Tag Archives: college degrees

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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The financial problems of the young

A recent article in the Wall Street Journal announced that Younger Generation Faces a Savings Deficit.  The economy has not been kind to those who left school in the last decade.

Adults under age 35—the so-called millennial generation—currently have a savings rate of negative 2%, meaning they are burning through their assets or going into debt, according to Moody’s Analytics. That compares with a positive savings rate of about 3% for those age 35 to 44, 6% for those 45 to 54, and 13% for those 55 and older.

 

The recession actually increased everyone’s savings rate. The young are falling behind. One reason is that the cost of higher education has grown much more rapidly that most other services. And it’s becoming increasingly necessary for students to take on debt in order to afford to attend college.

But there is another factor involved.  It’s a fact that young people are badly educated about financial issues.

Some, however, have the means to save and invest, but opt not to. Curtis Holland, a 30-year-old software developer in Arlington, Va., has held stable jobs since graduating in 2007, and—unlike the majority of millennials—has a retirement account. But he has avoided other types of investments as “too complicated.”

“I don’t know the risks,” he said. “I don’t know the benefits.”

We wrote a series of posts about the young and their attitude toward investing for the future. They could benefit from sage financial advice if they are willing to seek it. If you are in this group, or know someone who is, please contact us. We may be able to help.

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Don’t let college costs destroy your retirement

A recent headline in Financial Advisor magazine read: Parents Say Retirement Imperiled By College Costs. The cost of raising children can be daunting. Recent reports tell us that the total cost of raising a child until they become an adult will be about $245,340. According to the USDA the biggest expense was housing, the second largest was education and child care.

Fifty-four percent of surveyed parents said they fear their retirement would be jeopardized by helping their children pay for college, according to a study by Citizens Financial Group.

About the same percentage are worried college costs will harm their overall financial stability.

The average cost of college currently ranges from $25,000 to over $50,000 per year and is rising rapidly. The cost has caused an explosion in the amount of student loans, with negative consequences for the graduates and the many who don’t graduate but still have to pay off the loans. It has also given rise to innovation in the delivery of education, including on-line courses that can be taken for college credit without having to move into a residential college.

Given the need for the credentials that college provides, it’s wise to use time to your advantage and begin when your child is young. The most versatile way of putting money aside for education is the “529” plan. The “529” allows the parent (or grandparent) to put money aside in a tax-deferred account and allow it to grow. When used for legitimate educational expenses the money can be taken free of tax.

For more information, contact us.

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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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Top 10 Best Value Colleges

A column in Financial Advisor caught my eye.  For those  who have children who plan to go to college, this may be worth reading.

For clients with college bound children, a study by The Princeton Review ranks both public and private colleges and universities to determine the ones that offer the best academics at an affordable cost.

Based on criteria including academics, costs and financial aid, the study also considered the percentage of graduating seniors who borrowed from any loan program and the average debt those students had at graduation.

The following public colleges are the top 10 of 75 , with No. 1 offering the highest value.

No. 10  State University of New York at Binghamton (Binghamton University)

No. 9 Truman State University

No. 8  College of William and Mary

No. 7  University of Florida

No. 6  University of California—Los Angeles

No. 5  University of Michigan—Ann Arbor

No. 4  North Carolina State University

No. 3  University of Virginia

No. 2  New College of Florida

No. 1  The University of North Carolina at Chapel Hill

Whether you agree or disagree with these rankings, the cost of attending college has rocketing into the stratosphere and sending your children to college requires a plan well in advance of their matriculation.  A few things to keep in mind is that in-state tuition is often a fraction of the cost of sending your son or daughter out-of-state.  Setting up a college savings plan is always a good idea since it allows the college funds to grow tax-free. Taking out a college loan has become so popular that today, the college loan debt exceeds a trillion dollars.  However, college loans cannot be discharged through bankruptcy, if the student does not graduate (and many do not) the loan still needs to be paid, and college loan payments often extend for decades after the student has left school.

 

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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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Four in five investors provide financial support for adult children or parents,

The UBS survey of high net worth investors found that most are supporting their children and their parents.

Unemployment, the economy and aging parents make concerns about the financial situation of family members significant. In fact, investors’ second-biggest personal finance concern is the financial situation of their children/grandchildren (58% of those with children are concerned,  behind being able to afford the healthcare and support needed in old age). Investors are providing a high degree of financial support to family members and feel good about doing so. Four in five investors with adult children ages 18-39 are financially supporting other family generations in some way. Two in three are supporting these adult children, three in four are supporting their grandchildren, and for those with parents over 70, 28% are financially  supporting them.

A significant number of investors are providing substantial financial help, including education funding, paying for large purchases and sharing their home. Even among affluent and wealthy investors, one in five has another family generation (most commonly their adult children) living at home. For investors who are providing seemingly minor financial support—e.g., paying for phone bills, groceries, etc.—even this can have a real impact on their finances over time.

The current jobs picture means that many recent college graduates are moving back in with their parents.

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A Smart Investor Would Skip the M.B.A.

From the Wall Street Journal

Imagine that you have the money to get a Harvard MBA.  There are two options open to you: go to Harvard, or invest in yourself.

Imagine that you have been accepted to Harvard Business School. The ivy-covered buildings and high-powered faculty whisper that all you need to do is listen to your teachers, get good grades and work well with your peers. After two years, you’ll emerge ready to take the business world by storm. Once you have that degree, you’ll have it made.

But don’t kid yourself. What matters exponentially more than that M.B.A. is the set of skills and accomplishments that got you into business school in the first place. What if those same students, instead of spending two years and $174,400 at Harvard Business School, took the same amount of money and invested it in themselves? How would they compare after two years?

If you want a business education, the odds aren’t with you, unfortunately, in business school. Professors are rewarded for publishing journal articles, not for being good teachers. The other students are trying to get ahead of you. The development office is already assessing you for future donations. Administrators care about the metrics that will improve your school’s national ranking. None of these things actually helps you learn about business.

Consider what you could do instead with that $174,400. The first step should be to move to a part of the country that supports your interests. If that’s film, move to Los Angeles. Technology, San Francisco. Oil, Houston. You could live decently in these cities for $3,000 per month. Over the course of two years, that still leaves you $100,000 to invest in yourself.

To get the education, the author recommends “OpenCourseWare or Coursera. You’ll get to watch the same lectures, but for free.”  And how’s this as an alternative?

Consider investing in hard skills such as programming. Dev Bootcamp, a 10-week training course in programming, costs only $12,200. It takes people with no experience and teaches them how to code. In 2012, 88% of its graduates got job offers at an average starting salary of $79,000.Those outcomes are far better than for students fresh out of M.B.A. programs. According to Payscale.com, the average starting salary for M.B.A. graduates with less than one year of experience was $46,630 in 2012. Dev Bootcamp offers a much better return on investment.

By the way, if you can’t get in to Harvard, going to another school is an even worse investment!  Put yourself in the shoes of someone looking to hire.

Instead of relying on business school to succeed, deliberately practice the skills necessary to become a master in your chosen field. Build a network that supports your professional aspirations. Work on projects that show you can have an impact in the real world, dealing with practical problems.

Most of all, put yourself in the shoes of your future boss and imagine whom you would rather hire: the candidate who built a profitable business over the course of two years, or the candidate who sat in lectures and reviewed case studies to get a degree?

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Paying it forward

The December 2012 issue of Financial Planning featured an article about funding a 529 college savings plan for grandchildren which can offer estate tax benefits for grandparents plus feel-good rewards.

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.

Questions about education planning?  Contact us.

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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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