Archive for ‘saving for college’

May 27, 2014

What is the maximum 529 plan contribution limit?

by Grace

So you want to contribute the maximum amount to your child’s 529 plan?  Maybe you received a generous inheritance, and want to set aside enough funds to assure your child will be able to attend any college he chooses.

Here’s what the IRS says:

Q. Are there contribution limits?

A. Yes. Contributions can not exceed the amount necessary to provide for the qualified education expenses of the beneficiary. If you contribute to a 529 plan, however, be aware that there may be gift tax consequences if your contributions, plus any other gifts, to a particular beneficiary exceed $14,000 during the year. For information on a special rule that applies to contributions to 529 plans, see the instructions for Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return.

In practice, “the amount necessary” varies and is determined by each state-sponsored plan, with amounts ranging from about $335,000 to $400,000.  Check out Savingforcollege.com for a complete list of state maximum amounts.

Here is how the New York 529 Advisor-Guided College Savings Plan explains the maximum contribution.

How much can I contribute to my account?

You can contribute on behalf of a beneficiary until the total balance of all Program accounts held for the same beneficiary reaches an aggregate maximum balance, currently $375,000. If there’s more than one account owner contributing for the beneficiary, this is the total for all accounts. Once this limit is reached, you can no longer make additional contributions, but you can continue to accumulate earnings.

Gift and estate tax implications

Since a 529 contribution is treated as a gift to the beneficiary for tax purposes, another consideration for donors is to understand how amounts greater than $14,000 could trigger tax liabilities.

… your contribution qualifies for the $14,000 annual gift tax exclusion and so most people can make fairly large contributions without incurring the gift tax.

For contributions greater than $14,000, 529 plans offer a unique gift-tax exclusion feature.

… Specifically, you can make a lump-sum contribution to a 529 plan of up to $70,000, elect to spread the gift evenly over five years, and completely avoid federal gift tax, provided no other gifts are made to the same beneficiary during the five-year period. A married couple can gift up to $140,000.

A good explanation of the details on how this works can be found at the Ameriprise website.

Related:  “Most families are not taking advantage of 529 plans for college savings” (Cost of College)

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April 28, 2014

Pay for college every time you gas up the car

by Grace

College rewards programs are used by one in five families to help pay for college.  The dollar amounts may not be huge, but these programs are easy to use.

FinAid gives us an overview of college rewards programs, also known as loyalty programs.

Loyalty programs, also known as affinity programs, provide a rebate to the consumer in exchange for shopping at particular retailers or purchasing particular products or services. This section of FinAid provides information about loyalty programs that provide a reward in the form of tuition benefits, such as credits to a section 529 plan for your children. They are similar in nature to airline frequent flyer programs.

Typically, such programs do not require you to show a membership card to get the rebates. Instead, you register your credit cards with them and they track the purchases you make at participating merchants using the cards. You can also earn rebates by shopping online through the company web sites. This makes the programs a painless way to earn a little extra money for college.

Affinity programs with a college savings emphasis include:

Upromise is probably the most widely used program.

… The Upromise credit card enables people to earn cash back for everyday purchases. With the credit card, members get 5% cash back on all purchases and 10% cash back when they buy things in the Upromise shopping portal, explains Condon. Members can have the cash earned deposited directly in a Upromise 529 college savings account, in a Sallie Mae savings account or request a check whenever they are ready to cash in.

Small amounts can add up.

The amount saved is a small percentage of the amount spent, but with the magic of compound interest, small amounts grow exponentially larger over the years. For instance, if you spend $1,500 a month for 30 years and receive 1 percent back on your purchases, you would have more than $18,000 if you averaged a 7 percent return per year.

“I wouldn’t use this as a substitute for having a good investment strategy, but it might be a substitute for having to transfer $100 to your investment account every month,” says financial adviser Will Ertel, president of Tassel Capital Management in Matthews, N.C. “It can be a way to supplement or create some savings you aren’t otherwise building.”

Cash generated by any rewards program can also be designated to pay for college costs.  It seems like a no-brainer,  unless you rely on credit card reward points to defray the cost of vacations or other purchases.

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Donna Fuscaldo, “Last-Minute College Savings Tips”, FOXBusiness, March 20, 2014.

April 23, 2014

Most families are not taking advantage of 529 plans for college savings

by Grace

Only 29% of families choose 529 plans for college savings.

