Tips on trying to meet two great financial goals at once

Saving for retirement is a must. Saving for college is certainly a priority. How do you do both at once?

Saving for retirement should always come first. After all, retirees cannot apply for financial aid; college students can. That said, there are ways to try and accomplish both objectives within the big picture of your financial strategy.

As a first step, whittle down household debt. True, some debts are not easily reduced, and some are worth assuming, but many are byproducts of our wants rather than our needs. NerdWallet, a personal finance website, notes that the average U.S. household now carries credit card debt of more than $15,000. Less revolving consumer debt means more money available to potentially direct toward a retirement fund and a college fund.1

See if your children have a chance to qualify for need-based financial aid. Impossible, you say? You may be surprised. You can have one million dollars in your IRA or your workplace retirement plan and not impact your child’s potential for need-based financial aid one iota. That is because those retirement accounts are not considered parental assets in the calculation of the Expected Family Contribution (EFC) that factors into determining a student’s need.2

That “need” is determined through a basic equation: the cost to attend the school minus the EFC equals the financial need of the student. So, in theory, the lower you can keep your EFC, the more need-based financial assistance your student deserves.2

The Free Application for Federal Student Aid (FAFSA) and College Board CSS/Financial Aid PROFILE use slightly different calculation methods to determine the EFC. Both student and parental assets factor into the calculation. What usually counts most is the income of the parent(s), minus some taxes, tax deductions, and allowances. Capital gains from investment accounts can qualify as “parent income,” and so can Roth and traditional IRA distributions.2,

Money held inside a qualified retirement plan, though, is not included in need analysis formulas. Life insurance cash values rarely count. Most Coverdell ESAs and UGMA and UTMA accounts represent assets owned by the child, and child assets receive 20% weighting in EFC calculations (parental income receives up to 47% weighting). Parental assets, as opposed to parental income, are weighted at no more than 5.64% yearly. Cash and brokerage accounts are considered parental assets; so are student-owned 529 plans. Even real estate investments can be defined as parental assets.3,

The CSS PROFILE form does inquire about retirement account values and life insurance cash values, but they are not factored into the EFC calculation. They may be considered if a college financial aid officer needs to make an assessment of the overall financial health of a household pursuant to a financial aid decision.2

What if your kids have little or no chance to receive financial aid? Then scholarships and grants represent the primary routes to easing the tuition burden. So save for retirement as well as you can and save for college in a way that promotes the best after-tax return on your investment.

Feel free to max out your workplace retirement plan contribution (and get the match from your employer). If you do so, the impact on your child’s eligibility for college aid would be negligible. If you have a Roth IRA or permanent life insurance policy, think about the ways they can be used in college planning as well as retirement and estate planning. You may be able to tap a life insurance policy’s cash value to pay some college costs, and distributions from a Roth IRA occurring before age 59½ are exempt from the standard 10% early withdrawal penalty if they are used for qualified educational expenses.5

Even if your household is high-income, look at the American Opportunity Tax Credit. The AOTC is a federal tax credit of up to $2,500 per year that can be applied toward qualified higher education expenses. It is better than a federal tax deduction, as it lowers your federal income tax dollar-for-dollar. If you are married and you and your spouse file jointly, you are eligible to claim the AOTC if your modified adjusted gross incomes total $180,000 or less. If you are a single filer, you are eligible if your modified adjusted gross income is $90,000 or less. Phase-out ranges do kick in at $160,000 for joint filers and $80,000 for single filers.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
Citations.
1 – dailyfinance.com/2016/03/23/8-financial-decisions-youll-regret-forever/ [3/23/16]
2 – forbes.com/sites/troyonink/2016/02/29/balancing-act-strategically-saving-for-college-and-retirement/ [2/29/16]
3 – money.usnews.com/money/blogs/the-smarter-mutual-fund-investor/articles/2016-03-18/strategies-to-maximize-college-savings-and-financial-aid [3/18/16]
4 – finaid.org/savings/accountownership.phtml [4/6/16]
5 – irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-Tax-on-Early-Distributions [2/22/16]
6 – irs.gov/Individuals/AOTC [12/8/15]

 

It may not be what you think. 

How much will your family end up paying for college? Your household’s income may have less influence than you think – and some private colleges may be cheaper than you assume.

Private schools sometimes extend the best aid offers. Yes – it is true that the more money you earn and the more assets you have in a tax-advantaged college savings plan, the harder it becomes to qualify for financial aid. Merit aid is another matter, however; most private colleges and universities that boast major endowment funds support healthy, merit-based aid packages.

