529 101 overview & top-5 529 myths presentation
TRANSCRIPT
529 101 Overview: Abacus Wealth PartnersOctober 2015
Paul Curley, CFADirector of College Savings [email protected]@PaulCurleyBC617-399-5621 (office)857-222-3730 (cell)
• Introduction• 529 101• Resources• Next Steps
529s: The Most Efficient Way to Save for College
Overview
• Emory University • Chartered Financial Analyst (CFA) Charterholder• Boston College (MBA)
– Admissions Ambassador– Student Government (2 years)
• Director of College Savings Research since 2010• Strategic Insight, an Asset International Company
– Trusted Business Intelligence for the Mutual Fund Industry• CFA Exam Trainer, Boston Security & Analyst Society (2005-2013)
Specialize in 529s Since 2008
Introduction - Paul Curley, CFA
• Market Data• Research• Conference• Media/Publishing
Audience• Market Data/Research/Conference – Product Providers,
Broker-Dealer Home office, State Agencies, Administrative Firms to Industry, Investment Consultants, Lawyers
• Quoted over 70 times in press since 2011• Media/Publishing – Advisors, Accountants & Estate Planners
Product Agnostic
Introduction - Practice Overview
Quick Definition
529 101
Definition: “A plan operated by a state or educational institution, with tax advantages and potentially other incentives to make it easier to save for college and other post-secondary training for a designated beneficiary, such as a child or grandchild.”
Source: IRS, “529 Plans: Questions and Answers http://www.irs.gov/uac/529-Plans:-Questions-and-Answers
Source: IRS
529s: Efficient for Tax
529 101: Contributions Tax-Deferred Growth Tax-Exempt Distributions if used for Qualified Higher Education Expenses
(QHEE) of beneficiary
Control: Account owner maintains control of account
Account Beneficiary: Family Member
No Age or Income Limits Annual Contribution Limits: Up to Federal Gift Tax Limit of $14,000
Married Couple: $28,000 High Lifetime Contribution Limits: Can contribute up to high maximum set
by state (e.g. Wisconsin at $425,000)
Not Restricted to In-State Plans But Note: There also may be state tax incentives to residents who invest in their home state's 529 plan.
2 Reallocations Allowed per Year
Source: IRS Publication 970
Distributions: Dedicated Account for Higher Education
529 101: Distributions QHEE: Tuition, fees, books, supplies and equipment
Room & board if enrolled at least half-time
Eligible Institutions: Any school eligible to participate in federal student loans, including those in U.S. and abroad
529 savings plans – Not limited to colleges in your state
529 prepaid plans – Read plan disclosure statement
Distributions: Payment to Student, Parent or College
Rollover/Changing 529 Plans: 2 changed allowed per year
Beneficiary Changes: Change to Another Family Member
10% Penalty: Non-Qualified Distributions There are exceptions to the penalty - http://www.irs.gov/pub/irs-pdf/p970.pdf
Source: IRS
529s: Efficient for Financial Aid
529 101: Financial Aid Impact
Source: U.S. Department of Education
• Assets & Income– Students
• 50% of income above protected amount of $6,260• 20% of assets in bank accounts, CDs, UGMAs/UTMA’s and other savings
vehicles– Parents
• 22%-47% of Adjusted Gross Income above the protected amount• 5.64% (or less) of non-retirement assets above protected amount, including
529s, investments and savings– Grandparents
• 0% of income and assets. However, withdrawals for college by grandparents and others may be considered student income and must be reported on the following year’s financial aid forms. Such income can reduce the amount of aid by 50%.
– Distributions from parent’s retirement accounts are treated the same.
