Download Buying a Home - BYU Personal Finance

Saving for your Children’s
Education and Missions
August 16, 2012
Bryan Sudweeks, Ph.D., CFA
From the BYU MSM web site
Personal Finance: Another Perspective
at http://personalfinance.byu.net
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Abstract
The choice to help financially with your
children’s education and missions is an
individual or family decision. For those who
wish to help, many are unsure of ways to help
save to reduce the costs. This presentation will
help with ideas on the “why” of personal
finance, how education relates to financial
goals, principles of saving for education and
missions, and the process of selecting and the
advantages and disadvantages of specific
investment vehicles for education and missions.
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The emphasis is in what we can do now.
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Objectives
• A. Understand the “why” of personal finance
• B. Understand how education relates to goals
• C. Understand the principles of financing
education and missions
• D. Understand the process of selecting
investment vehicles
• E. Understand investment vehicles to save for
children’s education
• F. Understand investment vehicles to save for
children’s missions
• G. Understand how to apply for financial aid
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A. Understand the “Why” of Personal Finance
• We all have lists of what we could and should do in
our [priesthood] responsibilities. The what is important
in our work, and we need to attend to it. But it is in the
why of [priesthood service] that we discover the fire,
passion, and power. The what of [priesthood service]
teaches us what to do. The why inspires our souls. The
what informs, but the why transforms. . . My prayer is
that as bearers of his priesthood we will ever stay
attuned to the why of [priesthood service] and use the
principles of [] the restored gospel to transform our
lives and the lives of those whom we serve (italics,
color and brackets added, Dieter Uchtdorf, “The Why
of Priesthood Service”, Ensign, May 2012).
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The “Why” (continued)
• We all have lists of what we could and should do in
our [personal finance] responsibilities. The what is
important in our work, and we need to attend to it. But
it is in the why of [personal finance] that we discover
the fire, passion, and power. The what of [personal
finance] teaches us what to do. The why inspires our
souls. The what informs, but the why transforms. . .
My prayer is that as bearers of his priesthood we will
ever stay attuned to the why of [personal finance] and
use the principles of [personal finance and] the
restored gospel to transform our lives and the lives of
those whom we serve (italics, color and brackets
added, Dieter Uchtdorf, “The Why of Priesthood
5
Service”, Ensign, May 2012).
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The “Why” (continued)
• What is the “Why” of personal finance that
inspires our souls?
• How important is it for each of us to understand
these “whys”?
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The “Why” (continued)
• What is the “why” of personal finance?
• We learn and apply personal finance in our lives to:
• 1. Learn the lessons that personal finance can
teach us to help us become more like our Savior
Jesus Christ
• 2. Accomplish our personal and family goals
which will require financial resources
• 3. Accomplish our personal missions for which
we were sent here on earth, and
• 4. Help us return with our families back home
to our Savior and Heavenly Fathers’ presence
• The “why” is easier when we understand four key 7
doctrines:
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Doctrine 1: Ownership
Ownership: Everything we have is the Lord’s
• The Psalmist wrote:
• The earth is the Lord’s, and the fullness thereof;
the world, and they that dwell therein (Psalms
24:1)
• The Lord is the creator of the earth (Mosiah 2:21),
the creator of men and all things (D&C 93:10), the
supplier of our breath (2 Nephi 9:26), the giver of
our knowledge (Moses 7:32) the provider of our
life (Mosiah 2:22), and the giver of all we have and
are (Mosiah 2:21).
• Nothing we have is our own—its all God’s
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Doctrine 2: Stewardship
Stewardship: We are stewards over all that the
Lord has, is, or will share with us
• The Lord stated:
• It is expedient that I, the Lord, should make
every man accountable, as a steward over earthly
blessings, which I have made and prepared for
my creatures. (D&C 104:13)
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Doctrine 3: Agency
Agency: The gift of “choice” is man’s most
precious inheritance
• President David O. McKay wrote:
• Next to the bestowal of life itself, the right to
direct that life is God’s greatest gift to man.…
Freedom of choice is more to be treasured than
any possession earth can give (Conference
Report, Apr. 1950, p. 32; italics added).
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Doctrine 4: Accountability
Accountability: We are accountable for every
choice we make
• The Lord stated:
• For it is required of the Lord, at the hand of
every steward, to render an account of his
stewardship, both in time and in eternity (D&C
72:3).
