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9 Ways to Ensure You Don’t Overfund Your Kids 529 Plan

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Saving for your child’s college education is smart, but did you know it’s possible to save too much in a 529 plan? Overfunding a 529 plan can lead to unexpected tax consequences, limited flexibility, and even wasted money if your child doesn’t use all the funds for qualified expenses. With college costs rising and the rules around 529 plans constantly evolving, it’s more important than ever to strike the right balance. Whether you’re just starting to save or already have a healthy nest egg set aside, understanding how to avoid overfunding your kids’ 529 plan can save you headaches down the road. Let’s explore nine practical ways to keep your college savings on track—without going overboard.

1. Understand the Contribution Limits

The first step to avoiding overfunding your kids’ 529 plan is knowing the rules. Each state sets its own maximum aggregate contribution limit, typically ranging from $235,000 to over $500,000 per beneficiary. Once the account reaches this cap, you can’t contribute more. However, you should also know the annual gift tax exclusion of $18,000 per donor per beneficiary in 2024. Understanding these limits helps you plan your contributions wisely and avoid unnecessary tax complications.

2. Estimate Future College Costs Realistically

It’s easy to overestimate how much your child will need for college, especially with all the talk about skyrocketing tuition. Use online calculators to project future costs based on your child’s age, the type of school they might attend, and inflation rates. The College Board’s annual reports are a great resource for up-to-date tuition trends. By basing your savings goal on realistic numbers, you’ll be less likely to overfund your 529 plan.

3. Factor in Scholarships and Financial Aid

Many parents forget to consider the possibility of scholarships, grants, or other financial aid when funding a 529 plan. If your child is likely to receive merit-based or need-based aid, you may not need to save as much as you think. Review your child’s academic and extracurricular strengths, and research the types of aid available at schools they might attend. This can help you adjust your savings target and avoid overfunding.

4. Revisit Your Plan Regularly

Life changes, and so do your child’s educational plans. Maybe they decide to attend a less expensive school, take a gap year, or even skip college altogether. Make it a habit to review your 529 plan at least once a year. Adjust your contributions based on updated college cost estimates, changes in your financial situation, or new information about your child’s goals. Regular check-ins help ensure you’re not putting in more than you’ll actually need.

5. Coordinate with Other Family Members

Grandparents and other relatives often want to help with college savings, but if everyone is contributing to the same 529 plan, it’s easy to lose track and overfund. Communicate openly with family members about your savings goals and the account’s current balance. Consider designating one person to monitor contributions or setting up separate accounts if needed. Coordination is key to avoiding accidental overfunding.

6. Diversify Your Education Savings

A 529 plan is a fantastic tool, but it’s not the only way to save for education. Consider splitting your savings between a 529 plan and other vehicles like a custodial account (UGMA/UTMA) or a Roth IRA. This approach gives you more flexibility if your child doesn’t use all the 529 funds for qualified expenses. Plus, it can help you avoid the tax penalties associated with non-qualified withdrawals from an overfunded 529 plan.

7. Know the Qualified Expenses

Not all education-related costs are covered by 529 plans. Qualified expenses include tuition, fees, books, supplies, and certain room and board costs. However, things like transportation, health insurance, and extracurricular activities usually don’t count. If you overfund your 529 plan and your child doesn’t have enough qualified expenses, you could face taxes and penalties on withdrawals. Familiarize yourself with what counts as a qualified expense to avoid surprises.

8. Plan for Multiple Children

If you have more than one child, you can often change the beneficiary of a 529 plan to another family member. This flexibility can help you avoid overfunding one child’s account while underfunding another’s. If your oldest child doesn’t use all their 529 funds, you can transfer the balance to a sibling, cousin, or even yourself for further education. Planning with all your children in mind helps you make the most of your savings.

9. Consider the New Rollover Rules

Recent changes to 529 plan rules allow you to roll over up to $35,000 from a 529 plan to a Roth IRA for the beneficiary, provided certain conditions are met. This new option, effective in 2024, gives you a way to use leftover funds for your child’s retirement if they don’t need all the money for college. Understanding these new rollover rules can give you peace of mind and reduce the risk of overfunding.

Smart College Savings: Balance Is Everything

Saving for your child’s education is a wonderful gift, but more isn’t always better. By understanding contribution limits, estimating costs realistically, and staying flexible, you can avoid the pitfalls of overfunding your kids’ 529 plan. Remember, the goal is to support your child’s future, without tying up more money than you need to. With a little planning and regular check-ins, you’ll be well on your way to smart, balanced college savings.

How do you approach saving for your child’s education? Share your tips or questions in the comments below!

