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Education Information
Seminars
Colorado
Section 529 College Savings Plans
What is a Section 529 Plan?
A 529 Plan is an investment plan designed
to help families save for future higher education
costs. The plan offers tax-savings advantages, applies
to a wide range of colleges and institutions, provides
for a multiple of investment options, and has no
residency or income restrictions.
529 plans differ from UGMA and UTMA
accounts in that the ownership does not automatically
transfer to the beneficiary once they reach age
of majority. The account owner also controls the
account and investment options.
What are the tax advantages?
All account earnings, such as dividends
and capital gains, grow free from federal income
taxes while in the account. This creates higher
earnings potential for your assets than would be
for a taxable account.
All withdrawals used to pay for qualified
higher education expenses are exempt from federal
tax.1
Contributions to account are excluded
from the account owner’s taxable estate. Also allows
annual contributions of up to $11,000 ($22,000 for
married couples) per student or $55,000 ($110,000
for married couples) in a single five-year period
without triggering federal gift taxes.
You can withdraw funds from your account
at any time. If funds are not used for qualified
higher education expenses, earnings will be taxed
as ordinary income at your income tax rate. In addition,
there is a federally required 10% surtax on earnings
for making a non-qualified withdrawal.
How much can I invest in the plan?
Minimum initial investment is $25
with subsequent investments of $15.
Maximum account balance allowed by
all account owners for any once student through
Colorado Section 529 plans is $235,000.
What are the investment options?
Age based portfolios – investment
strategy based on the age of the individual. The
portfolios adjust automatically over time based
on the child’s attained age.
Balanced portfolio – 50% in stock
funds and 50% in bond funds for the life of the
investment.
Years to enrollment portfolio – similar
to age based portfolios in that the portfolio adjusts
based on the time to enroll in school. This portfolio
would be appropriate for an adult looking to further
their education.
Equity portfolio – 100% invested in
stock funds
Fixed income portfolio – 100% invested
in fixed income investments
Please note: you can change your investment
option once annually
What happens if a student does not go
to college?
No age restrictions exist on the investments.
You can choose to leave the funds in the account
to continue to grow tax deferred. This can then
be used for the student later in life if they change
their mind.
Change the student to receive the
invested dollars. This is allowed as long as the
student is a family member of the original student.
Make a non-qualified withdrawal. If
funds are not used for qualified higher education
expenses, earnings will be taxed as ordinary income
at your income tax rate. In addition, there is a
federally required 10% surtax on earnings for making
a non-qualified withdrawal.
If you have additional questions on the
Colorado Section 529 Plans, please give us a call.
Member of the SIPC
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Why
Not to Save for Your Kid’s College Years
Putting money in the wrong vehicle could reduce financial
aid
By Christopher J. Gearon - AARP Bulleting/October 2004
Alex and Elizabeth Galiano of Chicago have the usual
ambitions for their year-old daughter, Katherine.
College, for one thing. Which is why you might be surprised
to hear that, although they are college grads themselves
and make a comfortable living, they aren’t planning
to save a dime for Katherine’s college education.
Given how fast the costs of college are rising, what
can the Galianos possibly be thinking? Tuition,
fees, room and board averaged $10,636 at four-year public
institutions during the 2003-04 school year, and $26,854
at private colleges and universities, according to the
College Board. That’s a 10 percent jump and a
6 percent jump, respectively, from the year before.
When Katherine enters college in 2021, four years of
education is likely to cost more than $100,000 at a
state college and $250,000 at a private college.
The Galianos are among a new breed of parents and grandparents
questioning the common wisdom of saving for the kids’
college tab. They base the decisions on concerns
that saving for college could actually penalize their
children’s or grandchildren’s chances of obtaining financial
aid, which is much more widely available today, even
to families who are well-off. In the case of parents,
college savings could also divert money that they ought
to be saving for their own retirement.
It’s not back-of-the-envelope thinking. Some financial
planners are advising clients specifically not to save
for college, even as tax-free college-savings vehicles
have recently become widely available.
“They looked at me as if I was crazy at first,” financial
planner Sean Sebold says of the Galiano’s reaction to
his suggestion. Saving for college has been a
basic assumption of American financial life. “It’s
as if the hand of society was pushing them to make a
financial decision that they were not required to think
about but just do.”
New research suggests that parents need to think differently
about tuition bills far down the road.
“Under current tax and financial aid policies, saving
for their children’s college education can make parents
worse off than if they never saved at all,” says Susan
Dynarski, a Harvard University researcher. Dynarski
analyzed popular college-savings options and the impact
each has on financial aid applications.
All college-savings plans can affect financial aid,
she found, but saving money in a child’s name is the
worst possible way to go about it. Financial aid
gets determined through a complex formula based on financial
need, taking into account family income, certain assets
and college costs. Under the formula, a much greater
portion of savings placed in a child’s name counts for
college, compared with money saved in parents’ names.
