General principles Flashcards
What does FDIC cover?
250k per person, per ownership, per institution
What type of accounts do FDIC not cover?
Mutual funds, brokerage accounts
Chapter 7 Bankrupcty
liquidation, income must be below a certain amount
What obligations must still be repaid if a chapter 7 bankruptcy is filed?
child support, alimony, income taxes less than 3 years ago, student loans, secured debt
What is the main reason to file a chapter 7 bankruptcy?
medical debt
Chapter 13 bankruptcy
repayment plan. Will pay more every month to make payments on their overdue debt along with their current monthly payments
Eligibilty requred for chapter 13 bankruptcy
debt must be under a certain amount
How long does a chapter 13 stay on credit score
7 years
chapter 11 bankrupty
intended for business but also accomodates those who exceed chapter 13 debt limitations or lack regular income
Primary purpose of chapter 11 bankruptcy
reorganization
Consumer Credit Protection Act
right to know costs and terms of credit
Equal Credit Opportunity Act
right to fair opportunity to obtain creditq
Fair credit reporting act
right to know whats in your crdit file
Fair credit billing act
right to havebilling mistakes resolved
fair debt collection practices act
right to be protected from collection agencies
who oversees all things debt
consumer financial protection bureau
How much is payment history factored into a credit score
35%
how much is amounts owed factored into a credit score
30%
how much is length of histyr factored into a credit score
15%
how much is new credit factored into a credit score
10%
how much is credit mix factored into a credit score
10%
poor credit score
<580
fair credit score
580-669
good credit score
670-739
very good credit score
740-799
exceptional credit score
800+
balloon mortgage
a mortgage in which a large portion of the borrowed principle is repaid in a single payment at the end of the loan period
what are origination points
points are a percentage of the amount borrowed and can be added into the mortgage
conventional loan terms
3-20% down payment, down payment <20%=PMI insurance, fixed/variable rate, no funding fees
PMI(private mortgage) insurance
required if a borrower puts down less than 20% of value of home
VA loan tersm
0% down payment, no pmi insurance, fixed/variable fee, funding fees unless diabled veteran
FHA loan terms
3.5-20% down payment, pmi insurance always for 11 years or life of loan, fixed/variable fee, no funding fees
USDA loan terms
0% down, no pmi insurance, fixed only rate, funding fees
Goal of mortgage type to be considered
always look to minimize fees and interest. Ultimately looking to reduce years and rates when possible
What is an advantage and caveat of taking the lower monthly payment through a longer variable rated mortgage to invest the difference
investor must be disciplined and the return of the investment must be higher
Housing cost ratio (aka front end ratio or mortgage debt service ratio)
Pass if <or= 28%
Total debt ratio (aka back end ratio or debt repayment ratio) and
pass if = or <36%
total debt ratio formula
(PITI + monthly consumer debt) / monthly net household income
housing cost ratio formula
PITI/gross household income.
consumer debt ratio formula
=monthly consumer debt (non-housing) / monthly next household income
consumer debt ratio pass
= or < 20%
how to calculate for remanining balance on mortgage on calculator
xxxxx
how to calculate remianing balance on calculator
xxxxx
how to calculate total interest paid in any given timeframe on calculator
xxxxxxx
how to calculate total principal paid in any given timeframe on calculator
xxxxxxx
how to calculate a refinance in the calculator
xxxxx
Education Funding Required Information (6)
Child Age
Anticipated College Start Date (commonly 18)
Anticipated Length of College Enrollment (Assume 4 Years, if not provided)
Current Tuition
Education Rate of Inflation
Expected Investment Rate of Return
Education Funding 3 steps
INFLATING the current tuition to its value on Day 1 of College
ADJUSTING the amount to solve for the Present Value of TOTAL funding needed on DAY 1 of College
INVESTING the funds to hit the education savings need solve for in STEP 2
What % do you use when calculating total cost of college attendance on day one?
inflation adjusted (step 2)
What % do you use when calculating total college cost from today to day 1 of college?
education rate of inflation, not CPI
What step when calculating college funding does ‘begin mode’ get put in?
step two
What % do you use when INVESTING the funds to hit the education savings need solve for in STEP 2
investment % (step 3)
What is a Section 529 Plan?
A program that allows taxpayers to either prepay or contribute to an account that will pay a student’s qualified education expenses at an eligible educational institution
Who can have a Section 529 Plan?
Anyone can participate in a 529 plan regardless of the age of the beneficiary.
Who can contribute to a Section 529 Plan?
There are no income restrictions on the individual contributors. Contributions to both a 529 and a Coverdell Education Savings Account (ESA) in the same year for the same designated beneficiary are permitted.
Are distributions tax-free?
Yes, if they are made towards qualified education expenses.
What is a Coverdell ESA?
A savings account is set up to pay the qualified education expenses of a designated beneficiary.
Who can have a Coverdell ESA?
