How to Prep for College: Financially

How to Prep for College: Financially.

Qualified State Tuition Programs (Section 529 Plans) – Section 529 Plans are authorized under Internal Revenue Code Section 529 and are sponsored by the individual states. These programs allow parents, grandparents and non-relatives to contribute money to an account of which the child is the beneficiary. There are two types of plans: a prepaid tuition plan and a savings plan. Prepaid tuition plans guarantee that the investment will at least keep pace with increases in college tuition. Restrictions may apply regarding who may contribute to the prepaid plan and which schools are eligible. Savings plans are managed investment funds that can be more flexible. Income inside these plans is not currently taxable. Funds withdrawn to pay for qualified education expenses are also free from federal income tax. Other, nonqualified withdrawals are subject to ordinary income tax and may be subject to an additional 10% penalty tax. The child may attend almost any accredited college, university, or trade school regardless of location. These plans, having no income restrictions, are available to almost anyone. Unlike UGMAs and UTMAs (discussed below), the donor retains control over the funds. Tax-free rollovers from one plan to another are allowed for the benefit of the same beneficiary once per year. Because contributions are considered completed gifts, the plans may offer estate planning advantages. Some plans offer preferential state tax treatment. Funds may be transferred, if necessary, to certain family members of the beneficiary without penalty. Taxable withdrawals may avoid the additional 10% penalty tax if they occur on account of death, disability or receipt of a scholarship.

The availability of the tax or other benefits mentioned above may be conditioned on meeting certain requirements.

Investors should consider the investment objectives, risks, charges and expenses associated with 529 plans carefully before investing. More information about 529 plans is available in the issuer’s official statement, which should be read carefully before investing.

Coverdell Education Savings Accounts – Taxpayers may deposit up to $2,000 per year into a Coverdell Education Savings Account (ESA) for a child under age 18. Parents, grandparents, other family members, friends, and children themselves may contribute to the Coverdell ESA, provided that the total contributions during the taxable year do not exceed the $2,000 limit. Amounts deposited into the account grow tax-free until distributed, and the child will not owe tax on any withdrawal from the account if the child’s qualified higher education expenses at an eligible educational institution for the year equal or exceed the amount of withdrawal. Eligible expenses also include elementary and secondary school (K-12) costs and the cost of computer equipment, internet services, and software. If the child does not need the money for post-secondary education, the account balance can be rolled over to the Coverdell ESA of certain family members who can use it for their education expenses. Amounts withdrawn from a Coverdell ESA that exceed the child’s qualified education expenses in a taxable year are generally subject to income tax and to an additional tax of 10%.

Uniform Gift to Minors Act (UGMA) and Uniform Transfer to Minors Act (UTMA) – A donor may make an outright gift to a custodial account for the benefit of a minor child. The parent or custodian may retain responsibility of management of the assets in the account subject to the terms of the act. The standard rules regarding gift tax exclusions apply, including the annual $15,000 limit. The donor may choose to contribute from a number of assets, such as stocks, bonds, mutual funds or real estate. The funds may be used for any purpose, including education. One possible problem with the UGMA and UTMA is that upon reaching a certain age, specified by each state’s laws, the child has full discretionary control over the accumulated assets and may choose to use such assets for purposes other than college funding.

Cash Value Life Insurance – Parents, grandparents, or other family members may gift premiums, and the cash value build-up inside the policy is tax deferred during the accumulation period. When the time for college arrives, the needed cash may be withdrawn from the policy (generally on a tax-free basis up to the amount of the premiums paid), or the cash values can be borrowed from the policy. In most cases, loans or withdrawals will reduce the policy’s cash value and death benefit. If the policy is surrendered or lapses, taxes may be due. If the insured dies before the child goes to school, then the life insurance proceeds can be used to fund education expenses.

U.S. Savings Bonds – Interest earned by U.S. Series EE Savings Bonds is free from state income taxes. All or some of the interest may also be free from federal income taxes if the bonds are used for qualified higher education expenses. The exclusion from federal tax is subject to an income phase-out. The bonds must be registered in the parent’s name and redeemed in the same year as the eligible tuition and fees are paid.

Take the first step toward achieving your goals.

Learn More: Prepping for College Financially: The Total Cost.

Read more about what the total cost of college expenses will really look like for your children and how you can set them up for financial success now.

Building Your Nest Egg: An Emergency Fund

Building Your Nest Egg: An Emergency Fund

Finance 101: 

Paying your bills, sticking to a budget and saving for retirement are all important tenets of personal finance. But what about those unplanned emergencies that require money when you’re least expecting it? What would you do if, for instance, you lost your job unexpectedly? Or maybe your car needs repairs or your refrigerator stops working. To protect against emergencies like these, you can develop an emergency fund. An emergency fund is exactly what it sounds like, an easily accessible savings account to tap into in an emergency. 

