529 college savings plans: simply the smart way to save for college date / presenter name

529 College Savings Plans: Simply the Smart Way to Save for College

Date / Presenter Name

2 529 College Savings Plans

• To gain a clear perspective on where college costs are heading

• To weigh various approaches to saving for college

• To learn about the unique benefits of 529 college savings plans

• To see how Morgan Stanley can help you plan for this important financial goal

Why Are We Here Today?


Just How Expensive Is College? A Quick Quiz

1. Sources www.collegeboard.org, “Average Rates of Growth of Published Charges by Decade, 1984-85 to 2014– 15”2. Source: www.collegeboard.org (2015) “College Cost Calculator”. Calculations based on average cost of 4-year private college education (including room and board) in today’s dollars of $42,224 annually and a tuition inflation rate of 5% (ten-year historical rate}.

What is the average cost today of a four-year private college education?2

A: $100,429 C: $168,896B: $120,550

How much will a four-year private college education cost in 2030?2

A: $378,346

C: $190,256

B: $270,000

General inflation currently averages about 1% a year. What is the annual rate of college tuition inflation?1

A: 1% C: 2.2%B: 1.5%

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2

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http://trends.collegeboard.org/college-pricing/figures-tables/average-rates-growth-published-charges-decade

https://bigfuture.collegeboard.org/pay-for-college/college-costs/college-costs-calculator





A: $100,429 C: $168,896B: $120,550


A: $378,346

C: $190,256

B: $270,000


A: 1% C: 2.2%B: 1.5%

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2

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• Cash flow

• Personal loans

• Refinancing, home equity loans

• Financial aid / scholarships

• Student loans

• Taxable investments

• Tax-advantaged investments

Paying for College: What Are the Options?


529 College Savings Plans:An Ideal Way to Savefor College


Why 529 Plans?

TAX BENEFITS

• Income tax

• Estate tax

• Gift tax

FLEXIBILITY

• Anyone can contribute

• Can be used for qualified expenses at virtually any accredited post-secondary school1

• Choice of many different plans

CONTROL

• You retain control

• You can change the beneficiary

• You can withdraw money or liquidate the account2

1. Qualified expenses include tuition, fees, room and board, books, and supplies2. Nonqualified withdrawals are subject to ordinary income tax and a 10% penalty.


Income Tax Advantages of 529 Plans

1. Qualified expenses include tuition, fees, room and board, books, and supplies.

• Free from federal income tax

• Free from federal income tax; may also be free from state tax1

Qualified Withdrawals

Earnings on Investments


Gift and Estate Planning Advantages

Contributions to a 529 are excluded from your estate

Individuals can make contributions of up to $14,000 each year without incurring federal gift tax; for married couples it’s $28,000

Accelerated gifting lets you make up to five years’ worth of contributions in a single year 1

You can withdraw some or all of the monies in the account for any reason at any time 2

1. No further annual exclusion gifts and/or generation-skipping transfers to the same beneficiary may be made over the same five-year period, and the transfer must be reported as a series of five equal annual transfers. If the donor dies within the five year period, a portion of the transferred amount will be included in the donor’s estate for estate tax purposes.

2. For nonqualified withdrawals, gains are subject to ordinary income tax and a 10% penalty.


• No income restrictions

• No age limits

• High contribution limits

• Money can be used for any accredited college

• Qualified expenses include not only tuition and fees, but the cost of necessary books, equipment and supplies, and room and board for students enrolled on at least a half-time basis

Exceptional Flexibility


One of the flexible features of 529 plans is that virtually anyone can be named a beneficiary

Name Anyone as a Beneficiary

YOUR CHILD

YOUR SPOUSE

YOUR GRANDCHILD

A FRIEND

YOUR NIECE OR NEPHEW

A FRIEND OR MEMBER OF YOUR EXTENDED FAMILY

OR EVEN YOURSELF!


