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Investing for College
Financial Planning for WomenJean Lown, FCHD Dept., USU
Tiffany Smith, student
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Class Objective:
To learn about tax-advantaged ways to invest for college
• Coverdell Education Savings Accounts
•529 College Savings Plans
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Overview
Balancing goals; Setting priorities Coverdell ESAs 529 college savings plans
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What about Retirement?
Before you contribute to college savings for children» Is your retirement investment plan on
track?» Pay down high interest consumer debt
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Set Priorities; Balance Your Goals
Ensuring retirement security is more important than investing for college
Don't use retirement funds for college Students can borrow for college; retirees can
use reverse mortgages… but Before investing for college, review your
retirement goals & investment plans Investing for these two goals is not mutually
exclusive (especially with grandparent help)
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Coverdell Education Savings Accounts (ESAs)
Formerly called education IRAs Federal tax breaks
» Funds grow tax-free» Withdrawals tax-free» NO deduction for contribution
All levels of education (K-12 + college) No sunset provision Unlimited investment options Considered asset of parent for financial aid
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Coverdell Limitations
Maximum contribution: $2,000/year/child Contributors must have less than $190,000
in modified adjusted gross income ($95,000 for single filers) in order to qualify for a full $2,000 contribution
No state tax advantages Child owns the $ at maturity (18 in UT)
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529 College Savings Plans
Section 529 of IRS Code Federal & state tax advantages Each state offers a different plan Owned by contributor (parent, etc.) for
beneficiary (child) 10% penalty if not used for higher ed
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529 Advantages
Funds grow tax-free (federal & most states)
Withdrawals are tax-free (federal & state)
Higher contribution limits than Coverdell
Contributions are state tax deductible (UT)
Owner controls the account
Simple process
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Federal Financial Aid
Account is treated as an asset of the parent or other account owner in determining eligibility for federal financial aid.
Your expected contribution towards your child's college costs will include 5.6%, or less, of the value of your non-retirement assets
35% assessment against assets owned in your child's name or in a custodial account
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School-based Financial Aid
Each school sets its own rules for its own need-based scholarships» many schools take 529 accounts into
account Federal financial aid rules change often Most financial aid is in the form of loans,
not grants
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529 Disadvantages
Some state programs» High fees» Poor investment choices
Brokers charge additional fees
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Utah Educational Savings Plan
UESP is one of the best in the nation!
» Kiplinger’s Personal Finance Magazine
» Money magazine
» Savingforcollege.com
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UESP Features
9 investment options
Ultra low fees
No enrollment fees
No minimum contributions
No yearly fee for Utah residents (owners)
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Contributions & Account Balances
Contributions can be made by anyone
» No income limits for contributor
No minimum initial contribution
No minimum subsequent contribution
May contribute up to $315,000/beneficiary
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Tax Advantages Earnings grow free from federal & state income tax
When used for qualified higher ed expenses earning are exempt from:
» federal & state income taxes
For 2007, UT taxpayers may deduct contributions of up to $1,650 ($3,300 if filing jointly) or take a tax credit of $82.50 ($165 if filing jointly) per beneficiary.
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Fees & Charges
Deal directly with UESP <www.uesp.org>
No enrollment fees
Administrative fee + fund expense ratios
» 0.25% - .0414%
Max. annual maintenance fee = $25
» Waived for owners who are Utah residents
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Qualified Expenses
Tuition
Room & Board
Books, supplies & equipment
Eligible post-secondary schools in U.S. or abroad
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Account Owner Control
How & when the money is used Change beneficiaries within family
» Child does not attend post-secondary» Transfer funds to family member
Control disbursements Parental asset for financial aid
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Investment Options
4 static options
» Investment mix does not change
5 age-based options
» Investment mix becomes more conservative as child ages
UT Public Treasurer’s Investment Fund (PTIF)
Vanguard Group mutual funds
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Static Investment Options
Money market (Utah Public Treasurers Investment Fund, PTIF)
S&P Index Stock Fund
Bond market Index Fund
5 Stock funds
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Age-Based Options
S&P/Bonds/Money market S&P/bonds Diversified A Diversified B Diversified bonds emphasis
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Investment Options
Review handout with 9 options
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Tax Deferral Pays!
Tax-deferred money continues to grow
The longer you defer paying tax,the more you accumulate
Money contributed to a 529 plan grows tax-deferred and is tax-free when used for qualified higher education expenses
» Can be used in U.S. and Canada
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Non-qualified Disbursements
10% federal tax penalty on earnings No penalty on contributions
» All contributions are “after-tax”
–Made with money that was already taxed
–Similar to a Roth IRA
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Related Resources
UESP http://www.uesp.org
» 1-800-418-2551
Internet Guide to Funding College http://www.savingforcollege.com
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Questions?