Building your nest egg may be your first priority, even before debt repayment and retirement savings, or you might want to set your other financial goals in motion before focusing on an emergency fund. Some people attack both debt repayment and emergency savings at once.

How to Succeed

Getting started on building your emergency fund is as easy as opening a savings account. Decide how much you can contribute to it from each paycheck and stick to your goal. Consider these tips for building your fund:

• It may be easier to automate your finances so you don’t actively have to transfer money each week.

• Another strategy is to think of your emergency fund as a monthly bill that you must pay to yourself.

• A painless way to start your account is with a tax refund, work bonus or other financial windfall.

• If you pay off a credit card debt or car loan, reroute the money you were using to make those payments into your emergency fund. Similarly, if you get a pay raise, avoid lifestyle inflation and put the additional income in your savings.

• Carefully define “emergency” to make sure you’re not withdrawing from the account unnecessarily.

• If you do experience a financial emergency, do anything you can to pay for it without tapping into your fund so you won’t have to rebuild it.

How Much to Save

There are many rules of thumb to use when deciding how much to keep in your emergency fund. If you don’t save enough, you could face financial hardship in an emergency and be forced to rely on credit. If you save too much, you’re not maximizing your money’s potential for growth by investing it. Most experts agree that you should save between three and six months of expenses in case you were to lose your job. Loss of income is one of the most common reasons to use an emergency fund, so this rule of thumb makes sense if you assume you’ll be looking for work for three to six months. When determining how much to save, consider your individual circumstances:

• How many streams of income do you rely on? If you have multiple jobs or have a working spouse, you don’t have to save as much money because the likelihood of losing more than one income stream at once is low. 

• What kind of income do you rely on? If you and/or your spouse relies solely on commission or freelance pay, your situation is more precarious and you should consider building a larger emergency fund. 

• Can you predict any big expenses in the near future?If you have an older car or appliances that may need to be replaced soon, it’s probably a good idea to start saving now. The same goes for major home repairs or starting a family. 

Where to Keep Your Savings

A savings account at your local bank is a good place to start. You may also consider an online bank for added security, increased interest rates and less accessibility. You want your emergency account to be accessible in an emergency, but not so accessible that you are constantly tempted to use it. If you know you don’t have very strong willpower, you might not want to have a debit card or checkbook tied to your emergency fund account. Another option is a money market account or CDs, but make sure your funds are liquid enough in case you need to use them.

Many people decide to forgo building an emergency account in favor of saving for retirement. You can technically borrow money from a tax-sheltered account such as a 401(k) or IRA, but you could be faced with steep fines or have to repay it right away. Withdrawing early from a retirement account is not advised because of how much you’ll lose in taxes and fees. You could also rely on credit cards or a home equity line of credit, but this can put you deep in debt if you face a particularly expensive emergency.

Why It’s Important

Think of your emergency fund as self-insurance. You probably have insurance on your car, home and health, among other things. There are certain occurrences that you can’t insure against, such as losing your job. That’s where the emergency account comes in. Rather than relying on consumer debt with high interest rates, which can be especially bad for those who are struggling to become debt free, you can pay for emergency expenses from your savings. Additionally, you won’t have to halt debt repayment during a crisis because you won’t be taking funds from your monthly budget to pay for your emergency. You can’t predict what kinds of emergencies you’re going to face, and you can’t predict when they’ll happen. You can predict that there will most likely be an emergency at some point, and you can prepare in advance by building an adequate emergency fund.

Take the first step toward achieving your goals.

Learn More: Building Your Nest Egg: 401(k) Explained

Do you have a 401(k) savings plan? Do you know how it fits in to your retirement plan? Read on to learn how to use it for your future.

S&P 500 Could Fall 40%

Are your investments secure?

Friday, March 22, 2019: Market Close

“Stock investors should heed the warning emanating from the bond market, says at least one hedge-fund manager, as the yield curve staged a stunning inversion Friday.

‘I think people are going to be surprised where the S&P 500 is trading at the end of the year. We’re going at least for a 40% decline from the S&P’s top,’ Otavio Costa, a macro analyst at Crescat Capital, a hedge fund that oversees $52 million, told MarketWatch in an interview.

The analyst of the investment firm, says the inversion of the yield curve, where short-dated yields rise above their longer-dated peers, signals an ignominious end to a 10-year bull run for the S&P 500 index, which bottomed in March of 2009 but has mounted a record-long rally, by some measures, since that point.

In particular, Costa said the growing number of inversions in yield spreads across Treasury maturities suggested a bear-market for equities was at hand, in the face of a darkening global growth picture.” (Read the full article on MarketWatch  here.)

  • Do you want to secure your investments?

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When is enough enough?

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