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What is Really Ours? (continued)
• On this subject, Elder Neal A. Maxwell
stated:
• The submission of one’s will is really the only
uniquely personal thing we have to place on
God’s altar. The many other things we “give,”
brothers and sisters, are actually the things He
has already given or loaned to us. However,
when you and I finally submit ourselves, by
letting our individual wills be swallowed up in
God’s will, then we are really giving something
to Him! It is the only possession which is truly
ours to give! (italics added, “Swallowed Up in
the Will of the Father,” Ensign, Nov. 1995, 22.)12
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B. Understand How Education
Relates to Other Goals
Median
Level of Education
Annual Earnings* Lifetime Earnings
Not a HS graduate
$24,325
$973,000
High school Diploma
32,600
1,304,000
Some College, no degree
38,675
1,547,000
Associate's Degree
43,175
1,727,000
Bachelor’s Degree
56,700
2,268,000
Master’s Degree
66,775
2,671,000
Doctoral Degree
81,300
3,252,000
Professional Degree
91,200
3,648,000
*Annual earnings is lifetime earnings divided by 40 years.
Source: Anthony P. Carnevale, Stephen J. Rose, and Ban Cheah, “The
College Payoff: Education, Occupations, Lifetime Earnings,” Georgetown
University Center for Education and the Workforce, 2012.
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How Education Relates (continued)
• Is education a good investment?
• President Gordon B. Hinckley said:
• Now is the season to train your minds and
your hands for the work you wish to do.
Education can prove to be the wisest and
most profitable investment you will ever
make (Tambuli, Sept. 1989, 49).
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Education Week 2012
How Education Relates (continued)
• Cost Facts:
• Average U.S. medical school tuition cost in 20102011 was $49,298 (public) and $66,984 (private)
• 2011 average top 20 MBA programs tuition and
fees: >$100,000 (varies by school), up 5.7% yoy
• Average cost in tuition, fees and lost salary:
$150,000
• Annual budget for students of BYU in 2012-2013
• Undergraduate $21,840 (LDS), 31,080 (non-LDS)
• Graduate
$25,074 (LDS), 31,024 (non-LDS)
• MSM/Law
$30,826 (LDS), 41,776 (non-LDS)
• Education isn’t cheap, but the cost of ignorance is
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higher!
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How Education Relates (continued)
• You young people, the little decisions that you
make can so affect your lives. Shall I go to school
or not? Shall I continue on with my education?
That is a big decision for some of you. Our
doctrine suggests, although there may be some
circumstances that would affect that decision, that
the more education you receive the greater will be
your opportunity to serve. That is why this Church
encourages its young people to get the schooling
that will qualify them to take their places in the
society in which they will become a part. Make
the right decisions. Take a long look (italics
added, Pocatello, Idaho, Regional Conference, 16 1616
Idaho State University, 4 June 1995).
How Education Relates (continued)
President Hinckley further commented:
It is so important that you young men and you young
women get all of the education that you can. Education is
the key which will unlock the door of opportunity for you.
It is worth sacrificing for. It is worth working at, and if
you educate your mind and your hands, you will be able
to make a great contribution to the society of which you
are a part, and you will be able to reflect honorably on the
Church of which you are a member. My dear young
brothers and sisters, take advantage of every educational
opportunity that you can possibly afford, and you fathers
and mothers, encourage your sons and daughters to gain
an education which will bless their lives (“Inspirational 17
Thoughts,” Liahona, June 1999, 3).
