college education savings en-US Rethinking the 529 College Savings Plan Strategy <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/rethinking-the-529-college-savings-plan-strategy" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="" alt="graduate and parents" title="graduate and parents" class="imagecache imagecache-250w" width="250" height="166" /></a> </div> </div> </div> <p>For years we've been plowing money into 529 plans for our children (after, of course, contributing to our <a href="" title="The 10-Step Staircase to a Comfortable Retirement">retirement</a> accounts as well), knowing how painful it's going to be 10-15 years out when we start getting those tuition bills. Generally, I've always been a strong proponent of relying heavily on stock market returns over long periods of time since they tend to outperform all other asset classes in periods of 10 years or longer (with 2000-2010 being a notable exception). As such, we have our 529 plan portfolios set up to invest in the most aggressive stock portfolios I could find, with the intention of shifting gears into more conservative stock/bond mix portfolios as the kids reach their teenage years in order to protect the principal in the event of a downturn like what we saw in 2008 and 2009. However, I'm starting to rethink this approach.</p> <h3>529 Investing &mdash; Buying Tuition Credits or Investing in Stocks</h3> <p>The reason I'm rethinking my strategy has little to do with the market downturn in 2008 and 2009. I'm not easily influenced by &quot;the recency effect,&quot; and I don't change long-term strategies unless there's a game-changing definitive driver. Rather, the input that's making me rethink our strategy is the trajectory of college tuition costs and the prospect that there's no relief in sight. (See also: <a href="" title="Beyond Tuition: Helping Out With College Expenses">Beyond Tuition: Helping Out With College Expenses</a>)</p> <p>The most recent <a href="">survey of college tuition costs</a> from The College Board indicates that for the 2010-2011 school year, in-state tuition and fees will rise 7.9%, a staggering number. Private schools will see their costs increase 4.5%, but being mindful that private schools are generally 3-5 times more expensive than a top state school (and hence prohibitively expensive for us to fund fully), it's the state-school tuition hike that we're paying close attention to. Debt-burdened state budgets are facing an uphill battle, confronted with interest payments coming due mixed with declining tax revenues from a stagnant economy. I'd like to be more optimistic, but the pragmatist in me views this as a longer-term issue with the net result being continued lack of funding for public universities. As a result, it won't suprise me if we continue to see hikes of 7-9% for years to come.</p> <h3>Changing Strategy &mdash; What if I Guess Wrong?</h3> <p>By having prepared, and either saving a hefty amount in the 529 plan in a stock/bond mix or having purchased several tuition credits in advance, at least we will have taken a step in the right direction, no matter which option turns out to be the better investment. However, if it turns out that stocks average 2% or 12% over the next 15 years, buying tuition credits in advance will have either looked like a genius move or an overly conservative lost opportunity. In order to have it both ways, I'm actually going to look to start a new 529 plan to purchase tuition credits while retaining the aggressive market-based portfolio in my other plan. This way, I've mitigated my risk substantially. As far as weighting, I think I may start funneling money more heavily toward the credit option because the chances of college tuition costs dropping dramatically over time seem slim, as does the prospect of stocks having &quot;above average&quot; market performance, given that we're coming off a massive 75% gain from the pivot bottom in March 2009, and we're likely looking at very low single-digit GDP growth for years.</p> <h3>Multiple 529 Plans Are Allowed</h3> <p>Since most 529 plans don't have state residency requirements, you can usually have accounts with multiple state plans. Since I started with the Ohio savings plan due to their portfolio selection and low fees, I can actually do a state tuition credit plan in my home state. So, legally and practically speaking, my plan is achievable.</p> <p>By buying credits each year that are expected to increase at 8% or more, that's essentially my &quot;investment return.&quot; What makes, say, an 8% return on college tuition credits so much more attractive than an 8% return in stocks is the lack of volatility. While stocks will continue to see-saw up and down with no guarantee of beating 8%, college tuition increases over the years. Thus buying tuition credits is the equivalent of earning a very high &quot;risk-free return,&quot; which is presently in the very low single-digits for savings, CDs, and Treasury bonds. The intangible risk we're already taking on is that we'll save too much if one or more of our children doesn't go to college. Fortunately, there's ample flexibility built into 529 plans to redistribute savings to other family members or withdraw the money with a penalty as a last resort.</p> <p><em>What's your approach to 529 plan savings?