by stashing it into the Roth, you’re building up a pot of money that can be withdrawn without tax penalty when used for qualified education expenses as long as the account has been open 5 years.

 

For more tips and help, consider using a qualified College Aid Planner like a CERTIFIED FINANCIAL PLANNER (TM) professional.

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When your salary stops at retirement, will you have enough to pay your bills, travel and live the lifestyle that you want in your Golden Years?

 

Sure, you may be one of the lucky ones with a pension.  Social Security may even still be around. But if you want to live your vision of retirement, then saving and investing properly is important.

 

And how you pay for college for your kids will impact your own retirement.

Think about this:  College tuitions, books, fees and housing continue to increase at a rate faster than inflation in general.  Based on current trends, the cost of sending just two kids to a private or elite college for a total of eight years will cost more than $360,000 if paid after taxes.  This means that those in the 28 percent tax bracket need to earn more than $500,000 in order to meet the costs from cash flow.

 

Regardless of where you send your kids to school, the bottom-line fact is this:  How you pay for college impacts how much you save for retirement.  For every dollar that you save on college costs means more for your personal retirement down the road.

 

There are a number of strategies you can use to improve your chances at a better retirement and a solid education at a lower personal cost.

 

There are more than thirteen strategies for increasing needs-based aid.  There are at least a dozen cost-cutting ways that any family can use to improve their bottom line.

 

Ultimately, it depends on how well you know how to use the IRS code for your advantage to lower your own Expected Family Contribution (or EFC in financial aid parlance).

 

Regardless of whether you expect to qualify for needs-based aid or not, here are some examples of cost-cutting strategies available to you.

 

Strategy 1:  Get College Credit Through Exams

By taking Advanced Placement exams or even a “challenge” exam for basic college courses, a student can get through school quicker potentially saving thousands in tuition and fees.  Opportunities are available for Advanced Placement (AP), College-Level Examination Program (CLEP) or DSST exams for 37 different courses.  For more information on these, check out www.collegeboard.com or www.getcollegecredit.com.

 

 

Strategy 2: Stay Local

In-state tuition and fees at a public higher education institution is a bargain compared to the elites and even crossing the border to go to another state’s public college.  If you are considering going across the border or away, consider having your child establish residency in that state.  Find out what the residency requirement are ahead of time by contacting the admissions office.

 

Strategy 3:  Get the Credit You Deserve from the IRS

Use the Hope Education Credit, renamed the “American Opportunity Tax Credit.” This was recently increased to $2,500 (from $1,200) and now applies to all four years of college, not just the first two.  In addition, forty-percent of the credit is now refundable. Another helping-hand comes in the form of the Lifetime Learning Credit which is available for one family member and allows you to take up to 40% credit on educational expenses up to $10,000.  Income limits apply so be sure to consult a qualified tax professional or visit www.irs.gov.

 

Strategy 4: Employ Your Child

If you own a business, work as an independent contractor or own rental real estate, consider hiring your child to work for you. Maybe your child can provide administrative support or help with marketing or real estate related chores. By hiring a child and paying him or her, you will lower your own personal taxable income through a business expense deduction and provide income for your child.  In addition, the child can use the earnings to open a Roth IRA, a tax-favored retirement account which is not assessed as an asset for financial aid purposes.  And if needed, a child can withdraw a portion of the proceeds to pay for qualified educational expenses.  There are certain limits and time restrictions that apply.  

 

Strategy 5: Establish a Section 127 Educational Assistance Plan

As a business owner you can establish a Section 127 employer-paid tuition benefits program for your employees. This plan allows the business owner to pay up to $5,250 per year to employees (including employed children) as a qualified tax deductible expense.  This can be used for both undergraduate and graduate programs of study.  Assuming that Junior was going to work in the family business during the summer and throughout the year, Junior can earn a wage (deductible expense for the business) which he can use for his own support and Roth IRA contribution (which may be eligible for paying educational expenses) and earn a tuition benefit (another deductible business expense).  If you were going to give the child the money anyway, you may as well structure it to be tax deductible.

 

Consider this: There are more than 110 different other strategies for you to consider. All the more reason to have a coordinated plan in place by speaking with a professional advisor who can help evaluate these options with you.

 

Food for thought: 

 

  • Encourage your pre-teen to open a Roth IRA with earnings from their paper route or other jobs.
  • Consider hiring your child to work in your business or help with chores related to your investment property.
  • Use a CollegeSure CD issued by an FDIC-insured bank to accumulate savings
  • Think about using a fixed income annuity to hold a portion of money for college to avoid the potential loss in principal that can happen with a 529 plan invested in mutual funds.
  • Pursue private and merit-based scholarships  (For more information on some of these options, check out www.fastweb.com, the CollegBoard and www.scholarshipexperts.com

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PAYING FOR COLLEGE.

 

 

Do you own a business (full time or part-time)?  Do you own investment real estate or a farm?

 

Would you be interested in learning how to use IRS rules to help you pay for college?

 

If you want to find ways to pay for college without ruining your personal retirement, there is hope (and it’s not just the renames tax credit mentioned below).

 

In this series, we’ll go over the various strategies available to help parents explore the various possibilities to reduce taxes and improve the odds for receiving financial aid, grants or scholarships.  (Consider this: There are more than 110 different strategies.)

 

Food for thought: 

 

  • Encourage your pre-teen to open a Roth IRA with earnings from their paper route or other jobs.
  • Consider hiring your child to work in your business or help with chores related to your investment property.
  • Use a CollegeSure CD issued by an FDIC-insured bank to accumulate savings
  • Think about using a fixed income annuity to hold a portion of money for college to avoid the potential loss in principal that can happen with a 529 plan invested in mutual funds.

Tax Tips:

 

The Hope education credit is renamed the “American Opportunity Tax Credit,” is increased to $2,500, and applies to four years of

college, not just the first two. In addition, 40% of the credit is now refundable. Income limits apply.

 

Another break for those paying higher education expenses: In 2009 and 2010, funds in Section 529 college plans can be used tax-free to pay for

students’ computers, computer technology, and Internet fees.

 

For more information on this topic, continue to check out this blog as well as the weekly Wedesnday night conference call series.

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