The Diversified Blog

A wealth management blog dedicated to creating a long lasting sustainable retirement.

College Planning -- It's About More Than Money

Choosing a way to save for your child's education expenses may be your family's first college planning decision, but it certainly won't be the last. From making that first deposit, to selecting a college, to choosing a course of study, you and your child will be making choices that can have a financial impact for years to come.

How Will You Save Enough?

Starting to save for college when your child is young may give you the best chance for accumulating a significant amount of money. Section 529 plans -- prepaid tuition plans designed to lock in today's tuition rates at eligible institutions -- and college savings plans, which permit contributions to an investment account set up to pay qualified education expenses, are popular tax-favored options. 1Coverdell Education Savings Accounts also offer tax advantages, although contribution limits are relatively low.2 Custodial accounts set up under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) are another option to consider.

The Financial Aid Game

By the time college gets close, your family's life may seem to be ruled by deadlines. There are different deadlines for college applications, scholarship applications, and the FAFSA (Free Application for Federal Student Aid) submissions. Applying well in advance of the deadlines can boost your child's chances of getting accepted to the school of his or her choice and receiving a favorable financial aid package. If you wait too long, spots may already be filled and aid money given to students who applied earlier.

Dissecting Aid Packages

Typically, aid packages consist of grants, loans, work study, and an expected family contribution. When reviewing aid offers, compare apples to apples. Start with the cost of tuition at each school. Then look at how much of the aid package consists of loans that will have to be repaid. Make sure non-tuition costs, such as room and board, books, equipment, transportation, and fees, are included in the school's cost estimates. It's a good idea to do your own cost estimate and use that as your basis for comparing offers.

The Right Fit

As important as it is, money shouldn't be the only criterion used when choosing a college. Lower cost of attendance or generous financial aid is most valuable if the college is a good fit for your child's abilities, personality, and goals. Choosing the wrong college could cost a bundle in lost opportunities if your child is unhappy or doesn't feel sufficiently challenged by the curriculum.

Look Toward the Future

A college education is an investment in the future, so parents may want to discuss choosing a course of study that will lead to a career. Talk to your child about the importance of preparing for life beyond college by obtaining the practical skills and knowledge needed to land a job after graduation. By planning ahead, your child may turn his or her interests into a successful career.
 

Sources:

1.  Certain benefits may not be available unless specific requirements (e.g., residency) are met. There also may be restrictions on the timing of distributions and how they may be used.

2.  Internal Revenue Service. The annual contribution limit is $2,000. Taxpayers with modified adjusted gross incomes (MAGIs) of more than $220,000 (for married couples filing a joint tax return) and $110,000 (for singles) may not contribute. For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return.


Required Attribution


Because of the possibility of human or mechanical error by Wealth Management Systems Inc. or its sources, neither Wealth Management Systems Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall Wealth Management Systems Inc. be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content.

© 2016 DST Systems, Inc. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions.


Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail This email address is being protected from spambots. You need JavaScript enabled to view it. .

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Continue reading
335 Hits
0 Comments

Transferring Assets to a 529 Plan

By now most Americans who are saving and investing to pay for college costs have probably heard that so-called 529 college savings plans allow tax-free distributions for qualified education expenses, potentially making them even more attractive and effective than in the past, when they were only tax deferred. Add that tax benefit to other benefits of 529 plans, including high contribution limits, and many families may want to consider taking advantage of the plans.

But don't despair if you have already committed college-earmarked assets to another type of financial vehicle, such as a Coverdell Education Savings Account (formerly Education IRA) or a custodial account for a minor beneficiary. You may be able to transfer assets from either type of account into a 529 plan without triggering taxes or penalties. In addition, the proceeds from the redemption of certain types of U.S. savings bonds can also be transferred to a 529 plan tax free, as a result of the Treasury Department's "Education Bond Program."

Making the Move From a Coverdell

The IRS makes clear in Publication 970, Tax Benefits for Higher Education, that amounts transferred from a Coverdell account to a "qualified tuition program" (IRS lingo for a 529 plan) are viewed as qualified education expenses and are therefore tax free -- as long as the amount of the withdrawal is not more than the designated beneficiary's qualified education expenses.

There are several reasons a college saver may want to take this course of action. For example, to consolidate college assets into a single account with a more generous contribution limit. Whereas Coverdell accounts limit contributions to just $2,000 per beneficiary per year, 529 plans typically allow much higher lifetime contribution limits -- in excess of $200,000 per beneficiary in many states. And unlike Coverdells, 529 plans generally do not impose income limits that restrict the ability of higher-income taxpayers to contribute.

