University Retirement Specialists, LLC

Making and Keeping Financial Resolutions

What you might do (or do differently) in the months ahead?

  

How will your money habits change in 2016? What decisions or behaviors might help your personal finances, your retirement prospects, or your net worth?

Each year presents a “clean slate,” so as one year ebbs into another, it is natural to think about what you might do (or do differently) in the 12 months ahead.

Financially speaking, what New Year’s resolutions might you want to make for 2016 – and what can you do to stick by such resolutions as 2016 unfolds?

Strive to maximize your 2016 retirement plan contributions. The 2016 limit on IRA contributions is $5,500, $6,500 if you will be 50 or older at some point in the year. Contribution limits are set at $18,000 for 401(k)s, 403(b)s, and most 457 plans; if you will be 50 or older in 2016, you can make an additional catch-up contribution of up to $6,000 to those accounts.¹

 

If you want to retire in 2016, be mindful of the end of “file & suspend.” Social Security is closing the door on the file-and-suspend claiming strategy that married couples have used to try and optimize their Social Security benefits. If you are married and you will you be at least 66 years old by April 30, 2016, you and your spouse still have a chance to use the strategy. Starting May 1, that chance disappears forever for all married couples. (It will still be permitted on an individual basis.)^2,3

 

Similarly, the opportunity to file a restricted application for spousal benefits has also gone away. This was another tactic retirees employed in pursuit of greater lifetime Social Security income.²

 

Can you review & reduce your debt? Look at your debts, one by one. You may be able to renegotiate the terms of loans and interest rates with lenders and credit card firms. See if you can cut down the number of debts you have – either attack the one with the highest interest rate first or the smallest balance first, then repeat with the remaining debts.

 

Rebalance your portfolio. If you have rebalanced recently, great. Many investors go years without rebalancing, which can be problematic if you own too much in a declining sector.

 

See if you can solidify some retirement variables. Accumulating assets for retirement is great; doing so with a planned retirement age and an estimated retirement budget is even better. The older you get, the less hazy those variables start to become. See if you can define the “when” of retirement this year – that may make the “how” and “how much” clearer as well.

 

The same applies to college planning. If your child has now reached his or her teens, see if you can get a ballpark figure on the cost of attending local and out-of-state colleges. Even better, inquire about their financial aid packages and any relevant scholarships and grants. If you have college savings built up, you can work with those numbers and determine how those savings need to grow in the next few years.

 

How do you keep New Year’s resolutions from faltering? Often, New Year’s resolutions fail because there is only an end in mind – a clear goal, but no concrete steps toward realizing it.

So, if your aim is to save $20,000 toward retirement this year, map out the month-by-month contribution to your retirement account(s) that will help you do it. Web tools like Level Money and Mint.com can help you examine your cash flow week-to-week and month-to-month – you can use them to keep track of your saving effort as well as other aspects of your finances.⁴

If you wish, you can let a loved one or a close friend in on your New Year’s financial resolutions. That loved one or friend may decide to adopt them. Even if he or she does not, sharing your resolution might increase your commitment to carrying it out. Dominican University of California did a study on this very subject and found that when people set near-term goals and kept those goals private, they achieved them about 35% of the time – but when they informed friends about them and sent weekly progress updates, the achievement rate surpassed 70%.⁴  

Lastly, you may want to automate more of your financial life. If you have not set up monthly money transfers to a retirement or investment account, 2016 can be the year this happens.

 Citations.

1 - money.usnews.com/money/retirement/articles/2015/10/26/how-401-k-s-and-iras-will-and-wont-change-in-2016 [10/26/15]

2 - money.usnews.com/money/retirement/articles/2015/12/04/say-goodbye-to-the-social-security-file-and-suspend-strategy [12/4/15]

3 - tinyurl.com/p3exq5s [12/18/15]

4 - forbes.com/sites/bethbraverman/2015/12/29/4-tricks-to-get-your-new-years-resolutions-to-actually-stick-this-year/print/ [12/29/15]

Can an IRA Be a College Savings Vehicle?

You might be surprised at its potential.

 

An IRA is a retirement savings account, right? Indeed it is. IRA stands for Individual Retirement Arrangement. Even with that definition, however, there is no prohibition on using an IRA to save for other purposes, such as funding a college education. 

 

Why would anyone choose an IRA as a college savings vehicle? At first glance it may seem strange, since there are a couple of types of investment accounts dedicated to that goal in the first place. On closer inspection, IRAs – especially Roth IRAs – present some features that may be quite attractive to the parent or grandparent seeking ways to build education savings.

 

Flexibility. Parents are urged to save for their children’s college educations as soon as possible ... but what if their children end up spending little or no time in college? Some young adults do start careers or businesses without any college education. Some simply have no interest in going to school any longer.  Another, more pleasant circumstance worth mentioning: what if a child ends up getting a significant college scholarship, even a full ride?

