529 plan

Timing the Market + 529 Plans and College Savings

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Buying a home can seem like a daunting task, especially when you're doing it in a city like New York, where prices always seem to go up and never down. That's how we kicked off the show this week with Chris, a recent transplant from Chicago looking to find a new home in the Big Apple. 

Next up was Jeff from Georgia who has the bright idea of timing the market. You know, buying low and selling high, and knowing exactly when it's going to happen! 

Hour two was a deep dive into 529 plans and college savings in general with one of the foremost authorities on 529 plans, Andrea Feirstein, founder and Managing Director at AKF Consulting Group, a leading strategic advisor to public administrators of state investment programs.

Andrea was extremely knowledgeable and we touched on several topics, including:

What is a 529? A tax-advantaged savings plan designed to encourage saving for future education costs. 529 plans are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code.

What’s the tax benefit of a 529 plan? Withdrawals for qualified higher education expenses and earnings in the account are not subject to federal income tax and, in most cases, state income tax. Additionally, some states offer residents of the state specific incentives, like the ability to deduct contributions from state income tax or a matching grant.

What does a 529 plan cost? Fees and expenses vary widely from plan to plan and can include start-up fees, maintenance fees, or sales charges. In general, advisor-sold plans cost more than direct-sold plans. The Financial Industry Regulatory Authority (FINRA) has developed a tool to help you compare how these fees and expenses can reduce returns.

What happens if my kid doesn’t go to college? Most states allow you to tap the accounts for other children in the family or even for the parents. Those withdrawals that are not used for qualified higher education expenses will be subject to state and federal income taxes and an additional 10 percent federal tax penalty on earnings.

What has changed with the 2018 tax law? Americans can now withdraw funds tax-free from 529 plans to pay for K-12 tuition and other eligible expenses at private and religious schools, up to $10,000 per year. But there’s a caveat: Not all states will conform to the new federal rules. That means before you pull money, be sure to double check with your state.

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529 Plan Q&A

529 Plan Q&A

Happy 5-29 day, a day when states try to boost interest and participation in 529 education savings programs with various incentives. To mark 5-29 Day 2018, it’s time for a refresher Q&A on the popular plan and an update as to what has changed after the Tax Cut and Jobs Act was enacted.

Listener Questions: Student Loans, Retirement Planning, 529 College Savings

Desperate times call for desperate measures.

The questions from you guys continue to pour in, and at the current rate of taking one or two a week, we’re never going to clear out the inbox.

Hence today’s episode, one that’s devoted entirely to you guys and your questions! We’ll probably start doing this on a regular basis, maybe once a month or maybe more if you like it. So please let us know by sending a quick note or by leaving a comment in iTunes.

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The first question on today’s episode comes from Britton in South Carolina. There’s cause for celebration as Britton and his wife just learned that a baby is coming! Woot woot! As a police officer and teacher it’s safe to say they’re not raking in the bucks. With a small savings account, and a small chunk of student loan debt remaining, does it make sense to beef up the savings or just get rid of the outstanding loan before the baby comes?

Next up was Alex calling from somewhere overseas. Alex is on the complete opposite end of the spectrum. Married, no kids, federal employee, making good money, and perhaps most significant, virtually zero expenses, including housing. With the goal of becoming financially independent at a young age, which approach should she be taking with her investments.

The final call comes from Allen in Dallas. Planning for college way down the road, Allen is wondering what’s the best strategy to fund a couple 529 plans for his two kids. These guys are in great shape. If all goes according to plan, college should be taken care of when the time comes.

Before wrapping up, we read a quick listener email regarding the absurd cost of college. It was prompted by our interview with New York Times reporter John Schwartz and his comment that when he went to college at the University of Texas in the 1970s it cost less than $200 a semester. And guess what people, he didn’t graduate with any debt! Amazing how that works.  

“Better Off” is sponsored by Betterment.

Have a money question? Email us here or call 855-411-JILL.

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Should you go into Student Debt to Pay for College?

