Category Archives: 529

Virginia Pre-Paid Tuition: What You Need to Know

Virginia offers a prepaid tuition program to residents looking to save for future college educational costs, called Virginia529 prePAID.  The plan allows you to prepay future tuition and mandatory fees for Virginia colleges or universities.  However, there are several catches that you must be aware of that make this college savings option somewhat tricky to plan around.

You can only open accounts during a limited enrollment period each year.  Either the account owner or beneficiary must be a Virginia resident when opening the account.  This is not a big hurdle, but it is something that you should know.

You purchase the credits in semester increments, and this is where things really start to get confusing.

  • First, you can only buy the credits from the child’s birth through the time they complete the ninth grade.  After the beneficiary has completed the ninth grade, you can no longer purchase any more prepaid tuition credits for them.
  • Next, when purchasing semester credits, you can purchase either Tier1 or Tier2 credits.  Tier1 credits cover one semester of tuition at a Virginia public four-year college, where Tier2 credits cover one semester of tuition at a Virginia two-year or community college.  Applying a Tier1 credit to a Tier2 school will cover more than a semester of tuition, while applying a Tier2 credit to a Tier1 school will cover less than a semester of tuition.
  • Furthermore, if you apply either Tier1 or Tier2 credits to an out-of-state college or a private college (even a Virginia private college), the credits do not necessarily transfer one-for-one and your pre-paid tuition might be worth less than what you thought it would be.

Those things, in our opinion, make planning around the Virginia pre-paid tuition plan very difficult.  Before the ninth grade, college planning is a distant goal.  Narrowing down college choices is something that probably very few people sit around and do with their 4th grader.  Knowing where that child will eventually decide to go to school, or even whether your family will still live in-state when that 4th grader eventually heads off to college, is a wild guess for most.  Even if your child loves one particular school, knowing whether they will eventually be able to make it into that school is a whole other issue.

The benefit to the plan, and its allure, is that you can lock in the future tuition and fee payments now so that you will not have to worry about whether tuition prices continue their rapid increase.  However, you should at least be aware of some of the potential pitfalls involved with the plan before jumping in.  For more information, visit the Virginia prePAID plan website, or feel free to contact us.

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8 Things Every Parent Should Know About 529 College Savings Plans

We often are asked by parents (or grandparents) of young children about college savings plans.  529 college savings plans offer tax-advantaged ways to save for the various costs of higher education.  While these plans have a lot of name recognition, many people still have questions about the details.  Since it is the first day of school for most kids here in Virginia, it seemed an appropriate time for us to share these eight things you should know about 529 college savings plans:

  1. Earnings on 529s are tax-free, as are withdrawals, as long as you use the money for qualified educational expenses.  Qualified expenses include tuition and fees, books, room and board, supplies, and even computer-related expenses.
  2. There are no income restrictions to open and contribute to a 529 account.  Even high-income earners can open and fund college savings plans.
  3. The money in a 529 account can be used towards in-state or out-of-state schools, both public and private.
  4. The contribution amounts are very high: you can contribute up to $350,000 per beneficiary into a 529 account.  (Keep in mind that you will need to get a little deeper into gift tax rules if you intend to contribute more than $14,000 to a 529 account in any one calendar year.  You can do it, but you should know the rules first.)
  5. The beneficiary is portable.  If your child decides they want to do something else instead of going to college, you can name someone else the beneficiary (sibling, first cousin, grandparent, aunt, uncle, or yourself).  You do not need to decide on a new beneficiary the moment that your child decides not to go to college.  For instance, you could hold onto it and eventually name your grandchildren the beneficiaries.
  6. Charitable family members can contribute to an existing 529 account that you own or set up their own 529 and name your child as beneficiary.
  7. In Virginia, putting money into a 529 plan has the added bonus of providing a state tax deduction for contributions up to $4,000.  Thirty-three other states also offer state tax deductions for contributing to a 529.
  8. If your child gets a scholarship, you will not lose the money.  You can use the plan to cover expenses that the scholarship does not, such as books, room and board, or other supplies.  You can keep the plan open in case your child goes on to graduate school.  You can change the beneficiary and name another college-bound relative.  A final option would be to simply cash out the plan.  Doing so would subject you to income tax and a 10% penalty on the earnings.  If you were feeling generous, you could name your child the owner and let them cash it out at their (presumably) lower tax rate.

