529 101 overview & top-5 529 myths presentation

529 101 Overview: Abacus Wealth PartnersOctober 2015

Paul Curley, CFADirector of College Savings [email protected]@PaulCurleyBC617-399-5621 (office)857-222-3730 (cell)

• Introduction• 529 101• Resources• Next Steps

529s: The Most Efficient Way to Save for College

Overview

• Emory University • Chartered Financial Analyst (CFA) Charterholder• Boston College (MBA)

– Admissions Ambassador– Student Government (2 years)

• Director of College Savings Research since 2010• Strategic Insight, an Asset International Company

– Trusted Business Intelligence for the Mutual Fund Industry• CFA Exam Trainer, Boston Security & Analyst Society (2005-2013)

Specialize in 529s Since 2008

Introduction - Paul Curley, CFA

• Market Data• Research• Conference• Media/Publishing

Audience• Market Data/Research/Conference – Product Providers,

Broker-Dealer Home office, State Agencies, Administrative Firms to Industry, Investment Consultants, Lawyers

• Quoted over 70 times in press since 2011• Media/Publishing – Advisors, Accountants & Estate Planners

Product Agnostic

Introduction - Practice Overview

Quick Definition

529 101

Definition: “A plan operated by a state or educational institution, with tax advantages and potentially other incentives to make it easier to save for college and other post-secondary training for a designated beneficiary, such as a child or grandchild.”

Source: IRS, “529 Plans: Questions and Answers http://www.irs.gov/uac/529-Plans:-Questions-and-Answers

Source: IRS

529s: Efficient for Tax

529 101: Contributions Tax-Deferred Growth Tax-Exempt Distributions if used for Qualified Higher Education Expenses

(QHEE) of beneficiary

Control: Account owner maintains control of account

Account Beneficiary: Family Member

No Age or Income Limits Annual Contribution Limits: Up to Federal Gift Tax Limit of $14,000

Married Couple: $28,000 High Lifetime Contribution Limits: Can contribute up to high maximum set

by state (e.g. Wisconsin at $425,000)

Not Restricted to In-State Plans But Note: There also may be state tax incentives to residents who invest in their home state's 529 plan.

2 Reallocations Allowed per Year

Source: IRS Publication 970

Distributions: Dedicated Account for Higher Education

529 101: Distributions QHEE: Tuition, fees, books, supplies and equipment

Room & board if enrolled at least half-time

Eligible Institutions: Any school eligible to participate in federal student loans, including those in U.S. and abroad

529 savings plans – Not limited to colleges in your state

529 prepaid plans – Read plan disclosure statement

Distributions: Payment to Student, Parent or College

Rollover/Changing 529 Plans: 2 changed allowed per year

Beneficiary Changes: Change to Another Family Member

10% Penalty: Non-Qualified Distributions There are exceptions to the penalty - http://www.irs.gov/pub/irs-pdf/p970.pdf

Source: IRS

529s: Efficient for Financial Aid

529 101: Financial Aid Impact

Source: U.S. Department of Education

• Assets & Income– Students

• 50% of income above protected amount of $6,260• 20% of assets in bank accounts, CDs, UGMAs/UTMA’s and other savings

vehicles– Parents

• 22%-47% of Adjusted Gross Income above the protected amount• 5.64% (or less) of non-retirement assets above protected amount, including

529s, investments and savings– Grandparents

• 0% of income and assets. However, withdrawals for college by grandparents and others may be considered student income and must be reported on the following year’s financial aid forms. Such income can reduce the amount of aid by 50%.

– Distributions from parent’s retirement accounts are treated the same.

529s Improve Custodial Accounts

529 101: Custodial accounts

Source: IRS

• Taxes: A trust can be subject to taxes on earnings year-over-year• Assets in a trust can be used to buy a custodial 529 account• Custodial 529 accounts can grow tax-free, and can be distributed tax-free if

used for qualified expenses • Note: Contributions into 529 may require a capital gain on liquidation of

assets to put the assets into a 529; Ask you financial advisor• Other Estate Planning Features

– 5-Year gifting to remove assets from estate while maintaining control

529s: Efficient for Estate Planning

529: Estate Planning 5 year forward gifting feature:

Client can make 5 years of gifting in 1 year

For example, one parent can make a lump-sum contribution to a 529 plan for $70,000

($70,000 = 5 x $14,000)

$14,000 is federal gift tax maximum

$140,000 could be made by the married parents ($70,000 x 2 parents)