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13 Reasons Why Millennials Will Never Be Able To Pay For Their Kids To Go To College

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The dream of providing a college education for their children is increasingly becoming a distant hope for many millennials. Over the last 40 years, the cost of higher education has increased by more than 153%. Burdened by a combination of economic challenges, rising costs, and stagnant wages, this generation faces a daunting financial reality. Here are thirteen reasons why millennials may never be able to afford to pay for their kid’s college tuition.

1. Mounting Student Debt

student debt

Millennials themselves are still grappling with their student loan burdens. According to the Federal Reserve, the average student loan debt for those aged 25 to 34 is over $33,000. This debt load limits their capacity to save for their children’s education or qualify for other student loans.

2. Stagnant Wages

salary

Despite being one of the most educated generations, millennials have experienced minimal wage growth. Adjusted for inflation, average hourly wages for young college graduates have remained relatively flat since the 1980s, making it challenging to save for future expenses. The average millennial salary is about $47,034, according to the U.S. Census Bureau, and average Millennial household makes $69,000 a year, according to the Pew Research Center. Ultimately, these salaries are not enough to support a family and contribute to savings.

3. High Cost of Living

rising costs

Millennials face exorbitant costs of living, from housing to healthcare. Balancing these expenses alongside saving for their children’s college education becomes increasingly unattainable.

4. Rising Tuition Costs

millennials pay for college tuition

College tuition has skyrocketed over the past few decades, outpacing inflation by a significant margin. According to College Data, the average price of tuition and fees at a private college is $41,540 per year. Even public college tuition for out-of-state students averages $29,150 per year. With the cost of higher education continually rising, millennials find it increasingly difficult to keep up.

5. Decrease in Employer Benefits

employee benefits

Unlike previous generations, millennials often lack robust employer benefits such as pensions and comprehensive healthcare coverage. Without employer-sponsored college savings plans, they bear the full weight of educational expenses.

6. Delayed Financial Milestones

home buying

Millennials are delaying major life milestones such as homeownership and marriage due to financial constraints. This delay further limits their ability to save for their children’s college education.

7.  Financial Priorities

saving for college tuition

With competing financial priorities such as paying off their student loans, saving for retirement, and emergencies, millennials often must prioritize immediate needs over future expenses like their children’s education.

8. Inadequate Savings

inadequate savings

Many millennials have inadequate savings, if any, for their own emergencies, let alone their children’s college education. 58.26% of millennials have less than $10,000 saved. Without a financial safety net, the idea of funding a college education seems like an unattainable luxury.

9. Generational Wealth Disparity

generational wealth gap

Millennials are the first generation in modern history projected to be worse off financially than their parents. The wealth gap between generations makes it increasingly challenging for millennials to provide the same level of financial support for their children’s education.

10. Limited Access to Affordable Higher Education

college application millennials pay for college tuition

Despite the rise of online education and alternative learning options, access to affordable higher education remains limited. As colleges and universities continue to be more selective, this limits student’s access to many programs that may be more affordable. This lack of accessibility further exacerbates the financial strain on millennials.

11. Economic Uncertainty

job instability

Millennials entered the workforce during the Great Recession and are now weathering economic instability caused by factors like the COVID-19 pandemic. Uncertain job markets and economic downturns make long-term financial planning, including saving for college, a daunting task.

12.  Rising Healthcare Costs

rising healthcare costs

Millennials face steep healthcare costs, including insurance premiums, deductibles, and out-of-pocket expenses. A new study found that just over half of Americans who earn under $75,000 annually can cover their deductibles.  These expenses chip away at their disposable income, leaving little room for saving for their children’s education.

13. Intersecting Financial Pressures

financial pressures

Millennials often find themselves sandwiched between financially supporting their aging parents and raising their own children. This intergenerational financial pressure leaves little room for saving for future expenses like college tuition.

Is Saving for Your Kid’s College Tuition Attainable?

millennials pay for college tuition

Millennials face a myriad of economic challenges that make the prospect of saving to pay for their children’s college tuition seem increasingly out of reach. Without systemic changes to address issues such as student debt, stagnant wages, and rising costs of living, this generation may continue to struggle to provide the same opportunities for their children that previous generations enjoyed.

Saving for your child’s college tuition may not be a lost cause, however. Resources like student financial aid, student loans, and scholarships can help pay for tuition. 83.8% of first-year undergraduate students receive financial aid in some form. There may still be hope for millennials aiming to pay for their children’s college tuition.

Read More

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Is A Master’s Degree Worth The Money?

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It’s no secret that getting an education can come with a massive price tag. However, figuring out whether getting a Master’s degree is a wise investment or a waste of money is often surprisingly tricky. There are multiple factors you’ll need to consider. Otherwise, you may pursue a path that doesn’t lead to the financial boost or lifestyle you’re hoping to snag. If you’re wondering if a Master’s degree is worth the money, here’s what you need to know.