529s Improve Custodial Accounts
529 101: Custodial accounts
Source: IRS
• Taxes: A trust can be subject to taxes on earnings year-over-year• Assets in a trust can be used to buy a custodial 529 account• Custodial 529 accounts can grow tax-free, and can be distributed tax-free if
used for qualified expenses • Note: Contributions into 529 may require a capital gain on liquidation of
assets to put the assets into a 529; Ask you financial advisor• Other Estate Planning Features
– 5-Year gifting to remove assets from estate while maintaining control
529s: Efficient for Estate Planning
529: Estate Planning 5 year forward gifting feature:
Client can make 5 years of gifting in 1 year
For example, one parent can make a lump-sum contribution to a 529 plan for $70,000
($70,000 = 5 x $14,000)
$14,000 is federal gift tax maximum
$140,000 could be made by the married parents ($70,000 x 2 parents)
No other gifts are allowed to be made to the same beneficiary during 5-years
Assets are removed from contributor’s taxable estate. Some plans have a claw back provision if contributor passes away in less than 5-years
Source: IRS
1) IRS – Internal Revenue Service– http://www.irs.gov/uac/529-Plans:-Questions-and-Answers– Publication 970: http://www.irs.gov/pub/irs-pdf/p970.pdf
2) SEC – U.S. Securities and Exchange Commission– http://www.sec.gov/investor/pubs/intro529.htm
3) FINRA – Financial Industry Regulatory Authority– http://apps.finra.org/investor_Information/Smart/529/000100.asp
4) MSRB – Municipal Securities Rulemaking Board– http://www.msrb.org/EducationCenter/Municipal-Market/529-Plans/
Resources/Related-Resources-529-Plans.aspx5) FAFSA – Free Application for Federal Student Aid
– https://fafsa.ed.gov/fotw1415/pdf/PdfFafsa14-15.pdf6) IFAP – Information for Financial Aid Professionals
1) http://ifap.ed.gov/efcformulaguide/attachments/091913EFCFormulaGuide1415.pdf• 529 Dash e-Newsletter http://www.529conference.com/subscribe.aspx• SavingforCollege.com• 529 Product Providers
Resources
Resources & Sources
• Next: Topics for Lunch & Learns– Accumulation: Tax Free Growth– Distributions– Financial Aid Impact– Estate Planning/Custodial 529s
Questions?
Next Steps
© Copyright 2015 Strategic Insight, an Asset International company, and when referenced or sourced Access Data, a Broadridge company, Morningstar Inc. and Lipper Inc. All rights reserved. The information, data, analyses and opinions contained herein (a) include confidential and proprietary information of the aforementioned companies, (b) are provided solely for information purposes, and (c) are not warranted or represented to be correct, complete, accurate, or timely. Past performance is no guarantee of future results. The aforementioned companies are not affiliated with each other. This report has been prepared using information and sources we believe to be reliable; however, we make no representation as to its accuracy, adequacy or completeness, nor do we assume responsibility for any errors or omissions or for any results obtained from the use of this report, including any action taken with respect to securities referred to in this report. Our employees may from time to time acquire, hold or sell a position in securities mentioned herein. We may from time to time perform services for any company mentioned in this report. This report is not a prospectus or representation intended to use in the purchase or sale of any securities mentioned in this report. Strategic Insight is available by subscription and by single copy upon request to the publisher.
Top-5 529 Myths
Paul Curley, CFADirector of College Savings [email protected]@PaulCurleyBC617-399-5621 (office)857-222-3730 (cell)
1. You do not need a plan to save for college or higher education.
2. They can just take loans, or get a scholarship.3. Retirement assets are not included in financial
aid calculations.4. If they do not go to college, then I did not need
to save.5. I already have a trust set up for them.
Top-5 529 Myths
Overview of Top-5 529 Myths
Myth #1: You Do Not Need a Plan to Save for College or Higher Education
Source: College Board, Strategic Insight 529 Industry Analysis 2015
You Need a Plan: Tuition Inflation Continues to Outpace Wage Increase and CPI
Myth #1: You Do Not Need a Plan to Save for College or Higher Education
Source: Strategic Insight
4 Years Cost of Private Institution in 18 Years: $429,407; College Savings Not “Small Ticket”
*Cost includes Tuition, Fees and Room and Board
Majority of Parents are Not Saving, or Saving Efficiently
Source: Strategic Insight 529 Consumer Survey 2015
Myth #1: You Do Not Need a Plan to Save for College or Higher Education
Failure to Plan Leaves Clients with Get Loans
Source: FRBNY Consumer Credit Panel/Equifax
Myth #1: You Do Not Need a Plan to Save for College or Higher Education
Tuition Inflation Drives Student Loan Growth; Small Percentage Receive Scholarships
Myth #2: They Can Take Loans, or Get a Scholarship
Source: New York Fed Consumer Credit Panel/Equifax
• Assets & Income– Students
• 50% of income above protected amount of $6,260• 20% of assets in bank accounts, CDs, UGMAs/UTMA’s and other savings
vehicles– Parents
• 22%-47% of Adjusted Gross Income above the protected amount• 5.64% (or less) of non-retirement assets above protected amount, including
529s, investments and savings– Grandparents
• 0% of income and assets. However, withdrawals for college by grandparents and others may be considered student income and must be reported on the following year’s financial aid forms. Such income can reduce the amount of aid by 50%.
– Distributions from parent’s retirement accounts are treated the same.