As you take other variables into account, keep in mind that Coverdells and 529 plans are still relatively new, so the legal and procedural precedents for specific strategies may not be well established yet. For example, there is the question of the ownership and control of any money that is transferred from a Coverdell to a 529 plan. By declaring in Publication 970 that "the designated beneficiary of a Coverdell can take withdrawals at any time," the IRS effectively states that the funds in a Coverdell are owned by the beneficiary. If those assets were moved to a 529 plan owned by a parent, however, it could be construed as a transfer of ownership from the beneficiary to the parent. In theory, at least, that could raise legal issues down the road if the parent eventually uses the money for personal reasons or changes the beneficiary of the 529 plan.

It's also important to remember that Coverdells can be used to pay for primary or secondary school costs, whereas 529 plans are limited to college expenses. Consequently, you might want to contribute to a Coverdell and a 529 plan if you need to pay for a primary or secondary education in addition to college.

Relocating UGMA/UTMA Assets

Many 529 plans also accept rollovers from custodial accounts established for minor beneficiaries, such as those created under the provisions of the Uniform Gifts/Uniform Transfers to Minors Act (UGMA/UTMA). Keep in mind, though, that the money in an UGMA/UTMA account belongs to the minor, so any subsequent withdrawals of those assets after a transfer to a 529 plan may only be used for that minor.

Therefore, you are generally prohibited from changing the beneficiary of a 529 plan after assets from that beneficiary's UGMA/UTMA account have been transferred to the 529 plan. Also, the minor will gain full control of the UGMA/UTMA money at age 18 or 21 (depending on the state), which is not normally the case with 529 plans. Keep in mind, too, that contributions to 529 plans must be in cash. As a result, UGMA/UTMA assets would first need to be liquidated, with any capital gains being taxable to the minor.

Back to Basics: An Overview of 529 Plans, Coverdell Education Savings Accounts, and Custodial Accounts

As you begin your search for tax-efficient strategies to pay for college costs, keep in mind that 529 plans, Coverdell Education Savings Accounts, and UGMA/UTMA accounts each offer unique benefits. It's critical that you understand all of them before making a final decision.

Section 529 college savings plans are named after the section of IRS code that created them. They are college- or state-sponsored, tax-advantaged plans that allow individuals to invest in portfolios of stocks, bonds, and cash equivalents. Contribution limits for 529 plans vary from state to state. Distributions made to pay qualified education expenses are tax free. Prepaid tuition plans also fall under Section 529, but for the purposes of this article, the phrase 529 plan refers only to a college savings plan.

Coverdell Education Savings Accounts (formerly known as Education IRAs) allow tax-free earnings on nondeductible contributions of up to $2,000 per year, per student. Coverdell’s can generally hold a variety of investments. They can only be established for a child younger than 18, and the money must be distributed for educational costs before the beneficiary turns 30. Income limits apply: Single filers with modified adjusted gross incomes (MAGI) of more than $110,000 and joint filers with MAGI in excess of $220,000 are not eligible. Qualified withdrawals may be used to fund a primary, secondary, or college education.

An UGMA/UTMA custodial account allows you to establish a savings or investment account in a child's name, with one adult named as custodian. Each parent can contribute up to $14,000 in 2016 without triggering mandatory filing of IRS Gift Tax Form 706 and possible payment of gift taxes. With an UGMA/UTMA account, the first $1,050 per year of unearned income is tax free. For children under 19 (and for children under 24 who are full-time students and whose earned income does not exceed half of the annual expenses for their support), the next $1,050 is taxed at the child's rate. Beyond $2,100, the income is taxed at the parent's or child's rate, whichever is higher.

A Better Bond Strategy?

The third option you may have for a transfer involves cashing in qualified U.S. savings bonds and contributing the proceeds to a 529 plan, in accordance with the guidelines established by the IRS and the Treasury Department's "Education Bond Program." This strategy allows you to avoid the normal taxation of interest earned on U.S. savings bonds.

Only Series EE bonds issued since 1990 and Series I bonds can be used in this manner. To qualify, you need to have been at least 24 years old on the first day of the month in which you purchased the bonds. If the bonds are to be used for your child's education, they must be registered in your name and/or your spouse's name. (The child can be listed as a beneficiary of the bonds, but not as owner or co-owner.) If the bonds are to be used for your own education, they must be registered in your name. If you are married, you must file a joint tax return to reap the benefits of this program.

Work With a Pro

Which 529 transfer strategy makes the most sense in light of your unique situation? Will there be tax benefits or consequences? Before you decide, you should speak with financial and tax advisors who have the knowledge and experience to help assess your entire range of options.


Required Attribution


Because of the possibility of human or mechanical error by Wealth Management Systems Inc. or its sources, neither Wealth Management Systems Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall Wealth Management Systems Inc. be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content.

© 2016 DST Systems, Inc. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions.


Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail This email address is being protected from spambots. You need JavaScript enabled to view it. .

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Continue reading
496 Hits
0 Comments

Let us give you a second opinion

Contact us to schedule a no-cost no-obligation consultation and receive a free special report called Finding the Right Financial Advisor - Seven Questions to Help You Discover Whether a Financial Advisor Is the Right Match for You and Your Family.