#529

Every year, the College Board releases new college cost data and trends in its annual report. The figures published are average cost figures based on a survey of approximately 4,000 colleges across the country.

Over the past 20 years, the average price for tuition, fees, and room and board has increased 46% at public colleges and 30% at private colleges over and above increases in the Consumer Price Index, straining the budget of many families and leading to widespread student debt.

Here are cost highlights for the 2022-2023 year. This year, public colleges have done a better job than private colleges at keeping tuition and fee increases under 2.3%. Note: “Total cost of attendance” includes direct billed costs for tuition, fees, and room and board, plus indirect costs for books, transportation, and personal expenses.

Public colleges: in-state students

• Tuition and fees increased 1.8% to $10,940
• Room and board increased 3.0% to $12,310
• Average total cost of attendance: $27,940

Public colleges: out-of-state students

• Tuition and fees increased 2.2% to $28,240
• Room and board increased 3.0% to $12,310 (same as in-state)
• Average total cost of attendance: $45,240

Private colleges

• Tuition and fees increased 3.5% to $39,400
• Room and board increased 3.0% to $14,030
• Average total cost of attendance: $57,570

Note: Many private colleges are at or approaching $80,000 per year in total costs.

Sticker price vs. net price

The College Board’s cost figures are based on published college sticker prices. But many families don’t pay the full sticker price. A net price calculator, available on every college website, can help families see beyond a college’s sticker price. It can be a very useful tool for students who are currently researching and/or applying to colleges.

A net price calculator provides an estimate of how much grant aid a student might be eligible for at a particular college based on the student’s financial information and academic record, giving families an estimate of what their out-of-pocket cost — or net price — will be. The results aren’t a guarantee of grant aid, but they are meant to give as accurate a picture as possible.

FASFA for 2023-2024 year opened on October 1

Even though the college cost data contained here is for the 2022-2023 school year, it’s already time to think about the following year. The Free Application for Federal Student Aid (FAFSA) for the 2023-2024 year opened on October 1. It’s important to keep in mind that the 2023-2024 FAFSA will factor in your income information from two years prior, which it will get from your 2021 federal income tax return, but it uses current asset information. Your income is the biggest factor in determining financial aid eligibility.

Check out our recent webinar, “College Planning: How to Afford the College of Your Dreams”, where we discuss how to apply for FAFSA and how to negotiate the best possible financial aid packages.

Prepared by Broadridge. Edited by BFSG. Copyright 2022.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

By:  Paul Horn, CFP®, CPWA®, Senior Financial Planner

As parents we always want to see our kids succeed and do better than we did. This means many times we want to invest in their future for various things. Most of the time parents want to save for education, but there could be other reasons to save.  For example, helping them buy their first home, seed money to start their business venture, or to pay for a wedding. Below are the most common account types and when it may be the best choice based on your goals for the money. Some may notice that the Coverdell (Educational IRA) is not listed and that is because it is no longer relevant given recent changes to the 529 Plan.

529 Plan: Best account for saving for education

• Best used if you 100% know that the beneficiary is going to use the funds for college, post-secondary education, or private school.
• For 2022, the max that can be contributed in one year is $16,000 per person per beneficiary (or $32,000 with gift splitting).  There is also an option to superfund a 529 where 5 years of contributions are made in one year.
• Contributions grow tax-free and distributions can be tax-free as long as they are used for qualified education expenses.  Qualified education expenses include (but are not limited to) items like room and board, tuition, and books.
• Contributions can be deductible at the state level depending on your state.
• If the distribution is not for qualified education expenses, the earnings on the distribution are subjected to ordinary income taxes and a 10% withdrawal penalty.
• You can switch the beneficiary at any time. Let’s assume you have money left over after the oldest child graduates; you can transfer this money to the next kid in college.

UTMA/UGMA (custodial account): Best account if you want your kid to have the money at 18 or 21 without any limitations

• In 2022, this is an account where the custodian can contribute $16,000 per year to an investment account for a minor child.  At the age or majority (usually age 18 but can be increased to age 21 or 25 in some circumstances), the minor child then becomes the owner of the account.
• While the minor child is still listed on the UTMA (Uniform Transfer to Minors Act) account or UGMA (Uniform Gift to Minors Act) account, the earnings are subject to capital gains at the following schedule:
  • The first $1,100 of unearned income is free from tax,
  • The next $1,100 is taxed at the minor’s tax rate,
  • Earnings above $2,200 are taxed at the parent’s tax rate.

