building bridges with college funding beyond 529 plans: advanced college funding strategies building...

Building Bridges with College FundingBeyond 529 Plans: Advanced College Funding StrategiesBuilding Bridges with College FundingBeyond 529 Plans: Advanced College Funding Strategies

Rick Darvis, CPA, CCPS1-800-765-2031

[email protected]

AgendaAgenda

• The College Funding Opportunity

• College Funding vs. Retirement

• Education Tax Strategies

Building Bridgeswith College FundingBuilding Bridgeswith College Funding

• Bridge to existing and prospective clients

• Product has lost its sizzle

• Added Value is the key

• College funding will provide a niche

• College funding is HOT and recession proof

• Ultimate door-opener to premium clients

College is EXPENSIVE!College is EXPENSIVE!

$16,000$16,000

$32,000$32,000

$48,000$48,000

5,000

15,000

25,000

35,000

40,000

$45,000

30,000

20,000

10,000

Average Public

University

Average PrivateCollege

ElitePrivateCollege

*Source of college costs is from the College Board.

If You Haven’t Saved for College…You May Have A Retirement Issue!If You Haven’t Saved for College…You May Have A Retirement Issue!

? ?How are you

going to fund your

own retirement after

paying for college?

How old will you

be when your last child

graduates from

college?

Assumes 5% investment rate, one child in college, after-tax dollars

College Dollars Spent Equals Retirement Dollars LostCollege Dollars Spent Equals Retirement Dollars Lost

Years UntilRetirement

15

20

Public$80,000

$166,320

$212,240

Private$160,000

$332,640

$424,480

Elite$240,000

$498,960

$636,720

Solving the Dilemma…Solving the Dilemma…

How can I determine the most efficient way to fund college and retirement without going broke?

EducationFunding

RetirementFunding

College is Paid with After-Tax DollarsCollege is Paid with After-Tax Dollars

*Assumes additional 5% state and local tax and only ONE child’s college expenses

TaxBrackets

25%

28%

33%

35%

Five-Year College After-Tax Cost

Public$80,000

$114,286

$119,403

$129,032

$133,333

Private$160,000

$228,571

$238,806

$258,065

$266,666

Elite$240,000

$342,857

$358,209

$387,097

$400,000

Education Tax StrategiesEducation Tax Strategies

• A new-found tax benefit is the same as a “tax scholarship”

• The higher the income tax bracket, the greater the benefitof any tax strategy

• All tax strategies MUST be reviewed with a tax advisor

Using the IRS to Help Fund College

Introduction to Tax CapacityIntroduction to Tax Capacity

• Opportunities in the child’s tax return

• Child’s tax capacity definition

• Income shifting to utilize tax capacity

Age 0-13 $1,600Age 14-HS $34,700College $37,900 + HC/LC

The term “Tax Capacity” is from Practitioners Publishing Company

Example: College YearsExample: College Years

$ 7,442

Tax Scholarship

Wages

IRA Withdrawal

Capital Gain

Personal Exemption

Standard Deduction

Taxable Income

Tax Rate

Tax

Hope Tax Credit

Child’s Tax Liability

$ 5,000

$ 12,000

$ 10,000

(3,100)

(4,850)

19,050

X 5/15%

$1,508

(1,500)

$ 8

Income Shifted

Parents’ Tax Rate

Parents’ Tax Liability

$ 27,000

X 15/35%

$ 7,450

Case Study #1 — FactsCase Study #1 — Facts

• Income — $145,000

• Assets — $140,000 (outside of retirement)

• Medical expense of $9,000 per year

• Ineligible for aid at$35,000/year college

• Pay undergraduate & graduate school

Case Study #1 — StrategiesCase Study #1 — Strategies

1) Sole Proprietor• Employ Mother in the business• Establish SIMPLE IRA (Mother & Father)• Employ the two children in the business



2) Tax Strategy• Medical reimbursement plan• First year depreciation election



3) Junior Year• Employer Education Assistance• Gift and leaseback of equipment• Gifts of appreciated securities• Life Insurance or Federal PLUS Loans

2) Tax Strategy• Medical reimbursement plan• First year depreciation election

Case Study #1 — Added ValueCase Study #1 — Added Value

• Eligible for $43,240 of financial aid

• Tax Scholarships of $36,125

• IRC 105 & SIMPLE IRA tax benefit of $73,850

• IRC 127 tax benefit of $9,870

• Tuition Deduction tax benefit of $2,880

TOTAL BENEFITS - $165,965RETIREMENT DOLLARS - $345.041SIMPLE IRA CONTRIBUTIONS - $140,000

• Income - $624,000/year

• Assets - $4,017,000

• Newborn child

• Save and pay for K-12 private & college

• Grandparents havedesire to help

Case Study #2 — FactsCase Study #2 — Facts


1) Birth• Grandparents fund Coverdell ESA and 529 Plan

• Fund UTMA with municipal bond fund


2) Teenager• Employ child and invest wages in IRA (age 10)• Gift and leaseback of equipment (age 14)



3) College• Employer Education Assistance (age 21)• Grandparents contribute to CRT• Gifts of appreciated assets as needed


2) Teenager• Employ child and invest wages in IRA (age 10)• Gift and leaseback of equipment (age 14)



• Tax scholarships of $98,601

• IRC 127 tax benefit of $4,515

Grandparents

• Avoid tax on income of $123,005 from the 529 Plan & CESA

• Remove $226,000 from estate

• Receive a charitable tax deduction of $78,791

• Avoid tax on $80,000 of appreciation

Case Study #2 — Added ValueCase Study #2 — Added Value

ReviewReview

• The College Funding Opportunity - Added value is the key

- Network with other professionals- Attract premium clients, including grandparents

• College Funding vs. Retirement - Paying for college is a retirement problem

- College dollars saved are retirement dollars gained

• Education Tax Strategies - Use “tax capacity” to add value and increase

cash flow for investing- Unique opportunities for business owners- Employees also have opportunities

The Next StepsThe Next Steps

The College Funding Opportunity

- How to maximize financial aid eligibility- How to maximize the education tax incentives- Methods and investments to

fund college & retirement

- A roadmap to meet financial goals

Building Bridges with College Funding

building bridges with college funding beyond 529 plans: advanced college funding strategies building...

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