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With the cost of tuition, fees, room and board at public four-year colleges running around $20,000 -- and up to $70,000 for some elite private schools, how can families foot the steep education bill without getting crushed by student debt? Now that college acceptances are in, it's time to figure out how to pay for that coveted degree. Before you agree to the financial award offered, know that if your family finances have changed since you completed your FAFSA forms, due to a job loss, high medical expenses or caring for an elderly parent, you can appeal to get a better package. You will need to gather supporting documentation and be a bit of a squeaky wheel, but it is well worth the time and energy.

If the prospective student has received a better package from an equally ranked school, it is worth inquiring as to whether a match is available. In this case, financial aid officials say that it is better for the student to make the appeal directly, rather than have the parents call.

You should also know that the financial offers are only good for the first year of borrowing--families have to apply annually for aid. That means that your award could drop in the subsequent three years, which is why you should ask the college how much its costs could change. You can research whether a reduction is likely by using the Education Department’s College Navigator,  which highlights what percentage of first-year students at each school, earns scholarships compared with the entire undergraduate student body.

The biggest problem that families have is that there is no uniform standard for how colleges detail true net cost of earning a degree. That puts the onus on families to parse through the likely four-year total cost of attendance (tuition, fees, room, board, books, travel), the amount of financial aid available and the money that will be accessed through loans and work-study.

Once you have nailed down the costs, then it’s time to decide whether or not you will borrow money to finance the degree. Students should explore federal loan options before private ones, because most private loans have variable interest rates that can rise substantially in the future and only federal loans are eligible for different kinds of loan repayment options.

Colleges also often include federal parent PLUS loans in the aid package, but those come with a hefty loan origination fee of nearly 4.3 percent. Parents should check out the private sector too and remember that parental borrowers have to start making monthly payments immediately. Finally, education experts suggest that students only borrow a total of what they can earn in their first full year of employment and parents should be careful not to blow up their own retirement plans to finance education.

Because so many parents are trying to juggle competing financial goals, many grandparents have gotten into the act. While a grandparent’s assets are not included when colleges determine eligibility for financial aid, if a 529 plan is established in the grandparent’s name for the benefit of the grandchild, it can negatively impact the student’s financial aid award.

The reason is that when money is withdrawn to make a payment on behalf of the beneficiary of the plan, students must disclose those amounts as income, which can reduce a student’s aid eligibility significantly. In order not to diminish the ability to receive aid, grandparents should consider gifting the money to the parents, who can then deposit the gift into their own 529 accounts. Experts note that it makes sense to wait until after the aid has been determined before making the gift.

529 Day: 5 Myths About College Savings

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As I recently noted, the college class of 2015 is the most indebted ever. There a couple of ways to avoid the student loan trap: choose a cheaper educational route or be lucky enough to have family members that have enough dough that they are able to save money for education, hopefully after they have funded their own retirement accounts! This week, we are celebrating 529 Day (get it? May 29th is 5/29 or 529 Day), when states are trying to boost interest and participation in 529 college savings programs with various incentives. I have long said that the 529 plan is far and away my favorite education-funding vehicle, because it allows for tax-advantaged investing for college. Contributions within the account grow tax-free and are not taxed upon withdrawal, provided they are used for qualified higher education costs. The 529 is like a Roth IRA for education.

529 plans can also be a terrific estate planning tool, because wealthy grandparents can remove assets from their estates either by using the annual gift tax exclusion of $14,000 or by making a lump sum that is far larger (check with your plan to determine the maximum allowable limit). The nice part is that the donor can maintain control over the investments and the ultimate use of the money.