In addition, don’t forget to buy economics essay to be more free and successful while studying.

The Cost of a Master’s Degree

On average, a Master’s degree costs around $66,340. However, what an individual pays can vary dramatically. Some of the lowest cost options may run only $30,000, while the higher end may hit $120,000.

There are several reasons why the price can vary so dramatically. First, every university can set its own rates, so the college you choose plays a role. Generally, private schools cost more than public universities, with average prices sitting at $81,100 and $54,500, respectively. However, some colleges in both groups may break that mold.

Additionally, some majors come with higher price tags. On average, a Master’s in the Arts is more expensive than a Master’s in Science. However, individual majors can have unique price points.

Whether you’re an in-state or out-of-state student leads to cost variances. Typically, in-state students pay less than their out-of-state counterparts, causing the same educational experience to come with two different price tags.

Finally, program lengths differ depending on the course requirements, leading to further potential cost differences. Generally, a 30-credit-hour program costs less than a 60-hour program, mainly because college tuition prices are based on the number of credit hours taken.

Since there’s so much variation in cost, you’ll need to determine how much you’d need to pay for your preferred degree at the college you want to attend. Without that figure, it’s hard to decide on whether getting a Master’s degree is worthwhile in your situation.

Earning Potential Increase

Overall, Master’s degree holders earn approximately 20 percent more than Bachelor’s degree holders on average. That’s a notable jump, giving Master’s degree holders a median income of nearly $78,000 per year.

However, just as prices vary, so does earning potential. Some majors come with a far larger pay differential for those who choose to get an advanced degree.

For example, the differential between a Bachelor’s and Master’s in biology is a startling 86.5 percent. In that case, getting an advanced degree is worthwhile in nearly all cases. For those studying business administration, the Master’s comes with a differential of 51.4 percent, which is incredibly solid. The differential for information technology administration is similar, sitting at 46.9 percent.

But not all Master’s degrees perform as strongly. For instance, the differential between a Bachelor’s and Master’s in finance is just 15 percent. If you major in accounting, the differential is a mere 4 percent.

When determining if a Master’s degree is worth it, it’s wise to explore how much your earning potential increases if you have the extra education. By doing so, you can determine how it influences your long-term earning potential, making it easier to see if the financial value is ultimately there.

Unemployment Rate Differences

If you’re looking for job security above all else and wonder if having a Master’s degree makes a difference, it actually can have an impact.

Overall, the unemployment rate among Master’s degree holders in 2021 – a period where the pandemic was still influencing the market significantly – the unemployment rate was 2.6 percent. For Bachelor’s degree holders during that time, the rate was 3.5 percent. That’s a 0.9 percentage point difference.

Whether that’s enough to sway your decision may depend on your priorities or employment factors in your area. However, it’s worth factoring into the broader equation.

Long-Term Career Outlooks

Another financial factor to consider is the long-term career outlook associated with the roles relating to the Master’s degree. For instance, if a field is growing and there aren’t enough professionals to meet demand, then pay rates are likely to rise since companies are competing for talent. This can make a degree that seems costly today a wise move overall, as the associated earning potential will improve over time.

However, if a job is connected to a position or field in decline, the long-term earning potential may diminish. When the amount of available talent outpaces demand, employers don’t have to compete for strong candidates. As a result, they usually won’t need to increase wages to find a solid new hire. That harms the financial side of the equation from the beginning.

But if wages remain stagnant over the long-term but the availability of candidates remains high, the outlook gets worse. Inflation will ultimately diminish your purchasing power, and the company won’t necessarily have a reason to correct that.

That’s why it’s wise to examine the long-term career outlooks relating to the Master’s degree. That allows you to determine if the extra education may get more or less valuable over time, ensuring you can examine the big picture prior to making a decision.

Degree-Related Job Requirements

Finally, when determining if a Master’s degree is worth it, you need to consider any degree-related job requirements. In some fields or roles, having an advanced degree isn’t a way to stand out; it’s an outright necessity.

For example, you typically can’t get licensed as a mental health counselor or psychologist without a Master’s degree. Upper-level human resources roles may consider an advanced degree a must. The same goes for many healthcare roles. Some areas even require that high school teachers have a Master’s, and nearly all aspiring college professors have to earn an advanced degree to qualify for the job.

If you have your sights set on a specific role and it requires a Master’s degree, then advanced education is essentially your only path toward your dream job. In this case, the satisfaction that comes with working in the field may override many of the financial considerations, making a Master’s degree worth it for intrinsic reasons.

Is a Master’s Degree worth the money to you? Are you a Master’s degree holder that feels it wasn’t worth the time or money? Why do you feel the way you do? Share your thoughts in the comments below.