529s: Efficient for Financial Aid
Myth #3: Retirement Assets are Not Included in Financial Aid Calculations
Source: FAFSA
Families Use Retirement Vehicles to Save for College
Source: Strategic Insight 529 Consumer Survey 2012-2015
Myth #3: Retirement Assets are Not Included in Financial Aid Calculations
Some Advisor Use Retirement Vehicles to Save for College Also
Source: Strategic Insight 529 Advisor Survey 2014
Myth #3: Retirement Assets are Not Included in Financial Aid Calculations
• IRS – Change Beneficiary to another family member– Q. Can I change the beneficiary of a 529 plan I have set up?– A. Yes. There are no tax consequences if you change the designated
beneficiary to another member of the family. Also, any funds distributed from a 529 plan are not taxable if rolled over to another plan for the benefit of the same beneficiary or for the benefit of a member of the beneficiary’s family. So, for example, you can roll funds from the 529 for one of your children into a sibling’s plan without penalty.
• Keep for later in beneficiary’s life (mid-career training)• Keep for next generation, grandchildren or great grandchildren
– Continues to accrue tax differed– If beneficiary pass away, no 10% penalty if distributed
• Pay 10% penalty, plus taxes on gains
Options on Unused 529 Assets
Myth #4: If They Do Not Go to College, Then I Did Not Need to Save
Source: IRS Publication 970, IRS 529 Plans: Questions and Answers
• Member’s of the beneficiary’s family1. Son, daughter, stepchild, foster child, adopted child, or a descendant of
any of them.2. Brother, sister, stepbrother, or stepsister.3. Father or mother or ancestor of either.4. Stepfather or stepmother.5. Son or daughter of a brother or sister.6. Brother or sister of father or mother.7. Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law,
or sister-in-law.8. The spouse of any individual listed above.9. First cousin.
Rollover Assets to Family Members
Myth #4: If They Do Not Go to College, Then I Did Not Need to Save
Source: IRS Publication 970
• Assets in a trust can be used to buy a custodial 529 account• Custodial 529 accounts can grow tax-free, and can be distributed tax-free if
used for qualified expenses • A trust can be subject to taxes on earnings year-over-year• Note: Contributions into 529 may require a capital gain on liquidation of
assets to put the assets into a 529; Ask you financial advisor• Other Estate Planning Features
– 5-Year gifting to remove assets from estate while maintaining control
Speak with your Advisor on Implications
Myth #5: I Already Have a Trust Set Up for them
• You do not need a plan to save for college or higher education.• They can just take loans, or get a scholarship.• Retirement assets are not included in financial aid calculations.• If they do not go to college, then I did not need to save.• I already have a trust set up for them.
Thank you
Overview of Top-5 Myths
1) IRS – Internal Revenue Service– http://www.irs.gov/uac/529-Plans:-Questions-and-Answers– Publication 970: http://www.irs.gov/pub/irs-pdf/p970.pdf
2) SEC – U.S. Securities and Exchange Commission– http://www.sec.gov/investor/pubs/intro529.htm
3) FINRA – Financial Industry Regulatory Authority– http://apps.finra.org/investor_Information/Smart/529/000100.asp
4) MSRB – Municipal Securities Rulemaking Board– http://www.msrb.org/EducationCenter/Municipal-Market/529-Plans/
Resources/Related-Resources-529-Plans.aspx5) FAFSA – Free Application for Federal Student Aid
– https://fafsa.ed.gov/fotw1415/pdf/PdfFafsa14-15.pdf6) IFAP – Information for Financial Aid Professionals
1) http://ifap.ed.gov/efcformulaguide/attachments/091913EFCFormulaGuide1415.pdf• 529 Dash e-Newsletter http://www.529conference.com/subscribe.aspx• SavingforCollege.com• 529 Product Providers
Resources
Resources & Sources
© Copyright 2015 Strategic Insight, an Asset International company, and when referenced or sourced Access Data, a Broadridge company, Morningstar Inc. and Lipper Inc. All rights reserved. The information, data, analyses and opinions contained herein (a) include confidential and proprietary information of the aforementioned companies, (b) are provided solely for information purposes, and (c) are not warranted or represented to be correct, complete, accurate, or timely. Past performance is no guarantee of future results. The aforementioned companies are not affiliated with each other. This report has been prepared using information and sources we believe to be reliable; however, we make no representation as to its accuracy, adequacy or completeness, nor do we assume responsibility for any errors or omissions or for any results obtained from the use of this report, including any action taken with respect to securities referred to in this report. Our employees may from time to time acquire, hold or sell a position in securities mentioned herein. We may from time to time perform services for any company mentioned in this report. This report is not a prospectus or representation intended to use in the purchase or sale of any securities mentioned in this report. Strategic Insight is available by subscription and by single copy upon request to the publisher.