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C. Understand the Principles of Financing
Education and Missions
• Principles of financing education and missions:
• 1. Teach your children to be financially responsible
• 2. Help your children to contribute to their own and
other family member’s missions and education
• 3. If you choose to help, develop an education and
mission plan that is consistent with your personal
goals and budget, share it with your children early,
and follow it
• 4. Start early in saving for your children’s education
and missions
• 5. Invest funds wisely and tax-efficiently consistent
with your tolerance for risk
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Principles (continued)
• 1. Teach your children to be financially
responsible
• Teach them to work and to earn, consistent with
their age and abilities
• Teach them to be accountable for their spending,
just as they are for their words and thoughts
• Teach them to share the things they have—none of
our “stuff” belongs to us
• Teach them that they earn and receive money based
on their working—not their whining
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Principles (continued)
• 2. Help your children to save for their own
(and other family member’s) education and
missions consistent with their abilities to earn
• Encourage children to set savings goals where they
can save for their own missions and education
• Set up investment/savings accounts for your
children, and contribute their savings to these
accounts
• Give your children opportunities to earn money that
is earmarked, after paying the Lord, specifically for
their missions and education
• Consider matching children’s funds to encourage 20
their contributions first before you will help
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Principles (continued)
• 3. If you choose to help, develop education
and mission plans for your children consistent
with your personal goals and budget and share
it with your children
• Develop education and mission plans. Determine
how you will invest, help, what you will help pay
for, and what children must do to receive funds
• Set up investment accounts for your children and
set aside funds each month to fund these accounts
• Encourage your children to participate. Plans
which require work and contributions by children
have a better chance of teaching desired principles
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• Share these plans with your children early
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Principles (continued)
• 4. Start NOW (and early) to save for your
children’s education and missions
• Begin now and begin early if you choose to help
• The best time to begin saving for your children’s
education and missions is today. The Law of the
Harvest takes time and is still in effect
• Make saving a key part of your family budget—be
an example to your children
• Have your children begin now to help save for their
own missions as well
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Principles (continued)
• 5. Invest funds wisely and tax-efficiently
consistent with your own tolerance for risk
• Use wisdom in your investments
• Do not take on more risk than you are comfortable
with
• Understand your available financial vehicles for
education and missions
• Use the investment vehicles which allow you to
save the most on an after-tax basis (utilize tax
benefits in your educational savings plan)
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C. Understand the Process of Selecting Investment
Vehicles for Education and Missions
• Is there process for selecting investment
vehicles for financing education and missions?
• Your priority should be:
• 1. Free Money
• 2. Family Money
• 3. Employment
• 4. Loans
• 5. Credit Cards (No!)
• 6. Retirement Accounts (No!)
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1. Free Money
• Free money first--scholarships and grants
• This is free money which is not paid back
• If you have to pay money, its a scam!
• Grants are need-based--complete the FAFSA
• Pell Grant: approximately $575-$5,550/year
• Scholarships from schools and private sources
• You may need a supplemental application
• Find out which ones you are eligible for on a
scholarship search engine and apply for each
• Armed Forces Scholarships: See recruiting offices
• Individual Development Accounts: State sponsored,25
(Utah) www.uidan.org, or (877) 787-0727
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2. Family Money
• Use personal savings and help from parents
• If children pay for their education and missions,
they will likely use their resources more wisely, as
it is their money they are spending
• Start the process of financial self-reliance as
soon as you can
• Let your children do as much as they can, then
help if you are able--but don’t do it all
• If parents and grandparents can help, that is
wonderful
• Express appreciation to anyone who helps!
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3. Employment
• Have children work when possible to offset
educational expenses
• Most colleges offer federal College Work Study and
provide student employment opportunities
• Undergraduate students enrolled in 12+ semester
hours should work no more than 20 work hours per
week. This may cover rent and food expenses
• High school students should work no more than 010 hours per week while in school. Working more
hours reduces GPA and likelihood of attending
college
• Working summers to save for mission and college
is very desirable
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4. Loans
• Use (all) loans wisely. They must be paid
back. Understand:
• a. Who pays the interest during school?
• The borrower or the government?
• b. When must you start paying back the loan?
• Immediately or after graduation?
• c. Who takes out the loan?
• You or your parents?
• d. What is the interest rate cap?
• What is the highest rate you may pay?
• e. What are the costs?
• What are all the costs: amounts, fees, etc.?
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Loans (continued)
• Subsidized Federal Loans
• Subsidized Stafford Loan
• a. Government pays interest while in school
• b. Repayment begins 6 months after student
drops below half-time enrollment or graduates
• c. Loan is in the student’s name
• d. For 2012-13, the interest rate is fixed at 6.8%.
No interest accrues (or grows) while enrolled in
school. Simple interest accrues at 6.8% APR
• e. Subsidized Stafford Loan amounts range from
$3,000 to $5,500 for undergraduates and $8,500
for graduate students.