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A 529 plan is the “best college savings vehicle”.

… By far the most popular college savings vehicle is the general savings account (nearly half of families with children under 18 use this to save for college). But Foss says that the best college savings vehicle is the 529 plan (less than one-third of parents are using this to save). “There aren’t many reasons not to use it,” she says. One of the major reasons these plans are better than general savings accounts is that your investments in 529 plans grow tax-deferred and distributions come out tax-free on the federal level; plus 34 states and Washington, D.C. offer state income-tax deductions, so there’s a “double tax advantage” in these cases.

Furthermore, you can transfer the funds in these accounts to another child if one of your kids opts out of school and 529 plans are treated favorably with colleges’ financial aid offices. General savings accounts can’t compete with the benefits of the 529 when it comes to saving for college, Foss says. However, if you do not use the 529 plan for college expenses, you will likely have to pay a 10% penalty and income tax on the earnings when you withdraw the money.

Related: What you may not know about 529 plans (Cost of College)

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Catey Hill, Parents: “You’re saving for college all wrong”, MarketWatch, April 12, 2014.

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October 25, 2013

‘passively managed index funds outperform almost all actively managed funds’

by Grace

Economics professor Mark J. Perry shared some investment facts on the occasion of “Eugene Fama winning the Nobel Prize of Economics, largely for his path-breaking academic finance research on market efficiency that ultimately led to the introduction of low-cost mutual funds by Vanguard and others that pursue a passive investment strategy of buying and holding portfolios of stocks that track an index like the S&P 500″.

Here’s one fact that should get every investor’s attention.

Empirical evidence shows that passively managed index funds outperform almost all actively managed funds over long holding periods, adjusted for risk, taxes and expenses.

I used to work for a mutual fund company with a winning fund manager who consistently outperformed the market over more than 30 years, but he was the exception.  These days I’m a fan of index funds for most of my investing.

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May 31, 2013

A special day to remind us about the benefits of 529 plans

by Grace

Darn! I missed 529 day.

The College Savings Plans Network sponsored National 529 College Savings Day this past Wednesday, 5/29/13.  Many states sponsored promotions for their 529 plans, with some offering special incentives that are still in effect.

Florida, for instance, is waiving the $50 enrollment fee for plans opened from May 20 through June 30.

You can check out individual states’ events and promotions by clicking on this map.

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In general, 529 plans are college savings and investment accounts sponsored by state governments. Money deposited in the accounts grows tax free, as long as the funds are used for educational purposes when withdrawn. You don’t have to be a resident of a particular state to use its plan, although some states offer additional tax benefits to in-state plan participants.

Most 529s are designed as traditional savings-and-investment vehicles, but some states offer prepaid 529 plans, which allow savers to pay tuition at certain schools in advance at current rates.

Related:  What you may not know about 529 plans (Cost of College)

 

May 27, 2013

The challenge of paying for college and saving for retirement at the same time

by Grace

Especially for parents who had their children when they were in their 30s or later, the crunch of paying for college while trying to save for retirement can be tough to manage.  The Family CEO gives advice for families who find themselves in this situation.

Reduce other expenses to free up cash for these goals.

… It might be something big, like driving a car with high payments. Or something small, like have premium cable channels that you never watch. Big or small, eliminating some of these expenses and directing them to retirement or college savings can help you meet those goals.

I have neighbors who put their kids through college debt-free using this strategy.  Exercising great discipline, they gave up one of their cars, fancy vacations, most clothing purchases, and housecleaning services during the six years they were paying college tuition.  It’s certainly not easy, but it can be done.

Create new streams of income or boost the ones you have.

In some cases this is quite feasible – consultants can take on extra clients, teachers can tutor on the side, SAHMs can go back to paid employment.  But sometimes it’s hard to find new money, and even then the amounts are meager.  The whole family can get in the act; maybe a teen can earn spending money from a summer job.

If you need to choose one, choose retirement.

… there are multiple ways to pay for college, but no one is going to fund your retirement for you.

Since time is not on their side, older parents in particular should avoid skimping on their retirement savings.  It can be a hard decision for parents to put their needs above those of their children, but here’s one way to think about it.

It’s like putting on your oxygen mask first on an airplane. Make sure you’re taking care of yourself, so you can in turn take care of them.