</em></p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="">Darwins Money</a> of <a href="">Wise Bread</a>, an award-winning personal finance and <a href="">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="">The 9 Best State 529 College Savings Plans</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="">5 Creative Uses for a 529 Plan</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="">20 Places to Buy or Rent Textbooks</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="">20+ Freebies for College Students</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="">10 Surprising Ways a College Education Will Improve Your Life</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Education & Training Investment 529 plan college college education savings college planning saving for college saving strategies Thu, 04 Nov 2010 12:00:09 +0000 Darwins Money 277778 at Certainties: Death, Taxes, And Change <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/certainties-death-taxes-and-change" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src=" and sky.jpg" alt="clouds moving and weather changing" title="clouds moving and weather changing" class="imagecache imagecache-250w" width="250" height="172" /></a> </div> </div> </div> <p>My best tax advice: keep up with tax laws. You don’t have to become a tax expert but learn enough to 1) plan your strategies and 2) ask the right questions of your CPA if you choose to hire one. Don’t let current tax laws rule your planning decisions (<em>why? because they’ll change</em>) but be aware of tax implications for generating income and taking deductions. </p> <p>When my youngest son was born in early 1997 (before the <a href="" title="">Taxpayer Relief Act of 1997</a> - PDF), the tax-advantaged way to save for his college education was through a UTMA/UGMA account. Did caring for a baby and tending to his older brother distract me from keeping up with changes in IRS legislation? Yes! Meanwhile, before my child finished elementary school, tax laws relating to college education savings changed three times! </p> <h4>College Education Savings</h4> <p><strong>My Plan A: UTMA/UGMA</strong> (Uniform Transfer to Minors Act/Uniform Gifts to Minors Act). I set up an account in my son’s name so that unearned income (capital gains on investments) would be taxed at his rate, which typically would be lower than mine. The upside to this arrangement was the lower tax liability; the downside was that UTMA/UGMA investments would be classified as his assets when he applied for financial aid. (Note: assets in these accounts are to be used for the child but not necessarily designated for education.)</p> <p><strong>My Plan B: Coverdell Education Savings Account</strong> formerly known as Education IRA. The Education IRA (now <a href="" title="">Coverdell ESA</a>) and Qualified Tuition Programs (generally called 529 plans in reference to the section of IRS code referring to these programs) were introduced in late 1997. The Coverdell allows me to set aside money for my children’s education and receive a tax deduction of up to $2,000 per year (note: there are income restrictions and contribution caps on this savings mechanism). Capital gains on investments held are not taxed and distributions for qualifying expenses are tax-free. Depending on the classification of the account when opened, a Coverdell may be treated as a parental asset or a child’s asset when he applies for financial aid. </p> <p><strong>My Plan C to complement Plan B: Qualified Tuition Programs</strong> commonly known as <a href="/529-plans-for-college-expenses-what-s-cool-and-what-s-quirky" title="">529 Plans</a>. These have been around a while but just recently (January 2007), tax advantages associated with the plans have been made permanent through The Pension Protection Act of 2006. No tax deduction is available with these accounts though annual contribution limits (without incurring gift taxes) are much higher and there are no income restrictions. No taxes are incurred on investment gains and money can be taken out tax free to pay for allowable educational expenses. Accounts can be owned by children, parents, and even grandparents with varying financial aid implications.</p> <h4>Retirement Savings</h4> <p>According to the <a href="" title="">Legislative History of IRAs</a>, the tax law allowing Individual Retirement Accounts (IRAs) were introduced in 1974. Actually, I thought that President Reagan had created them in 1981 though really what happened was they became available to a bigger group of people. I found it odd that the same administration that allowed taxpayers to contribute to IRAs then added restrictions. Here’s a rundown on some of the legislative changes: </p> <ul> <li>1974 – Those not covered by a qualified employer-based retirement plan can contribute to (and receive a tax deduction for) a traditional IRA by up to $1,500.</li> <li>1978 – SEP-IRA (Simplified Employee Pension Plan-IRA) is introduced for small businesses (primarily) and the self-employed.</li> <li>1981 – All taxpayers and those employed under 70½ years old can contribute to (and receive a tax deduction for) a traditional IRA by up to $2,000 and put in $250 for a nonworking spouse.</li> <li>1986 – Tax deduction on traditional IRAs is phased out for higher-earning workers covered by an employment-based retirement plan or whose spouse is covered.</li> <li>1997 – Roth IRA is introduced that allows taxpayers (under certain income restrictions) to save for retirement while avoiding capital gains on investment trades and avoiding taxes on withdrawals.