Education – Annuity

College Savings Plan 2016: What has Changed?

Steve Garcia — Sat, 18 Mar 2017 14:33:08 +0000

Parents looking to save for college have long turned to 529 college savings plans as a tax-advantaged way to put away money for higher education.

According to Sallie Mae’s 2015 How America Saves for College survey, while 89% of parents believe college is an investment in their child’s future, only 27% of savers are using a 529 college savings plan. What’s more, 48% use a traditional savings account, despite the low yield on this type of savings vehicle in today’s current interest rate environment. 529 plans are attractive because parents can invest money in the stock market and, hopefully, grow their savings without facing a taxable event when they use the money for qualified higher education expenses such as tuition, books and room and board.

One of the biggest and most helpful changes to 529 plans for this year is what can now be deducted as a college expense.

According to Rick Castellano, a spokesman at Sallie Mae, in the past, parents weren’t able to deduct computers, tablets and other electronic devices as a qualified education expense, but now they can. When the rules were passed for 529s back some twenty years ago, computer equipment wasn’t found in every classroom and attached to every college student’s hip. Now, it’s almost a requirement on college campuses around the country.

In addition to giving families greater flexibility in terms of what their 529 savings can get them, the government has made it easier for students to take off from school without being penalized. Up until Jan. 1, students who used money from a 529 college savings plan and for whatever reason had to drop out of school with a full refund weren’t allowed to redeposit the money into the 529 savings plan. That meant that if an illness, family emergency or other circumstance prevented the student from attending college, the money that initially went to pay for college would be treated as income and taxed accordingly. “529s treated it as once you get the money, it is a distribution and is a completed transaction,” says Betty Lochner, chair of the College Savings Plans Network.

That all changes this year. Now, students who have to withdraw from college for whatever reason and get their tuition back can reinvest it into the 529 account and avoid a tax bill.

How a Little Planning can go a Long Way

Steve Garcia — Sat, 22 Oct 2016 13:51:04 +0000

What types of options do I have when it comes to saving for my children's college education, which is best and why?

While the cost of college continues to increase at a torrid pace, there are ways to prepare for one of the biggest expenditures in your lifetime. With appropriate planning, disciplined savings and thoughtful conversations with your child you can significantly improve your chances for success.

Power of Starting Early & Saving Often

Just as the case with any savings goal, the sooner you start and the more disciplined your approach to saving the better off you are. The power of compounding cannot be overstated when looking at an 18 year time horizon. As an example we've created the table below to highlight the power of compounding and the difference in total savings when someone starts saving $1,000, $500 or $250 a month at the birth of their child vs. their 5^th birthday using a tax-deferred vehicle.

Savings Amount	Savings Beginning at Child's Birth	Savings Beginning on Child's 5th Birthday	Difference in Final Account Balance
$1,000 per month	$349,345.16	$219,171.86	+ $130,173.30
$500 per month	$174,672.58	$109,585.93	+ $65,086.65
$250 per month	$87,336.29	$54,792.97	+ $35,543.32

Assuming a 5% annual return you could have approximately $130,000 more in savings when the child turns 18, while only contributing $60,000 extra dollars by starting at birth vs. age 5 (when saving $1,000 per month). As you can see, before worrying about the actual cost or which school your child will attend, the most important action you can take is to simply begin saving sooner than later.

Impact of Inflation on the Cost of Education

Just as the power of compounding can dramatically affect the amount of your savings, so too can inflation affect the cost of a college education. Recent research suggests that college tuition could continue to increase anywhere between 6% – 7% over the next several years. This is nearly three times the current rate of inflation for the majority of consumer products and services.

Balancing the cost of raising a family, saving for your own retirement and saving for your children's college education can be daunting tasks, but all of these should be considered.

Using our Financial Planning software "NaviPlan", we have created the table below to highlight the dramatic impact inflation can have on the cost of secondary education over the next 18 years. Using current tuition figures (room & board included) for a PA resident and a 6% rate of inflation, we were able to highlight the projected cost for the following four well-known schools at different cost levels.

School	Current Annual Cost	Projected Cost in 18 Years
West Chester University	$17,589	$219,627
Penn State University	$28,434	$355,045
Ohio State University	$39,031	$487,366
University of Pennsylvania	$63,526	$793,226

How Much Life Insurance Do You Need?

Steve Garcia — Thu, 19 Nov 2015 11:49:09 +0000

Life insurance is rarely a topic that consumers like to think about, talk about — or even do anything about for that matter.

Recent statistics show ownership of life insurance policies is at the lowest level in decades: One in four consumers have no life insurance at all. One of the biggest problems is many consumers simply have no idea how much life insurance they need or the best place to get it.

So, who needs insurance?

Simply put: If you have anyone in your life who depends on you financially, you need life insurance. While many Americans get life insurance policies through their job, the coverage is usually lower than individual policies and is only in place while they’re employed. Fewer than half of Americans between the ages of 25 and 64 with annual household incomes between $35,000 and $100,000 have their own life insurance policies, according to new data released by the insurance industry group LIMRA. In its survey, most consumers said they were not financially prepared for the death of a family member and would need to make a drastic or significant financial change if that occurred.

So how much insurance is enough?

Some experts say you should have enough life insurance to cover five to 10 times your annual income (especially if you have a young family), but often that’s just a guess. The answer really depends on how much money your family and/or dependents will need after you’re gone.

There are three key steps to take to determine the amount of life insurance that is right for you:

Evaluate your family’s needs. How much money does it take to run your household? Do you have unpaid medical bills, a mortgage balance and/or outstanding debts? Don’t forget to add funeral expenses and possible estate taxes to the mix. Life insurance policies can pay immediate expenses, including medical costs, as well as funeral bills, taxes, mortgage payments and other debts. The equivalent of all of that will get you close to the amount of life insurance you may need.

Consider future financial obligations. You should also have enough coverage to pay for future financial obligations. If you intend to help pay for college for your kids, say, factor in pending tuition bill and fees as well. Outline your family’s cash-flow needs as well as financial goals. Add it all up to figure out the estimated amount of money that your survivors would need.

Tally up the resources. Now look at the money that would be available. What is your spouse’s income? Do you have long- and/or short-term savings? Add up the balances in your 401(k)s, IRAs, 529 college savings plan, emergency reserves and estimated Social Security survivor benefits, as well as any existing life insurance policies (perhaps through your employer).