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Loans (continued)
• Unsubsidized Federal Loans
• Direct Unsubsidized Stafford Loans
• a. Student is responsible for interest during
school
• b. Repayment begins after student stays below
half-time for a continuous 6 months
• c. Loan is in student’s name
• d. Fixed interest rate 6.8%
• e. Default and origination fees of 1.5%. Loan
amounts vary up to $12,500 for undergraduates
and up to $20,500 for graduate students
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Loans (continued)
• Unsubsidized Federal Loans
• PLUS Loan: Available for parents of undergraduate,
dependent students to help with school-related
expense
• a. Parent is responsible for interest accruing
while the student is in school
• b. Repayment begins 60 days after second
disbursement
• c. Parent is the borrower
• d. Interest rates is 7.9% fixed APR charged from
first disbursement
• e. Parent can borrow up to cost of education less31
financial aid the student receives
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Loans (continued)
• Direct Unsubsidized Federal Loans
• PARENT PLUS Loan: Available for parents of
undergraduate, dependent students to help with
school-related expenses
• a. Interest accrues while the student is in school
• b. Repayment begins 60 days after second
disbursement
• c. Parent is the borrower
• d. Interest rates is 7.9% fixed APR charged from
first disbursement
• e. Parent can borrow up to cost of education less
financial aid the student receives
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Loans (continued)
• Unsubsidized Loans
• Private Alternative Loans
•
•
•
•
a. Interest starts immediately and accrues
b. Must begin paying the loan back immediately
c. Student is the borrower
d. Interest rates are higher than Federal loans and
there is no interest rate cap. A 14.5% variable
interest rate means loan amount can double in five
years (Rule of 72)
• e. These have higher up-front fees and may require a
cosigner. Read the fine print VERY CAREFULLY
• Caution -- these unsubsidized loans are much more
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expensive than federal unsubsidized loans
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Education Week 2012
Loan Comparison
Federal Stafford Loan
• Subsidized 6.8% fixed
• Unsubsidized 6.8% fixed
• Like a Credit Card
Private – Alternative Loan
• 14.5% variable
• Double in 5 years
• Unsubsidized only
• Like a Credit Card
• Principle:
• Federal Stafford,
PLUS, Grad PLUS =
Less Costly
• Principle:
• Private = More Costly
• APR limit = 25% to
Infinity
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Loans (continued)
• Final Thoughts on Loans and Borrowing:
• Use Federal loans first. Federal loans are generally
less expensive than private, non-federal loans,
subsidize the interest during school, and are a better
choice if borrowing is necessary
• Have the child borrow. Parents should not put their
retirement at risk for their children’s education
• Let the child work a semester. This may not only
help the child save money, but teach the importance
of spending wisely
• Avoid private-alternative loans. Beware of
aggressive marketing campaigns by these
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companies. These loans are very expensive
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5. Credit Cards (No!)
• Credit Cards and Payday Loans
• Among the most expensive way to borrow
• They require you to pay it back immediately
• There is no help in the payment of interest
• The interest rates are extremely high (> 500%)
and you are in school
• These are not advisable ways to finance schooling
and are usually the result of poor planning!!!
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6. Retirement Accounts (No)
• Taking money from retirement accounts is
NOT NOT NOT NOT NOT recommended
• (Do you get the hint?)
• Parent’s first priority is to save for their own
retirement, and then, if resources are available
and they desire, to help their children with their
education (there is no commandment to do this)
• It is not wise to jeopardize your retirement
for your children’s education. They can get
grants and loans and will live longer
• Find other alternatives. This is expensive, not
tax efficient, and is not a good option to even 37
think about!
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D. Understand Investment Vehicles
to Save for your Children’s Education
• College Savings Plans
• Six major ways to save for college:
• With Tax benefits
1. Series EE and Series I Government bonds
2. Education Savings Account (Education IRA)
3. 529 Prepaid Tuition Plan
4. 529 Savings Plan
• Without tax-benefits
5. Tax-efficient Investing
6. Custodial Accounts (UGMA/UTMA)
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1. Series EE and Series I Bonds
Advantages:
• Bond earnings are tax-free if used for paying tuition
and fees (I bond rates are 2.2% and EE bonds are 0.6%
until October 2012)
• Earnings are not taxed until bonds are cashed
• Can be purchased in small denominations
Disadvantages:
• 3-month penalty on early withdrawal before 5 years,
with minimum holding period of 1 year
• $10,000 per year maximum purchase per year per SSN
(and $5,000 more if use your tax refund)
• Can only be used for tuition and fees, not other
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expenses for tax-free status
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U.S. Series EE Bonds/I over Time
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EE/I Savings Bond Phase-out Limits
• If your income is above specified limits in the year
bonds are cashed, you cannot exclude the interest
income from your income taxes. The limits are:
•
•
•
•
•
Year
2009
2010
2011
2012
Filing Single
$69,950-84,950
$69,950-84,950
$71,100-86,100
$72,850-87,850
Married
Filing Jointly
$104,900-134,900
$104,900-134,900
$106,500-136,500
$109,250-139,250
• Your modified Adjusted Gross Income is your adjusted gross
income adding back certain items such as foreign income, foreignhousing deductions, student-loan deductions, IRA-contribution
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deductions and deductions for higher-education costs.