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Cost vs. Value: How to Choose the Right Degree for Your Finances

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Paying for college is one of the biggest commitments you can make, but it’s also one of the most essential. Many wonder whether they can even find a job without a degree. While there are still ways to earn a decent living through trade school or freelancing, degrees give you far more than just job opportunities.

A degree prepares you to enter your industry with the knowledge and skills necessary to thrive. You also position yourself as a dedicated, trustworthy professional who is more likely to attract employers or even their own clients. Setting yourself up to increase your net worth over time and for a successful career doesn’t have to cost you six-figures, though. In fact, the flexibility of today’s degrees makes it easier than ever to protect your finances while furthering your education.

What Type of Degree Do I Need?

The level of education you pursue is most largely impacted by your goals. Some jobs have strict educational requirements, like mental health counselors and veterinarians. Other fields are more flexible, and you can enter them with an undergraduate or even an associate’s degree. Before you decide what to study or what type of degree to pursue, think about where you see yourself in five years. Do you have a specific career in mind, or are you more interested in a general field?

Those who have a specific career goal can research job listings to see what employers are actively looking for. Then, you can choose a program that will give you the perfect credentials. On the other hand, you may find that just choosing a major is enough for you to start your studies. You may begin by pursuing an associate’s degree, then move on to a bachelor’s if you want to expand your horizons even further.

Is an Associate’s Degree Worth It?

Because bachelor’s degrees are standard in the modern workforce, those who pursue an associate’s may feel like they’re wasting money on a program. However, most associate’s programs prepare you for a specific job that you can start working immediately after graduation. Unlike a four-year program, an associate’s degree gives you highly specific skills training for careers like a dental hygienist, paralegal or law enforcement officer. The cost of an associate’s can be 50 to 70% cheaper than that of a bachelors. Depending on your school and the program, you may be able to pay as little as $3,000 per year in tuition.

How Much Should I Pay for College?

Every student’s comfort level is different when it comes to debt. Some are willing to go any length to get the degrees they want while others are okay with a trade-off. In general, the average student has roughly $40,000 in student loans by the time they graduate from an undergraduate program. You may be able to offset this by exploring alternatives to federal student loans. Scholarships and need-based grants are free, and private student loans are diverse and flexible. You can borrow student loans from a private lender to fill gaps that aid does not cover, or to get better interest rates.

Choosing the Right School for Your Dreams

No matter what you decide, make sure to take time exploring different schools. While price is important, it’s not the only factor worth considering. You should also consider the faculty, student body, opportunities and career options you’ll have by attending a particular institution. Be sure to reach out to each school’s financial aid office as well. They can help you break down tuition, find better financing options and get the most out of your investment.

A Systematic Approach to Goals

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With 2020 staring us in the face, it’s time to review goal setting and the systems you can put in place in order to reach those goals.

“A goal without a plan is just a wish.” – Antoine de Saint-Exupery

That said, let’s look at systematic ways to approach goal setting and actionable tools you can use to smash those goals.

How to begin

  1. Large/Lifetime goals – These are things you want to accomplish throughout your life. They can be philanthropic, health, financial, etc. Figure these out first.
  2. Short-term – Now that you have your long-term/lifetime goals determined, you can break them down into shorter-term goals. Consider these stepping stones, and a lot of these will change as you age. For example, your philanthropic goals. There may be causes you care deeply about now, but that can change.
  3. Actionable steps – Once you have your lifetime goals broken down into manageable targets, it’s time to create steps to get there and I’ll illustrate that using the three examples above.
    1. Philanthropic – Research causes and charities. Pick the ones you most identify with. Review your budget to find out how much you can give. Do a little more research to find out if your donations are tax-deductible (most, if not all, should be).
    2. Health – Establish the specific reason you want to be healthier (for yourself, your partner, your kids, grandkids, etc.). Research a diet that could work for you. Research an exercise regimen that could work for you. Consult experts (i.e. nutritionist and personal trainer).
    3. Financial – Create a budget/spending plan. Cut expenses. Save for emergencies. Insure you and your belongings. Save for retirement.

Here are a few articles I’ve written in the past about financial goals:

Worthy Goals For You To Set And Crush

How Do You Set Financial Goals?

Systems

We can think of systems as the sub-category of actionable steps. A routine is another word for it. When it comes to goals and habits, you can’t rely on will power. You have put a plan in place to do the work for you.

Take exercising for example. You need to create low barriers for yourself. Wear your gym clothes to bed or have your bag packed the night before.

If you go to the gym, put your bag and your keys in a place where you have to pass them to get to your car.

If you exercise at home, have your routine and your equipment laid out and ready for you.