• When the account transfers to the minor child due to the minor child reaching the age of majority, earnings and distributions are taxed at capital gains tax rates.

2. Put money into a taxable account in your name – Best option for anything not education specific

• There are no limits on how much you put into the account or how the money is used.
• You maintain full control of the assets and determine when and how much they receive.
• This is a taxable account, so it would be subject to regular taxes (i.e., interest income, capital gains, dividends, etc.)
• If your kid(s) were to inherit the taxable account, the securities in the taxable account get a step up in basis to virtually eliminate any tax implications for them.
• A taxable account has less impact on financial aid for your kid(s) than a UTMA/UGMA.
• Money can be invested however you choose.
• When you give the money to them it is considered a gift and limited to $16,000 per person or $32,000 for a married couple per year (2022). Any amount over this is reported on a gift tax return (no taxes are paid but it reduces your estate tax exemption).
• If the money is used to pay tuition for a school directly or directly to medical bills, then the $16,000 limit does not apply.

Roth IRA: Best if saving for their retirement

• Contributions to a Roth IRA can be made for a minor child as long as the minor child has earned income from working.
• For 2022, contributions are limited to $6,000 or the amount of earned income (whichever is lower). Assume they make $3,000 from a summer job, then you are limited to contributing $3,000.
• A parent can put money into the Roth IRA for the kids to allow the kids to keep their income they earned.
• Contributions grow tax-free and distributions can be tax-free if the owner (the minor child) is at least age 59.5 and the contributions have been in the account for at least 5 years.  If not, earnings on the distributions are subject to ordinary income tax and subject to a 10% early withdrawal penalty.  There are some instances where the 10% early withdrawal penalty can be waived that include (but are not limited to): buying your first home (up to $10k), college tuition, or permanent disability.

As you can see, there are many options available to you and the best account depends on what your goals are. You can reach us at financialplanning@bfsg.com if you would like to have a complimentary call to discuss your specific situation.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

By:  Henry VanBuskirk, CFP®, Wealth Manager

Investing is a broad concept that has a wide array of definitions that differ depending on whom you ask.  If you ask a recent college graduate, parents in their early 40s with two young children, and an elderly retired couple to define what investing means to them, you will probably get three wildly different answers. They all have different goals, and their investment accounts need to match those goals. My goal with this article is to help define some of these different investment accounts and why they would be used. There are many different types of investment accounts, and it may be overwhelming to keep tabs on the goals and rules for each account type. While I’m not going to go through every single investment account type in existence, I am going to help define some of the more common and lesser-known investment account types and why they would be used in each stage of life. Let’s start with the recent college graduate.

College graduate:

Say you are a recent college graduate of 24 and you started working for ABC Company. You probably aren’t thinking much about your retirement (…that’s 40 years from now…). You probably are thinking about making sure you can pay rent on time and hoping your date on Friday night goes well. The recent college graduate would probably answer, “I have a 401(k) at work, social security when I’m older, and I’ll be fine. There are a few stocks I like, and I follow the market, but I don’t have enough money to set aside to focus on investing. I don’t need to focus on investing right now.” The sentiment towards investing is understandable, but there are a lot of things that this college graduate can do now. This could be the prime time in this person’s life to start thinking about investing. Assume that ABC Company offers a match of 4%, you make $50,000, your salary never increases, and you contribute 10% to the 401(k).  Below is how much you would have at your projected retirement at age 65 assuming a 7% rate of return.   

Now compare this to someone at ABC Company who is 40 years old, makes $100,000 per year, their salary increases by 5% per year, and contributes 10% to the 401(k) each year. We will use the same 7% rate of return assumption.

The college graduate (24-year-old), who makes half as much as the 40-year-old, would have more saved in retirement. This is due to what Einstein calls “The Eighth Wonder of the World”, compound interest. 

A Traditional 401(k) also would offer tax-deductible contributions that would lower your pre-tax income, would you lower your tax bill, and the investments would grow tax deferred. The catch is that you would be required to take distributions in retirement starting at age 72. This is called the required minimum distribution (RMD). The college graduate is probably not thinking about RMDs right now, but what they are thinking of is getting a break on their taxes and saving for their future retirement. There is also a Roth 401(k)that does not allow for tax-deductible contributions, the earnings would grow tax-deferred, but you would not be required to take any distributions ever (not all plans offer this option).