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2. Coverdell Education Savings Account
(ESA)
Advantages:
• You choose your investments
• Distributions are tax-free (even beyond 2012)
• Can be used for eligible elementary, secondary and
post-secondary education expenses
Disadvantages
• Contribution limits of $2,000 per year in 2012, which
may phase out as your income increases beyond
specific limits
• Funds must be used by age 30 (but can be transferred to
other children). Earnings not used for educational
expenses are taxed with a 10% penalty
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• Assets reduce financial aid dollar for dollar
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Coverdell Deductibility Limits
Education IRA
MAGI Phase Out Range (in 000’s)
Year
Amount
Single Range Married FJ Range
2008
$2,000
$95-$110
$190-$220
2009
$2,000
$95-$110
$190-$220
2010
$2,000
$95-$110
$190-$220
2011
$2,000
$95-$110
$190-$220
2012
$2,000
$95-$110
$190-$220
• Your Modified Adjusted Gross Income is your adjusted gross
income and adding back certain items such as foreign income,
foreign-housing deductions, student-loan deductions, IRAcontribution deductions and deductions for higher-education
costs. Earnings beyond these limits ($95k single and $190k
jointly) result in a phase out of allowable interest deductions,
which totally phase out at $110k and $220k).
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3. 529 Prepaid Tuition Plan
Advantages:
• You know tuition will be covered, regardless of
raises in costs of tuition
• May be useful if you think your children will not be
eligible for financial aid. Can save up to a
maximum of $390,000 per child in 2012
Disadvantages:
• May not be offered in the state you/your child wants
• Does not allow you to choose your investments
• Your children are young, so you could be more
aggressive with your investing for higher returns
• Assets reduce financial aid dollar for dollar
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4. 529 Savings Plan
Advantages:
• Control of the funds resides with the contributor, who
chooses the assets within options provided
• 529 Savings Plan assets are not considered student
assets, increasing aid
• States may offer tax deductions for contributions to
your local 529 funds (check by state)
• Distributions are tax-free if used for qualified
educational expenses ($390,000 maximum in 2012)
Disadvantages:
• May not cover all college expenses
• If not used for educational expenses, earnings subject 45
to tax and 10% penalty
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Different States Savings Plans
• When determining which 529 Plan to use, start
with a review of your state’s 529 plan (Utah’s
Plan is at www.uesp.org)
• Check the fees (at the Plan and Fund level)
• Check for any tax benefits (Utah has a 5% tax
credit against your Utah State tax)
• Check for investment assets and options
• Check for the maximum amount you can invest per
child
• Once you have reviewed your state’s plan, read about
other state’s plans and select the best plan to meet your
needs and goals. You can invest in any state’s plan 46
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College Savings Plans Comparison Chart Coverdell
and 529 information From Robert Brokamp, the Motley Fool.com, May 1, 2002
College Savings Plans Comparison Chart
C ustodi al Account
Highlight s
Can be open by anyone
Offered by…
Brokerages, mut ual
fund companies, banks
Cont ribut ion limit
Se ri e s EE/I
C ove rde l l ESA
529: Pre pai d Tui ti on
529: Savi ngs Pl an
An invest ment account
Cont ribut ions t oday are
available t o cont ribut ors guarant eed t o cover
who earn less t han $110K t uit ion cost s in t he fut ure.