Habits

When it comes to creating habits, James Clear, the author of Atomic Habits, likes to break down the habit into bite-sized pieces.

For example, if your saving for a down payment, go to your banking app and transfer $1 from checking to savings every morning (or whatever amount is realistic for you).

When that becomes second nature, bump it up a dollar a day.

Another thing that James says is, “People ask me all of the time, how many days does it take to create a habit? My answer, all of them because if you stop doing it for one day, it’s no longer a habit.”

External versus Internal

This section is speaking specifically to mental health versus other goals. You could also consider physical health as an internal goal, but for this article internal relates to mental health.

There are several things you can do to work on your mental health. See a therapist, exercise, and start a journal. Those three are low-barrier, easy things you can implement into your day to help.

Meditation, medication, and other forms of mindfulness training/practice can also help. There’s a podcast that I listen to regularly called “10% Happier” that will help you with establishing a meditation practice.

Do some research about this. Meditation can and will take many different forms, and not each modality will be right for you. Some may find that magic mushrooms from a magic mushroom dispensary can help them to relax, whilst reading has also proven to have meditative benefits.

Financial Goals

It really is up to the individual as to what they consider, short, medium, and long-term, but my definitions are as follows: Short-term – less than 3 years. Medium-term – 3-15. Long-term – 15+.

My definitions are almost entirely based on the investability of those assets for that specific time period.

  • Short-term – Emergencies, a new car, what have you. This is money you will need soon, so risking it in the stock market is out of the question. High-yield savings accounts should be your go-to in this scenario.
  • Medium-term – Things like down payments for a house or sending your kid to college. What you’re saving for will dictate the vehicle that you use. If it’s saving for college, a 529 or a Coverdell ESA should do the trick. If it’s for a down payment, your best bet is usually a taxable brokerage account, as there are no fees for early withdrawal.
  • Long-term – This should be strictly focused on retirement. Assets should be in a retirement account(s) and invested (investment selection should be based on risk tolerance and time horizon).

Once you’ve established your short, medium, and long-term goals you can break them down into actionable steps as we talked about earlier.

Wrapping it up

Each New Year brings about resolutions that we hope to achieve. Whether it’s getting in shape or paying down debt, your barometer for success should be progress and consistency.

Are you in a better place than you were on January 1st? Do you have more saved? Are you still committed to the goals you set in the first place?

Yes. It feels great to set a target and hit it, but as far as I’m concerned, if you’re better than you were yesterday, that’s all that matters.

Take it one day at a time and keep your eyes on the prize. You got this!

Related Reading:

How to Set Long & Short-Term Goals (And Reach Them Too!)

What Can a Student’s Bank Account Say About Them?

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If you’re interested in college, you probably already know that it’s likely going to be very expensive. Although it’s possible to find scholarships and even get grants for housing, transportation, and food, it’s not guaranteed, and it’s rare to get out of college with no debt at all. That means many college students end up living paycheck to paycheck, which can be a pretty significant burden. If you want to learn more about how college might impact your finances, you might want to ask one simple question: How much money do students tend to have in their bank accounts?

Most Students Have Less Than $2,000 Right Now

When it comes to the basic numbers, 57.1% of respondents indicated that they had less than $2,000 in their bank accounts. As asked by OneClass, this question regarded both checking and savings accounts, which means that these students had less than $2,000 in available funds overall.

That’s an extremely low number — it’s definitely less than the suggested “emergency fund” of 3-6 months’ worth of bills. In some areas, it might be as small as one months’ worth of bills. Because the survey covered 82 schools, it’s impossible to say how dire these students’ situations are, but regardless of the area, it’s an unfortunate response.

A Substantial Amount of Students Have Less Than $500

Though it may come as a surprise that over half of all students have less than $2,000, the numbers get even more dire when you break them down further. 13.5% of respondents indicated that they had $0-$50, and 22.8% responded $51-$500.

That’s 36.3% of students surveyed — over one third — who indicated that they had less than $500. $500 is barely enough to cover an emergency car repair, and that’s cause for alarm. And when juxtaposed with the students who indicated having $2,000 or less, it’s even more telling. $500 is 25% of $2,000, but in fact, 63.6% of that body actually indicated having $500 or less.

Mathematics and Business Majors Tend to Be More Well-Off

In a result that probably won’t surprise you, Mathematics and Business majors reported the highest average amount when compared to other majors. Both majors most commonly reported having $2,001-$5,000.

When it comes to the median amount, the results are even more drastic, as Mathematics majors jump to $10,000 or more and Business majors move up to $5,001-$10,000. Because Mathematics and Business majors have a reputation for being more expensive, it may be that more well-off people move into those majors, causing those majors to report better finances.