You – not the beneficiary – retain control over the money. This means

• You can change the beneficiary to someone else1

• You can withdraw the money up to the value of a scholarship without incurring a 10% federal tax penalty2

• You can withdraw some or all of the money in the account at any time, for any reason3

You Retain Control

1. Some plans may have age, residency or other restrictions and may charge a fee for beneficiary changes.2. Ordinary income tax still applies in this case on any gains.3. For nonqualified withdrawals, gains are subject to ordinary income tax and a 10% penalty.


How 529 Plans Compare With the Alternatives

529 PLAN UTMA/UGMA Account

Who can open an account, and who controls the account?

Any U.S. citizen or U.S. resident of legal age can open an account – such as a parent, grandparent, aunt / uncle, non-relative – can be the account owner. Only the owner – not the beneficiary (child) – controls the account. You can also establish an account for yourself and name yourself as account owner and beneficiary.

The money belongs to the child.A custodian opens the account and controls the money until the child reaches the age of majority, which varies by state.

How can I use the money, and what is the tax treatment?

The money can be withdrawn tax-free to pay qualified expenses at any accredited post-secondary school in the U.S. and many schools abroad. The earnings portion of any withdrawals not used for qualified expenses are subject to ordinary income tax and a 10% federal penalty.

Any money that is used before the child reaches the age of majority must be used for the child’s benefit. Annual earnings are generally taxed at the parents rate.

Are there contribution limits?

Each state sets its own maximum contribution limit for the Plan, which generally ranges from $235,000 to $400,000.

No limit.

Does my Adjusted Gross Income (AGI) limit my contributions?

No. No.


How 529 Plans Compare With the Alternatives (cont’d)529 PLAN

COVERDELL EDUCATION SAVINGS ACCOUNT

Who can open an account, and who controls the account?

Any U.S. citizen or U.S. resident of legal age can open an account – such as a parent, grandparent, aunt / uncle, non-relative – can be the account owner. Only the owner – not the beneficiary (child) – controls the account. You can also establish an account for yourself and name yourself as account owner and beneficiary

An eligible contributor may establish an account for a child under age 18. The contributor or a responsible individual controls the account until the child reaches the age of majority, which varies by state.

How can I use the money, and what is the tax treatment?

The money can be withdrawn tax-free to pay qualified expenses at any accredited post-secondary school in the U.S. and many schools abroad. The earnings portion of any withdrawals not used for qualified expenses are subject to ordinary income tax and a 10% federal penalty.

The money may be used for qualified education expenses for grades K-12 and postsecondary before the student reaches age 30 to avoid tax / penalty. Distributions cannot exceed the beneficiary’s adjusted qualified education expenses for the year.

Are there contribution limits?

Each state sets its own maximum contribution limit for the Plan, which generally ranges from $235,000 to $400,000.

The limit is $2,000 per year until the child

reaches age 18.

Does my Adjusted Gross Income (AGI) limit my contributions?

No. Yes. Contributor eligibility is based on Modified Adjusted Gross Income (MAGI), less than $95,000 for an individual (or less than $190,000 if filing jointly) to qualify for the full $2,000 contribution. The $2,000 maximum is gradually phased out if your modified adjusted gross income falls between $95,000 and $110,000 for single filers or between $190,000 and $220,000 for joint filers.


Does Having a 529 Plan Affect Eligibilityfor Financial Aid?

Parental Income 22% – 47% (of adj. gross income)

Parental Assets (e.g., 529)2.6% – 5.6% (of nonretirement assets)

Student Income 50% (after certain allowances)

Student Assets (e.g., UGMA) 20% (of all assets)

EXPECTED FAMILY CONTRIBUTION (EFC) FEDERAL STUDENT AID FORMULA USED NATIONWIDE

Source: Family Source Guide to College Savings (2013 – 2014) by Joseph F. Hurley, CPA; page 64.


How Are the Assets in a 529 Plan Invested?

Age-based (Years-to-Enrollment)

Diversified portfolios, automatically rebalanced and reallocated to more conservative holdings as the Beneficiary ages.

Single-fund Account Owner creates own allocation strategy by selecting from among portfolios that invest in single underlying mutual funds.

Static / Multi-fund Diversified and rebalanced, but not automatically reallocated as the Beneficiary ages.