If you have questions, or are interested in finding out how to start a 529 plan, please let us know!

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The Real vs. the Ideal (Sometimes Life Happens)

The latest issue of Investment News reminded me of an article I saw recently about Marco Rubio, a Senator seeking the Republican Presidential nomination. It seems that he cashed in a 401k to buy a refrigerator, an air conditioner, pay some college costs for his children and cover some campaign expenses.

Financial planners always tell their clients that they need to put money aside for retirement and to never, ever take money out of retirement plans before age 59 ½ because the taxes and penalties can take nearly half of the money that you withdraw.

The article goes on to say that:

“Unfortunately, many middle-class Americans aren’t saving enough for retirement and some, like Mr. Rubio, even pull money out of their retirement plans prematurely.”

Our advice regarding the timing of withdrawals from retirement accounts is, of course, exactly right. And it will be followed if you are rich enough. Unfortunately, as John Lennon once said, “life is what happens when you’re making other plans.”

Most people have finite resources. Not everyone has the money to fully fund their IRA, 401k, 529 college savings plan, health savings account, life insurance and long-term care insurance policies. Life is about making choices between have-to-have and nice-to-have.

We realize that, and provide our clients with the trade-offs they often need to make. Some goals are achievable and others may not be. And sometimes it’s worthwhile cashing in a 401k if it means that later on you can become President.

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Are You an “Affluent Worker?”

Forbes magazine recently had an article about some of our favorite clients. They call them the “High Net Worker.” These are people who are successful mid-level executives in major businesses. They range in age from 40 to the early 60s. They earn from $200,000 per year and often more than $500,000. They work long hours and are good at their jobs.

According to the Forbes article, many have no plans to retire. Our experience is different; retirement is definitely an objective. But many have valuable skills and plan to begin a second career or consult after retiring from their current company.

At this time in their lives they have accumulated a fair amount of wealth, own a nice home in a good neighborhood, and may be getting stock options or deferred bonuses. That means that at this critical time in their lives, when they are focused on career and have little time for anything else, they have not done much in the way of financial planning.

When it comes to investing, most view themselves as conservative. But because of their compensation their investments are actually much riskier than they think. It is not unusual for executives of large corporations to have well over 50% of their net worth tied to their company’s stock. Few people realize the risks they are taking until something bad happens. For example, the industrial giant General Electric’s stock lost over 90% of its value over a nine year period ending in 2009. The stock of financial giant UBS dropped nearly 90% between May 2007 and February 2009. These companies survived. There are many household names, like General Motors and K-Mart whose shareholders lost everything.

The affluent worker’s family usually includes one or more children who are expected to go to college. Many of these families have a 529 college savings plan for their children. Most have IRAs and contribute to their company’s 401k plan, but because many don’t have a financial planner they do not have a well thought out strategy for this part of their portfolio.

At a time when many less affluent families are downsizing, many families in this category are either looking to upgrade their homes, buy a bigger home, or buy a second – vacation – home. They may even help their adult children with down-payments.

If you are an Affluent Worker, give us a call and see what we can do for you. If you already have a financial advisor, it may be time to get a second opinion.

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“529” Plans – Keep Your Receipts

A client recently asked me how to make sure that money moved from a 529 college savings account to a student’s checking account would be viewed from an IRS perspective.  What do you need to know if you take money from a 529 plan and put it in your, or the student’s checking account?

The answer can be found on the American Funds website.  Virginia’s 529 plan offers the American Funds and is known as CollegeAmerica.  Here are their answers:

Q: What is considered a qualified higher education expense?

A: Qualified higher education expenses generally include:

  • tuition
  • mandatory fees
  • textbooks, supplies and required equipment
  • room and board during any academic period during which the beneficiary is enrolled at least half-time in a degree, certificate or other program that leads to a recognized educational credential awarded by an eligible educational institution
  • special needs services for a beneficiary with special needs

Paying off a student loan is NOT considered a qualified expense.

Q: Who is responsible for determining that a withdrawal was made for qualified higher education expenses?