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April 9, 2013

Private College 529 Plan is a unique option for locking in tuition costs

by Grace

The Private College 529 Plan is “a relatively little-known program that lets participants prepay tuition at private colleges and universities, at today’s rates”.  This plan is unusual in that prepaid 529 plans are typically designed for enrollment in public colleges.

How it works

… Families contribute to a trust and get a certificate representing a share of tuition at current rates, a proportion that remains constant even as tuition rises. So, for instance, if you were to pay in $10,000, and the tuition at a given college were $40,000, the certificate you bought would be worth a quarter of one year’s tuition at that college. If, in 10 years, the tuition is $60,000, your certificate would be worth a fourth of that amount, or $15,000. Money must be in the plan for at least three years before it can be used. The plan covers tuition and mandatory fees, but not room and board and other expenses, like books.

The private plan includes more than 270 participating colleges and universities, but what happens if your child doesn’t want to attend one on their list?

If your child chooses a college that is not in the plan, you can change the beneficiary of the account, so another family member or relative can use it. Or you can request a refund. But you will earn only 2 percent maximum on your savings in the plan, and you could be subject to a loss of as much as 2 percent, depending on the performance of the trust’s investments. (While the value of the tuition certificates are guaranteed, plan documents caution that refunds aren’t assured, if the trust lacks funds to pay them. But Ms. Farmer says it’s “hard to imagine a scenario” in which that would happen. Refunds have averaged about 1 percent of plan assets for the last five years.)

Both the private and state prepaid 529 plans guarantee parents a locked-in tuition cost that can mean substantial savings, but there are some risks involved.

Because the emotional draw of the plan is strong, it is important that families carefully consider possible risks. For instance, to benefit from the plan, students must be accepted at a member college, and they do not get extra points in the admissions office for participating. The savings are greatest when families join early, but making such a commitment for a baby is a gamble. A student may later feel financial pressure to choose a college that participates in the plan.

What if college costs stabilize?  These prepaid plans may not turn out to be such a good value if college costs stagnate or even drop after their meteoric increases over the last few decades.

Related:  Average 529 savings reach all-time high

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March 27, 2013

Quick Links – Middle school mess; hypergamy and single-parent families; bipartisan cuts to higher ed; and more

by Grace

◊◊◊  The middle school debate

Various views on the middle school model were presented in the New York Times last year.

You don’t have to have to read all the studies to know that the ages between 10 and 13 are socially awkward ones. But they are also important ones academically, crucial in determining college and career outcomes. Would these preteens be better off staying in an elementary school that covers kindergarten through eighth grade? Or is there a reason why this age group needs to be sectioned off into a separate middle school?

Another observation on the Middle School Mess:

American middle schools have become the places “where academic achievement goes to die.”  — Cheri Pierson Yecke

◊◊◊  Fewer college-educated men are reason for rise in single parent families?

The effects of a low sex ratio

As this column has repeatedly noted, women are hypergamous, which means that their instinct is to be attracted to men of higher status than themselves. When the societywide status of women increases relative to men, the effect is to diminish the pool of suitable men for any given woman. If most women reject most men as not good enough for them, the effect is no different from that of a low sex ratio. High-status men, being in short supply, set the terms of relationships, resulting in libertine sexual mores and higher illegitimacy.

I rarely see the term “illegitimacy” used these days.

◊◊◊  ‘Bipartisan Support for Cutting Higher-Ed

The national trend is marked: between 2009 and 2012, 47 states cut higher education spending per FTE. The median (mean) reduction was just over 23 percent (22 percent). Just three states saw increases: Illinois (unified Democratic government), North Dakota (unified Republican government), and Rhode Island (divided government with Republican governor).

When they have had unified government, both Democrats and Republicans have cut higher education funding. If we look at the seven states with unified Democratic control over this period, six reduced funding. Those six (excluding Illinois’s 2.8 percent increase) reduced funding by between 19 and 31 percent (West Virginia and Washington respectively) for an average reduction of 22.9 percent.

Of the nine states under unified Republican control, eight reduced funding by an average of 25.2 percent, ranging from a 0.2 percent decline in South Dakota to 42.8 percent reduction in Idaho. Texas, one of Leonard’s great villains, reduced funding by 9.2 percent (less than any of the Democratically-controlled states). Florida cut funding by 27 percent, which outranked all but one unified Democratic state. So while Republican-controlled states did cut higher education spending, they were not alone; unified Democratic governments more than held their own. (Of the 17 states with divided government, 16 reduced higher ed spending by an average of 25 percent during the period)….

