More than Making the Grade: College Funding and Planning

1
More than Making the Grade College Funding and
Planning

• Presented by
• John J. Pallaria, MBA, ChFC, CRPS, CFP
• August 4, 2007

2
Agenda

• Making the Investment (Product Review)
• Planning Ideas
• Getting Started

3
What Were Up Against

• The average total tuition, fees, room and board
  of a 4-year education at a public college is
  expected to be approximately 125,000 in 2022.
  Private colleges will run closer to 300,000.¹
• Average tuition increase over the last few years
  has been approx 6.3 for public colleges and
  approx 5.9 for private colleges.²
• Result Your retirement and college education
  goals are in conflict with each other.
• 1Money Magazine August 2007
• ²www.collegeboard..com

4
Current U.S. Situation

• Average household debt, not including housing
  costs, is 14,500.¹
• Only 56 of high school graduates will go
  directly to college.²
• Average debt of students upon graduation is
  approximately 20,000.³
• Current U.S. savings rate is hovering around 0
• ¹www.bankrate.com
• ²www.higheredinfo.org
• ³www.statcan.ca

5
Conclusion?

• Americans like to spend
• Money they do not have!

6
Why Do We Care?

• College graduates, on average, earn 60 more than
  those completing only high school or had a GED.¹
• Education should be looked upon as an investment.
• ¹www.randford.org/

7
An Investment That Pays Off.
8
Making the Investment

• Tax advantaged ways to save
• 529 Plans
• Coverdell Education Savings Account
• 401(k) plans and IRAs
• Taxable ways to save
• Mutual Funds
• UGMA/UTMA

9
529 Plans
10
529 Plan - Overview

• Now offered by all states.
• Prepaid plans provides hedge against future
  tuition increases.
• Savings plans provide more investment
  flexibility more popular type of plan.

11
529 Plans - Contributions

• Funded with non-deductible contributions
• Maximum contribution varies by plan.
• Can exceed 300,000 in some cases.
• No income limits or phase outs.
• Most plans allow systematic investments.

12
529 Plans Tax Breaks

• Earnings not taxed while in the plan.
• Distributions are tax-free if used for qualifying
  education costs.
• Includes tuition, fees, supplies.
• Includes room and board (half-time student).
• Non qualified withdrawals subject to income tax
  and 10 penalty.
• Penalty waived for scholarships.

13
529 Plans - Other

• Beneficiary can be changed.
• Generally there are no time/age restrictions on
  contributions/distributions.
• Counted as a parental asset if parent is account
  owner.
• You can maintain control of account.
• Provide professional investment management.

14
Other items to consider?

• Gift tax changing beneficiaries
• Potential future tax law changes?
• Types of investments target date vs. target
  risk funds (do-it-for me investments)

15
Proceed with Caution..

• But what about my 401(k) plan as an education
  funding source of funds?
• No, No, No!

16
Coverdell Education Savings Accounts
17
CESA - Overview

• A Coverdell Education Savings Account (CESA)
  offers tax-advantaged saving for grades K-12, as
  well as college.
• Offered by financial institutions.
• Subject to limits and phase-outs of the Internal
  Revenue Code.

18
CESA - Contributions

• Funded with non-deductible contributions
• Contribution limited to 2,000 per beneficiary
  from all combined sources.
• Contributions can be made up to time beneficiary
  reaches age 18 use of account by age 30
• Phase-outs apply.

19
CESA Tax Breaks

• Earnings not taxed while in the plan.
• Distributions are tax-free if used for qualifying
  education costs.
• Includes tuition, fees, supplies.
• Includes room and board (half-time student).
• Also applies to grades K-12.
• Non qualified withdrawals subject to income tax
  and 10 penalty.
• Penalty waived for scholarships.

20
CESA - Other

• Beneficiary can be changed to another member of
  beneficiarys family
• Ability to participate in a CESA phases out at
  higher incomes
• Counted as a parental asset if parent is account
  owner for financial aid purposes

21
Other Items?

• More simple and uniform than 529 plan.
• You pick investments.
• Can have both 529 and CESA for same student.