Third-Year Students Are the Worst Off Overall

Overall, people’s finances tend to worsen as they continue college. First-year students most commonly reported having $2,001-$5,000, while second and third-year students both most commonly reported having $51-$500.

When moving to the median responses, second-year and first-year actually switched places — second-year respondents indicated a median amount of $1,001-$2,000, and first-year students replied with a median of $501-$1,000. But third-year students actually had a worse median response, with a median response of $0-$50.

Conclusion

You can’t draw any super definitive conclusions from just these numbers. There are of course plenty of extenuating factors that might play into these numbers. Maybe a student just received a grant, or maybe they just paid bills. But the truth is, when you look at the overarching picture, it’s much easier to see the wealth disparity.

Of the 399 students who responded, less than 100 had more than $5,000 available, which is likely the amount that one should have in case of emergencies. That’s a big deal. Whether you’re planning on going into college, you’re in college right now, or you just want to keep an eye on overarching financial trends, these are numbers you should definitely pay attention to.

What is the Coverdell ESA?

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Introducing the last account type on our quest to find the best way to save for college, the Coverdell ESA.

Without further delay, here’s what you need to know about the Coverdell ESA.

What is it?

Like the 529, the Coverdell ESA is an education savings vehicle for K-12 and secondary education. Coverdell ESA stands for Coverdell Education Savings Account.

It got its name from Senator Paul Coverdell, who introduced the legislation for a similar account, the Education IRA. In 2002, a new piece of legislation was introduced to make the account what it is today.

The 529 and the Coverdell ESA share many of the same characteristics, but there are some things that set it apart. All of these will be listed below.

Advantages

  • Savings and investments in the account grow tax-deferred and are withdrawn tax-free when used for qualified education expenses.
  • When it comes time to withdraw, those funds are not considered income, as long as you are using them for qualified education expenses.
  • Can use in conjunction with other education tax credits, like the Lifetime Learning Credit, as long as there’s no double-dipping.
  • These accounts are self-directed, so your investment options are plentiful. They include…
    • Age-based funds
    • Static mutual funds
    • ETFs
    • Stocks
    • Bonds
    • Real estate

Disadvantages

  • Contribution limit of $2,000 per child per year.
  • The funds inside the account are taken into consideration when you file for financial aid. The assets are considered their parents assets.
  • If the money is not withdrawn from the account by the time the beneficiary is 30, they could be subject to taxes and penalties.
    • After 30, the funds inside the account become fully taxable and you’re penalized 10%.
  • Like the 529, contributions to this account are not tax-deductible.

Unique Characteristics

  • Only eligible to families/individuals that fall below an income threshold ($110,000 for single taxpayers and $220,000 for couples who file jointly).
  • The contribution limit is $2,000 per child per year, so even if a family member opens an account for your child, you still can’t go over that number, or there will be a penalty.
  • Qualified expenses include…
    • Tuition
    • Books
    • Supplies
    • Equipment
    • Tutoring
    • Special needs services
  • And can also include…
    • Room and board
    • Uniforms
    • Supplementary and transportation services
  • With a 529, the account owner has control over the assets. Conversely, with a Coverdell ESA, the beneficiary has control.

Conclusion

Effectively, there are three education savings vehicles used today. The UTMA/UGMA, Coverdell ESA, and the 529 plan. I’ve written about the other two in the past so go check those out.

On paper, the 529 looks like the best option, with a high contribution limit, a large number of qualified expenses, and there’s no penalty for letting funds sit for decades.

That is all true, and honestly, I prefer the 529, but the vast, vast majority of people that are helping their children save for college will not come close to the high contribution limit.

The only drawback to the Coverdell ESA is the penalty if the funds aren’t used before 30. Other than that, I don’t think the $2,000 contribution limit is a factor because most people can’t put that much away, anyway. Not without sacrificing their ability to save for retirement, as well.

That said, they’re both great options and you can’t go wrong with either one.

What Is A 529 Plan?

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Education, especially secondary education, is getting more and more expensive. The cost of a 4-year public university has gone up 110% from 1994 to 2014 (Source).

Conversely, wages have grown an astounding 8 times slower than that (Source).

What can you do to save for college? How can you help your kids? Are there certain vehicles that work better than others?

We’ll take a look at one of those in the following article.

What is a 529?

A college savings plan that is exempt from federal taxes, if you use the funds to pay for qualified education-related expenses.

Those expenses include tuition, books, room and board, computer equipment, and necessary supplies for students with special needs, as long as the student is attending at least half-time.