Now assume that ABC Company offers a High Deductible Health Plan. Since you are a 24-year-old, you probably are in good health and would be okay signing up for a high deductible health plan.  Doing so would give you access to a lesser-known account, a Health Savings Account (HSA). This account type offers the trifecta of tax savings:

• Tax-deductible contributions
• Tax-free growth
• Tax-free distributions when used for qualified health expenses

Think of this account as a Traditional 401(k) where you don’t have required distributions. If you don’t use it for qualified health expenses, then distributions are taxed at ordinary income tax rates. There is also a limit to how much you can contribute to an HSA in any given year (for 2022, $3,650 for individual coverage and $7,300 for family coverage). As we illustrated before, time is your friend when it comes to investing.

Parents in their early 40s with two young children:

Now assume that you are a 43-year-old parent with two young children, ages 5 and 6. You may be thinking about what’s best for your children. Fortunately, there are investment accounts that you can consider for their goals as well. Some investment account types that would fit this bill are Uniform Transfer to Minors Act (UTMA) accounts, Uniform Gift to Minors Act (UGMA) accounts, and Roth IRAs.

Uniform Transfers to Minors Act (UTMA) accounts or Uniform Gifts to Minors Act (UGMA) accounts are accounts where you can set aside money each year to invest for a minor. The adult family member is the custodian (person in charge of the account) and when the child reaches the age of majority (normally 18 but can be as high as 25 in some states), the account legally changes ownership to the child. There are very few differences between a UTMA and a UGMA, which is why I lump them together and will refer to them as a custodial accounts. A custodial account is taxed with the following schedule:

• The first $1,100 of unearned income is free from tax
• The next $1,100 is taxed at the minor’s tax rate
• Earnings above $2,200 are taxed at the parent’s tax rate

It generally would require filing a tax return to report any gains or losses attributed to the investment account’s performance. The taxation in a custodial account is not dependent on whether or not the child or grandchild uses it for qualified education expenses. The UTMA or UGMA account after the child or grandchild reaches the age of majority becomes a non-qualified investment account. This means that it is taxed at the more favorable capital gains tax rates.

One account that can help pay for future college expenses is a 529 plan. 529 Plans (sometimes referred to as college savings plans) are a great investment vehicle if your child goes to college or a private school. This is because the earnings are tax-free, and distributions are tax-free as long as the funds are used for qualified education expenses. The downside is if the distribution is not for qualified education expenses, then the earnings are taxed at ordinary income tax rates and a 10% penalty is assessed. If your child has goals of wanting to be an astronaut, doctor, or another profession that requires post-secondary education, it may be a good opportunity to talk to them about what needs to happen to realize that goal. Maybe during Christmas, you have the child open a letter that has a $100 check made out to a 529 plan. The kid would naturally have questions. You could then give them the same gift every Christmas and show them the 529 plan statement on how you are working together to make that goal a reality.

Another way to save for a minor child would be a Roth IRA. Roth IRAs are available to anyone that has an earned income below $144k for single taxpayers or $214k for married filing jointly. This isn’t just for people 16 and older that work part-time after school. You can have even younger people than that contribute (with the parent’s help as custodian) to a Roth IRA provided that they have earned income.  Earnings on a Roth IRA are tax-free, as long as it has been longer than 5 years since you first contributed to a Roth IRA account, and you have reached age 59.5. There is a 10% early withdrawal penalty if funds are withdrawn before age 59.5 and it is possible that you would owe ordinary income taxes on the earnings received. Your basis in the Roth IRA is never subject to taxation.

For example, I worked with a client who owned an educational toy company, and her 2-year-old was a ‘toy tester’. She gave the 2-year-old a salary, and then matched that salary in the form of a Roth IRA. Think outside the box, but also make sure everything is well documented since you are reporting all of this to the IRS. We are all about tax saving strategies at BFSG, but we will never recommend illegal tax avoidance strategies.

An elderly retired couple:

The elderly couple isn’t thinking about accumulating and is instead thinking about maintaining their lifestyle and passing on their successes to future generations in their household. This is also the time when you are taking required minimum distributions (RMDs) from your Traditional 401(k) or Individual Retirement Account (IRA).