22
Retirement Vehicles
23
Roth IRA

• Non deductible contributions
• Earnings withdrawn are income tax free on
  qualified distributions (hold account for 5 yrs
  and age 59 ½ , death, disability or first time
  home purchase)
• Non qualified distributions used for education
  avoid the 10 early withdrawal penalty

24
Roth IRA, cont

• Maximum investment limited to 4,000 in 2007
  (5,000 if age 50 or older) or earned income,
  whichever is less
• Ability to contribute is limited by income
  (99,000-114,000 single filers
  156,000-166,000 for joint filers)
• Qualified educational expenses are same as 529
• Roth IRA is not counted as a financial aid asset
  though withdrawals will count as financial aid
  income
• Contributions can be returned anytime with no tax
  and no penalty

25
Traditional IRA

• Contributions are deductible or non deductible
• Early withdrawals avoid the 10 penalty if used
  for education qualified expenses are same as 529
  plan
• Contributions limited to 4,000 in 2007 (5,000
  if age 50 or older) or earned income, whichever
  is less

26
Traditional IRA, cont

• Withdrawals without penalty are allowed after age
  59 ½
• Ability to contribute limited by taxable income
  ability to deduct an IRA contribution potentially
  limited by retirement plan participation
• Traditional IRA is not counted as a financial aid
  asset though withdrawals will count as financial
  aid income

27
Taxable Savings
28
Taxable Accounts

• Financial institutions that typically offer
  taxable accounts include
• Banks.
• Credit unions.
• Mutual fund companies.
• Brokerage firms.

29
Taxable Accounts

• Earnings and gains are taxed to account owner in
  year applied, i.e. taxable accounts
• No contribution limitations
• No early withdrawal penalty
• No restrictions on what the funds can be used for
• No contribution restrictions based on earnings
• Counted as an asset of the owner for financial
  aid purposes

30
UGMA/UTMA

• Minors trusts unearned income in excess of
  1,700 (2007) for children under age 18 is taxed
  to the child at the parents tax rate
• There is no contribution amount restriction
• Beneficiary elections are irrevocable and cannot
  be changed
• Custodianship terminates when child reaches age
  of majority as determined by state law
  (generally 18 or 21)

31
UGMA/UTMA, cont

• Accounts are counted as an asset of child or
  financial aid purposes
• Funds must be used for the benefit of the child

32
Planning Considerations
33
The Planning Process Items to Consider

• Saving for education vs. saving for your own
  retirement
• The power of starting early
• Investing just 100/month for 18 years will yield
  48,000 (assuming an 8 average annual return)
• Investment strategy is key stocks vs other
  investments
• Understanding the products
• Understanding financial aid alternatives
• Automate, Automate, Automate!

34
Call to Action Items

• Partner with a CFP practitioner to review
  
• the following
• Your financial goals
• Your educational savings needs
• Your investment risk tolerance
• Your cash flow and spending habits
• The educational funding products that best suit
  your needs.

35
Brainstorming Ideas

• Contribute before year end to take advantage of
  12,000/60,000 annual exclusion.
• Elect gift splitting with spouse.
• Pay tuition costs directly to education
  institution no gift
• Sign up for a Upromise account
• Login to www.savingforcollege.com to determine
  best 529 plan.

36
Brainstorming Ideas

• Take advantage of education credits.
• Roll Series EE bonds to a 529 plan.
• Use Roth IRA basis to pay education costs.
• Pre-pay tuition costs (in December) to accelerate
  credits, etc.
• Shift education credits to your child, by not
  claiming him/her as a dependent.
• Review IRS Pub 970 Tax Benefits for Education

37

• THANK YOU!

38
Disclosures

• This communication is intended to provide
  general information about the subject matter
  covered and is provided with the understanding
  that presenter is not rendering legal,
  accounting, or tax advice. It is not a marketed
  opinion and may not be used to avoid penalties
  under the Internal Revenue Code. You should
  consult with appropriate counsel or other
  advisors on all matters pertaining to legal, tax,
  or accounting obligations and requirements.