 

In the event that these things happen, parents or grandparents who long ago opened a conventional college savings account may face a financial dilemma. Withdrawals from these conventional college savings plans are tax-free as long as they are used for qualified educational expenses, but if the funds are withdrawn other purposes, the distribution is regarded as fully taxable income (and the account gains are subject to a 10% penalty). Sometimes you can transfer assets in one of these conventional college plans to another family member, but some families do not have that choice.¹

 

As an IRA can be used to build retirement savings as well as a college fund, it offers a family flexibility in the face of such uncertainty. If the assets saved and invested for college end up being nice but not really necessary, those invested assets can serve as retirement funds.

 

Tax-deferred growth & the possibility of a tax-free withdrawal.  You probably know the basic distinction between a traditional IRA and a Roth IRA: the former permits tax-deductible contributions as a tradeoff for eventual taxable withdrawals, while the latter offers no tax deduction on contributions in exchange for tax-free withdrawals later (provided an investor follows IRS rules). Either IRA gives you tax-deferred growth of the invested assets.²

 

Now, can you open a Roth IRA, own it for five years or more and withdraw its assets tax-free even if you use the money for something other than your retirement? If that something is your child’s college education, the answer is (a qualified) yes.³

 

Withdrawals from Roth (and for that matter, traditional) IRAs face no withdrawal penalties if the money withdrawn is used for qualified educational expenses. Does this mean you can take $100K out of a Roth IRA today and use it to pay for your child’s college education? Probably not that large an amount, as some restrictions apply.³

 

Roth IRA withdrawals are regarded by the IRS as a return of contribution first, with account earnings coming out next. If you own a Roth IRA and are younger than 59½, or are older than 59½ but have owned your Roth IRA for less than five years, your Roth IRA’s earnings are ordinary, taxable income if withdrawn. Roth IRA contributions may be withdrawn tax-free at any age. So if you have contributed, say, $45,000 to a Roth IRA, as much as $45,000 from that Roth could be taken out tax-free and used for qualified educational expenses.³

   

One other note about taxes that pertains to all this: eight states offer no tax deduction on funds contributed to a conventional college savings plan. If you live in one of those eight states (Massachusetts, New Jersey, and California among them), then idea of withdrawing Roth IRA contributions tax-free at some point for education purposes may seem more attractive.³

 

Not considered an asset on the FAFSA. When students apply for college aid, they routinely fill out the Free Application for Federal Student Aid (FAFSA), which helps the federal government figure out the Expected Family Contribution (EFC), or the degree of college costs the family finances can handle. Conventional college savings accounts are counted as assets on the FAFSA in determining the EFC, but IRAs and other retirement accounts are not.¹

   

What are the shortcomings of building college savings with an IRA? First, this idea may not work for retirees, as you must have “taxable compensation” to make Roth IRA contributions and you cannot make traditional IRA contributions past age 70½. Phase-outs on for high earners may reduce or even prohibit annual Roth IRA contributions for some. Lastly, some of the conventional college savings vehicles have no annual contribution limits, while the annual contribution limit for Roth and traditional IRAs is currently set at $5,500 ($6,500 if catch-up contributions are included). Even so, families who seek more flexibility in their college savings options may see an IRA, particularly a Roth IRA, as an intriguing potential college savings vehicle.^2,3

 

    

Citations.

1 - marketwatch.com/story/3-reasons-to-use-a-roth-ira-to-save-for-college-2015-03-25 [3/25/15]

2 - irs.gov/Retirement-Plans/Traditional-and-Roth-IRAs [3/18/15]

3 - cnbc.com/2014/02/03/roth-iras-can-be-a-better-way-to-save-pay-for-higher-education-costs.html [2/3/14]

Yes, Young Growing Families Can Save & Invest

It may seem like a tall order, but it can be accomplished.

Plan to put yourself steps ahead of your peers. If you have a young, growing family, no doubt your to-do list is pretty long on any given day. Beyond today, you are probably working on another kind of to-do list for the long term. Where does “saving and investing” rank on that list?

 

For some families, it never quite ranks high enough – and it never becomes the priority it should become. Assorted financial pressures, sudden shifts in household needs, bad luck – they can all move “saving and investing” down the list. Even so, young families have planned to build wealth in the face of such stresses. You can follow their example. It is less an option than a necessity.   

     

First step: put it into numbers. Most people have invested a little by the time they reach 30 or 35, and some have invested avidly. A plan is not always in place, however. The mission is simply to “make money” or “build wealth” for “the future.”

 

This is good, but also vague. How much money will you need to save by 65 to promote enough retirement income and to live comfortably? Are you on pace to build a retirement nest egg that large? How much risk do you feel comfortable tolerating as you invest? What kind of impact are investment fees and taxes having on your efforts?