These scholarships and institutional grants – awarded irrespective of a family’s financial need – can reduce the “sticker shock” of a college education. A study from the National Association of College and University Business Officers found that grant-based aid effectively cut tuition and fees by an average of 48.6% in the 2015-16 academic year. If your child can fit into the top quarter of a college’s student population in terms of grades or achievement, merit aid may be a possibility. A college that might be your student’s second or third choice might offer him or her more merit aid than the first choice.1

Relatively speaking, some universities demand more from poorer families. An analysis published in 2016 by New America noted 102 U.S. colleges with endowments of greater than $250 million that charged the poorest students more than $10,000 in tuition for the 2013-14 academic year. Out of more than 1,400 colleges and universities New America studied, hundreds expected households earning $30,000 or less per year to pay the equivalent of half or more of their earnings on higher ed.2

The state legislature of New York made a striking move this spring. It decided to waive tuition for many full-time undergraduate students at both 2-year and 4-year public colleges and universities within its borders. To qualify for this tuition break, households had to earn less than $100,000 annually – and students had to pledge to work and reside in New York state after they earned their degrees. (The annual earnings threshold will presently rise to $125,000.) Families and their students will still have to pay fees (and if needed, room and board).3

New York is not the only state making such an offer. Programs like the Tennessee Promise and the Oregon Promise have made community college tuition free in those states. Delaware and Minnesota have adopted similar plans, and Rhode Island and Arkansas also have like policies in the works. Any little tuition break helps, especially in these times. According to the Institute for College Access and Success, about 70% of college graduates in 2015 owed a great deal of money; their average education debt was $30,100.4

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
Citations.
1 – usnews.com/education/best-colleges/paying-for-college/articles/2016-07-07/strategies-for-students-too-rich-for-financial-aid-too-poor-for-college [7/7/16]
2 – washingtonpost.com/news/grade-point/wp/2016/03/16/these-colleges-expect-poor-families-to-pay-more-than-half-their-earnings-to-cover-costs/ [3/16/16]
3 – nytimes.com/2017/04/28/your-money/paying-for-college/as-college-deadlines-near-families-wonder-what-they-can-pay.html [4/28/17]
4 – newsweek.com/free-college-tuition-new-york-bernie-sanders-582345 [4/11/17]

 

You can plan to meet the costs through a variety of methods.

 

How can you cover your child’s future college costs? Saving early (and often) may be the key for most families. Here are some college savings vehicles to consider. 

529 college savings plans. Offered by states and some educational institutions, these plans let you save up to $15,000 per year for your child’s college costs without having to file an I.R.S. gift tax return. A married couple can contribute up to $30,000 per year. (An individual or couple’s annual contribution to a 529 plan cannot exceed the yearly gift tax exclusion set by the Internal Revenue Service.) You can even frontload a 529 plan with up to $75,000 in initial contributions per plan beneficiary – up to five years of gifts in one year – without triggering gift taxes.1,2

529 plans commonly feature equity investment options that you may use to try and grow your college savings. You can even participate in 529 plans offered by other states, which may be advantageous if your student wants to go to college in another part of the country. (More than 30 states offer some form of tax deduction for 529 plan contributions.)1,2

Earnings of 529 plans are exempt from federal tax and generally exempt from state tax when withdrawn, so long as they are used to pay for qualified education expenses of the plan beneficiary. If your child doesn’t want to go to college, you can change the beneficiary to another child in your family. You can even roll over distributions from a 529 plan into another 529 plan established for the same beneficiary (or another family member) without tax consequences.1

Grandparents can start a 529 plan (or other college savings vehicle) just like parents can. In fact, anyone can set up a 529 plan on behalf of anyone. You can even establish one for yourself.1

These plans now have greater flexibility. Thanks to the federal tax reforms passed in 2017, up to $10,000 of 529 plan funds per year may now be used to pay qualified K-12 tuition costs.2,3

Coverdell ESAs. Single filers with modified adjusted gross income (MAGI) of $95,000 or less and joint filers with MAGI of $190,000 or less can pour up to $2,000 annually into these accounts, which typically offer more investment options than 529 plans. (Phase-outs apply above those MAGI levels.) Money saved and invested in a Coverdell ESA can be used for college or K-12 education expenses.3

Contributions to Coverdell ESAs aren’t tax deductible, but the accounts enjoy tax-deferred growth, and withdrawals are tax free, so long as they are used for qualified education expenses. Contributions may be made until the account beneficiary turns 18. The money must be withdrawn when the beneficiary turns 30, or taxes and penalties will occur. Money from a Coverdell ESA may even be rolled over into a 529 plan.3,4

UGMA & UTMA accounts. These all-purpose savings and investment accounts are often used to save for college. They take the form of a trust. When you put money in the trust, you are making an irrevocable gift to your child. You manage the trust assets until your child reaches the age when the trust terminates (i.e., adulthood). At that point, your child can use the UGMA or UTMA funds to pay for college; however, once that age is reached, your child can also use the money to pay for anything else.5

Whole life insurance. If you have a permanent life insurance policy with cash value, you can take a loan from (or even cash out) the policy to meet college costs. Should you fail to repay the loan balance, obviously, the policy’s death benefit will be lower.6,7