Advantages

  • Funds can be used for K-12, university, graduate school, and trade schools.
  • Parents can withdraw $10,000 per student per year to pay for tuition ONLY.
  • Other people, besides the account owner, can contribute to a 529 plan.
  • If funds are used for the beneficiary you intended, they can be transferred to a family member.
  • Earnings grow tax-deferred

Disadvantages

  • Gift tax exclusions – You are exempt from paying gift taxes if you keep it under $15,000 per individual per year, or $75,000 as lump sum every 5 years.
  • A penalty of 10% will be assessed for funds used on non-qualified expenses.
  • Limited investment options – most plans offer mutual funds as investments
    • Risk-based – Aggressive, moderate, conservative, etc.
    • Age-based – You can select an age-based fund from the get-go, and the fund company will reallocate into new funds as your child gets older.
    • Self-selected

Miscellaneous

  • All plans come with federal tax advantages, but some states offer tax deductions and credits as well!
  • Every dollar in a 529 plan will deduct 5.6% from your family’s need-based financial aid
    • One way around that is to have a family member act as the custodian for the account, so it isn’t in your name
    • However, once the child begins withdrawing the funds and is still attending school, they could have 50% of their financial aid withheld because those withdrawals are considered income
  • You can open one using other state’s plans, besides your own state

Other types of accounts

  • Coverdell ESA – Similar to the 529 in that you use the funds to pay for education-related expenses, However, there is an annual contribution limit of $2,000 per beneficiary, and there’s also an income restriction (once you make above a certain amount, you can no longer contribute to a Coverdell ESA).
  • UTMA/UGMA – Stands for Uniform Transfer to Minors Act/Uniform Gift to Minors Act. I’ve written about this in the past, so if you’d like to learn more, check out the article here.
  • IRA – You can use a Traditional IRA or a Roth IRA to pay for education expenses. Similar to the 529 and the Coverdell ESA, the expenses must be qualified and the student must go to a qualified institution, as indicated by the Department of Education. The most beneficial way to use an IRA is to withdraw the funds from a Roth IRA, but only withdraw what you contributed.

Conclusion

Secondary education is expensive! If you start saving for your kids’ college right away, the compounding returns could really help you save a decent amount.

It’s important to use the right vehicle, and, in my opinion, there’s no better option than the 529.

If you’d like to learn more about paying for college, read this article here. Or if you’re a future or current student that need some finance tips, read this one here.

Be advised: Investments in 529 plans involve risks to principal and may involve additional fees such as enrollment charges and annual maintenance fees. 529 plans offer no guarantees. There are exceptions to the gift tax and estate tax exemptions; please contact a qualified tax, legal, or financial advisor for more information prior to investing.

 

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How does Investment Strategy Change with Age?

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As we all know, as we age and our lives change. Our financial responsibilities and investment strategies change along with it.

In most cases, there are two truths to abide by. You have saved as much as you can and invest according to your risk tolerance, time horizon, and goals.

But what else is there? How do my financial life and my investment strategy change with time?

Starting career

Either you are just out of school or have been in the workforce for a few years. Regardless of which path you came from, there are two things on your list. Get rid of debt, or at least get it under control, and save for retirement.

There are several ways to plan for debt repayment.

  • Debt Snowball
  • Debt Avalanche
  • Balance transfers (credit cards)
  • Personal Loan (loan consolidation)
  • Refinance (student loans)

Check out this post on paying off your debt, here.

Step two is saving for retirement. If the company you work for offers a retirement plan, sign up for it. Max out your contributions if you can, but at the very least, contribute enough to get the employer match (if it’s offered).

Also, open a Roth IRA. If you have a little extra, contribute some to a Roth IRA in addition to your workplace plan.

Your investments. Time is your best friend at this point. Most of your investment allocation should be focused towards growth. Don’t put all of your eggs in one basket, diversify among stocks and bonds.

Again, the majority (at least 70%) of your portfolio should be in stocks, in some form or another.

Starting family

If you’re like the average American, your family starts to form around your 30th birthday. Hopefully, you’ve got a good head start on paying down your debt and saving for your retirement. Continue on that path.

With a family, comes saving for your kid’s college education, as well as other expenses (house, car, etc.). Contribute a little every month to a 529 College Savings Plan. The funds within this account can be invested aggressively, similar to your allocation in your twenties.

Your retirement savings is still in a good spot. Similar to your twenties, regarding the stock and bond allocation.

One last thing, get some disability and life insurance. If you have people that count on you, you need to protect them.

High earning years

More than likely, this will be your forties and fifties. At this point in your life, the average American is in their peak earning years, so take advantage of that and increase your retirement savings.

This will also be the time that your kids either go off to college or enter the workforce. Congratulations (kind of) you are empty nesters. You no longer have a college education to save for. More can go towards your retirement.

More than likely, though, you will have miscellaneous expenses from your kids that you will continue to pay for.

Your investment strategy will change slightly. You are getting closer to retirement so it’s time to start protecting what you’ve saved. A little less in stocks and a little more in bonds. Think 60/40 or 50/50.