 

A financial professional can help you arrive at answers to these questions, and others. He or she can help you define long-range retirement savings goals and project the amount of savings and income you may need to sustain your lifestyle as retirees. At that point, “the future” will seem more tangible and your wealth-building effort even more purposeful.   

   

Second step: start today & never stop. If you have already started, congratulations! In getting an early start, you have taken advantage of a young investor’s greatest financial asset: time.

 

If you haven’t started saving and investing, you can do so now. It doesn’t take a huge lump sum to begin. Even if you defer $100 worth of salary into a retirement plan a month, you are putting a foot forward. See if you can allocate much more.

 

If you begin when you are young and keep at it, you will witness the awesome power of compounding as you build your retirement savings and net worth through the years. 

 

Just how awesome is it? An example: let’s say you save $100 per month in an investment account for 20 years and the account returns a (hypothetical) 5% for you over those two decades. In 20 years under such conditions, your $100-a-month nest egg will not amount to $24,000 – it will work out to $41,011, which is 71% more! If you put in $200 a month, you wind up with a projected $82,022 off of the $24,000 in contributions! We aren’t factoring in account fees or market fluctuations, of course – but you get the picture. Stretched out to 30 years, a consistent $100-per-month contribution and a consistent 5% return project to $82,302; raise the monthly contribution to $200 and you get $164,604. These numbers factor in annual compounding; use daily compounding as the variable, and they grow a bit larger. So even if you set aside and invest a few twenties each month, you may still end up with appreciable retirement savings – and these are numbers for one retirement saver, there are two of you.¹ 

 

What’s that? You say you can’t retire on $164,000 or less? You’re absolutely right. You have to devote more than that to your effort. You may need a million or two – and if you plan ahead, you may very well generate it. Ownership of equity investments, real property, business or professional success – this can all help to position you and your family for a comfortable future, provided you keep good financial habits along the way and pay attention to taxes. 

   

How do you find the balance? This is worth addressing – how do you balance saving and investing with attending to your family’s immediate financial needs?

  

Bottom line, you have to find money to save and invest for your family’s near-term and long-term goals. If it isn’t on hand, you may find it by reducing certain household costs. Are you spending a lot of money on goods and services you want rather than need? Cut back on that kind of spending. Is credit card debt siphoning away dollars you should assign to saving and investing? Fix that financial leak and avoid paying with plastic whenever you can. Other young families are doing it, and yours can as well.

   

Vow to keep “paying yourself first” – maintain the consistency of your saving and investing effort. What is more important, saving for your child’s college education or buying those season tickets? Who comes first in your life, your family or your gardener? You know the answer. 

    

It has been done; it should be done. Stories abound of families that have built wealth out of comparative poverty. There are people who came to this country with little more than the clothes on their backs who have found prosperity; there are families (including single-parent households) who have been dealt a bad hand yet overcame long financial odds to gain affluence.

 

It all starts with belief – the belief that you can do it. Complement that belief with a plan and regular saving and investing, and you may find yourself much better off much sooner than you think. 

        

  

     

Citations.

1 - bankrate.com/calculators/savings/compound-savings-calculator-tool.aspx [12/26/14]

 

When a Windfall Comes Your Way

What do you do with big money?

    

A first-world problem, and nothing more? Not quite. Getting rich quick can be liberating, but it can also be frustrating. Sudden wealth can help you resolve anxieties about funding your retirement or your children’s college educations, and newfound financial freedom can lead to time freedom – greater opportunity to live and work on your terms.

 

On the other hand, you’ll pay more taxes, attract more attention and maybe even contend with jealousy or envy from certain friends and relatives. You may deal with grief or stress, as a lump sum may be linked to a death, a divorce or a pension payout decision.

    

Windfalls don’t always lead to happy endings. Take the example of one Bud Post, who won more than $16 million in the Pennsylvania lottery in 1988. Eighteen years later, he passed away owing more than $1 million after business failures and bad investments. Along the way, his girlfriend successfully sued him for some of the money and his brother hired a hit man to try and take him out, hoping to inherit some of those assets. That weird and tragic example aside, windfalls don’t necessarily breed “old money” either – without long-range vision, one generation’s wealth may not transfer to the next. As the Wall Street Journal mentions, on average 70% of the wealth built by one generation is lost by the next. Two generations later, an average of 90% of it disappears.^1,2  

 

So what are some wise steps to take when you receive a windfall? What might you do to keep that money in your life and in your family for years to come?

    

Keep quiet, if you can. If you aren’t in the spotlight, don’t step into it. Who really needs to know about your newfound wealth besides you and your immediate family? The IRS, the financial professionals who you consult or hire, and your attorney. The list needn’t be much longer, and you may want to limit it at that.

