Download College Funding vs. Retirement

Building Bridges with College Funding
Beyond 529 Plans: Advanced College Funding Strategies
Rick Darvis, CPA, CCPS
1-800-765-2031
[email protected]
www.solutionsforcollege.com
Agenda
• The College Funding Opportunity
• College Funding vs. Retirement
• Education Tax Strategies
Building Bridges
with College Funding
• Bridge to existing and prospective clients
• Product has lost its sizzle
• Added Value is the key
• College funding will provide a niche
• College funding is HOT and recession proof
• Ultimate door-opener to premium clients
College is EXPENSIVE!
$45,000
40,000
$48,000
35,000
30,000
$32,000
25,000
20,000
15,000
10,000
$16,000
5,000
Average
Public
University
Average
Private
College
*Source of college costs is from the College Board.
Elite
Private
College
If You Haven’t Saved for College…
You May Have A Retirement Issue!
How old will you
be when your last child
graduates from
college?
How are you
going to fund your
own retirement after
paying for college?
College Dollars Spent Equals
Retirement Dollars Lost
Years Until
Retirement
Public
$80,000
Private
$160,000
Elite
$240,000
15
$166,320
$332,640
$498,960
20
$212,240
$424,480
$636,720
Assumes 5% investment rate,
one child in college, after-tax dollars
Solving the Dilemma…
Education
Funding
Retirement
Funding
How can I determine the most efficient
way to fund college and retirement without going broke?
College is Paid with After-Tax Dollars
Five-Year College After-Tax Cost
Tax
Brackets
Public
$80,000
Private
$160,000
Elite
$240,000
25%
$114,286
$228,571
$342,857
28%
$119,403
$238,806
$358,209
33%
$129,032
$258,065
$387,097
35%
$133,333
$266,666
$400,000
*Assumes additional 5% state and local tax and only
ONE child’s college expenses
Education Tax Strategies
Using the IRS to Help Fund College
• A new-found tax benefit is the same as a “tax scholarship”
• The higher the income tax bracket, the greater the benefit
of any tax strategy
• All tax strategies MUST be reviewed with a tax advisor
Introduction to Tax Capacity
• Opportunities in the child’s tax return
• Child’s tax capacity definition
Age 0-13
Age 14-HS
College
$1,600
$34,700
$37,900 + HC/LC
• Income shifting to utilize tax capacity
The term “Tax Capacity” is from Practitioners Publishing Company
Example: College Years
Wages
$
IRA Withdrawal
Capital Gain
5,000
Income Shifted
$ 27,000
$ 12,000
Parents’ Tax Rate
X 15/35%
$ 10,000
Parents’ Tax Liability
Personal Exemption
(3,100)
Standard Deduction
(4,850)
Taxable Income
19,050
Tax Rate
X 5/15%
Tax
$1,508
Hope Tax Credit
(1,500)
Child’s Tax Liability
$
8
$ 7,450
Tax Scholarship
$ 7,442
Case Study #1 — Facts
• Income — $145,000
• Assets — $140,000 (outside of retirement)
• Medical expense of $9,000 per year
• Ineligible for aid at
$35,000/year college
• Pay undergraduate
& graduate school
Case Study #1 — Strategies
1) Sole Proprietor
• Employ Mother in the business
• Establish SIMPLE IRA (Mother & Father)
• Employ the two children in the business
Case Study #1 — Strategies
1) Sole Proprietor
• Employ Mother in the business
• Establish SIMPLE IRA (Mother & Father)
• Employ the two children in the business
2) Tax Strategy
• Medical reimbursement plan
• First year depreciation election
Case Study #1 — Strategies
1) Sole Proprietor
• Employ Mother in the business
• Establish SIMPLE IRA (Mother & Father)
• Employ the two children in the business
2) Tax Strategy
• Medical reimbursement plan
• First year depreciation election
3) Junior Year
• Employer Education Assistance
• Gift and leaseback of equipment
• Gifts of appreciated securities
• Life Insurance or Federal PLUS Loans
Case Study #1 — Added Value
• Eligible for $43,240 of financial aid
• Tax Scholarships of $36,125
• IRC 105 & SIMPLE IRA tax benefit of $73,850
• IRC 127 tax benefit of $9,870
• Tuition Deduction tax benefit of $2,880
TOTAL BENEFITS - $165,965
RETIREMENT DOLLARS - $345.041
SIMPLE IRA CONTRIBUTIONS - $140,000
Case Study #2 — Facts
• Income - $624,000/year
• Assets - $4,017,000
• Newborn child
• Save and pay for K-12 private & college
• Grandparents have
desire to help
Case Study #2 — Strategies
1) Birth
• Grandparents fund Coverdell ESA and 529 Plan
• Fund UTMA with municipal bond fund
Case Study #2 — Strategies
1) Birth
• Grandparents fund Coverdell ESA and 529 Plan
• Fund UTMA with municipal bond fund
2) Teenager
• Employ child and invest wages in IRA (age 10)
• Gift and leaseback of equipment (age 14)
Case Study #2 — Strategies
1) Birth
• Grandparents fund Coverdell ESA and 529 Plan
• Fund UTMA with municipal bond fund
2) Teenager
• Employ child and invest wages in IRA (age 10)
• Gift and leaseback of equipment (age 14)
3) College
• Employer Education Assistance (age 21)
• Grandparents contribute to CRT
• Gifts of appreciated assets as needed
Case Study #2 — Added Value
• Tax scholarships of $98,601
• IRC 127 tax benefit of $4,515
Grandparents
• Avoid tax on income of $123,005 from the 529 Plan & CESA
• Remove $226,000 from estate
• Receive a charitable tax deduction of $78,791
• Avoid tax on $80,000 of appreciation
Review
• The College Funding Opportunity
- Added value is the key
- Network with other professionals
- Attract premium clients, including grandparents
• College Funding vs. Retirement
- Paying for college is a retirement problem
- College dollars saved are retirement dollars gained
• Education Tax Strategies
- Use “tax capacity” to add value and increase
cash flow for investing
- Unique opportunities for business owners
- Employees also have opportunities
The Next Steps
Building Bridges with College Funding
The College Funding Opportunity
- How to maximize financial aid eligibility
- How to maximize the education tax
incentives
- Methods and investments to
fund college & retirement
- A roadmap to meet financial goals