Savings Vehicles Flashcards
529 College Savings Advantages
Parent controls the asset
Anyone (parent, single person with no dependents, a TRUST, grandparents-can do trust, and say $ goes to most needy grandchild) can contribute
Appreciation is Tax-Free
Contributions can be made over a 5-year period (up to $75,000 without annual gift tax); couple choosing gift-splitting can contribute $150,000 to pay for each child’s education (equivalent of five $15,000 gifts made over five years)
Allows grandparents to remove assets from gross estate
No A.G.I phase out!
Account owner can change! as long as new beneficiary is a family member (cousin or closer) of original beneficiary,
529 College Savings Disadvantages
If funds are not used for qualified education expenses
There is a 10% penalty on earnings
Earnings are also included in gross income
529 Qualified Education Expenses
Tuition, fees, books, supplies, equipment, ROOM and BOARD of students enrolled at least half-time
Beginning in 2018, up to $10,000 may be used for K-12 tuition in public, private, or religious school
Beginning in 2020, Secure Act, an aggregate of $10,000 can be distributed to pay student loans; also qualified distributions include use for apprenticeships (registered with Secretary of Labor, and certified)
529 Pre-Paid Tuition Plan
No pre-set annual limit
For example, grandparent can put lump sum $140,000 into Pre-Paid plan for her alma mater
529 Pre-Paid Tuition Plan Features and Disadvantages
Advantages
Asset of parent for financial aid purposes
Can pay In-State college credit at “today’s cost”
For Risk-averse Investor
Disadvantages
Only earn return equal to Tuition Inflation
Kid can earn a scholarship and not use this savings
If funds are not used, the principal is returned (without interest)
Only Pays TUITION; not ROOM and BOARD
529, Accelerated five years’ worth of contributions
Donor can contribute up to $75,000 to 529 plan in 2021; it is treated as if you spread it over 5 years
Additional contributions are NOT allowed during that period, even if donor is below gift exclusion limit
The 5-Year Election must be reported on Form 709 each year
For a contribution of $50,000, it leaves $5,000 unused gift exclusion per year
Reasons to Choose 529 over Coverdell
No income cap (Coverdell phases out between $95,000 and $100,000 MAGI for single, $190,000 and $200,000 married taxpayers filing jointly
Higher contribution limits (Coverdell is $2,000 per year total limit) with no five-year averaging
Potential for $75,000 in one year
529A Account
529 Achieving a Better Life Experience
Persons w disabilities; eligible under SS disability or SSI
Similar to Pre-Paid Tuition Plan
Contributions can be made by anyone
Not to exceed $15,000 in total
529 plans are eligible to be rolled into a 529A, (family member of ORIGINAL beneficiary)
Federal Supplemental Educ Opportunity Grant (FSEOG)
Federal Work Study
CAMPUS BASED FINANCIAL AID
FSEOG is awarded to students with very low EFC; limited to $4,000. Needs-based.
Federal Work Study
On or off campus employment to help pay education expenses; carries no statutory maximum
How to pay for private secondary school (setting aside an account to grow TAX-FREE)
Both 529 Savings Plan or Coverdell provide education benefits for secondary education
What is best option to pay for college for kids in their late teens if parents (A.G.I. over $100,000) have not saved?
PLUS Loan (remember “+” for high income)
Uniform Gift to Minors Act/ Uniform Transfers to Minors Act
If parents want to set aside college funds of $5,000 per year for 2 small children, what’s one savings instrument?
UGMA account, of well-diversified stocks
(UGTA can hold real estate (remember, tall buildings).
Asset of child
May be subject to KIDDIE TAX
Child under 19, may be TAXED using trust and estate tax rates
Child 19 or older unearned income taxed at child’s rate: exception is FT student, 23 or less, subject to KIDDIE
UGMA-age of majority, 18 or 21, depending on state
UTMA-age can be designated by custodian up to age 25
Coverdell Education Savings Account
Asset of parent
Max contribution $2000, PER STUDENT (not per donor), up until beneficiary is age 18
Used only for education expenses, if beneficiary is under age 18, or specified as “special needs”
Must be used by time beneficiary is 30; if beneficiary is 30, funds must be withdrawn, however they are used
Contributions grow TAX-DEFERRED and earnings are TAX-FREE
Penalty of 10% on earnings and earnings are included in gross income if NOT used for qualified ed expenses
Can be used for both private K-12 and higher education
Funds can be held in a trust
Coverdell Advantages, Disadvantages
Advantage of Coverdell over 529?