   

What if you can’t? Winning a lottery prize, selling your company, signing a multiyear deal – when your wealth is publicized, expect friends and strangers to come knocking at your door. Be fair, firm and friendly – and avoid handling the requests yourself. (That first, generous handout may risk opening the floodgate to subsequent handouts). Let your financial team review appeals for loans, business proposals, and pipe dreams.

       

Yes, your team. If big money comes your way, you need skilled professionals in your corner – a CPA, an attorney and a wealth manager. Ideally your CPA is a tax advisor, your lawyer is an estate planning attorney and your wealth manager pays attention to tax efficiency.

    

Think in stages. When a big lump sum enhances your financial standing, you need to think about the immediate future, the near future and the decades ahead. Many people celebrate their good fortune when they receive sudden wealth and live in the moment, only to wonder years later where that moment went.

   

In the immediate future, an infusion of wealth may give you some tax dilemmas; it may also require you to reconsider existing beneficiary designations on IRAs, retirement plans and investment accounts and insurance policies. A will, a trust, an existing estate plan – they may need to be revisited. Resist the temptation to try and grow the newly acquired wealth quickly through aggressive investing.

 

Now, how about the next few years? What does financial independence (or greater financial freedom) mean for you? How do you want to spend your time? Should you continue in your present career? Should you stick with your business or sell or transfer ownership? What kinds of near-term possibilities could this open up for you? What are the concrete financial steps that could help you defer or reduce taxes in the next few years? How can risk be sensibly managed as some or all of the assets are invested?  

 

Looking further ahead, tax efficiency can potentially make an enormous difference for that lump sum. You may end up with considerably more money (or considerably less) decades from now due to asset location and other tax factors.

      

Think about doing nothing for a while. Nothing financially momentous, that is. There’s nothing wrong with that. Sudden, impulsive moves with sudden wealth can backfire.

 

Welcome the positive financial changes, but don’t change yourself. Remaining true to your morals, ethics and beliefs will help you stay grounded. Turning to professionals who know how to capably guide that wealth is just as vital.

  

    

Citations.

1 - money.usnews.com/money/personal-finance/articles/2014/01/24/5-things-to-do-if-you-receive-a-windfall [1/24/14]

2 - tinyurl.com/qblyk6v [3/8/13]

 

End of Year Money Moves for 2013

Here are some things you might want to do before saying goodbye to 2013.  

 

                       

What has changed for you in 2013? Did you start a new job – or leave a job behind? Did you retire? Did you start a family? If some notable changes occurred in your personal or professional life, then you will want to review your finances before this year ends and the next one begins.

 

Even if your 2013 has been relatively uneventful, the end of the year is still a good time to get cracking and see where you can plan to save some taxes and/or build a little more wealth. 

 

Do you practice tax loss harvesting? That is the art of taking capital losses (selling securities worth less than what you first paid for them) to offset your short-term capital gains. If you fall into one of the upper tax brackets, you might want to consider this move, which directly lowers your taxable income. It should be made with the guidance of a financial professional you trust.¹ 

 

In fact, you could even take it a step further. Consider that up to $3,000 of capital losses in excess of capital gains can be deducted from ordinary income, and any remaining capital losses above that can be carried forward to offset capital gains in upcoming years.¹

   

Do you itemize deductions? If you do, great. Now would be a good time to get the receipts and assorted paperwork together. Besides a possible mortgage interest deduction, you might be able to take a state sales tax deduction, a student-loan interest deduction, a military-related deduction, a deduction for the amount of estate tax paid on inherited IRA assets, an energy-saving deduction, a homebuyer credit … there are so many deductions you can potentially claim, and now is the time to meet with your tax professional so that you can strategize to claim as many as you can.

  

Could you ramp up 401(k) or 403(b) contributions? If you can do this in November and December, that will lower your taxable income for 2013. Do it enough and you might be able to qualify for other tax credits or breaks available to those under certain income limits.

 

Are you thinking of gifting? How about making a contribution to a charity or some other kind of 501(c)(3) non-profit organization before 2013 ends? In many cases, these gifts are partly tax-deductible. If you pour some money into a 529 plan on behalf of a child, you could get a deduction at the state level (depending on the state).

 

Of course, you can also reduce the value of your taxable estate with a gift or two. This year, the gift tax exclusion is $14,000. So you can gift up to $14,000 to as many people as you wish this year, with the understanding that you have a $5.25 million lifetime limit before you are actually hit with gift taxes. This $5.25 million limit will rise in future years as it is inflation-indexed.²

 

While we’re on the topic of estate planning, why not take a moment to review the beneficiary designations for your IRA, your life insurance policy, and your retirement plan at work? If you haven’t reviewed them for a decade or more (which isn’t uncommon), double-check to see that these assets will go where you want them to go should you pass away. Lastly, take a look at your will to see that it remains valid and up to date.  