Just remember that while a grandparent’s assets are not included when colleges determine eligibility for financial aid, there is a big downside to using a 529 plan that is in the grandparent’s name: When money is withdrawn to make a payment on behalf of the beneficiary of the plan, students must disclose those amounts as income. For every dollar of income, a student’s aid eligibility may be reduced by as much as 50 cents. In order not to diminish the ability to receive aid, there are a few work-around solutions.

i. Wait to use money in the 529 until the student’s senior year: Tapping the account for the last year of school shouldn't affect eligibility, because the year in which the income will be reported (as income for the previous year) will also be the year in which the student graduates.

ii. Transfer ownership of account: A few years before the first aid application is due, grandparents could transfer ownership of the account to a parent of the beneficiary. Assets in a parent-controlled account get assessed for financial aid purposes, but disbursements do not appear on the income statement of either the parent or the student. Fair warning on this idea: some states, like New York, do not allow changes in account ownership unless there’s a court order or the owner dies.

iii. If the 529 plan ownership seems too complicated, grandparents might considering gifting the money to the parents, who can then deposit the gift into their own 529 accounts that have been established for the kids. It makes sense to wait until after the aid has been determined before making the gift. Alternatively, extended family members may choose to wait until the student has graduated and then help with college loan repayment.

There are some people who could afford to snag money or save for college, but fall prey to a number of misconceptions, which prevent them from acting. Let's dispel some of those myths right now!

1.“I’m not going to complete the Free Application for Federal Student Aid (FAFSA) form, because I make too much money to qualify.”

What’s the number one reason that families don’t qualify for financial aid? According to one college financial aid officer, the answer is obvious: because families do not complete the necessary paperwork. Those with household income below $250,000 and two dependents should spend the time and at least attempt to grab a few bucks. Maybe it will all be for naught, or maybe a few tedious hours of work will be worth a few thousand dollars next semester.

2.“I’m not going to save for college because it will count against me for financial aid.”

Some of your savings can reduce a portion of your need-based aid, but the amount of that reduction may be smaller than you think. The money in retirement plan accounts is not counted, nor is the equity in the family's residence. Additionally, a portion of assets held by the parents is not counted, based on the age of the older parent.

Assets owned by parents for a dependent child are assessed up to 5.64 percent, while assets in the child’s name are assessed at a 20 percent rate, which is why it's preferable to hold accounts in the parents’ names. Let’s say that by the time junior heads off to school, you have saved $100,000 in the kid’s 529 plan, your potential aid may be reduced by $5,640, leaving you with plenty of money to help pay for college.

3. "Rather than save for college, I’m going to count on government grants to cover costs."

Although grants are great, they will not cover the total nut for most colleges. The Pell Grant covers about 10 percent of current private four-year college costs and work study can add up to another 20 percent.

 4. "Why save now when I can borrow later?"

Before families start saving for college, I recommend that they get their financial houses in order. That means paying down consumer debt, establishing an emergency reserve fund of six to 12 months worth of expenses and maximizing their retirement savings. But once those big three goals have been accomplished, it makes sense to save today rather than worrying about whether interest rates will rise in the future. Put another way, when you save, you earn interest; while when you borrow, you pay interest.

5. “My kid is a great soccer/basketball/football player, so he/she will get a scholarship.”

As a former varsity NCAA athlete, let me share something with you that few others will tell you: your kid is probably not as good an athlete you think. Of course I thought that I was an awesome soccer player when the collegiate recruiters came calling, but within the first week of practice, I quickly learned that I was a decent player and one who would never have been given a free ride. It is very difficult to earn a scholarship and it is not prudent to count on a future scholarship as the basis of your college funding plan.

 

#216 Paying for College

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May 1 is "college decision day," the deadline to formally accept an offer of college admission and send in your deposit. It's also the time when families must make choices about financial aid packages, which is why we spend time outlining some of the strategies necessary to maximize the process.

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Here are some resources that might be helpful in the college funding and planning process:

Great calls from Holly (college funding), Marchello (saving and investing), Ryan (early retirement plan) and Brian (disability insurance). We also field Chris' e-mail about the "good" annuity company (TIAA-CREF) and a property tax issue from E.