Guaranteed The rate of return is guaranteed as to the resources of the guarantor.

Diversification and rebalancing do not protect against loss in declining financial markets.

SOME TYPICAL ALLOCATION STRATEGIES INCLUDE:


Age-Based Portfolios: How They Work

These charts represent hypothetical portfolios, which do not reflect, and are not an offer of, any actual investment.

Stock85%

Bond15%

Ages 0 – 4 Ages 5 – 8 Ages 9 – 13

Stock70%

Bond30%

Stock50%

Bond50%

Stock20%

Bond80%

Ages 14 – 18 Ages Over 18Stock5%

Bond95%


Changing Investments is Easy

New contributions can be directed to any portfolio at any time

Assets already in an account can be reallocated twice per calendar year

Changing the beneficiary allows assets to be reallocated

As the account owner, you can specify how you want your assets to be invested


• 529 plans are available in nearly every state and the District of Columbia1

• Morgan Stanley offers a robust platform of 529 plans from some of the nation’s leading mutual fund companies

• Your Morgan Stanley Financial Advisor can help you select the 529 plan that is best for you

How Can Morgan Stanley Help?

1. Besides Wyoming, which dismantled its program in 2006, every state offers at least one 529 savings or prepaid tuition program.


Components of a Good Financial Strategy

Retirement Planning

Investments

Education Planning

Charitable Giving

Business Succession Planning

Caring for Others

Estate Planning

Contingency Planning

Your 529 Plan Can Be Part of an Overall Portfolio Strategy Tailored to Help You Achieve Your Financial Objectives and Life Goals


How We Help You Define and Achieve Your Goals

We periodically evaluate and recommend potential solutions to address your situation.

OngoingCommitment

TailorSolutions

DevelopUnderstanding Conduct

Analysis

Implementand Deliver

We help you developa thorough understanding

of your college savings goals.

We review and analyze your current financial situation and relevant factors.

We evaluate various 529 plans to identify the one that best meets your needs.

We help you set up the planand begin making contributions.


Getting Started

Our relationship begins with learning more about you. Here are our next steps.

I’d like to invite you to meet with me to discuss your college savings needs and goals. We’ll look at all the relevant variables—including your time frame, financial situation and overall objectives.

Start planning

to help meetyour college

goals

Make an appointment

with your FinancialAdvisor


DisclosuresIf an Account Owner or the Beneficiary resides in or pays income taxes to a state that offers its own 529 college savings or pre-paid tuition plan (an “In-State Plan”), that state may offer state or local tax benefits, but only for participation in the In-State Plan. These tax benefits may include deductible contributions, deferral of taxes on earnings and/or tax-free withdrawals. In addition, some states waive or discount fees or offer other benefits for state residents or taxpayers who participate in the In-State Plan. An Account Owner may be denied any or all state or local tax benefits or expense reductions by investing in another state’s plan (an “Out-of-State Plan”). In addition, an account owner’s state or locality may seek to recover the value of tax benefits (by assessing income or penalty taxes) should an Account Owner roll over or transfer assets from an In-State Plan to an Out-of-State Plan. While state and local tax consequences and plan expenses are not the only factors to consider when investing in a 529 plan, they are important to an Account Owner’s investment return and should be taken into account when selecting a 529 plan.

Tax laws are complex and are subject to change. This information is based upon current tax rules in effect at the time this was written. Morgan Stanley Smith Barney LLC ("Morgan Stanley"), its affiliates, Morgan Stanley and its Financial Advisors do not provide tax or legal advice. Individuals should always check with their tax or legal advisor before engaging in any transaction involving 529 plans, Education Savings Accounts and other tax-advantaged investments.

Investments in a 529 plan are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so an individual may lose money. The 529 Plan Program Disclosure contains more information on investment options, risk factors, fees and expenses, and possible tax consequences. Investors can obtain the 529 Plan Program Disclosure from their Financial Advisor and should read it carefully before investing.

©2015 Morgan Stanley Smith Barney LLC. Member SIPC.

CRC1181799 04/15

529 college savings plans: simply the smart way to save for college date / presenter name

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