Financial Symmetry News & Views

Posts Tagged ‘529 College Savings Plans’

HBO has a popular series they air in the fall called “Hard Knocks.” The aim of the program is to uncover the intricacies and nuances that make the training camp of an NFL team so fascinating.  They pull the curtain back and give us a peek at the events that lends a revealing perspective to how the football preseason transpires.  In a similar vein, over the past few posts, we’ve given an insider’s view to our investment review process.  This week we profile the final steps involved in our individual portfolio analysis.

The Dreaded Check Engine Light

Check that Engine!

One of the more standard ways your car will alert you of a problem is by triggering the check engine light.  Usually once illuminated, the check engine light can be decoded by running a diagnostic test on the car.  When we first meet with clients, we’ll often hear the statement, “I want to make sure I’m doing all I can with my investments.”  By running our version of the diagnostic test each quarter, we spot tune-ups and efficiencies that otherwise may be missed.  Our checklist includes:

• Handling required minimum distributions
• Identifying opportunities to fund more tax advantaged accounts (Roth IRA’s, IRA’s or qualified plans)
• Verifying funds will be available for short-term cash needs
• Minimizing transaction fees
• Evaluating if a lower cost investment could fill the role of a current one
• Determining if any accounts can be transferred for cheaper or better investment options
• Considering if any other account openings or transfers would be beneficial (college planning accounts/life insurance/1035 exchanges/annuities)
• Keeping investment allocations in line with your risk capacity and our investment themes

Some of these items occur every year and some every quarter.  Staying on top of each one keeps your portfolio in good working order.

Photo Credit: Robert Couse-Baker

This is the third and final installment of our “Behind the Scenes” series.  It is our hope that this series gave our clients a more transparent look at our business so they can better understand the diligence we employ with each client review.

The American Recovery and Reinvestment Act provides better education cost breaks to more taxpayers for 2009 and 2010. Computers, certain software and internet access can be covered by tax free 529 plan distributions as long as they are used by an eligible student while enrolled at an eligible institution.  The ARRA also replaces the Hope education credit with the American opportunity credit.  Key changes from the Hope include: books are now eligible expenses, an increase in the amount of credit available, and higher income limits for eligible taxpayers.  Click here to view more information on IRS.gov.

Article published on FiLife.com by Financial Symmetry’s Allison Berger, CFP ®.

Finding the motivation to save can be just as difficult as motivating yourself to diet and exercise. In both cases you know the outcome will be worthwhile — financial security and better health. However, taking the steps to get there is easier said than done.

If you have ever watched the show “The Biggest Loser,” you have probably heard the trainers say that being fit is not about dieting, but about making lifestyle changes that you can stick with over time. As the contestants participate in the challenge, their health gradually improves and their motivation to continue a healthy lifestyle typically increases. The hardest part is usually getting started.

The same is true with saving. While difficult at first, adopting a scheduled savings strategy and making budgeting part of your routine will increase your odds of achieving your financial goals. Identifying those goals is the first step to finding that motivation, so spend some time thinking about what you want your money to do for you. Maybe you are saving for a family vacation, your children’s education, retirement, or all of the above. Make a list prioritizing each goal and put time frames on them.

Next, work on identifying those triggers that keep you from saving money. Just as having chips and cookies in the house can derail your healthy lifestyle, so can mail order catalogs on your coffee table or even a clear view of your neighbor’s new BMW. Toss those catalogues in the recycle bin, put a limit on your Amazon or eBay habit, and start planning a savings strategy.

One of the best ways to stick to your financially fit goals is to make savings automatic. Hopefully you are already deferring money from every paycheck to your 401k. Think about increasing your deferral to put more toward your retirement goal. Then find other savings you can make automatic. Maybe you can set up a monthly transfer into your savings account, Roth IRA, or your child’s 529 plan. This strategy takes some of the work out of saving and automatically curbs spending, as your checking account appears less flush each month.

Lastly, remember that you are not alone. You probably have friends and neighbors who are also trying to stick to a financially fit lifestyle. Work together on finding low cost activities to do, and exchange tips and tricks along the way. You may also want to consider using a professional. A financial planner can help you develop a strategy specific to your needs in the same way a personal trainer can recommend the best exercises for your health and fitness goals. You can seek out a fee-only financial planner at napfa.org.

Article published on FiLife.com by Financial Symmetry’s Allison Berger, CFP.

Naturally parents want to provide the best for their children. For many parents today this means paying for them to earn a college degree. This is an admirable goal, and one that their children will greatly appreciate when they graduate free from student loan debt. But what does saving for the ever-rising cost of college tuition mean for their other lifestyle goals?

529 plans have become the gold standard of saving for college. They are a great choice because they do not have an annual contribution limit or income threshold. They also allow tax-deferred earnings and tax-free withdrawals for qualified education expenses. While these features are beneficial, 529s also have some negative aspects. The biggest drawback is that the funds must be used for college. Therefore if your child receives a scholarship, decides not to go to college, or you have excess money left over in the 529 after they graduate, your earnings will be subject to federal and state income taxes in addition to a 10% penalty. This emphasizes the importance of not over-funding 529 plans.

While the 10% penalty is enough to discourage over-funding, parents should also consider how they are planning for their own future. Too often retirement planning is put on the back burner until children are off the family payroll. However, student loan options are abundant; retirement savings loans…not so much. Another variable is that parents may have enough income by the time their children go to college that they can pay their expenses out of cash flow.

For these reasons I encourage parents to consider maxing out contributions to their own retirement accounts before funding 529 plans or other education savings accounts. If you are eligible, the Roth IRA is a tool that can work toward both goals. Roth IRAs are funded with after-tax dollars and provide for tax-free withdrawals in retirement. While this is a retirement account, a feature often overlooked is that you can always withdraw your contributions from a Roth IRA tax and penalty free. This makes it a great tool for college planning as well because you can plan to max out contributions every year and withdraw those contributions for use toward college expenses if necessary. In the event you earn enough income that you don’t need to make any withdrawals or your child receives a scholarship, you can leave that money to grow for your own retirement.

The goals and resources of every family are unique. To develop a savings plan most appropriate for your personal situation, seek the guidance of your financial adviser.