These data suggest a bipartisan national trend, not a conservative conspiracy. The vast majority of states–whether controlled by Republicans or Democrats–have cut higher education funding in response to budget deficits.

◊◊◊  Grandparents’ contribution make up about 9.5 percent of the total 529 assets

By all accounts, Grandma and Grandpa are more active than ever in funding their grandkids’ educations, including sinking money into 529 college savings plans….

By the end of 2012, American families had a record $190.7 billion socked away in 529 college savings plans, according to a March 13 report from the College Savings Plans Network. …

Parents still contribute the lion’s share of funds invested in 529 accounts. But contributions from grandparents now make up about 9.5 percent of the total, according to the most recent data from the Financial Research Corp, which tracks 529 investments. It was a substantial enough increase that FRC started keeping track of which types of relatives were funding 529s for the first time last year.

March 19, 2013

Average 529 savings reach all-time high

by Grace

Average balances for 529 college savings and prepaid tuition plans grew to a record $17,174 in 2012 — up 12% from an average of $15,349 in 2011, according to a report from the College Savings Plans Network, a nonprofit and affiliate of the National Association of State Treasurers.

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In December 2012, the number of existing 529 accounts increased by about 4% to 11.1 million, up from 10.7 million in December 2011. Total 529 investments reached a record $190.7 billion, up from $165 billion in 2011.

Those numbers were also helped by a strong stock market last year. In 2012, the S&P 500 soared 13%.

Is the college savings situation improving or not?

The picture painted by these numbers is rosier than the one depicted by another report of fewer families saving for college.  The discrepancy between the this story and previous one could be due to what was measured (only 529 plans vs. total college savings), source of information (plan administrators vs. parents), and focus on different years (2012 vs. 2011).  Even with this latest positive indication for college savings, there are valid reasons why many parents still “feel overwhelmed, annoyed, angry, or frustrated”.

Yet, students and their families are still struggling to keep up with rapid increases in tuition….

Average tuition paid at public community colleges and four-year colleges and universities rose by 8.3% last year, according to a recent report by the State Higher Education Executive Officers Association.

For the 2012-13 school year, the average prices for tuition, fees, room and board for in-state students at public four-year colleges and universities is $17,860, according to the College Board. And the average bill at private institutions is nearly $40,000.

College savings hits all-time high (CNNMoney)

College Savings Plans Network 2012 Year-End 529 Report

March 5, 2013

Fewer families are saving for college, with many feeling overwhelmed

by Grace

The number of families saving for college has dropped to 50%.

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From How America saves for College 2013, a survey commissioned by Sallie Mae conducted by Ipsos Public Affairs

Not only did fewer families save for college last year, but they also saved less. Parents who saved have socked away almost $12,000 total last year, a sharp drop from over $20,000 reported in 2010. That might explain why only 55% of those who are saving for college said this year that they feel confident about being able to cover the costs.

Most parents expect their children to get scholarships and grants, which on average have dropped to about $6,000 per student.

For those parents who aren’t saving for college, 53% say a major reason is that they can’t afford it. Another 18% cite that as a minor reason, while 13% say a lack of money plays no role in their college-savings decision. More than half of nonsavers say they’re not saving at least in part because they expect their children to receive scholarships and grants to cover college costs.

But that’s a risky calculation to make, as the average amount of funding U.S. undergraduates got from grants and scholarships fell 15% during the last academic year. On average, students received $6,077 in grants and scholarships in the 2011-2012 academic year, down from $7,124 a year earlier, according to a July Sallie Mae study.

Whatever their income level, non-savers say they simply don’t have the money for college.

Unsurprisingly, 70% of parents with income below $35,000 say a lack of money comprises at least part of the reason why they’re not saving for college. But what is a shock is that the share of families who earn between $35,000 and $100,000 and say they can’t afford to save is even higher, at 74%. (Among families earning $100,000 or more, 72% of respondents cite money — or lack thereof — as a reason for not saving.)

Only 38% of parents feel confident about meeting the costs of college.  Many feel overwhelmed, annoyed, angry, or frustrated.

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