Did you know that the value of a life insurance policy is not factored into a student’s financial aid calculation? If only that were true for college savings funds.6

Imagine your child graduating from college, debt free. With the right kind of college planning, that may happen.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
Citations.
1 – irs.gov/newsroom/529-plans-questions-and-answers [2/20/18]
2 – cnbc.com/2017/12/29/tax-bill-529-plan-provision-helps-families-save-on-school-costs-taxes.html [12/29/17]
3 – forbes.com/sites/katiepf/2018/04/13/yes-the-coverdell-esa-still-exists-and-heres-why-you-should-care [4/13/18]
4 – irs.gov/taxtopics/tc310 [3/1/18]
5 – finaid.org/savings/ugma.phtml [5/8/18]
6 – collegemadesimple.com/whole-life-insurance-vs-529-college-savings-plans/ [5/9/18]
7 – marketwatch.com/story/a-529-roth-ira-insurance-whats-best-for-college-savings-2017-03-22 [5/13/17]

Do it smartly, without the all-too-common missteps.

 According to Sallie Mae, U.S. families with one or more college students spent an average of $24,164 on tuition, housing, and linked expenses in 2015. That was 16% more than in 2014.1

Statistics like these underline the importance of saving and investing to fund a university education, but that effort has become optional to many. In its annual How America Saves for College survey, Sallie Mae found that only 48% of U.S. families with at least one child younger than age 18 were saving for college at all. Among those that were saving, the average 2015 amount was $10,040 – the lowest figure in the 7-year history of the survey. It is little wonder that 22% of college costs are covered by either parent or student borrowing.1,2

If you want to build a college fund, what should you keep in mind? What should you do? What should you avoid doing?

First, save with realistic assumptions. Outdated perceptions of college expenses can linger, so be sure to replace them with current data and future projections.

Consider a tax-advantaged account. Remarkably, Sallie Mae’s 2015 survey found that just 27% of households saving for higher education had chosen 529 plans or similar vehicles. Nearly half of the households building college funds were simply directing the money into common savings accounts, giving those dollars no chance to significantly grow or compound through equity investment.

If you open a tax-advantaged account, fund it adequately. Some states have established very low contribution minimums for their college savings plans. That does not mean your contribution should be at or near that level.

Explore your options with regard to these accounts. You can participate in any number of state-operated college savings plans, not just the one in your state. Another state’s plan may offer you different tax breaks or incentives. Many of these plans now offer more investment choices than they once did, in addition to the traditional age-based options. You can also change the way you invest assets in these plans, sometimes as often as twice a year.3

Think twice about opening a custodial account. Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts were fairly popular at one time. About 10% of parents saving for college still use them, but they have distinct drawbacks. They do not offer tax-advantaged growth, and until the child turns 24, account earnings above a certain threshold are taxed at the parents’ highest marginal rate instead of the child’s lower rate. The money inside the account is considered an irrevocable gift and an asset owned by the student – a real demerit when trying to claim financial aid. Also, when the student reaches the “age of majority” (typically 18 or 21), the money can be used for anything the student desires.4,5

Keep your retirement savings earmarked for retirement. In a 2014 Sallie Mae report, an alarming 30% of parents saving for higher education expenses said that their retirement savings would be their number one resource to pay college costs. Is this idea generous, or merely foolish? Sensibly speaking, eliminating your debt, starting a rainy day fund, and building up your retirement savings should all take precedence over amassing college savings.6

Set a specific savings goal – perhaps with certain schools in mind. Some parents build college savings without any real goal of how much to save, not knowing the university their children will attend. Defining the destination should be part of the strategy. It is perfectly okay to tell your children that you will be saving $X for college by the time they are 18, and that they may have to strive for scholarships and grants if they want to go to especially costly universities.6

The biggest blunder is not saving for college at all. As tuition costs continue to rise, getting any kind of head start on funding a university education is a must on a family’s financial to-do list. While financial aid is certainly available, it rarely absorbs 100% of college costs.

If you save $300 per month for college for 10 years and that money earns 7% a year, your college fund will grow to $52,228 a decade from now. If you borrow that much in Stafford Loans, you will owe about $600 per month for the next ten years and pay about $20,000 in interest along the way. A notable contrast and an argument for building a college fund.6

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
Citations.
1 – news.salliemae.com/research-tools/america-pays-2015 [2/4/16]
2 – news.salliemae.com/research-tools/america-saves-2015 [2/4/16]
3 – tinyurl.com/hyroj6n [6/9/15]
4 – time.com/money/4155733/the-3-biggest-mistakes-parents-make-in-saving-for-college/ [12/22/15]
5 – franklintempleton.com/investor/products/goals/education/ugma-utma-accounts?role=investor [2/3/16]
6 – forbes.com/sites/learnvest/2015/02/24/4-common-college-savings-mistakes-many-parents-make/ [2/24/16]