No other gifts are allowed to be made to the same beneficiary during 5-years

Assets are removed from contributor’s taxable estate. Some plans have a claw back provision if contributor passes away in less than 5-years

Source: IRS

1) IRS – Internal Revenue Service– http://www.irs.gov/uac/529-Plans:-Questions-and-Answers– Publication 970: http://www.irs.gov/pub/irs-pdf/p970.pdf

2) SEC – U.S. Securities and Exchange Commission– http://www.sec.gov/investor/pubs/intro529.htm

3) FINRA – Financial Industry Regulatory Authority– http://apps.finra.org/investor_Information/Smart/529/000100.asp

4) MSRB – Municipal Securities Rulemaking Board– http://www.msrb.org/EducationCenter/Municipal-Market/529-Plans/

Resources/Related-Resources-529-Plans.aspx5) FAFSA – Free Application for Federal Student Aid

– https://fafsa.ed.gov/fotw1415/pdf/PdfFafsa14-15.pdf6) IFAP – Information for Financial Aid Professionals

1) http://ifap.ed.gov/efcformulaguide/attachments/091913EFCFormulaGuide1415.pdf• 529 Dash e-Newsletter http://www.529conference.com/subscribe.aspx• SavingforCollege.com• 529 Product Providers

Resources

Resources & Sources

• Next: Topics for Lunch & Learns– Accumulation: Tax Free Growth– Distributions– Financial Aid Impact– Estate Planning/Custodial 529s

Questions?

Next Steps

© Copyright 2015 Strategic Insight, an Asset International company, and when referenced or sourced Access Data, a Broadridge company, Morningstar Inc. and Lipper Inc. All rights reserved. The information, data, analyses and opinions contained herein (a) include confidential and proprietary information of the aforementioned companies, (b) are provided solely for information purposes, and (c) are not warranted or represented to be correct, complete, accurate, or timely. Past performance is no guarantee of future results. The aforementioned companies are not affiliated with each other. This report has been prepared using information and sources we believe to be reliable; however, we make no representation as to its accuracy, adequacy or completeness, nor do we assume responsibility for any errors or omissions or for any results obtained from the use of this report, including any action taken with respect to securities referred to in this report. Our employees may from time to time acquire, hold or sell a position in securities mentioned herein. We may from time to time perform services for any company mentioned in this report. This report is not a prospectus or representation intended to use in the purchase or sale of any securities mentioned in this report. Strategic Insight is available by subscription and by single copy upon request to the publisher.

Top-5 529 Myths

Paul Curley, CFADirector of College Savings [email protected]@PaulCurleyBC617-399-5621 (office)857-222-3730 (cell)

1. You do not need a plan to save for college or higher education.

2. They can just take loans, or get a scholarship.3. Retirement assets are not included in financial

aid calculations.4. If they do not go to college, then I did not need

to save.5. I already have a trust set up for them.

Top-5 529 Myths

Overview of Top-5 529 Myths

Myth #1: You Do Not Need a Plan to Save for College or Higher Education

Source: College Board, Strategic Insight 529 Industry Analysis 2015

You Need a Plan: Tuition Inflation Continues to Outpace Wage Increase and CPI


Source: Strategic Insight

4 Years Cost of Private Institution in 18 Years: $429,407; College Savings Not “Small Ticket”

*Cost includes Tuition, Fees and Room and Board

Majority of Parents are Not Saving, or Saving Efficiently

Source: Strategic Insight 529 Consumer Survey 2015


Failure to Plan Leaves Clients with Get Loans

Source: FRBNY Consumer Credit Panel/Equifax


Tuition Inflation Drives Student Loan Growth; Small Percentage Receive Scholarships

Myth #2: They Can Take Loans, or Get a Scholarship

Source: New York Fed Consumer Credit Panel/Equifax

• Assets & Income– Students

• 50% of income above protected amount of $6,260• 20% of assets in bank accounts, CDs, UGMAs/UTMA’s and other savings

vehicles– Parents

• 22%-47% of Adjusted Gross Income above the protected amount• 5.64% (or less) of non-retirement assets above protected amount, including

529s, investments and savings– Grandparents

• 0% of income and assets. However, withdrawals for college by grandparents and others may be considered student income and must be reported on the following year’s financial aid forms. Such income can reduce the amount of aid by 50%.

– Distributions from parent’s retirement accounts are treated the same.