A: The account owner or the beneficiary makes the determination and must retain appropriate documentation to show that a withdrawal was made for qualified higher education expenses.

Q: Can my withdrawal be sent to my bank account?

A: Yes. You can have a withdrawal transferred to the checking or savings account linked to the CollegeAmerica account. This transaction may take place online, over the phone, or by mailing us a completed CollegeAmerica Distribution Request Form (PDF). Direct deposit withdrawals requested online are limited to $25,000 per day. Payments will be deposited into your bank account within three business days of the transaction date. Use the FundsLink® form (PDF) to link a bank account. A signature guarantee may be required.

Q: Can my withdrawal be sent to an educational institution?

A: Yes. You can call us to redeem up to $125,000 per day from a CollegeAmerica account and have the money sent directly to an eligible educational institution. We’ll need the name and address of the institution when you call.

Q: When making a withdrawal from my CollegeAmerica account, will it be reported under the Social Security number of the account owner or of the beneficiary for tax purposes? 

A: It depends on to whom the distribution is made payable. If the withdrawal is made payable to the account owner, then the tax reporting will be under the account owner’s Social Security number. If withdrawals are made payable to the account beneficiary or to the school, then the tax reporting will be under the beneficiary’s Social Security number.

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Considering 529 Plans?

Saving for college usually involves putting money aside and a popular vehicle for this is the so-called “529” plan.  Here are five things to consider when deciding on this kind of plan.

  1. Don’t overlook prepaid tuition plans.  If you are fairly certain that you know where the student will be attending college, these may reduce the uncertainty of the amount that will be available for college.  The down side is if the student elects to attend a college that does not participate in the plan, then the credits may only cover a very small portion of the tuition cost — or participants just get their money back.
  2. Beware of the strict rules for changing beneficiaries, which could cause a client to incur taxes or penalties. The new beneficiary must be a member of the family as defined by the IRS, within the same generation (or an earlier one) as the original plan beneficiary, in accordance with gift tax laws.
  3. Even if the student does receive a scholarship for any reason, the dollars in a 529 plan are not wasted. Clients have the option to withdraw from the plan the dollar amount of the scholarship. Taxes will have to be paid on the earnings, but the 10% penalty on non-qualified distributions is waived.
  4. The IRS allows 529 plans to be rebalanced only once per year, turning any further trades into taxable events that may incur penalties too.
  5. Consider target date funds as an alternative to choosing your own asset allocation program.

 

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Funding college for grandchildren

The most popular tax advantaged plans to pay for college education ar called “529 Plans.”  They allow people to put money into tax sheltered accounts which, if they are withdrawn for educational expenses are tax free.

Grandparent-owned 529 accounts offer distinct advantages.  Grandparents concerned about estate taxes can move large sums from their estate, tax-free. They can help trim college costs for their progeny. And there’s security knowing that money in 529 plans can be redeemed, if necessary, often with a modest tax bill.

One other advantage the 529 Plan has is that the grandparent stays in control of the money in the plans to insure that it’s used for the purpose it was intended.   With the high cost of college education today, many grandparents who have the ability will be willing to put money aside for their grandchildren’s education rather than gifts of games or toys.

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Is your college fund investment mix making the grade?

With college costs climbing faster than the general rate of inflation, many parents feel the pressure of saving for their children’s education.  Many parents don’t want to see their children saddled with debt when they graduate from college, but spiraling costs and “easy credit” have result in student loan debt in excess of $1 trillion.

One of the programs that allow parents (and grandparents) to save money for college is a “529 plan.”  A 529 is a tax-advantaged plan operated by a state or educational institution designed to help families set aside funds for future college costs. Created in 1996, it’s named after Section 529 of the Internal Revenue Code.

College savers typically have about 18 years if they start early to save for college.  Finding the right balance of investments in a 529 depends largely on the child’s age and your tolerance for risk.  If the child is young, the focus should be on growth and growth-an-income funds according to experts.  As the child gets older, the portfolio should become more conservative since there is less time to recover from a market downturn.

Each state sponsors its own 529 plan which differ in the investments they offer.  Some states also offer a modest tax benefit to those who contribute to 529 plans.  For more details, consult your RIA or check your state’s website  for more information.

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