Thanks to everyone who participated and to Mark, the BEST producer in the world. If you have a financial question, there are lots of ways to contact us:

  • Call 855-411-JILL and we'll schedule time to get you on the show LIVE 

College Savings Myths

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It is clear that college is indeed worth it, but assuming massive amounts of debt to attain the coveted degree may not be. That's why it's so important for families to get a head start on the process by saving as early as possible. Unfortunately, many simply do not have the resources to save for college. For those who could afford to save, there are misconceptions -- and flat-out myths -- which prevent them from acting. To help, it's time to dispel some of those myths right now! 1.“I’m not going to complete the Free Application for Federal Student Aid (FAFSA) form, because I make too much money to qualify.”

What’s the number one reason that families don’t qualify for financial aid? According to one college financial aid officer, the answer is obvious: because families do not complete the necessary paperwork. Those with household income below $250,000 and two dependents should spend the time and at least attempt to grab a few bucks. Maybe it will all be for naught, or maybe a few tedious hours of work will be worth a few thousand dollars next semester.

2.“I’m not going to save for college because it will count against me for financial aid.”

Some of your savings can reduce a portion of your need-based aid, but the amount of that reduction may be smaller than you think. The money in retirement plan accounts is not counted, nor is the equity in the family's residence. Additionally, a portion of assets held by the parents is not counted, based on the age of the older parent.

Assets owned by parents for a dependent child are assessed up to 5.64 percent, while assets in the child’s name are assessed at a 20 percent rate, which is why it's preferable to hold accounts in the parents’ names. Let’s say that by the time junior heads off to school, you have saved $100,000 in the kid’s 529 plan, your potential aid may be reduced by $5,640, leaving you with plenty of money to help pay for college.

3. "Rather than save for college, I’m going to count on government grants to cover costs."

Although grants are great, they will not cover the total nut for most colleges. The Pell Grant covers about 10 percent of current private four-year college costs and work study can add up to another 20 percent.

 4. "Why save now when I can borrow later?"

Before families start saving for college, I recommend that they get their financial houses in order. That means paying down consumer debt, establishing an emergency reserve fund of six to 12 months worth of expenses and maximizing their retirement savings. But once those big three goals have been accomplished, it makes sense to save today rather than worrying about whether interest rates will rise in the future. Put another way, when you save, you earn interest; while when you borrow, you pay interest.

5. “My kid is a great soccer/basketball/football player, so he/she will get a scholarship.”

As a former varsity NCAA athlete, let me share something with you that few others will tell you: your kid is probably not as good an athlete you think. Of course I thought that I was an awesome soccer player when the collegiate recruiters came calling, but within the first week of practice, I quickly learned that I was a decent player and one who would never have been given a free ride. It is very difficult to earn a scholarship and it is not prudent to count on a future scholarship as the basis of your college funding plan.

6. "I don’t want to ask my parents for help."

It takes a village and often many generations to fund a college education. If you have parents with means and and education is important to you and your kids, ask for help! Just remember that how the extended family helps can have a big impact on a student’s financial aid chances.

A grandparent’s assets are not included when colleges determine eligibility for financial aid. However, there is a big downside to using a 529 plan that is in the grandparent’s name: When money is withdrawn to make a payment on behalf of the beneficiary of the plan, students must disclose those amounts as income. For every dollar of income, a student’s aid eligibility may be reduced by as much as 50 cents. In order not to diminish the ability to receive aid, there are a few work-around solutions.

i. Wait to use money in the 529 until the student’s senior year: Tapping the account for the last year of school shouldn't affect eligibility, because the year in which the income will be reported (as income for the previous year) will also be the year in which the student graduates.

ii. Transfer ownership of account: A few years before the first aid application is due, grandparents could transfer ownership of the account to a parent of the beneficiary. Assets in a parent-controlled account get assessed for financial aid purposes, but disbursements do not appear on the income statement of either the parent or the student. Fair warning on this idea: some states, like New York, do not allow changes in account ownership unless there’s a court order or the owner dies.

iii. If the 529 plan ownership seems too complicated, grandparents might considering gifting the money to the parents, who can then deposit the gift into their own 529 accounts that have been established for the kids. It makes sense to wait until after the aid has been determined before making the gift. Alternatively, extended family members may choose to wait until the student has graduated and then help with college loan repayment.

