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Mutual Funds vs. 529 Plans

Saving for college is a tough job – on par with saving for retirement, and often in direct conflict with that goal as well. Adding to the difficulty of the task is the fact that there are so many different options out there (in terms of investment vehicles) that really muddy the waters for the individual college saver. One question that comes up very often is whether it is just as effective to utilize tax-effficient mutual funds instead of 529 plans as we save for college. The idea is that the mutual fund can generate a higher overall return than the 529 plan due to the additional costs associated with the administration of the 529 plan. It is a fact that most 529 plans charge management fees that have a direct impact on the overall return of the account, and it is also a fact that many tax-efficient mutual funds […]

Three Year-End Financial Moves

As 2015 comes to a close here are a few things to consider so you can make the most of your money for 2015. Take full advantage of your IRA contributions. For those age 50 and over, you’re allowed $6,500 and if you’re under age 50, $5,500. It may also be of benefit to see if you qualify for a deductible IRA contribution or if contributing to a Roth IRA makes sense. Make the maximum contribution to your employer sponsored retirement plan. Granted, there may not be much time left in the year to do this, but there is plenty of time to do so for 2016. Many companies have access to their plans online and employees can change contribution amounts when necessary. If you’re not already doing so, consider saving at least 10 percent of your gross income. Aim for 15 to 20 percent if you can. Pay yourself […]

Retirement vs College Saving in a Nutshell

Those of us who are parents know this conflict very well – should we put aside money for retirement, or for college saving? It may come as a surprise, but a general rule of thumb with regard to this conflict is to put money aside for retirement first, and college second. The reason behind this is that there are many ways to pay for college, such as grants, scholarships, work-study programs, student loans, parent loans, etc.. With this plethora of choices, it becomes clear that your student’s college funding needs can be met from quite a few angles, none of which should have a dramatic impact on your overall net worth (or your student’s). On the other hand, no one will give you a scholarship to retire. It is solely up to you and your savings (coupled with Social Security and any available pensions).

The Airplane Analogy

Many parents face the decision during their working years to try to fund both retirement and college education. Some can adequately do both while others are forced to do the best they can with what money they can save. Sometimes parents can get caught up in wanting to save as much as they can for their children’s college education and forgo the need to save for or save more for retirement. When this situation presents itself, I have given my clients my airplane analogy. It goes something like this: Have you ever flown on an airplane before? If you have you know that once you’re scrunched in and belted and the plane makes its way from the gate the flight attendants break radio silence and start with their routine flight instructions. After you’re taught where the exit rows are and how to use your seat as a floatation device they […]

Tax Benefits for College

When faced with the high cost of college, you want to find and take advantage of every opportunity that you can to cut down on your out-of-pocket expenses, before you give in and take out loans.  So after you’ve applied for all of the grants, scholarships, and other non-loan financial aid that you can, it’s time to consider what sorts of tax benefits may help out with your situation. Credits There are two different kinds of tax credits currently available in tax year 2010 and 2011: American Opportunity Credit – This credit is available for students (and parents of students) that are in their first four years in a degree program at college.  The credit is a maximum of $2,500, and is calculated as:  100% of the first $2,000, and 25% of the next $2,000 of Qualified Higher Education Expenses (QHEE) paid for that student.  QHEE is limited to tuition, […]

The Downside of Prepaid Tuition

When planning to save for future college expenses, you may run across several options – including insurance policies, savings bonds, retirement accounts and specific education accounts, such as Coverdell Education Savings and Section 529 plans. Among the options for Section 529 plans are two types of account:  savings and prepaid tuition.  Following is a brief explanation of the two types of account. Savings-Type 529 Plan The savings type of 529 plan works much like an IRA or 401(k): contributions are made and the amounts contributed to the plan are allocated among various sorts of investment options, mostly mutual funds or derivatives of mutual funds.  Over time, assuming that you’ve made appropriate allocation choices and the investments grow, the balance of the account will in turn grow, increasing the amount of funds available to pay for college expenses.  Growth in the account is tax-free when used for qualified higher education expenses […]

20 Questions About 529 Plans

Below is a reprint of an interaction that I had with an anonymous individual several years ago on a web bulletin board, as I thought the 20 questions that the individual listed might be interesting to you.  I’ve reviewed the list and updated responses where laws have changed or where I was more snarky than necessary in my response.  Let me know if you have more questions to add to the list! Keep in mind as you read this, the questions are one individual’s specific concerns about his situation.  The person asking the question has simply put this list of questions out on a public bulletin board hoping for responses – that’s part of why some of the questions aren’t fully answered or clarified, since the original poster didn’t come back to clarify his questions or respond to my responses… The original questions are numbered, and my response is italicized. […]

401(kids)? A Rehash of the Coverdell

With much fanfare, Illinois congressman and US Senate candidate Mark Kirk (R-Illinois) has pushed his plan, adorably referred to as 401(kids) (see news story here).  But what is this plan he’s referring to?  Unless I’m missing something, this is the Coverdell ESA (Education Savings Account) that has been in existence for quite some time now. Kirk’s primary beef is with the Illinois-based BrightStart 529 plan – which is mostly a swipe at one of his main opponents in the Senate race, Illinois’ Treasurer Alexi Giannoulias, since BrightStart falls under Giannoulias’ responsibility.  Last year, one of the funds in the BrightStart plan, managed by Oppenheimer, was severely impacted by the fallout in the bond market due to overexposure in the derivatives market.  Negotiations between Oppenheimer and Giannoulias’ office are continuing, and investors are expected to receive some sort of remuneration soon. So anyhow, as is often the case, in the heat of […]

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