Near retirement

You are in the home stretch! At this point, your debts (including your house, hopefully) should be paid off. All assets and your retirement savings should be looking healthy.

Your investment allocation will be similar to the last section. Definitely 50/50 if not 40/60, stocks to bonds.

Retirement

Congratulations, you’ve made it to your retirement. This can be liberating for some, but for others, this is an emotional challenge.

You’ve spent the last 40 or so years saving for retirement and now you are expected to start spending it. This is very tough for a lot of people.

From my experience and in my opinion, you should retain some sort of activity. Something that gets you out of the house, something that forces you to socialize, and something that makes you use your brain.

Staying social and sharp mentally could add some extra time to your life.

Your investments should be conservative. At least 40/60, but the more conservative the better. And it’s usually not a bad idea to keep some of your savings in cash, for emergencies such as health expenses (which will certainly go up at this point).

You don’t have many or any, more chances to earn more money, so it’s very important that you protect what you’ve saved.

Conclusion

The above information can be very useful to the average person. Paying off your debt and making your retirement savings a priority is very important.

Unfortunately, there is a retirement savings crisis in America. People aren’t saving nearly enough for retirement. They are counting on other sources, like Social Security or pensions to fund their retirement.

This isn’t enough. You won’t receive enough from Social Security to support yourself and pensions are few and far between, nowadays. We all need to do a better job of saving.

This article was created for informational purposes only. The above items are not to be taken for personal financial advice. Please consult with a professional about your personal situation.

To learn more about retirement savings and investing, and for our disclosures, visit our website: www.crgfinancialservices.com.

 

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What my $25,000/year College Tuition Didn’t Teach Me

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What Kevin's 25000 college tuition didn't teach him

It’s been about eight years since I graduated college. I was 22 at the time and excited to start my career. I started off working as a mortgage banker at a local Chicago bank getting paid a small monthly draw and commission.

I know what most of you are thinking. Why would you go straight for commission based job right out of college? The short answer is that real estate has always been my passion. Luckily in college, I was able to save up a little money doing affiliate marketing with online gaming sites. I had very little debt and was living comfortably.

It was about a year down the road after I graduated that I things started to spiral out of control, and before I knew it, I saw my finances spiraling a bit out of control. How did this happen? I knew everything about net present value, gross domestic product, and calculating an internal rate of return. However, one thing I had no clue about was  personal finance.

Building and Establishing Credit

Colleges simply don’t put enough emphasis on how important your credit score is. It’s a three digit number that determines how much credit you’re given and will have a huge impact on your future finances. Most students typically have what’s called a “thin file” report. A thin file report means that there aren’t enough trade lines on to provide a FICO score.

The underlying problem with this is that it’s hard to establish a credit score when you can’t obtain it. I established credit by becoming an authorized user on a family member’s account. After a short while, I was able to get a small $500 limit account. I slowly began to build my credit score and my creditors increased my limit over time.

I never knew how important credit was when I was 22 years. It wasn’t until I got into the mortgage industry where I saw the enormous difference in a homeowner’s mortgage rate that a few points could make.

Using Credit Responsibly

We’re all guilty of this. We overextend our credit, and we dig ourselves a hole too deep to climb out of. Having a large credit limit almost gives you a sense of “free money” to use. Your monthly payments are small enough to the point where you think you can afford to keep a large balance. In 2007, credit card companies didn’t need to require the fine prints of “By only paying the minimum payment, it will take you 27 years to pay off your debt.” It wasn’t in those exact words, but you get my drift.

The Credit Card Act of 2009 now requires creditors to show on the statement how long it would take to pay off a balance if the customer only makes the minimum payment, as well as the total interest cost to pay off the entire balance in 36 months. Unfortunately, that wasn’t the case in 2007.

And Then it Went Downhill

A few years later after I got my first credit card, my credit limit went from $500 to $20,000. I had credit card offers coming in my mail every single day. They clearly wanted my business and were offering a nice incentive to sign up (usually a ton of airline miles).

It wasn’t long before I overextended my credit. I found it more difficult to payday my debts and was never able to see real progress.

What exactly do you do in this situation? I couldn’t recall any classroom lectures on how to convince credit card companies to lower your interest rate. It was up to me to do my research and figure it out myself. At the end of the day, I was able to set up a payment arrangement plan with my creditors (similar to that of what credit counseling companies provide).

Personal finance is something that needs to be mandated in schools. No matter how book smart you are, your lack of knowledge in personal finance can make or break your future.

This is a guest post from Kevin Yu, a Senior Associate at Avant and managing editor at ReadyForZero. He also blogs for the Huffington Post and is part of the start-up incubator, Y-Combinator.