(for single filers) and
$220K (for joint filers)
A st at e-sponsored
invest ment account for
t he benefit of anyone -your child, your cousin,
your neighbor, yourself
US Government
Brokerages, mut ual fund
companies, banks
St at es
None
$30,000 per year for
EE and I bonds
$2,000 per st udent per
year
Depends on plan and age
of st udent
T ax t reat ment of
wit hdrawals
No favorable t ax
t reat ment
T ax-free if used for
qualified expenses and
if your income is
wit hin t he government
set limit s. T axes may
be eit her paid annually
or when redeemed.
T ax-free if used for
qualified expenses
T ax-free if used for
qualified expenses
St at es (usually wit h help
from a financial services
companies)
Depends on plan -- varies
from $100,000 t o
$305,000
T ax-free if used for
qualified expenses unt il
2010 (dist ribut ions will
count as income t o t he
st udent in 2011 and
beyond unless Congress
ext ends t he current law)
Qualified expenses
None
T uit ion, fees, supplies
and special needs.
Room and board are
not qualified expenses.
T he amount of
qualified expenses are
reduced by scholarships
and ot her aid.
T uit ion, room, board,
fees, supplies, and special
needs relat ed t o t he
at t endance of a qualified
element ary, secondary, or
post -secondary
inst it ut ion
T uit ion at a college
wit hin t he plan (some
plans will also cover
room and board)
T uit ion, fees, room, and
board at qualified highereducat ion inst it ut ions
www.Tre a s urydire c t.go v
Mot leyFool.com
Mot leyFool.com
Mot leyFool.com
Source of Informat ion: Charles Schwab
47
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College Savings Comparison
(continued)
College Savings Plans Comparison Chart
C ustodial Account
Se rie s EE
C ove rde ll ESA
529: Pre paid Tuition
T ax-deductibility
None
None
None
Investment flexibility
Assets can be invested
in stocks, bonds,
mutual funds, and cash
equivalents.
Investments can be
bought and sold as
often as desired.
Bonds must be held at
least 5 years for full
interest. An interest
penalty of 3 months
will be assessed on all
bonds cashed before 5
years.
Assets can be invested in
stocks, bonds, mutual
funds, and cash
equivalents. Investments
can be bought and sold as
often as desired.
Ability to transfer
account
None
None
Account may be
Depends on plan
transferred to other
brokerage or mutual fund,
or to a 529 plan, subject
to fees and penalties.
Interaction with Hope
and Lifetime Learning
Credits
None
None
Credits can be claimed in
the same year as tax-free
withdrawal provided that
the distribution is not
used for the same
expenses for which a
credit is claimed.
MotleyFool.com
Source of Information: Charles Schwab
www.Tre a s urydire c t.go v
Some states allow
contributions to be
partially or completely
deductible.
Plan administrators
invest all assets.
Credits can be claimed in
the same year as tax-free
withdrawal provided that
the distribution is not
used for the same
expenses for which a
credit is claimed.
MotleyFool.com
529: Savings Plan
Some states allow
contributions to be
partially or completely
deductible.
Assets are professionally
managed. Depending on
the plan, participants can
choose from two to
almost 30 mutual fundtype investments.
Investment choice may
be changed once every 12
months.
May transfer to another
529 plan once every 12
months
Credits can be claimed in
the same year as tax-free
withdrawal provided that
the distribution is not
used for the same
expenses for which a
credit is claimed.48
48
48
MotleyFool.com
College Savings Comparison
(continued)
College Savings Plans Comparison Chart
Custodial Account
Cove rde ll ESA
529: Pre paid Tuition
Assets are considered
to be property of the
account owner, which -unless the owner is also
the beneficiary -means only a small
portion of the assets
will be considered in
the finanical aid
calculation
Control of the account In most states, account In most states, control
assets become property of account will always
of the student at age
remain with
18.
contributor.
Must use funds by…
No age limit
No age limit
Considered to be an asset
of the student, which
means a large portion of
the assets will be
considered in the
financial aid calculation
Considered to be the
student's resource and
thus reduces financial aid
dollar-for-dollar
In most states, account
assets become property
of the student at age 18.
In most states, control of In most states, control of
account will always
account will always
remain with contributor. remain with contributor.
