General principles Flashcards
College Education Funding
Needs Analysis
(steps)
Step 1. Determine the cost of the first year of college. Find FV or inflated college cost.
I = increase in cost or inflation only
Step 2. Determine the amount that must be available when the child is age 18. Use inflated college cost from step 1 as PMT in this step. Find PV or lump sum needed.
NOTE: College costs are due at the beginning of the period. You must be in begin mode.
I = inflation adjusted = (after tax return / inflation) typically n = 4 years in school
Step 3. Determine how much the parent needs to save either lump sum (PV) or yearly (PMT). Use lump sum needed from step 2 as FV in this step.
I = after tax return only
Buying home vs Leasing apartment
Buying
Tax deductions for interest,
taxes Capital gains on sale
Leasing
Rent may be lower,
save money
No closing or maintenance costs
Concept – think time and taxes to make the recommendation on the exam.
The higher the marginal tax bracket, the greater the advantage of home ownership. Also consider the time frame. Short-time periods favor renting; long-time periods favor owning.
American opportunity credit
$2,500 per student maximum
First four years of college
Lifetime Learning Credit
$2,000 maximum
undergraduate/graduate
College years funding - (after poorish + wealthy)
Coordination rules per year, per expense, per student - use only one*
American Opportunity Credit
Lifetime Learning Credit
Coverdell withdrawal
Qualified tuition 529 program withdrawal
Rule 3.9 Commingling of funds
A CFP® designee may not commingle client funds with the funds of the financial planning firm.
However, clients’ funds can be commingled in a common client investment account.
Client wants to use unrealistic inflation and return assumptions, what should you do?
It is okay to use the client’s unrealistic inflation and return assumptions. It can help educate them on weaknesses.
Ask to use 10-year inflation and return assumptions.
Be careful using prior year numbers. Better to use a period of time instead.
What does CFP Board mean by “costs” and “any other sources of compensation”?
Rule 2.2a.ii requires disclosure of expenses the client will incur, including firm or adviser expenses passed on to the client as an additional charge. Examples that must be disclosed include but are not limited to the following, when applicable:
• 12b-1 fees;
• Cash bonuses or other incentives received from the firm or issuer for selling specific financial or insurance products;
• Trailing commissions for selling financial or insurance products;
• Compensation received from wrap-fee programs;
• Trading fees, if passed on to the client;
• Ticket charges, if passed on to the client;
• Administrative or management fees on mutual funds or variable annuities as outlined in the prospectus; and
• Solicitation fees.
If the cost to the client is not known until a series of decisions or actions occurs, the Standards do not require the CFP® professional to provide disclosure until that information is determined.
Coverdell ESA qualified education expenses
“Qualified elementary and secondary education expenses” may also be paid tax-free. Such expenses include tuition, fees, academic tutoring, special needs services, books, supplies, and other equipment incurred in connection with the enrollment or attendance of the designated beneficiary at a public, private, or religious school that provides elementary or secondary education (K-12). In addition, the covered expenses include room and board, uniforms, transportation, supplementary items, and services including extended day programs (after school) required or provided by such schools. Also permissible are expenses for any computer technology or certain equipment or internet access and related services if such are to be used by the beneficiary and the beneficiary’s family during any of the years the beneficiary is in school.