 

 

College is Worth It!

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Attending college is costly, but according to new research, not going to college is even more costly. Pew Research Center found that Millennials with a college degree earn more than those who stopped their formal educations during or after high school. Between 1965 and 2013, median annual earnings, among college-educated full-time workers aged 25-32 rose to $45,500. Meanwhile, their high-school-educated peers lost more than $3,000, with earnings falling to $28,000 over that time period. In other words, a college degree is worth more and a high school degree alone is worth a lot less. That differential adds up over time: According to Priceonomics blog, a college degree offers a 30-year wage premium of over $200,000 in extra income ($6,667 a year) compared to a high school graduate’s salary.

For Millennials, like the broader population, going to college may help you get or keep a job.  The unemployment rate for high school grads is 12.2 percent, while for those with a degree, it is two-thirds lower, at 3.8 percent. Those with two years of college fall in between at 8.1 percent.

I know what you’re thinking: “What about the escalating costs of education and those ballooning student loans?” In the survey, 66 percent of Millennials said they had borrowed to pay for school, compared to 43 percent of boomers. That explains why outstanding student loans have soared to over a trillion dollars. One way to keep debt levels in check is to only assume a total student debt load that matches what you think you will earn in your first year of work. If you’re going to be an engineer, you can borrow more than say, an art history major.

The good news is that the College Board has reported that the rate of tuition increases at U.S. colleges and universities has slowed down in recent years, it is still a huge burden for American families.  The average annual tab for public colleges is $8,893, though after subtracting grants and financial aid, the net cost is $3,120. Private universities total $30,094, with a net cost of $12,460. Tack on room and board, and the price tag increases by another $10,000 or so.

Because the value of a college diploma is so great, families are increasingly seeking the help of older generations to foot the bill. But, how the extended family helps can have a big impact on a student’s financial aid chances. That’s why it’s important to understand some of the rules surrounding college savings and financial aid.

On the positive side, a grandparent’s assets are not included when colleges determine eligibility for financial aid. My favorite education-funding vehicle is the 529 plan, which allows for tax-advantaged investing for college. Contributions within the account grow tax-free and are not taxed upon withdrawal, provided they are used for qualified higher education costs.

Another benefit of 529 plans is that they can be a terrific estate planning tool, because wealthy grandparents can remove assets from their estates either using the annual gift tax exclusion of $14,000 or by making a lump sum that is far larger. The nice part is that the donor can maintain control over the investments and the ultimate use of the money.

However, there is a big downside to using a 529 plan that is in the grandparent’s name. When money is withdrawn to make a payment on behalf of the beneficiary of the plan, students must disclose those amounts as income. For every dollar of income, a student’s aid eligibility may be reduced by as much as 50 cents. In order not to diminish the ability to receive aid, there are a few work-around solutions.

1. Wait to use money in the 529 until the student’s senior year: Tapping the account for the last year of school shouldn't affect eligibility, because the year in which the income will be reported (as income for the previous year) will also be the year in which the student graduates.

2.Trasnfer ownership of account: A few years before the first aid application is due, grandparents could transfer ownership of the account to a parent of the beneficiary. Assets in a parent-controlled account get assessed for financial aid purposes, but disbursements do not appear on the income statement of either the parent or the student. Fair warning on this idea: some states, like New York, do not allow changes in account ownership unless there’s a court order or the owner dies.

3.If the 529 plan ownership seems too complicated, grandparents might considering gifting the money to the parents, who can then deposit the gift into their own 529 accounts that have been established for the kids. It makes sense to wait until after the aid has been determined before making the gift. Alternatively, extended family members may choose to wait until the student has graduated and then help with college loan repayment.

It takes a family, a village and just about everyone else to fund an education, but the investment is worth it!