The Free Financial Advisor

You are here: Home / Archives for College Planning

10 Financial Moves That Break FAFSA Eligibility

by Leave a Comment

college
Image source: pexels.com

Filling out the Free Application for Federal Student Aid (FAFSA) is a key step for families hoping to lower the cost of college. But not everyone knows that certain financial decisions can hurt your chances of getting aid. Some moves might seem smart at first, but they can raise your Expected Family Contribution (EFC) and reduce or eliminate your eligibility for need-based aid. If you’re planning for college costs, understanding what breaks FAFSA eligibility is crucial. Here are ten common financial mistakes that can impact your FAFSA eligibility, so you can avoid them and maximize your financial aid.

1. Transferring Assets to a Student’s Name

Putting assets in your student’s name might sound like a way to help them feel responsible, but it can backfire. The FAFSA formula counts student assets much more heavily than parent assets. While parent assets are assessed at a maximum of 5.64%, student assets are assessed at 20%. That means moving savings or investments into your child’s name can sharply reduce your FAFSA eligibility by increasing your EFC.

2. Cashing Out Retirement Accounts

Retirement accounts like 401(k)s and IRAs are not counted as assets on the FAFSA. However, if you cash them out to pay for college, the withdrawal counts as income on the FAFSA for that year. This can significantly increase your reported income, causing a big drop in FAFSA eligibility and reducing your need-based financial aid for at least one year.

3. Large Gifts or Inheritances

Receiving a large monetary gift or inheritance before or during college might feel like a blessing, but it can hurt your financial aid eligibility. The FAFSA considers untaxed income, including gifts and inheritances, as part of your financial picture. If you receive a significant sum, it could raise your EFC and break FAFSA eligibility for that year.

4. Selling Investments Right Before Filing

If you sell stocks, bonds, or other investments just before completing the FAFSA, you could be increasing your income for the year. The FAFSA uses your tax return to calculate aid, so capital gains from investments count as income. This move can make your financial picture look stronger than it is, which can cut your FAFSA eligibility and reduce aid.

5. Paying Off Debt with Savings

It might seem logical to use your savings to pay down debts like credit cards or car loans before applying for aid. However, the FAFSA doesn’t count consumer debt against your assets. If you deplete your savings to pay off debt, you’ll have less cash on hand, but your FAFSA eligibility won’t improve. In fact, you could end up with less flexibility and no impact on your aid package.

6. Failing to Report Required Untaxed Income

Some families think skipping certain types of income on the FAFSA will help, but this is risky. Untaxed income, like child support or contributions to tax-deferred retirement plans, must be reported. Omitting these can result in corrections later, which may break FAFSA eligibility or even trigger a loss of aid if the mistake is caught.

7. Overfunding 529 Plans in the Student’s Name

529 college savings plans are a smart way to save, but whose name the account is in matters. If the student or a non-parent relative owns a 529 plan, distributions may be counted as the student’s untaxed income on the next year’s FAFSA. This can sharply reduce FAFSA eligibility, as student income is heavily weighted in the aid formula.

8. Ignoring the FAFSA Deadline

Missing the FAFSA deadline is a straightforward way to break FAFSA eligibility. Federal, state, and college deadlines can vary, and many forms of aid are first-come, first-served. Failing to file on time may mean you miss out on grants, scholarships, or work-study opportunities that could have made college more affordable.

9. Reporting Home Equity Incorrectly

For most families, the value of your primary home is not counted on the FAFSA. However, if you mistakenly include home equity as an asset, you could artificially inflate your resources and reduce your FAFSA eligibility. Always check the FAFSA instructions or consult a financial aid expert to make sure you’re reporting assets accurately.

10. Taking Out Parent PLUS Loans Before Filing

Parent PLUS loans are federal loans parents can use to help pay for their child’s education. But if you take out a PLUS loan before filing the FAFSA, the loan amount counts as an asset until it’s spent. This can increase your EFC and lower your FAFSA eligibility. Wait until after you’ve filed the FAFSA to consider these loans if possible.

Smart Planning for Maximum FAFSA Eligibility

Understanding what breaks FAFSA eligibility can help you avoid costly mistakes. The FAFSA formula isn’t always intuitive, and some moves that look financially savvy can actually hurt your chances for aid. Before making big financial decisions in the years leading up to college, consider how those choices will show up on the FAFSA.

Have you run into any FAFSA eligibility surprises? Share your experiences and questions below—we’d love to hear from you!

Read More

6 Retirement Plans That Kick You Off Federal Aid Without Notice

7 Financial Steps That Can Disqualify You From Medicaid

7 Investment Accounts That Could Disqualify You From Financial Aid for Your Kids

by Leave a Comment

7 Investment Accounts That Could Disqualify You From Financial Aid for Your Kids
Image source: 123rf.com

Parents often work hard to save for their children’s future, but some savings strategies can unintentionally reduce the chances of qualifying for financial aid. The type of account you choose can directly impact the amount of need-based aid your child receives. Certain assets are factored more heavily into financial aid formulas, making it important to understand where your money is stored. By knowing which accounts to be cautious with, you can avoid surprises when tuition bills arrive. Here are seven common investment accounts that could disqualify you from financial aid for your kids — and what to consider instead.

