Getting the Most from College 529 Plans

Posted on August 19, 2014 by Dr. David Edward Marcinko MBA MEd CMP™

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A List of Suggestions

By Rick Kahler MS CFP® http://www.KahlerFinancial.com

Rick Kahler CFPWhen it comes to 529 college savings plans, the best strategy is to start early and start big. Don’t wait to set up an account until your teenager is starting to wonder which schools might offer skateboarding scholarships.

These accounts are excellent vehicles to save for college, in large part because of the tax-free growth they offer. Here are some suggestions for getting the most benefit from a 529 plan.

The List

1. Start as early as possible. The best time to start a 529 plan is at birth. Well, maybe a few weeks later; you do need to wait until the kid gets a Social Security number. The earlier an account is established, the more years of growth it will provide. Ideally, the plan and the child will grow together.

2. In the early years, invest more aggressively. It would be a shame to open a plan for a two-year-old and put everything in a money market fund or bonds; the goal in early years is growth. It’s a good idea to invest heavily in equities for about the first 10 years, then gradually move to bonds and other low-risk options. Many plans have an age-based option that does this automatically.

3. Fund the plan as much as you can when the child is young. Obviously, this can be a challenge for young families. If you can, however, it’s good to start with higher monthly amounts even if you need to taper off your contributions as the child gets older. The goal is to get as much into the plan as you can.

4. Consider using the five-year option. If someone has the ability to put a large amount into a child’s 529 plan all at once, it’s possible to contribute as much as $70,000 that is considered a contribution in advance for the following five years. The five-year period is to minimize federal gift tax purposes. This option might be most applicable for grandparents as part of their own estate planning.

5. Pay attention to fees and performance. Many 529 plans are sold through investment firms, and the commissions paid to those firms vary. Some offer mutual funds with relatively high annual fees. Fees are required to be clearly disclosed. It’s also a good idea to look at the performance of the fund managers. As an example of how to find this information, the South Dakota 529 plan has a FAQ section on its website with details on fees, performance, and funds.

6. Compare several state plans. While some states do offer tax breaks for residents who use their 529 plans, you aren’t limited to the plan from your own state. You can open new accounts in or move existing accounts to other states.

7. The more plans, the better. One child can be the beneficiary of several plans, perhaps set up by parents and both sets of grandparents. Or grandparents, say, could contribute to accounts opened by parents. The potential disadvantage here is that the money then belongs to the owner of the account.

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One Last Point

Don’t get so excited by the idea of maximizing a 529 plan that you forget one essential guideline: Parents should fund their own retirement accounts ahead of funding college accounts for the kids.

Assessment

There are many places to find a little extra money for kids’ 529 plans. A few possibilities are cash gifts from relatives, contributions from grandparents, tax refunds, or bonuses. But the worst place to find that money is your own retirement fund. It isn’t wise to sacrifice a healthy retirement plan in order to create a healthy 529 plan.

More: Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

Conclusion

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Paying for College

Posted on March 13, 2013 by Dr. David Edward Marcinko MBA MEd CMP™

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Maybe Not!

By Rick Kahler MS CFP® ChFC CCIM www.KahlerFinancial.com

Rick Kahler CFPDo you want to give your children the best possible chance to do well in college, earn higher salaries, and save more for their retirement? Then, don’t pay for their college education.

One of the most popular money scripts I encounter is the notion that being a good parent means paying for your child’s college. Many parents do this at the expense of taking care of themselves in retirement, which is a very high price to pay.

The most popular reason I hear from clients for funding children’s’ education is empowerment. They want to spare kids the burden of repaying school loans after graduation. They also want them to be able to focus on their studies without the distraction of having to work to put themselves through college. For most parents, allowing students to concentrate on classes so they can perform well, make better grades, and obtain better jobs, is a sacrifice worth making.

The Myth

There’s just one problem with this scenario. It’s a myth.

In most cases, parents who fund their kid’s’ college education are insuring they will actually do worse in school than those who have to pay their own way. This is the finding of new research conducted by Laura T. Hamilton, published January 7, 2012, by The American Sociological Review under the title “More Is More or More Is Less?” Her study shows that students whose education is funded by parents or through student loans actually have lower GPA’s than students who in some way must work to put themselves through school.

Hamilton found that students who have to “do something” requiring them to take personal responsibility for obtaining the funds for their education do best and carry higher GPA’s. This includes those who receive grants, scholarships, or veteran’s benefits, or who participate in work-study programs.