Self-directed investments
Qualified educ expenses include ROOM and BOARD; also K-12 uniforms and transportation
Disadvantage?
Contributions to Coverdell are phased out for MFJ $190,000-$220,000 and single $95,000-$110,000
Expected Family Contribution
Expected Family Contribution (EFC) is used to determine type of financial aid you qualify for
Tuition/Cost of Attendance (COA)
-- Expected Family Contribution
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
FINANCIAL NEED
Free Application for Student Aid (FAFSA)
Way for college to determine EFC
Draws information from IRS and consolidates it in one place
All families should complete FAFSA
PLUS Direct
Grad or Professional Student enrolled at least half time
Dependent on STUDENT CREDIT SCORE
Max loan is COA minus financial assistance rec’d divided by Max PLUS loan amount
Start paying loan back 6 mo after you graduate, leave school, fall below half-time
Interest accrues as you go, or you can start paying it right away
At what point are students Independents?
Age 23 Married Working on Masters or Doctorate If they have legal dependents or a spouse Vet of US Armed Forces
PLUS
Parent Loans for Undergraduate Students
Loan for parents
Not need-based
Not subsidized
Pell Grants
Awarded by federal government based on financial need; up to $6,495 for 2021-2022
Only for students who have not yet earned a bachelor’s degree
Roth IRA
Contribution limit of $6,000/year; plus $1,000 if 50 or over
Contributions are NOT TAX deductible
Grow TAX DEFERRED and QUALIFIED Distributions are excluded from GROSS INCOME
Qualified ed expenses: tuition, fees, books, supplies, equipment, ROOM & BOARD (kids enrolled at least half-time)
Qualified Distribution Rules: Meet 5 year holding period; limited to $10,000 (Non-qualified distributions face 10% penalty and earnings are included in gross income)
(Owner can withdraw contributions, but this action may have negative impact on retirement)
529 Plan versus Roth IRA
Choose 529
Donor has $75,000 for accelerated five years’ worth of contributions
Choose Roth IRA
(Donor is middle income.) Withdrawals of up to $10,000 are EXEMPT FROM TAXATION if used for qualified education expenses
Series EE/E Savings Bond
Sold at face value, $25 minimum, $10,000 annual max
Do not pay periodically
Slowly increases in value, over 30+ years, based on fixed rate at time of purchase
Redeemable after one year, with 3 month interest penalty if redeemed in less than 5 years
INTEREST is not TAXED at federal level until bond is redeemed. May qualify for TAX-FREE for educational expenses
INTEREST is not TAXED at state or local level
Stafford Loan (AKA Direct Subsidized Loans)
Primary type of aid from US Dept of Education
Are student LOANS (both undergrad and graduate)
Repayment begins after 6 month grace period of leaving school or falling below PT status
There are two types: SUBSIDIZED (needs based, feds pay interest while you’re in school) and UN SUBSIDIZED (interest begins to accrue when funds are disbursed)
(Stafford Loan is not appropriate if parents intend to repay loans)
Student Loan Interest Deductions
Interest on student loans (Stafford) is deductible ABOVE-THE-LINE (before A.G.I.) and limited to $2,500
Loan must have been used for : Tuition, ROOM and BOARD, supplies, necessary expenses
Qualified Tuition and Related Expenses DEDUCTION
Taxpayer Certainty and Disaster Tax Relief (2019)
Reinstated the deduction for TUITION and FEES as deductible ABOVE-THE-LINE (before A.G.I.)