This elderly retired couple has a sizable estate and are concerned about making sure their grandchildren can attend college. They can put the RMD funds (net of taxes) into a 529 Plan that would grow tax-free and withdrawals can be tax-free if the funds withdrawn from a 529 Plan are used for qualified educational expenses. With a 529 plan, you can build an educational legacy for your grandchild while taking advantage of tax and estate planning benefits.  

What some of our clients do when they don’t need the money from their RMDs (not a bad problem to have) is that they journal the net distribution from their Traditional 401(k) or IRA to their brokerage investment account.  The brokerage investment account is non-qualified (no favorable tax treatment) that can be used for any purpose.

However, don’t let Lloyd Christmas have that chance at your estate. Make sure the brokerage investment account is titled properly – preferably in the name of your Living Trust.

Upon the elderly retired couples passing, the brokerage investment account would pass to their heirs (as dictated in the Trust), and they would receive a step-up in cost basis at death. For example, assume you put $100,000 into a brokerage investment account and it grows to $150,000 10 years later. If you close out the brokerage investment account, you would owe long-term capital gains taxes on the $50,000 gain and you would receive $150,000 minus what was paid in long-term capital gains taxes. If you instead leave the account open and pass away with the $150,000 brokerage investment account, your heirs would receive the account and can choose to take the $150,000 tax-free.

Conclusion:

Regardless of what demographic group you are a part of, there are investment accounts for you and a team of CERTIFIED FINANCIAL PLANNERS^TM at BFSG that can help you along your life journey.  Let us know what we can do to help. 

Sources:

1. https://www.bankrate.com/retirement/401-k-calculator/
2. https://www.fidelity.com/viewpoints/wealth-management/hsas-and-your-retirement
3. https://www.nerdwallet.com/article/investing/utma-ugma
4. https://www.bankrate.com/loans/student-loans/roth-ira-for-college/
5. https://www.savingforcollege.com/article/can-i-pay-my-mortgage-with-529-plan-money
6. https://www.irs.gov/newsroom/irs-announces-changes-to-retirement-plans-for-2022
7. https://www.courts.ca.gov/partners/documents/probguide-eng.pdf

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

All those benefits of personal growth, expanded horizons, and increased lifetime earning power comes at a price, a price that increases every year, but we believe a college degree is worth it.

A college education is expensive. For decades, college costs have outpaced annual inflation, and this trend is expected to continue. According to the College Board’s annual Trends in College Pricing Report, for the 2020-2021 academic year, the average cost of attendance at a four-year public college for in-state students is $26,820, the average cost of attendance at a four-year public college for out-of-state students is $43,280, and the average cost of attendance at a four-year private college is $54,880. Many private colleges cost substantially more. The total cost of attendance includes direct billed costs for tuition, fees, room, and board, plus a sum for books, personal expenses, and transportation.

However, a college degree typically provides job security and increased lifetime earning power (see the charts below).¹

Keep in mind though, there are different labor market and wage outcomes by the chosen college major. Click here to see those outcomes. This should be an important consideration when helping your child choose which school to attend.

Why You Should Start Saving Early

Next to buying a home, a college education is the largest expenditure most parents will ever make (and perhaps the biggest expenditure when more than one child is in the family picture).

The earlier in the process you become informed about the potential costs and your saving options, the greater chance you will start saving. And the more money you save now, the less money you or your child will need to borrow later.

How much you need to save obviously depends on the estimated cost of college at the time your child is ready to attend. Often, these numbers are staggering. Don’t be discouraged if you can save only a minimal amount at first. The key is to start saving early and consistently and to add to it whenever you can from raises, bonuses, or unexpected gifts. In addition, parents generally supplement their savings at college time with a combination of personal loans, financial aid (student loans, grants, scholarships, and work-study), and tax credits to cover college costs.

After you determine how much you can save each month, you will need to choose one or more college-saving options. There are many possibilities to pay for college — watch our webinar “A Definitive Guide for education Planning” to understand your options with student loans and learn about the best ways to save for college and maximize student aid.

It is never too late to start planning for college and we are here to help you put together a plan.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2021. Edited by BFSG.

1. Federal Reserve Bank of New York, The Labor Market for Recent College Graduates, February 12, 2021

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s web site or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.