 

Should you convert all or part of a traditional IRA into a Roth IRA? You will be withdrawing money from that traditional IRA someday ... and those withdrawals will equal taxable income. Withdrawals from a Roth IRA you own are never taxed during your lifetime, assuming you follow the rules. Translation: tax savings tomorrow. Before you go Roth, you do need to make sure you have the money to pay taxes on the conversion amount. If you do this and change your mind, the IRS gives you until October 15 of the year after a conversion to undo it.³

 

Can you take advantage of the American Opportunity Tax Credit? Now in place through 2017, the AOTC for qualified college expenses allows individuals whose modified adjusted gross income is $80,000 or less (and joint filers with MAGI of $160,000 or less) a chance to claim a credit of up to $2,500 for qualified tuition and related expenses. Phase-outs kick in above those MAGI levels.^3,4

 

What can you do before they sing “Auld Lang Syne”? Talk with a financial or tax professional now rather than in February or March. Little year-end moves might help you improve your short-term and long-term financial situation.

 

 

Citations.

1 - bankrate.com/finance/money-guides/capital-losses-can-help-cut-your-tax-bill-1.aspx [9/19/13]

2 - chron.com/news/article/New-act-clears-up-estate-gift-tax-confusion-4301217.php [2/22/13]

3 - tinyurl.com/lcb66o8 [12/28/12]

4 - irs.gov/uac/American-Opportunity-Tax-Credit [5/31/13]

 

Major Risks to Family Wealth

Will your accumulated assets be threatened by them?

 

 

All too often, family wealth fails to last. One generation builds a business – or even a fortune – and it is lost in ensuing decades. Why does it happen, again and again?

 

It is because families fall prey to serious money blunders – old and new. Classic mistakes are made, and changing times aren’t recognized.

 

Procrastination. This isn’t simply a matter of failing to plan, but also of failing to respond to acknowledged financial weaknesses.   

 

For example, let’s say we have a multimillionaire named Alan. Alan gets a call one afternoon from his bank, which considers him a VIP. It turns out that his six-figure savings account lacks a designated beneficiary. He thanks the caller, and says he will come in soon to take care of that – but he never does. His schedule is busy, and the detour is always inconvenient.

 

While Alan knows about this financial flaw, knowledge is one thing and action is another. Sadly, procrastination wins out in the end and those assets end up subject to probate. Then his heirs find out about other lingering financial matters that should have been taken care of regarding his IRA, his real estate holdings, and more.

 

Minimal or absent estate planning. Forbes notes that 55% of Americans lack wills, and every year multimillionaires die without them – not just rock stars and actors, but also small business owners and entrepreneurs. Others opt for a living trust and a pour-over will, or just a basic will created online.¹

 

This may not be enough. Anyone reliant on a will risks handing the destiny of their wealth over to a probate judge. The multimillionaire who has a child with special needs, a family history of Alzheimer’s or Parkinson’s, or a former spouse or estranged children may need more rigorous estate planning. The same is true if he or she wants to endow charities or give grandkids a nice start in life. Is this person a business owner? That factor alone calls for coordinated estate and succession planning.

 

A finely crafted estate plan has the potential to perpetuate and enhance family wealth for decades, perhaps generations. Without it, heirs may have to deal with probate and a painful opportunity cost: the lost potential for tax-advantaged growth and compounding of those assets.

 

The lack of a “family office”. Years ago, wealthy families sometimes chose to assign financial management to professionals. The family mansion boasted an office where those professionals worked closely with the family. While the traditional “family office” has disappeared, the concept is as relevant as ever. Today, wealth management firms consult families, provide reports and assist in decision-making in an ongoing relationship with personal and responsive service. This is a wise choice when your financial picture becomes too complex to address on your own.

 

Technological flaws. Hackers can hijack email accounts and send phony messages to banks, brokerages and financial advisors greenlighting asset transfers. Social media can help you build your business, but it can also lend personal information to identity thieves who want access to digital and tangible assets.

 

Sometimes a business or family installs a security system that proves problematic – so much so that it is turned off half the time. Unscrupulous people have ways of learning about that. Maybe they are only one or two degrees separated from you.

 

No long-term strategy in place. When a family wants to sustain wealth for decades to come, heirs have to understand the how and why. All family members have to be on the same page, or at least read that page. If family communication about wealth tends to be more opaque than transparent, the mechanics and purpose of the strategy may never be adequately conveyed to heirs.

 

No decision-making process. In the typical high net worth family, financial decision-making is vertical and top-down. Parents or grandparents may make a decision in private, and it may be years before heirs learn about it or fully understand it. When the heirs do become decision makers, it is usually upon the death of the elders – only now the heirs are in their forties or fifties, with current and former spouses and perhaps children of their own to make family wealth decisions more trying.

 

Horizontal decision-making can help multiple generations understand and participate in the guidance of family wealth. Estate and succession planning professionals can help a family make these decisions with an awareness of different communication styles. In-depth conversations are essential; good estate planners recognize that silence does not necessarily mean agreement.