Any beneficiary who is under age 18 or is a special needs beneficiary.
Who can contribute to a Coverdell ESA?
Generally, any individual (including the beneficiary) whose modified adjusted gross income for the year is less than $110,000 ($220,000 in the case of a joint return).
Are distributions tax-free?
Yes, if the distributions are not more than the beneficiary’s adjusted qualified education expenses for the year.
How are 529 plans federal income tax?
non deductible contributions; withdrawn earnings excluded from income to the extent of qualified education expenses
Federal gift tax treatment of 529
contributions treated as complete gifts; apply 17k annual exclusions or up to 85k with 5 year election
federal estate tax treatment of 529s
value removed from donors gross estate; partial inclusion for death during a 5 year election
Max investment in 529 plans
established by the program; many excess of 400k per bene
qualified expenses for a 529 plan
college tuition, fees, books, computers, and related equipment, supplies, special needs; room and board for min part time students. Up to 10k in tuition expenses k-12 schools. Up to 10k in student loan payments
Are there time/age restrictions for a 529 plan?
no unless imposed by the program
income restrictions for 529 plan?
none
federal financial aid impacts of a 529
counted as an asset of parent if owner is parent or dependent student
tax consequence in a 529 plan if used for a nonqualfied expenses
withdrawn earnings subject to federal tax and 10% penalty
federal income tax of a coverdell esa
non deductible contributions; withdrawn earnings excluded from income to extent of qualified higher education expenses and qualfied k-12 expenses also excluded
federal gift tax treatment of coverdell esa
contributions treataed as completed gifts; apply 17k annual exclusion
federal estate tax treatment
value removed from donors gross estate
maximum investment in a coverdell esa
2k per beneficiary per year combined from all sources
qualfied expenses
tuition, fees, supplies, equipment, special needs; room and board for min hald time students; additional types of k-12 expenses
time/age resitrictions of coverdell esa
contributions before beneficiary reaches 18; use accocunt or change beneficiary by age 30
income restriictions for cvoerdell esa
phase out for incomes between 190k-220k (jt filers) or 95k-11k (single filers)
federal financial aid for a coverdell esa
counted as asset of parent if owner is parent or dependent student
what is the best way to fund education?
529 & esa accounts
What is a UGMA & UTMA account?
A custodial account for the benefit of a minor within which a minor may own securities.
Who can have a UGMA/UTMA account?
The minor named as beneficiary on the account.
Who can contribute to a UGMA/UTMA account?
Anyone can contribute to a UGMA or UTMA. They are taxable investment accounts with no contribution limits. Kiddie tax rules may apply to unearned income generated by the investments.
Are UGMA/UTMA distributions tax-free?
No, the investments within the account are taxable
What is a Series EE/Series I bond?
Special savings bonds through which an exclusion from taxation on interest is available when used for qualifying educational expenses.
Who can have a Series EE/Series I bond?
The bond must be issued either in one parent’s name (as the sole owner) or in the name of both parent and spouse (as co-owners).
Who can purchase a Series EE/Series I bond?
The purchaser/owner must be at least 24 years old before the bond’s issue date
Are distributions tax-free in a Series EE/Series I bond?
When used for qualifying educational expenses and the owner’s MAGI is below certain limits, interest from bonds is tax-free.
Federal financial aid for UGMA/UTMA
counted as asset of student (more punitive for child)
maximum investment in qualifying us savings bons
series EE: 10k per year, per owner. Series I 10k (digital); 5k (paper) per year, per owner
federal income tax for qualfiying us savings bond
tax deferred for federal; tax free for state
federal income tax for utma/ugma
earnings and gains taxed to minor; for 1250 of unearned income is tax free, unearned income over 2500 for certain children under age 24 is taxed at parentsl highest marginal rate
financial aid alternatives
home equity loan, life insurance cash values, qualfied plans (via borrowing), defer admissions, community college
by when do coverdell esa’s need to be funded by?
age 18
federal income tax for Roth IRA as a education funding option
non-deductible contributions; withdrawn earnings excluded from income after age 59.5 and five years; 10% penalty on early withdrawals waived if used for qualified higher education expenses
federal income tax for a traditional IRA as a education funding option
deductible or non-deductible contributions; withdrawals in excsess of basis subject to tax; 10% penalty on early withdrawals waived if used for qualfied higher education expenses
Roth IRA federal financial aid
not counted as asset; withdrawals of principal and interest counted as financial aid income
traditional IRA federal financial aid
not counted as asset; withdrawals of principal and interest counted as fianncial aid income
When may a 529 ABLE Plan be be established?
if blindness or disability occurred before age 26
529 ABLE accounts Qualified disability expenses
any expenses incurred at a time when the designated beneficiary is an eligible individual. The expenses must relate to blindness or disability, including expenses for maintaining or improving health, independence, or quality of life.