Parental funds or borrowing “provide the time, money, and proximity (i.e., living on or near campus) necessary to delve deeply into college peer cultures,” Hamilton notes. The gift of time that student loans and parental funding provide isn’t usually poured into studies. Instead, students tend to focus that extra time on increasing their social life. The average college student receiving money from loans or parents spends less time on studies in college than in high school. Even though they spend about 28 hours a week attending class and studying, the research found they devote a full 41 hours a week to social and recreational endeavors.

Put more succinctly, students who have to work to pay their way through college spend slightly more time studying and significantly less time partying.

The Results 

The net result in this is a big personal and societal lose-lose. Those of you who have sacrificed your retirement to help your children through college have potentially done harm to both your children and yourselves. Your kids have probably done worse in college, thus obtaining lower paying jobs. This loss of potential income has downsides for both children and parents. Previous research has shown that parents who don’t fully fund their own retirement years will actually end up costing their children five times as much as the kids would have spent by funding their own college education.

Understandably, a few of you are now choking on your last sip of coffee as you read the last paragraph. This is not at all the outcome you intended.

Money

Assessment

The evidence is clear. Parents who take care of fully funding their own retirement instead of sacrificing to pay for their kids’ education are not being selfish. Instead, they give their children something far more valuable than the cost of tuition: the gift of success and achievement.

Conclusion

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Ten Questions on Section 127 Plans for College Funding

Posted on December 16, 2009 by Dr. David Edward Marcinko MBA MEd CMP™

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Physician-Parents and the Cost of Education

[By Staff Reporters]

IRS Section 127 plans are used to pay and deduct college costs. These plans allow your practice to pay up to $5,250 of college expenses per year, but do not require your child to recognize the tuition payment as income. The following questions and answers relate to the IRS Section 127 Educational Assistance Plan which became effective on July 1, 2002

1. What benefits are provided under the Section 127 Plan?

The Section 127 Plan is intended to provide favorable tax benefits only. The Plan will exclude from taxation graduate-level courses provided to eligibles up to a maximum of $5,250 per calendar year. Section 127 plans provide relief from taxation for those eligibles whose graduate-level educational benefits are not covered under other Code provisions.

2. Who will benefit under the Plan?

Employees enrolled in graduate-level courses under the Reduced Fee Enrollment Policy that are not job-related will benefit from the Plan.  The value of such courses will not be taxed, up to the $5,250 annual limit.  Employees enrolled in non-job-related graduate courses taken for professional development at another educational institution are also covered by the Plan and will not be taxed on the value of those courses, subject to the annual limit.

3. What kinds of graduate courses are covered under the Plan?

The Plan covers graduate-level courses of a kind normally taken by an individual leading to a law, business, medical, or other advanced academic or professional degree. Covered courses do not include courses or other education involving sports, games, or hobbies. Courses covered by the Plan may be taken at another educational institution.

4. Are any undergraduate courses covered under the Plan?

No.  Undergraduate courses are excluded from taxation under IRC section 117.

5. Why are job-related courses not covered under the Plan?

Job-related courses are already exempt from taxation under IRC section 162. Thus, only courses taken for professional development that are not directly related to an employee’s current position are covered by the Plan.

6. What is the definition of a job-related course?

A job-related course is a course taken by an employee either to maintain or improve skills required in the employee’s current job; or to meet the express requirements of the employer; or the requirements of law or regulations, imposed as a condition to retaining the employee’s salary, status, or employment.

7. Are Section 127 educational benefits reportable on the Form W-2?

No. The instructions for Form W-2 provide that payments qualifying under a Section 127 educational assistance program are not reportable in box 1 as wages.  Only waivers or reimbursements (for non-job-related graduate courses) in excess of the $5,250 annual exclusion limit would be reported on the Form W-2 as taxable compensation, subject to withholding. Accordingly, such excess amounts should be paid through a payroll system.

8. What are the requirements for a Section 127 Plan?

Section 127 requires that an employer prepare a separate written plan for the exclusive benefit of its employees to provide such employees with educational assistance. In addition, eligible employees must be provided reasonable notification of the availability and terms of the plan; and the plan must not discriminate in favor of highly compensated employees.  Section 127 does not require the educational assistance program to be funded.

9. May benefits be provided on a retroactive basis?

No. Section 127 requires that employees be provided with reasonable notice about the benefits available under the plan.  If benefits are provided before the plan is in effect, employees have not been provided with the requisite notice.

10. Are there any IRS information reporting requirements related to 127 Plans?

No. The IRS has indefinitely suspended the reporting of data related to the administration of a Section 127 Plan (IRS Notice 2002-24).

Assessment

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To properly use a Section 127 plan, physicians must adhere to several rules: the student must be 21 years old; the student cannot be a tax dependent of the physician; the student must be an employee of the medical practice; and the plan cannot discriminate against employees not related to the physician.

Conclusion

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Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

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