 

You may plan to reduce these risks (and others) in collaboration with financial and legal professionals who focus on estate planning and wealth transfer issues. It is never too early to begin.

 

 

 

Citations.

1 – www.forbes.com/sites/financialfinesse/2012/01/19/a-common-sense-approach-to-estate-planning/ [1/19/12]

 

Out-Of-The-Box Ways to Pay for College

Many of these options go unrecognized.

 

 

Today’s average student borrower takes out more than $25K in loans. Education debt has reached record levels in America – more than $1 trillion. In the face of those numbers, parents and students are looking for assorted ways to pay for college without incurring big liabilities.¹

 

In addition to grants, loans, merit-based aid and your student holding down a job, there are other ways to reduce college cost – some little recognized.

 

First, how expensive will college be? Can you project the total cost of your student’s college education? Assuming five years in school (which is the average for today’s undergrads) and no change in majors along the way, can a financial aid officer give you a ballpark figure? If not, an online resource such as Alltuition.com may be able to estimate it for you.^1,2

 

Presumably, you opened a 529 plan or some other form of college savings fund for your student years ago. If those funds aren’t enough, where can you find other resources to meet a projected shortfall?

 

What about outright gifts of cash? If you or relatives or friends have the money, that is an option. Will you suffer gift tax consequences as a result? No. If the money constituting that completed gift is used directly to pay tuition expenses at an educational institution, that gift is not taxable. It will not cut into your annual gift exclusion amount ($13,000 for 2012) or your lifetime unified credit (currently set at $5.12 million).^3,4

 

One caveat, however: if you make any kind of tuition payment on behalf of your student, that will be characterized as untaxed income on the FAFSA (Free Application for Federal Student Aid). That could wipe out your student’s chances of getting any need-based financial aid. This is why some families elect to put off tuition gifts until a student’s senior year.⁴

       

Can you reduce your taxable income to get your student more financial aid? You may be able to do so. If getting federal student aid is your objective, knocking down your taxable income (through moves big and little) might make a big difference.

 

On the FAFSA, family income matters more than family assets. Retirement account balances, net worth attributable to home values and small businesses – none of this matters, it doesn’t factor into the needs analysis. The FAFSA is used to determine the expected family contribution (EFC), which is the combination of funds that the parent(s) and student can make available for a school year. The gap between the EFC and the expected total education costs of the school year represents the level of financial need weighed in determining federal student aid.⁵

 

So the lower your EFC is, the greater your level of financial need will be – and the greater amount of federal student aid that may be available. This is why many parents and students elect to spend down their combined savings and assets set aside for college during the freshman year. With no assets left for the sophomore year (and by this same logic, subsequent academic years), eligibility for federal student aid is wide open. Of course, you may be also opening a door to potential long-term debt.

 

There are other ways to alter your tax picture to get your student some financial aid –aid not linked to lingering debt.

 

Have you heard of “tax scholarships”? No, not scholarships linked to a state tax credit (though those may be worth a look). These are de facto scholarships that you may be able to create for your student with the help of a CPA or financial advisor (and the IRS). If you can find or arrange new tax deductions this year, you can redirect that money toward your student’s college expenses. Savvy business owners and professionals often make this move.

 

What about untraditional scholarships? For example, CollegeNet.com currently offers a “weekly scholarship” running between $3,000-10,000. Collegians themselves decide which applicant deserves the funds. There are other such examples.¹

 

Can you negotiate tuition? At first instinct, does that seem rude, uncouth? It may prove smart – and it is done. There are such things as tuition discounts (and grant programs) offered to those who negotiate, even those not eligible for need-based aid. If a university really wants your student, you may have some leverage.

 

Are you willing to go the JC route, or the online route? Going to a local junior college for the first two years of study toward a bachelor’s degree can save a student and family tuition, housing and travel and auto expenses, and maybe a little anxiety – if your student decides he or she wants to major in oceanography instead of marketing, you haven’t paid $10,000 or $20,000 a year to arrive at that conclusion.

 

Recognizing the costs of housing, commuting and parking permits, some colleges are offering parts of their curriculum online or in more accessible settings – for example, Virginia Tech offers introductory math courses through computer labs and the University of Minnesota’s new Rochester campus uses part of a local shopping mall to hold classes. While taking classes on a computer or at some obscure satellite campus may not give you the full university experience, it may help to reduce expenses.²

 

Need help with college planning? Talk with a financial professional well versed in the matter – sooner rather than later.

 

Citations.