What is the total annual contributions to an ABLE account
17k including amounts rolled over from a 529 account
Federal tax consequences for an ABLE account
non-deductible contributions;
withdrawn earnings excluded from income to the extent of qualified disability expenses
What is the threshold for federal fianncial aid for a ABLE account?
balances of 100k or less are disregarded; would also not be reported as an asset on a siblings FAFSA
ABLE accounts used for nonqualifying expenses
Will result in tax implications and penalties and could affect the bene’s eligibility for public benefits
Where can contributions from an ABLE account be made from?
friends & family, special needs trust,529 college savings account rollover
What 2 types of financial aid does not required to be paid back?
grants and scholarships
Pell Grants
Awarded to undergraduate students who have exceptional financial need and who have not earned a bachelor’s, graduate, or professional degree.
Scholarships
Generally, a scholarship is tax-free if you are a full- or part-time candidate for a degree at accredited post-secondary institutions.
Federal Supplemental Educational Opportunity Grant (FSEOG)
A FSEOG is for undergraduates with exceptional financial needs (i.e., students with the lowest EFCs) and gives priority to students who receive Federal Pell Grants. An FSEOG does not have to be paid back.
Direct Subsidized Loan
(need-based; undergrad ONLY)
In short, Direct Subsidized Loans have slightly better terms to help students with financial needs.
The U.S. Department of Education pays the interest on a Direct Subsidized Loan
while you’re in school at least half-time
for the first six months after you leave school (referred to as a grace period)
during a period of deferment (a postponement of loan payments).
Direct Unsubsidized Loans
(non-need-based; undergrad, grad, & professional student)
Direct Unsubsidized Loans are available to undergraduate and graduate students; there is no requirement to demonstrate financial need.
Students are responsible for paying the interest on a Direct Unsubsidized Loan during all periods.
Who pays interest on a direct subsidized loan while the student is in school at least half time?
the US department of education
Direct PLUS/PLUS Loans
(non-need-based; undergrad, grad, & professional student) is commonly referred to as a parent PLUS loan when made to a parent, and as a grad PLUS loan when made to a graduate or professional student.
The U.S. Department of Education is the lender.
Cannot have an adverse credit history.
What is the MAX PLUS loan one could receive?
(cost of attendance - any other financial aid received)
What loans are non-need based; undergrad, grad & professional student?
Direct unsubsidized laons, direct PLUS/PLUS loans
529 account distributions when a child receives a scholarship?
the parent can take up to the scholarship amount of the 529 plan account without penalties. Will have taxation but NO penalties.
How far does a FAFSA application look back for income?
2 years
EFC (Expected Family Contribution)
Consists of: Income (Parent & Student) + Assets (Parent & Student)
Income
Parents = (AGI) minus an allowance for taxes + living expenses.
Students = Amount over ‘protected amount’ ($7,600 for 2023-24 academic year).
Assets that are counted towards the EFC
Cash, savings, checking accounts, money market funds, and CDs
Investments (e.g., mutual funds, stocks, stock options, bonds, commodities)
Rental real estate equity, businesses, investment farms, and trust funds
College savings plans, CESAs and 529s
What is not counted towrds the EFC?
home equity and retirement plans
How does the EFC see assets listed as?
Parents or in dependent child’s name: Parent Assets
Independent students/spouses: Student Assets
Others (e.g., aunts or grandparents): Excluded
Financial Need Formula:
Cost of Attendance (COA) – EFC = Financial Need
Percentages of what EFC counts for childs and parents income and assets?
Income: parent 22-47% (will be given), child 50%
Assets: child 50%, parent 5.64%
EFC assets and distrbutions
EFC assets included at: parent 5.64%, others 0
Distributions: parent none; others up to 50% reduction
What type of relationship does Financial aid availability and the Expected Family Contribution (EFC) have?
inverse relationship
What is more punitive in the EFC formula?
assets and income in the students name
AOTC max benefit
up to 2500 per elgible student; 1st 2k= 100%inclusion, 2nd 2k= 25% inclsuion
Lifetime learning credit max benefit
up to 2k per return
are the AOTC and LLC refundable?
AOTC up to 40% (1k); LLC no
Limit of MAGO for MFJ for AOTC and LLC?
90k
Number of years of post-secondary education available for AOTC and LLC?
AOtC for 4 yerws of post secondary education; LLC all years of post secondary education and for courses to acquire or improve job skills
Number of tax years benefit available for AOTC and LLC?
AOTC= 4 yers per eligible student; LLC= unlimited
Minimum number of courses needed for ATOC and LLC credit?
AOTC= at least half time for at least one school year; LLC= availablke for one or more courses
qualified expenses for AOTC
Tuition, required enrollment fees, and materials needed for the course of study
qualified expenses for LLC
Tuition and fees required for enrollment or attendance only.
Can you use both AOTC and LLC in the same tax year?
yes as long as ty are not pulling from the same overlapping expenses