For example, money saved in a Uniform Transfer to Minors
Act (UTMA) account, a typical way to save for college,
can hurt a student’s financial aid chances up to $1.24
for each dollar saved, Dynarski says.
She found that savings plans called 529s (which have
become popular in recent years because they are tax-free,
although problems of high fees with certain 529s have
cropped up) and Coverdell education savings accounts
offer the best deals for college saving from a combined
tax and financial aid perspective. Still, depending
on family income, those savings options can reduce a
student’s aid by 15 cents for each dollar drawn from
such accounts.
“Unfortunately, everyone has to be an accountant or
pay for one to figure it out,” Dynarski says.
The research has caught the attention of Sebold, in
Naperville, Ill., and other financial planners because
Dynarski’s findings forecast an unsettling surprise
for families who have saved part of what they need but
who still must count on financial aid to pay the college
bills.
That includes more and more people. Nearly a third
of students in families with incomes between $70,000
and $100,000 received some financial aid in 2000; 62
percent in families with incomes below $70,000 got aid.
As education costs rise faster than inflation, the need
for student aid grows. Sebold presented the Galianos
with two harsh realities. Not only is there the
problem of the reduction in financial aid for each dollar
saved. More important, experts say, couples in
their 30s like the Galianos need to save $2 million
to $3 million during their working years to maintain
their standard of living in retirement. As people
live longer and as companies cut back on traditional
retirement plans, experts say, the chief priority for
baby boomers and other workers ought to be to save for
themselves.
“You can get a loan for college but you can’t get a
loan for retirement,” says Alex Galiano, a software
salesman who has a finance degree.
But some college savings experts wonder if the new research
is sending the wrong message.
“A huge financial planning mistake would be not to save
for college at all, only to discover that you do not
qualify for financial aid because your income is too
high,” says accountant Alice Orzechowski, author of
101 Tips for Maximizing College Financial Aid.
“Income is the major deal breaker with financial aid.”
For the Galianos, saving for retirement and not Katherine’s
education best suits them. Retirement requires
more saving, and such assets as home equity, retirement
accounts, annuities and insurance policies aren’t considered
in financial aid requests, although once money is withdrawn
from a retirement account it can be counted as income
or as a resource. Should the couple choose to
pay for some of Katherine’s education, they could (although
they could forgo some tax benefits). Or they could
let Katherine pay for college through loans and aid,
then help her repay loans after graduation. Or
they could give her money for a down payment on a home.
Should Katherine get a scholarship or not go to college,
the money would stay in a retirement account.
Money withdrawn from a 529 plan or a Coverdell would
be penalized when not used for educational expenses.
For the Galianos, the strategy bridges two different
ways of thinking. Alex largely paid his way through
college with loans, while Elizabeth’s family covered
the cost of her schooling.
“In my mind, this is an excellent compromise,” says
Elizabeth. “We don’t know what the future holds,
but we’ll be ready.”
| Dollar
for dollar |
|
Saving for college has gotten more complicated.
New research shows the potential financial aid
lost for each dollar saved: |
| Ø 15 cents in a
529 savings plan or Coverdell education savings
account |
|
Ø 26 to 33 cents in a traditional IRA |
| Ø 40 to 45 cents in a mutual fund |
| Ø $1.24 in a UTMA account |
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Annuities
Many times
the word annuities conjures up all sorts of bad thoughts
such as insurance, expensive, low rates of return and
it leaves nothing in my estate to pass on. Actually
annuities were created by Congress as a retirement investment
that provides certain income tax advantages and the
opportunity to have income for life. Because of the
income for life choice that must be made available in
every annuity offered, it makes sense that insurance
companies dealing with life expectancies are the financial
institutions that offer annuities.
Annuity
investment choices are broadly categorized as fixed
or variable. Investors can purchase annuities that begin
making immediate distributions or that defer distributions
and income taxation. Investors may also choose between
a one-time investment into an annuity or continuing
investments such as monthly deposits. Annuities may
be purchased as retirement plans such as IRA Rollovers
(qualified annuities) or with money outside of retirement
plans such as bank CDs (nonqualified annuities). There
are a few different income tax rules for qualified and
non-qualified annuities.
A fixed
income annuity guarantees a rate of return for a period
of time and the guarantee is backed only by the strength
of the issuing insurance company. Anytime guarantees
are offered it means the insurance company incurs the
investment risk and the investor receives a lower rate
of return for the guarantee, much like a bank would
structure a certificate of deposit. The difference,
of course, is that FDIC also backs a bank CD up to $100,000.
Many times an annuity offering provides a higher rate
of return for the first year or two and then reverts
to the insurance company’s standard interest rates for
the balance of the contract period, which typically
are seven to ten years. Be careful to not be enticed
by one or two years of good return in exchange for many
more years of substandard return.