1 – www.dailyfinance.com/2012/04/19/paying-for-college-two-websites-offer-outside-of-the-box-ideas/ [4/19/12]               

2 – www.businessweek.com/printer/articles/70120-student-loans-debt-for-life [9/6/12]            

3 – www.irs.gov/uac/In-2012,-Many-Tax-Benefits-Increase-Due-to-Inflation-Adjustments [10/20/11]       

4 - www.education.com/reference/article/pay-college-saving-understand-gift-tax/ [9/6/12]

5 – thechoice.blogs.nytimes.com/2011/01/11/fafsaq-and-a/ [1/11/11]

End-of-Year Money Moves

Here are some things you might want to do before saying goodbye to 2010.

 What has changed for you in 2010? Did you start a new job – or leave a job behind? Did you retire? Did you start a family? If some notable changes occurred in your personal or professional life, then you will want to review your finances before this year ends and the next one begins.

Even if your 2010 has been comparatively uneventful, the end of the year is still a good time to get cracking and see where you can plan to save some taxes and/or build a little more wealth. 

Do you practice tax loss harvesting? That is the art of taking capital losses (selling securities worth less than what you first paid for them) to offset your short-term capital gains. You might want to consider this move, which should be made with the guidance of a financial professional you trust.  

In fact, you could even take it a step further. Consider that up to $3,000 of capital losses in excess of capital gains can be deducted from ordinary income, and any remaining capital losses above that can be carried forward to offset capital gains in upcoming years.¹

 

There is still the risk that if Congress doesn’t act soon, long-term capital gains will be taxed at 10% for those in the 15% bracket and 20% for those in the higher brackets beginning in 2011. President Obama has himself proposed a 20% top tax rate for capital gains.² So you might think of triggering excess capital losses in 2010 and using the losses to shelter future long-term capital gains that could be taxed at a higher rate.

 

If you are in the 10% or 15% brackets (taxable income of $34,000 or less for an individual, $68,000 or less for a married couple), 2010 could be the final year in which you can cash in capital gains without triggering a tax.³

Deductions and credits. Besides a possible mortgage interest deduction, you might be able to take a state sales tax deduction, a student-loan interest deduction, a military-related deduction, a deduction for the amount of estate tax paid on inherited IRA assets, an energy-saving credit, a homebuyer credit … there are so many possibilities. Now is the time to meet with your tax professional so that you can strategize to claim as many as you can. If you’re planning on itemizing deductions, now is also the time to start gathering receipts and assorted paperwork (if you haven’t already done so).

Could you ramp up your 401(k) or 403(b) contributions? If you can do this in November and December, that will lower your taxable income. Do it enough and you might be able to qualify for other tax credits or breaks available to those under certain income limits.

Are you thinking of gifting? How about making a contribution to a charity or some other kind of 501(c)(3) non-profit organization before 2010 ends? In most cases, these gifts are partly tax-deductible. If you pour some money into a 529 plan on behalf of a child, you could get a deduction at the state level (depending on the state).

Of course, you can also reduce the value of your taxable estate with a gift or two. This year, the gift tax exclusion is $13,000 – so you can gift up to $13,000 to as many people as you wish this year, with the understanding that you have a $1 million lifetime limit before you are actually hit with gift taxes.⁴  

While we’re on the topic of estate planning, why not take a moment to review the beneficiary designations for your IRA, your life insurance policy, and your retirement plan at work? If you haven’t reviewed them for a decade or more (which isn’t uncommon), double-check to see that these assets will go where you want them to go should you pass away. Lastly, take a look at your will to see that it remains valid and up to date.  

Should you go Roth before 2010 ends? The IRS has given you a little incentive to do so: if you convert a traditional IRA to a Roth in 2010, you can optionally split the income taxes stemming from the conversion across 2011 and 2012 - without increasing your 2010 taxable income. If you wait until 2011 to make the conversion, that choice won’t be there.³

Do you have a student in college or a private K-12 school? If you’re paying for private school with Coverdell ESA funds, here’s an alert: the annual contribution limit is dropping from $2,000 to $500 in 2011, and primary and secondary school tuition will no longer count as a qualified expense next year. In 2010, you can buy your college student computer hardware, computer software and Internet service with funds from a 529 account; you won’t be able to do that in 2011. You’ll also want to see if you can claim the American Opportunity Credit (which is as much as $2,500 per student) for qualified college expenses in 2010; it may or may not be extended for 2011.^3,5

What can you do before they sing “Auld Lang Syne”? Talk with a financial or tax professional now rather than in February or March. Little year-end moves might help you improve your short-term and long-term financial situation. 

Citations

 

1 – irs.gov/taxtopics/tc409.html [3/4/10]

2 – cnbc.com/id/40014147 [11/4/10]

3 – kiplinger.com/columns/taxtips/archive/last-minute-tax-savings-for-2010.html [11/3/10]

4 - turbotax.intuit.com/tax-tools/tax-tips/tax-planning-and-checklists/5533.html [11/5/10]

5 – usatoday.com/money/perfi/columnist/block/2010-09-14-yourmoney14_ST_N.htm [9/14/10]

 

Coverdells VS. 529 Plans

There is more than one way to save for college.