Age 30
Varies by plan
Varies by plan
Assignability to other
relatives
Immediate family,
including cousins, steprelatives, and in-laws
Earnings are taxed as
ordinary income to
contributor, plus a 10%
penalty
T ax-filing deadline for
the year of the
contribution
MotleyFool.com
Immediate family,
including cousins, steprelatives, and in-laws
Earnings are taxed as
ordinary income to
account owner, plus a
10% penalty
Depends on the plan
Immediate family,
including cousins, steprelatives, and in-laws
Earnings are taxed as
ordinary income to
account owner, plus a
10% penalty
Depends on the plan
Effect on financial aid
Se rie s EE
Considered to be an
asset of the student,
which means a large
portion of the assets
will be considered in
the financial aid
calculation
Penalty for nonqualified withdrawals
None
Selling before 5 years
results in a 3 month
interest penalty
Contribution deadline
None
None
Source of Information: Charles Schwab
www.Tre a s urydire c t.go v
MotleyFool.com
529: Savings Plan
Assets are considered to
be property of the
account owner, which -unless the owner is also
the beneficiary -- means
only a small portion of
the assets will be
considered in the
finanical aid calculation
49
49
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MotleyFool.com
5. Tax-efficient Investing
• How do you invest tax-efficiently:
• 1. Know your tax rates. Calculate the after-tax
return on each of your investments
• 2. Invest long-term. Replace interest and shortterm distributions with long-term capital gains and
LTCG distributions
• 3. Invest wisely. Replace interest and short-term
distributions with qualified stock dividends/stock
distributions (consistent with your risk tolerance)
• 4. Receive tax-exempt income. Purchase
muni/Treasury securities when rates are more
attractive than other securities for tax-exempt
50
income
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50
Tax-efficient Investing (continued)
Advantages:
• Can be invested in all types of financial assets,
stocks, bonds, mutual funds, etc.
• Can be used for any educational, mission, or other
expense
• Parent has control of the assets and can use them
for any purposes
• Investments can be made which minimize taxes
Disadvantages:
• No tax advantages
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6. Custodial Accounts: UGMA/UTMA
Advantages:
• Can be invested in all types of financial assets,
stocks, bonds, mutual funds, etc. UTMA has fewer
restrictions and may include real estate
• Can be used for any educational or other expenses,
including missions
Disadvantages:
• No tax advantages. Currently taxed at parent’s rate
until child is 18 years old
• Is considered the child’s money as soon as the child
is of age—it cannot be taken back by the parent
52
• I prefer a tax-efficiently invested account
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Education Week 2012
My Preferred Education Vehicles
• For a majority of families I recommend:
• First, the 529 Savings Plan
• This is a good option with many benefits
• If you are from Utah, you get a 5% tax credit
of up to a $3,480 contribution if married
($1,760 per beneficiary in 2012)
• Utah’s plan is very inexpensive and utilizes
Vanguard Funds
• Money can be used in any college in any state
• Second, the Education IRA
• Third, I Bonds due to the higher interest rate if you
can accept a variable rate (but for tuition/fees only)53
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E. Understand the investment vehicles you
can use to save for your children’s missions
• There are fewer ways to save for children’s
missions:
• 1. Tax-efficiently invested assets (with accounts in
each child’s names to remind you of their purpose)
• 2. Custodial accounts: UGMA/UTMA (Not
Recommended)
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54
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1. Tax-efficient Investing
Four ways to invest tax-efficiently:
1. Know your tax rates. Calculate the after-tax return
on each of your investments
2. Invest long-term. Replace interest/short-term
distributions with long-term capital gains/LTCG
distributions
3. Receive stock dividends. Replace interest/shortterm distributions with qualified stock
dividends/stock distributions (consistent with your
risk tolerance)
4. Receive tax-exempt income. Purchase
muni/Treasury securities when rates are more
55
attractive than other securities
55
55
Tax-efficient Investing (continued)
Advantages:
• Can be invested in all types of financial assets,
stocks, bonds, mutual funds, etc.
• Can be used for any educational, mission, or other
expense
• Parent has control of the assets and can use them
for any purposes
• Investments can be made which minimize taxes
Disadvantages:
• No tax advantages
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56
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2. Custodial Accounts: UGMA/UTMA
Advantages:
• Can be invested in all types of financial assets,
stocks, bonds, mutual funds, etc. UTMA has fewer
restrictions and may include real estate
• Can be used for any educational, mission, or other
expense
Disadvantages:
• No tax advantages. Currently taxed at parents rate
until child is 18 years old
• Is considered the child’s money as soon as the child
is of age (age 21 in Utah)—it cannot be taken back
by the parent
57
• I prefer a tax-efficiently invested account
57
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F. How Do You Reduce the Cost of Your Kid’s
Education and Sign up for Aid?