Variable
annuities do not guarantee return and tie to the investment
performance of sub-accounts, which are like a family
of mutual funds. Investors can choose from sub-accounts
that generally include government bonds, corporate bonds,
large stock, growth stock, foreign stock, etc. There
are charges incurred above and beyond the fees charged
by a mutual fund. These additional charges are generally
1.25% to 1.5% of the annuity value. There are options
known as riders that can be added at additional cost
providing additional benefit
Death Benefit Guarantees -
great for beneficiaries and for estate and income tax
structuring, but of no benefit to investors
Highest Anniversary Value Lock-Ins
Annual percentage step-up guarantee
Earnings Enhancement Riders
Typical policy will provide an enhance payout
of 40% of the gain in a contract limited to $200,000
which may facilitate payment of deferred income taxes
Living Benefits
Some variable annuities guarantee distribution of the original principal
over a stated period regardless of negative market performance.
Investor benefits
from positive market performance in excess of
the distribution amount
Another
type of annuity commonly referred to as an indexed annuity
is a hybrid of a fixed and variable annuity. The annuity
typically guarantees a minimum distribution rate of
around 3% and ties investment performance to an index
like the S&P 500. Because a base return is guaranteed,
investors are limited regarding upside index performance
Index performance that is negative or less than 3%
o Typical policy
will credit 3% interest on 90% of the investment
(effective rate of 2.7%)
· Index performance
in excess of 3%
o Typical policy
will credit the excess performance on 60%
of the investment
o Excess performance
is capped at 10%
Annuities
do pass to beneficiaries unless the investor chooses
a payout only over their life expectancy which is unusual.
Annuities also avoid probate, which simplifies transfer
at death. In addition, some annuities allow the investor
to stipulate the method of distribution for each beneficiary.
This may give the investor peace of mind without the
use and expense of trusts in situations where the beneficiary
does not have money management skills.
Because
of the many annuity choices it makes sense to clearly
define the goals for each investment account including
the need for flexibility and have Colorado Financial
Management assist you with your investment decisions.
This
summary of annuities was prepared by Colorado Financial
Management, Inc. and is intended to give general and
educational information and is not an offer to sell
securities. Investors are advised to read and understand
annuity contracts and prospectus before investing.
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Insurance - Auto
Colorado
Automobile Insurance – Change Effective June 30, 2003
Under
the former Colorado automobile insurance no-fault laws,
each motorist had to purchase liability coverage and
separate, expensive medical coverage so your insurance
company could pay for your medical bills, regardless
of who caused the accident. Coverage was mandatory including medical coverage.
The problem with this law was
that the mandatory medical insurance carried
with auto policies resulted in expensive duplication
as most people carry health insurance separately.
Colorado
changed to tort laws effective June 30, 2003, meaning
that the at-fault motorist is liable for medical expenses
and property damage for all parties in an accident.
A typical automobile insurance policy may provide
for $100,000 in medical expenses for one person, $300,000
for more than one person and $100,000 in personal property
damage. The
at-fault driver in an accident would easily exceed these
limits when multiple cars and/or injuries occur, the
result being personal liability for expenses above their
policy limits.
Elimination
of mandatory medical coverage under PIP automobile insurance
law does result in premium savings for Colorado motorists.
However, the added liability exposure for the
at-fault driver should be addressed. Insurance agents typically recommend increased liability coverage
through the auto policy or an umbrella liability policy.
As an example, my personal vehicle insurance
decreased $182 per year and the cost of a $1,000,000
umbrella policy is $193 per year.
CFM does
not offer casualty insurance, but we do recognize the
additional liability exposure for our clients as a result
of the new Colorado automobile insurance laws.
To that end, it is advisable to visit with your
insurance agent and make sure you are comfortable with
your policy’s liability limits.
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Seminars
Investment Management
The next seminar has not been scheduled. If you would
like to attend a future seminar, please call.
Seminar topics covered include:
-
How to
make your retirement savings last as long as you
do.
-
Why your
life savings should be diversified.
-
Investment
choices for each of the four phases of a business
- market cycle.
-
Design
of investment portfolios that meet your goals.
-
What to
watch when watching your investments.
Reservations:
Phone: (970) 613-1392 or
E-mail: info@colofin.com
American Legacy
- Please let us know if you would like
information or to attend the next seminar on "Principal
Security." Please call or e-mail
if you would like to reserve a spot for the next educational
seminar.
Reservations:
Phone: (970) 613-1392 or
E-mail: info@colofin.com
Estate Planning
The next seminars have not been scheduled. If you would
like to attend one of the next seminars, please
let us know via e-mail or by calling us.
Reservations:
Phone: (970) 613-1392 or
E-mail: info@colofin.com
If you have
additional questions on Estate Planning or would like
to attend a future seminar taught by one of our featured
speakers, please go to
www.schlenderlaw.com for additional information.
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