September 1, 2017
The average price tag for four years at a private college exceeds $170,000, according to the College Board’s Trends in College Pricing 2014. That’s 17% higher than seven years previously. In fact, rising tuition costs are outpacing inflation at the same time that federal grant aid is lagging behind inflation.
While funding four years of college can be a challenge, research also proves that higher education remains a valuable investment. According to the College Board’s Education Pays 2013, in 2011, women with bachelor’s degrees earned 70% more than women with only high school diplomas; college-educated men earned 69% more than men who graduated from high school but did not have college degrees.
There are a variety of savings vehicles and planning strategies that can help you overcome the financial challenges and reach your education goals. One tax-efficient vehicle is the Coverdell Education Savings Account (ESA), which can be used to pay for college expenses, as well as for the cost of attending qualified K-12 schools.
With a Coverdell ESA, funds have the opportunity to grow tax deferred, and withdrawals used for qualified educational expenses, such as tuition, are tax free. A beneficiary can be anyone under the age of 18 (or older, if qualified as a special needs beneficiary). Any individual (including the beneficiary) may make contributions to a Coverdell ESA, as long as his or her modified adjusted gross income for the year is less than $110,000 ($220,000 for married couples filing joint tax returns). Other features include the following:
- Contribution limits are $2,000, per beneficiary, per year.
- Individuals may contribute to both a Coverdell ESA and a 529 plan for the same beneficiary, without incurring any tax penalties.
- Corporations and nonprofit groups are eligible to contribute to ESAs. Unlike individual contributors, corporations or nonprofit organizations are not subject to earning restrictions.
- Contributions can be made up to the April tax-filing deadline.
- It is permissible to claim either the American Opportunity Tax Credit or the Lifetime Learning Credit in the same year that you take a tax-free distribution from an ESA, provided the ESA distribution is not used for the same expenses for which the credit is claimed.
- In addition, distributions from ESAs may be used to fund the following qualified education expenses:
- Tuition and fees incurred by the beneficiary at any eligible educational institution, including qualified elementary and secondary schools (K-12), as well as qualified post-secondary educational institutions.
- The cost of books, supplies, and equipment, including uniforms, computers, and related technology peripherals (if the computer-related equipment and services are to be used by the beneficiary during any of the years he or she attends school).
- Room and board, if the beneficiary is enrolled at least half-time in an eligible educational institution. Room and board expenses are limited to one of the following: The school’s regular, posted room and board charges for students living on campus, or $2,500 for each year the student is living off campus, but not at home.
By expanding the definition of qualified educational expenses to include primary and secondary education expenses, as well as room and board, the Coverdell ESA is proving to be a welcome addition to the various tax-favored options for saving for educational expenses.
Note: Nonqualified distributions may be subject to an additional 10% federal tax penalty on earnings.
July 21, 2017
What parents need to know about saving for college
If you’re saving for your child’s higher education, you probably have a lot of questions besides “When did college get so incredibly expensive?” One popular savings tool that might puzzle you the most is the 529 Plan.
Started in the late 1980s and operated by states and financial institutions, the 529 College Savings Plan offers tax-advantaged ways to save for various costs of higher education. What else should you know? Here’s a list of commonly asked questions:
What can my child use 529 money for?
The money can pay for qualified expenses such as tuition, fees, books, supplies, computer-related costs and room and board for someone who is at least a half-time student. Pizza, burritos and beer don’t qualify, unfortunately.
How much can I contribute?
The answer is not as straightforward as with an individual retirement account or 401(k) retirement plan. Generally, contributions to a 529 Plan max out at $350,000 per beneficiary.
You also need to remember federal gifting tax laws. A gift of more than $14,000 to a single person in one year incurs gift tax. A 529 allows an individual to potentially contribute up to $70,000 (married couples up to $140,000) tax-free in one year to an account for a beneficiary. There are no age or income restrictions to contribute.
What if our relatives want to contribute?
Family members can either open a 529 account and name your child as the beneficiary or kick into an existing 529 that they don’t own. If your family members contribute to a 529 account that they do own, they receive a state tax benefit if their state offers such a deduction. Opening just one account for the beneficiary and letting your family help fund it is usually simpler.
Why use a 529 over a regular taxable account?
These accounts defer taxes and your contributions grow tax-free as long as you use the funds on the qualified expenses mentioned earlier. This beats paying the government for an after-tax account – but the latter does offer complete flexibility on where and how you can spend the money. A 529 doesn’t.
What if my child gets a full scholarship?
You will not lose scholarship money. You can withdraw from the 529 without penalty, though you do pay taxes on the earnings at the scholarship recipient’s tax rate. You can also use your 529 to pay for expenses that the scholarship doesn’t cover, such as room and board, books and other required supplies.
In addition, you can keep the 529 open with your child as beneficiary if he or she plans on graduate school, or you can also change the beneficiary and name another college-bound child.
What if my child does not want to go to college?
You can change the beneficiary to another family member (a sibling, first cousin, grandparent, aunt, uncle or yourself, for example), and the money goes toward that person’s education. Most plans allow you to change your beneficiary only once a year, but if your child has a change of heart and does decide to attend college, you can rename that child the beneficiary. Remember too that these funds can help pay for two-year associate degrees, as well as for trade and vocational schools.
A final option: Withdraw the money, or cash out the plan. You pay income tax and a 10% penalty on the earnings, but not on your contributions.
If unsure that your child is in fact headed to college, sit tight on cashing out. One thing you learn fast about young adults: life can always change.
July 7, 2015
As a single parent, you need to understand the financial strategies that can stretch your income and help you lay the groundwork for a secure future. Consider the following lessons to help improve your family’s bottom line:
Identify Your Goals
You can’t have a financial plan without first defining your financial goals. Start by recording all of your short-, medium-, and long-term financial goals.
For example, a child’s education could be one of the biggest expenses in your future. Setting aside money for emergencies and planning for retirement are other important goals you’ll need to keep in mind while raising a family. Don’t let day-to-day concerns distract you from such important goals. Plan for today and tomorrow.
Be a Better Budgeter
To pursue your family’s goals, it’s necessary to manage your household’s cash flow. That involves tracking income and spending, eliminating unnecessary costs, and living within the confines of a realistic budget.
For example, if you spend $2 each work day on a take-out coffee, that amounts to about $40 each month. By eliminating that minor expense from your budget, you could easily save almost $500 per year.
Say No to Debt
High-interest credit card debt can make it extremely difficult to get your budget in order. If you have an outstanding balance, consider paying it off as aggressively as possible. The savings in interest alone could allow you to address other important financial goals.
It’s also a good idea to review your credit history, commonly referred to as your credit report, to make sure that the information it contains about your past use of credit is accurate.
Capitalize on Tax-Advantaged Accounts
Once you free up some cash, apply it toward your goals. But first, learn about the savings and investment opportunities available to you. Keep in mind that tax-deferred investment accounts may enable you to grow the value of your assets more significantly than taxable accounts. Examples of such accounts include 401(k) plans and IRAs for retirement planning.
For college goals, Section 529 college savings plans. These plans are state-sponsored investment programs that allow tax-free withdrawals for college expenses. College savers who contribute to their home state’s 529 plan may be eligible for state tax breaks.
Learn more about Hiley Hunt Wealth Management and who we serve in Omaha, NE – Financial Planning and Investment Management