1. Custodial Accounts (UGMA/UTMA)

Custodial accounts, such as Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) accounts, are considered the child’s assets for financial aid purposes. This means they are assessed at a much higher rate than parental assets in the aid calculation. Even a modest balance can significantly reduce need-based assistance. While these accounts offer flexibility and tax benefits, they’re one of the investment accounts that could disqualify you from financial aid for your kids if the funds are substantial. Before funding them heavily, weigh the potential impact on future college costs.

2. Standard Brokerage Accounts in the Parents’ Name

Although assets in a parent’s name are generally assessed at a lower percentage than the child’s, large balances in a taxable brokerage account can still affect aid eligibility. These accounts include stocks, bonds, mutual funds, and ETFs held outside of retirement plans. Because they are readily accessible, they count more heavily in financial aid formulas than certain protected accounts. This makes them one of the investment accounts that could disqualify you from financial aid for your kids if the balances are high. Consider using tax-advantaged college savings plans as an alternative.

3. 529 College Savings Plans Owned by the Student

529 plans are excellent tools for college savings, but ownership matters. If the account is in the student’s name, it’s treated as the student’s asset and assessed at a higher rate. This can make a noticeable difference in the expected family contribution. While 529 accounts are generally favorable in aid formulas when owned by a parent, student-owned plans can still be one of the investment accounts that could disqualify you from financial aid for your kids. To maximize aid potential, it’s often better for parents or grandparents to own the plan.

4. Coverdell Education Savings Accounts

Coverdell accounts allow for tax-free withdrawals for education expenses, but like student-owned 529 plans, ownership impacts financial aid eligibility. If the student is the account owner, the funds are considered their asset. Even when owned by a parent, the balances can still reduce aid eligibility more than some other savings vehicles. This makes them one of the investment accounts that could disqualify you from financial aid for your kids if they are heavily funded. Weigh the benefits of tax-free growth against potential reductions in need-based aid.

5. Trust Funds for the Student’s Benefit

Trust funds, depending on how they are structured, can be counted as either a student or parental asset. In many cases, the value of the trust is factored into the aid formula even if the student cannot access it until a later date. If the trust is irrevocable, it still may impact eligibility depending on the terms. Because of this, trust funds are one of the investment accounts that could disqualify you from financial aid for your kids without careful planning. A financial planner experienced in college funding can help structure trusts more strategically.

6. Savings Bonds in the Student’s Name

Savings bonds, such as Series EE or I Bonds, are considered student assets when owned by the child. Even though they can be used for education and may offer tax advantages, their ownership can hurt financial aid eligibility. The value of the bonds will be included in the formula, potentially reducing the amount of aid awarded. This makes them another example of investment accounts that could disqualify you from financial aid for your kids if the holdings are significant. Transferring ownership to a parent before filing the FAFSA may be worth considering.

7. Real Estate Investments Outside the Primary Home

While your primary residence is generally excluded from the FAFSA asset calculation, other real estate investments are not. This includes vacation homes, rental properties, and land. The equity in these properties can significantly raise your expected family contribution. Because they are often high-value assets, they’re among the most impactful investment accounts that could disqualify you from financial aid for your kids. If real estate is part of your portfolio, consult with a financial aid advisor to understand its effect before applying.

Balancing Savings and Aid Eligibility

The challenge for parents is finding the right balance between saving for the future and preserving financial aid opportunities. By understanding which investment accounts could disqualify you from financial aid for your kids, you can make more informed decisions about where to place your assets. Sometimes, the best approach is to diversify across protected accounts and more flexible investment vehicles. With early planning and the right strategy, you can support your child’s education without sacrificing valuable aid.

Have you reviewed your savings strategy for its impact on financial aid? Share your experiences and tips in the comments to help other parents plan smarter.

Read More:

Why Do So Many Teenagers Think There Parents Will Take Care of Them After 18

What Financial Planners Know About Divorce That Most Couples Don’t

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

by Leave a Comment

college
Image Source: unsplash.com

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!

Read More

Bank of Mom and Dad: How You’re Risking Your Retirement for Your Adult Children

Planning for the Unexpected: Why Newlyweds Should Get Life Insurance

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

by Leave a Comment

millennials pay for college tuition

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

12 Crucial Money Lessons Baby Boomers Passed Down to Their Millennial Kids

Top 10 Craziest Splurges Lottery Winners Make

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

by Leave a Comment

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.

What is the Coverdell ESA?

by

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?

by

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.

 

If reading this blog post makes you want to try your hand at blogging, we have good news for you; you can do exactly that on Saving Advice. Just click here to get started.

How does Investment Strategy Change with Age?

by Leave a Comment

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.

 

If reading this blog post makes you want to try your hand at blogging, we have good news for you; you can do exactly that on Saving Advice. Just click here to get started.

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

by 1 Comment

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.

Teaching Your College-Aged Child About Money – 2 Guys and Your Money 45

by Leave a Comment

Subscribe to the podcast through iTunes and new episodes will show up every week!

Never subscribed to a podcast before? Here’s Apple’s fantastic tutorial.

 Would you rather listen on your smartphone? Try Stitcher or the iPhone podcast app. We’re available on both platforms.

In the episode, OG & I discuss how we were both horrible with money while in college. We learned many lessons, but today’s college-aged child needs to know about topics many parents didn’t confront. We describe the college landscape and how to help your child cope with financial complexity while in college.

Show Notes

<> Open

<> Hotels.com – Score up to 50% off the published rate on a hotel stay AND help out your favorite podcast all at the same time.

<> From Broke College Kid To Financial Whiz

Enhanced by Zemanta