529s: Efficient for Financial Aid

Myth #3: Retirement Assets are Not Included in Financial Aid Calculations

Source: FAFSA

Families Use Retirement Vehicles to Save for College

Source: Strategic Insight 529 Consumer Survey 2012-2015


Some Advisor Use Retirement Vehicles to Save for College Also

Source: Strategic Insight 529 Advisor Survey 2014


• IRS – Change Beneficiary to another family member– Q. Can I change the beneficiary of a 529 plan I have set up?– A. Yes. There are no tax consequences if you change the designated

beneficiary to another member of the family. Also, any funds distributed from a 529 plan are not taxable if rolled over to another plan for the benefit of the same beneficiary or for the benefit of a member of the beneficiary’s family. So, for example, you can roll funds from the 529 for one of your children into a sibling’s plan without penalty.

• Keep for later in beneficiary’s life (mid-career training)• Keep for next generation, grandchildren or great grandchildren

– Continues to accrue tax differed– If beneficiary pass away, no 10% penalty if distributed

• Pay 10% penalty, plus taxes on gains

Options on Unused 529 Assets

Myth #4: If They Do Not Go to College, Then I Did Not Need to Save

Source: IRS Publication 970, IRS 529 Plans: Questions and Answers

• Member’s of the beneficiary’s family1. Son, daughter, stepchild, foster child, adopted child, or a descendant of

any of them.2. Brother, sister, stepbrother, or stepsister.3. Father or mother or ancestor of either.4. Stepfather or stepmother.5. Son or daughter of a brother or sister.6. Brother or sister of father or mother.7. Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law,

or sister-in-law.8. The spouse of any individual listed above.9. First cousin.

Rollover Assets to Family Members

Myth #4: If They Do Not Go to College, Then I Did Not Need to Save

Source: IRS Publication 970

• Assets in a trust can be used to buy a custodial 529 account• Custodial 529 accounts can grow tax-free, and can be distributed tax-free if

used for qualified expenses • A trust can be subject to taxes on earnings year-over-year• Note: Contributions into 529 may require a capital gain on liquidation of

assets to put the assets into a 529; Ask you financial advisor• Other Estate Planning Features

– 5-Year gifting to remove assets from estate while maintaining control

Speak with your Advisor on Implications

Myth #5: I Already Have a Trust Set Up for them

• You do not need a plan to save for college or higher education.• They can just take loans, or get a scholarship.• Retirement assets are not included in financial aid calculations.• If they do not go to college, then I did not need to save.• I already have a trust set up for them.

Thank you

Overview of Top-5 Myths

1) IRS – Internal Revenue Service– http://www.irs.gov/uac/529-Plans:-Questions-and-Answers– Publication 970: http://www.irs.gov/pub/irs-pdf/p970.pdf

2) SEC – U.S. Securities and Exchange Commission– http://www.sec.gov/investor/pubs/intro529.htm

3) FINRA – Financial Industry Regulatory Authority– http://apps.finra.org/investor_Information/Smart/529/000100.asp

4) MSRB – Municipal Securities Rulemaking Board– http://www.msrb.org/EducationCenter/Municipal-Market/529-Plans/

Resources/Related-Resources-529-Plans.aspx5) FAFSA – Free Application for Federal Student Aid

– https://fafsa.ed.gov/fotw1415/pdf/PdfFafsa14-15.pdf6) IFAP – Information for Financial Aid Professionals

1) http://ifap.ed.gov/efcformulaguide/attachments/091913EFCFormulaGuide1415.pdf• 529 Dash e-Newsletter http://www.529conference.com/subscribe.aspx• SavingforCollege.com• 529 Product Providers

Resources

Resources & Sources

© Copyright 2015 Strategic Insight, an Asset International company, and when referenced or sourced Access Data, a Broadridge company, Morningstar Inc. and Lipper Inc. All rights reserved. The information, data, analyses and opinions contained herein (a) include confidential and proprietary information of the aforementioned companies, (b) are provided solely for information purposes, and (c) are not warranted or represented to be correct, complete, accurate, or timely. Past performance is no guarantee of future results. The aforementioned companies are not affiliated with each other. This report has been prepared using information and sources we believe to be reliable; however, we make no representation as to its accuracy, adequacy or completeness, nor do we assume responsibility for any errors or omissions or for any results obtained from the use of this report, including any action taken with respect to securities referred to in this report. Our employees may from time to time acquire, hold or sell a position in securities mentioned herein. We may from time to time perform services for any company mentioned in this report. This report is not a prospectus or representation intended to use in the purchase or sale of any securities mentioned in this report. Strategic Insight is available by subscription and by single copy upon request to the publisher.