• 1. Encourage parents to begin planning early
• 2. Fill out the FAFSA (Free Application For Federal
Student Aid) on the net at www.FAFSA.ed.gov
(remember your PIN number)
• Follow the instructions and do it early (usually after
your tax forms are completed)
• You may submit the FAFSA as early as January 1
for the Fall term
• The amount of your award is based on the FAFSA
results and credit hours, not when you apply
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Signing Up for Aid (continued)
• 3. Talk with your personal financial aid
counselor in the Admissions, Financial Aid,
Scholarship Counseling Center (D-148 ASB) at
BYU.
• Call their direct line for an appointment at 801-4227075
• They will guide you in the process and help you in
determining your eligibility for aid
• You can also go to feedback.byu.edu to submit
concerns or questions (24/7), which will be routed
to your counselor for a response
• 4. Look for other available aid on the web.
• View the following sources and utilize them:
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Helpful Websites Containing Information
about Financing School
• Helpful Websites
• Onestop.byu.edu
FinancialAid.byu.edu
• Scholarships.byu.edu Opsf.byu.edu
• BYU resources
• BYU Counseling Center: Admissions, Financial
Aid, Scholarships (801-422-4104 or 801-422-7025)
• To have your federal aid in place by fall semester, it is
wise to submit the FAFSA by June 1 the same year,
unless you are planning to get married soon
• Make an appointment with a counselor if you have
questions
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Resources for Financing School (continued)
• www.fafsa.ed.gov - Free Application for Federal
Student Aid. This form must be filled out for any
federal financial aid
• www.pin.ed.gov – request a Personal Identification
Number (PIN) needed for FAFSA
• nslds.ed.gov – provides student a centralized,
integrated view of their Title IV loans and grants
• www.fastweb.monster.com – matches student profiles
to a database of scholarships
• www.collegeboard.com– connects student profiles to a
database of scholarships, internships, and loans.
• www.srnexpress.com – contains resources on
scholarships, fellowships, internships, and loan
61
forgiveness programs
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Resources for Financing School (continued)
• www.wiredscholar.com – a good website for college
preparation and information.
• www.finAid.org – a comprehensive site that has
information on loans, scholarships and savings plans.
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Summary
• A. The “why” of personal finance?
• learn and apply personal finance in our lives to:
• 1. Learn the lessons that personal finance can
teach us to help us become more like our Savior
Jesus Christ
• 2. Accomplish our personal and family goals
which will require financial resources
• 3. Accomplish our personal missions for which
we were sent here on earth, and
• 4. Help us return with our families back home
to our Savior and Heavenly Fathers’ presence
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Education Week 2012
Summary (continued)
• B. How education relates to your financial
goals?
• Education can prove to be the wisest and more
profitable investment you will ever make
• The more education you have, the greater will be
your opportunity to serve
64
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Education Week 2012
Summary (continued)
• C. The principles of financing education and
missions
• 1. Teach your children to be financially responsible
• 2. Help your children to contribute to their own
and other family member’s missions and education
• 3. Develop an education and mission plan that is
consistent with your personal goals and budget and
then follow it
• 4. Start early in saving for your children’s
education and missions
• 5. Invest wisely and tax-efficiently
65
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Education Week 2012
Summary (continued)
• D. The process for selecting investment
vehicles for financing school and missions:
• The priority is:
• 1. Free Money
• 2. Family Money
• 3. Employment
• 4. Loans
• 5. Credit Cards (No!)
• 6. Retirement Accounts (No!)
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Education Week 2012
Summary (continued)
• E. Investment vehicles to help save for your
children’s education:
•
•
•
•
1. Series EE and Series I Government bonds
2. Education Savings Account (Education IRA)
3. 529 Prepaid Tuition Plan
4. 529 Savings Plan
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Education Week 2012
Summary (continued)
• F. Investment vehicles to help save for your
children’s missions
• 1. Tax-Efficient Investing
• 2. Custodial Accounts (UGMA/UTMA)
68
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Education Week 2012
Summary (continued)
• G. Support for how to reduce the cost of
education and sign up for aid
• See the PowerPoint on the website
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