With changes coming to Coverdell Education Savings Accounts in 2011, some parents are wondering if they should convert Coverdells to 529 plans. With that mind, here is a brief look at how both of these accounts work.

Why were Coverdell ESAs so popular in the past decade? Imagine a Roth IRA used only for college savings. That's basically the concept behind a Coverdell. In fact, the Coverdell ESA (created in 2002) evolved from the Education IRA (created in 1998).

Contributions to a Coverdell ESA aren’t deductible, but you get tax-deferred growth. Withdrawals from Coverdells are (currently) tax-free if used for qualified educational expenses such as tuition, fees and books. The funds can also pay for certain K-12 education costs.¹ You can allocate Coverdell account assets among many different kinds of investment vehicles, and many banks, credit unions and mutual fund providers offer these accounts.

However, Coverdells have some drawbacks. The (current) annual contribution limit to a Coverdell is $2,000, and phase-outs kick in at $95,000 for single filers and $190,000 for married filers.²

Aside from a limit on annual contributions, there are also some age requirements. The Coverdell ESA beneficiary must be younger than 18 when the account is set up, and the money in the account must be spent or transferred before the beneficiary turns 30. At that point, the funds will have to be withdrawn and taxes and a 10% penalty may be assessed on the withdrawal. (If a beneficiary has special needs, contributions after age 18 and retention of the account assets after age 30 may be allowed – see IRS Publication 970 for details.)^1,2

Big changes are coming for Coverdells in 2011. Unless Congress intervenes, these accounts will be a lot less attractive next year. Beginning in 2011:

• The annual contribution limit drops from $2,000 to $500.
• A portion of the withdrawals will be taxed as ordinary income.
• A 10% penalty applies if a withdrawal is not used for education expenses.
• No withdrawals may be used to pay K-12 education expenses.^3,4

All this has many parents thinking about shifting their Coverdell funds to a 529 plan.

Thinking of moving Coverdell assets into a 529? You can do a rollover from a Coverdell ESA to a 529 plan without incurring any tax penalties as long as the 529 plan will have the same beneficiary as the present Coverdell account.⁴

Under federal tax law, withdrawals from a 529 plan are tax-free - assuming they are used for qualified education expenses - but contributions are taxed. (Some states do give you a break and let you deduct part of your 529 contribution from state tax returns.)^4,5

You can go one of two ways with a 529:

• You can prepay tuition at today’s rates (at a qualifying college or university) through a 529 prepaid tuition program.
• You can save to pay tomorrow’s college tuition through a 529 savings plan which gives you tax-deferred growth. Most people prefer this option for its flexibility and asset accumulation potential.⁶

You can put much more money into a 529 annually. You can put up to $13,000 in a 529 plan this year without having to file a gift tax report. Your spouse can, too. So can your relatives. So can anyone: any individual taxpayer can contribute up to $13,000 to a 529 plan in 2010. In fact, a taxpayer can pour in up to five years worth of contributions in one year – currently, that’s $65,000 – if that taxpayer refrains from making further contributions for the next five years. While these contributions will reduce your $1 million lifetime federal gift exemption, they can also obviously be useful in estate planning.

In 2010, most 529 plans allow annual contributions of more than $230,000. Some have “lifetime” limits on the total contribution. All 529 contributions must be in cash.^6,7

A 529 plan has no phase-outs. You are never too rich to contribute to a 529 plan. 529s do not have any form of income restrictions.⁷

Other nice features. The owner of a 529 plan retains control of the assets and has the power to change the beneficiary. You can even start multiple 529 plans.⁸

In many respects, 529 plans have left Coverdell ESAs in the dust.

Here comes 2011. As the calendar pages turn, you may want to arrange a move from a Coverdell ESA to a 529 plan. You certainly will want to keep up with developments affecting these accounts and other education savings options. Your financial consultant can help you stay informed.

Citations

1 – irs.gov/newsroom/article/0,,id=107636,00.html [3/24/08]

2 – irs.gov/pub/irs-pdf/p970.pdf [1/25/10]

3 – online.wsj.com/article/SB10001424052748704300004575095942228680772.html [4/5/10]

4 – usatoday.com/money/perfi/columnist/block/2010-09-14-yourmoney14_ST_N.htm [9/14/10]

5 –news.cincinnati.com/article/20100908/BIZ01/9090330/1076/BIZ/BusinessWise-briefs-Pros-and-cons-of-529-plans [9/8/10]

6 –smartmoney.com/spending/deals/the-529-basics-10676/ [2/3/10]

7 – investopedia.com/university/retirementplans/529plan/529plan1.asp [9/28/10]

        investopedia.com/university/retirementplans/529plan/529plan2.asp [9/28/10]

8 – schwab.com/public/schwab/planning/college_planning/529_plan/faqs [9/7/10]