</li> <li>2000s – Contribution limits and income restrictions keep changing!</li> </ul> <h4>Interest Deductions</h4> <p>Interest on consumer loans (credit cards, auto loans) used to be tax deductible but those deductions were phased out in the 1980s. Mortgage-based loans retained the interest deduction and, based on my observations, home equity loans and home equity lines of credit became more and more popular. For an entertaining, informative look at interest deductions, specifically the public policy behind mortgage interest deductions, see <a href="" title="">“Who Needs the Mortgage-Interest Deduction?”</a> (<em>New York Times</em>) by Roger Lowenstein. </p> <h4>Capital Gains on Primary Residences</h4> <p>Once upon a time, homeowners could avoid capital gains tax on the sale of their primary residence <strong>one time in a lifetime,</strong> unless they plowed those profits right back into another home purchase. Now, homeowners can get this deduction as many times as they&#39;d like (with no capital gains tax due on profits $250,000 and less) according to a article on <a href="" title="">Capital Gains Home Sale Tax Break</a>. </p> <h4>Section 179 Deduction for Business Owners</h4> <p>When I first started my business, I was thrilled to be savvy enough about tax laws in general and the Section 179 deduction in particular to know that I could expense, rather than depreciate, the cost of fixed assets (my computer for example). </p> <p>To illustrate the changes in tax law, at one time, the Section 179 deduction had a cap of a few thousand dollars (that is if you bought a computer for $2,000 and the Sec. 179 cap was $5,000, then you could take a full deduction for the cost of the computer rather than spreading its cost over 5 years and taking $400 deductions each year). For more on this fascinating topic, see <a href="" title="">Section 179 Tax Deductions</a>. </p> <p>A few weeks ago, I was reading a personal finance article and the topic of Section 179 deductions was mentioned. When I saw the dollar amount that the author said you could deduct, I was sure it was a misprint, most likely a misplaced comma. I did some research and discovered that in 2008, a business owner can make a capital investment of $125,000 and deduct the full amount. Amazing! Apparently, <a href="" title="">a major increase in the deduction took place in 2003</a>, when the limit was raised from $25,000 to $100,000. It looks like this generous deduction is available through 2009. </p> <h4>Long-Term Capital Gains on Investments</h4> <p>The tax rate on long-term capital gains is typically lower than ordinary income rates, varying from 5% to 28% depending on income levels for the past several years. In 2008, however, <a href="" title="">lower-earning taxpayers will be exempt from capital gains taxes</a> (that&#39;s <strong>ZERO</strong> on long-term assets such as equity investments but not counting collectibles and small business stock). According to, &quot;To qualify for the zero rate in 2008, a married couple must make no more than $65,100 in taxable income; single filers earning $32,550 or less will pay no tax on their sales of assets they&#39;ve owned for more than a year.&quot; This deal is available until 2010 unless, of course, tax laws change again. (Warning: long-term capital gains generated by the sale of investments are included in taxable income). </p> <p>Coasting along with financial vehicles and investment strategies aligned with outdated tax laws may be dangerous. Stir in frequent changes to your personal circumstances and you’ll cook up some not-so-great decisions. </p> <p><em>Note: I am not a tax expert or CPA, so please consult the IRS or a tax professional in regard to tax questions. I hope this post has helped you figure out what some of those questions should be.</em></p> <p><em>This post is a part of the <a href="">MoneyBlogNetwork Group Writing Project</a> focusing on taxes.  Check out other great tax articles from MBN: </em></p> <ul> <li>Consumerism Commentary: <a href="">Is it Better to Receive a Tax Refund or Owe the IRS?</a></li> <li>Five Cent Nickel: <a href="">The Value of Doing Your Own Taxes</a></li> <li>Free Money Finance: <a href="">My Best Piece of Tax Advice</a></li> <li>Get Rich Slowly: <a href="">Mr. Lawyer and Mr. Accountant Chat About Taxes </a></li> <li>Mighty Bargain Hunter: <a href="">A tax tip from my pastor</a></li> <li>No Credit Needed: <a href="">A Taxing Situation - My Biggest Financial Regret </a></li> </ul> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="">Julie Rains</a> of <a href="">Wise Bread</a>, an award-winning personal finance and <a href="">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-2"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="">4 Ways Your IRA Beats Your Savings Account</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="">7 Penalty-Free Ways to Withdraw Money From Your Retirement Account</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="">8 Steps to Starting a Retirement Plan in Your 30s</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="">Avoid the Tax Season Rush With These Early Prep Steps</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="">Winter Is Coming: Make These 6 Money Moves Now</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Taxes capital gain on primary residence college education savings interest deductions IRAs tax law changes Mon, 03 Mar 2008 14:50:13 +0000 Julie Rains 1872 at