Lifetime Learning CREDIT
Tuition, fees
Undergraduate, Graduate, and Professional program
Tax CREDIT limit: 20% up to $10,000 per yr
Maximum Lifetime Learning Credit is “PER FAMILY”, at $2,000 per year (e.g., son has $5,000 bill, daughter has $7,000; family total of $12,000 X .2 = $2,400. Limited to $2,000)
Unlimited number of years (for tuition, fees, student activity fees, books, supplies, equipment, as long as fees are paid DIRECTLY to eligible institution)
American Opportunity Tax CREDIT
Tuition, fees
4 YEARS of post-secondary education
Tax CREDIT consists of:
-100% of first $2,000 qualified expenses
-25% of second $2,000
Max credit “PER STUDENT” is $2,500 per year, based on no. of dependent students on family’s tax return (1st born has $4,000 in expenses; 2nd born, $5,000 in expenses: Total AOTC for family is $5000 ($2,500 per kid)
Qualified expenses for AOTC include tuition, fees, paid DIRECTLY to university. Other qualified expenses DO NOT have to be paid directly to college (books, supplies, equipment)
Coordination Rules
MAY use AOTC or Lifetime Learning Credit in same year as distribution from QTP, just NOT same expenses
May NOT claim both AOTC and Lifetime Learning Credit for same child in same year
May NOT use AOTC or Lifetime Learning Credit for the same expense paid by QTP
Funding Years
Coverdell Education Savings Plan
EE Education Bonds
Sect 529 plan (QTP): College Savings vs Prepaid tuition
UGMA/UTMA
College Years
Lower Income: Pell, SEOG, Subsidized Stafford
Higher Income: PLUS
Credits, Withdrawals, Other:
AOC ($2000 plus 25% $2000, Max $2500;
MAGI phase out; first 4 years of college)
Lifetime Learning ($2,000 max; any higher educ
(undergrad, grad, continuing ed; MAGI phase out)
Coverdell withdrawals (MAGI phase out),
529 distributions (No MAGI phase out)
Graduate Years
Options Fulbright Scholarship Stafford Loan 529 distribution or Coverdell distribution (same coordination rules apply)
Gifts of Present Interest
Gifts of UGMA/UTMA, Coverdell, 529 plans
EE/E bonds are NOT a complete gift, as parents will own the bond
Gifting through a TRUST
Disadvantage
If trust is funded first, contribution to 529 plan are then made directly to trust; five-year averaging election is not available
Advantage
To maximize the annual gift exclusion with 5-year averaging election, it is better to make that contribution to 529 account first, and then transfer account ownership to a trust, Or,
Trust can make a small contribution to 529 plan in order to establish it; the grantor can then make a larger contribution directly to the trust-owned 529 account. Five-year averaging election should be available for these large contributions
Under SECURE ACT, can 529 plans pay up loans?
Yes, the SECURE ACT allows 529 plan distributions to pay student loans up to a lifetime limit of $10,0000 for any person(s).
529 Distributions from Non-Parent Sources, Impact on Financial Aid
529 plan distributions from Non-parent sources can be considered assets of child, and affect financial aid.
Use non-parent 529 monies in Junior/Senior years of college so as to not affect FAFSA aid calculation
Kiddie Tax Calculation
If Kiddie Tax is applied on UNEARNED income, it is calculated as:
STEP 1. Child gets $1,100 (2021) standard deduction (No TAX applied to first $1,100)
STEP 2. Next $1,100 is taxed at child’s income tax rate of 10% ($110 of tax)
STEP 3. Amounts greater than $2,200 are taxed at parents’ marginal tax rate
If child has EARNED income greater than standard deduction, the amount of earned income PLUS $350 is used in Step 1.
UGMA/UTMA Advantages and Disadvantages
Primary Risk: Kid uses money for something other than education
Advantage:
Assets can be invested in any investment
Disadvantages:
Kiddie Tax operates until child reaches 18 or 24
Assets pass to child at age of majority
Assets are child owned for federal aid
Some states allow UGMA/UGTA transfer to 529; but, child remains the owner!
Series EE or Series I education bonds
Intend to fund eligible education expenses
Normally purchased in parents’ name (age 24+ at time)
CANNOT be issued in name of child OR in custodial account
Must be redeemed in year in which the owner pays qualified higher ed expenses (defined as TUITION and FEES; room and board are not qualified expenses!)
Interest will be fully exempt from federal income tax only
Phase Outs: (included on Tax Tables) for 2021 are $124,800-$154,800 MFJ, $83,200-$98,200 Single
Savings bonds can be held in UTMA account, but they cannot qualify for educational expense exclusion!! If redeemed for college, Interest is TAXABLE!
SUITABILITY
Relates to:
Time HORIZON
RISK TOLERANCE
TAX ADVANTAGE
