PT Money » Kids and Money

Suggested Asset Allocation for Your 529 Plan

PT — Mon, 07 Dec 2009 10:30:53 +0000

Since we’ve been covering college savings and 529 plans here lately, I thought it made sense to have a quick discussion about how you might consider investing your funds with your 529 savings plan. Let’s discuss how to achieve a proper asset allocation within your 529 plan.

What is Asset Allocation?

Asset allocation is spreading your money over different types of asset classes. The three types of asset classes are stocks, bonds, and cash. If you’re investing for the long-term you can reduce your risk by allocating your funds across these different assets. Each asset responds differently to the various changes to the economy/market. Therefore, you’re less likely to see all your investment money go down because all three asset classes are unlikely to go down at once.

Two things typically affect your asset allocation decision: your own time horizon and your own risk tolerance. This is very personal decision.

Should Asset Allocation Be Different for a 529 Plan vs Retirement Savings?

It may not be. But typically since the time horizon for needing college funds is tied to the age of your child, and because your risk tolerance for those funds may be different, the asset allocation is different. You may not be retiring for 25 years, but your 5 year old child will need his college savings in 13 years.

Likewise, you may be more willing to risk your retirement savings vs risking your child’s education savings. Only you know. But, there are some suggestions out there. I stumbled upon these suggested asset allocations percentages while sorting through my mail from the CollegeAdvantage 529 Savings Plan:

Suggested Asset Allocation for Your 529 Plan

Child's Age	Conservative	Moderate	Aggressive
5 and Under	50% Stocks / 50% Bonds	75% Stocks / 25% Bonds	100% Stocks
6-10	25% Stocks / 75% Bonds	50% Stocks / 50% Bonds	75% Stocks / 25% Bonds
11-15	75% Stocks / 25% Cash	25% Stocks / 75% Bonds	50% Stocks / 50% Bonds
16-18	75% Bonds / 25% Cash	75% Bonds / 25% Cash	25% Stocks / 75% Bonds
19 and Up	100% Cash	75% Bonds / 25% Cash	75% Bonds / 25% Cash

Source: CollegeAdvantage.com

Remember that your own asset allocation decisions could vary greatly from this. These are just suggestion.

Mrs. PT and I just opened our 529 savings plan and we have the contributions going to a Vanguard aggressive age-based fund (0.23% expense fee). We’re along way from needing the funds (17 years) and we are comfortable investing 100% in stocks, so we felt like this was a smart option.

See the third column below for how our asset allocation will change over time. Of course, we’re just getting started and so we may adjust and invest directly in funds to have bit more control.

How do you have your assets allocated in your 529 savings plan portfolio? Is it similar to the chart above?

Common Questions About 529 Plans

PT — Mon, 30 Nov 2009 21:25:45 +0000

I’ve had some questions come in lately regarding saving for education expenses using a 529 Plan. Since I just recently set up a 529 Plan for little Miss PT, the topic is fresh on my mind. I thought I’d take today to attempt to answer some common questions about 529 Plans.

What is a 529 Plan?

A 529 Plan is a savings plan for educational expenses (named after the Federal tax code) set up by individual States or institutions. They’re designed so that you are encouraged to help save for your child’s education (college or trade school). The encouragement comes in two forms: the ability to save money free from Federal taxes and the ability to receive a deduction on State taxes.

The 529 Plan is really the Roth IRA of the college savings world. Your savings grows tax-deferred and the withdrawals are tax-free as long as you use them for qualifying educational expenses. They’re really a good deal.

What About Prepaid vs. Savings Type Plans?

529 Plans usually come in two types: prepaid and savings. It’s important to know the difference. Some States offer one or the other, both, or a plan that combines the features.

Prepaid 529 Plans usually give you more tax benefits and college discount for schools in that particular State. The prepaid plans are considered inflation-busting, since they allow you to save for college at today’s prices.

But they also come with more restrictions. For instance, if you decide to use a prepaid plan in your State and then later send your child to a college out-of-state you’re going to forfeit some of the savings you were able to get by being in an in-state prepaid plan. This varies greatly by State plan.

529 Savings Plans are more flexible. You can usually use these types of plans at any accredited college or university in the Country. I’m a resident of Texas and have a 529 Savings Plan with Ohio’s College Advantage Program. Since it’s a savings-type plan, I can use the funds where ever I want, as long as it’s for qualifying education expenses.

What if my child doesn’t end up going to college?

The savings and earnings from the savings are always your money. The donor (you) always maintains control over the funds. The beneficiary (your child) has no control. You can switch beneficiaries at any time (typically once a year).

So, if your first kid doesn’t go to a qualifying institution, then you can switch the plan beneficiary to another child, yourself, or whoever. Or, you can withdraw the funds. There is generally no limit to how long keep the funds in the 529 plan account.

The only thing that you may forfeit for not using the funds for educational spending is the tax savings on the funds, and a 10% penalty on the earnings from the savings.

As an example, let’s say:

You deposit $50,000 now into a 529 Plan.
Fast forward 18 years and your funds are now worth $60,000. You’ve earned $10,000!
Let’s assume your child decides to skip college.
If you withdraw those funds and use them for yourself on Twinkies, the $10,000 would be subject to the tax and the penalty.
You’d roughly owe the Federal Government $3,000 to $4,000. You’d walk away with around $56,0000 of your $60,000.

But, the 10% penalty can be waived if your child becomes disabled, dies, or gets a scholarship.

What if my child gets a scholarship to college, then what happens to the 529 Plan funds?

Like I said above, you generally have a few options: transfer to another beneficiary and give it to them, sit on the funds until another option becomes available, or withdraw the funds penalty-free (you just have to pay the taxes). The penalty is waived if your child gets a scholarship though.

Should I open a separate 529 account for each child or should I have just one account?

Yes, open an account for each child. To my knowledge you can only have one beneficiary of the funds from an account.

Do I have to use my State’s 529 Plan?

No. But there may be a good reason for you to. Typically the savings in State taxes is the biggest factor. The best guide I’ve found for helping me determine this is Kiplinger’s Best 529 Savings Plans. They will tell you if there’s a reason to stick to your State’s 529 Plan or go with a top 5 plan from another state.

Can you withdraw 529 Plan funds for an emergency with or without pentalty?

Generally, you have complete control over the funds in the plan. You can withdraw your funds at anytime, for any reason. As I mentioned above though, you’d be subject to a tax and penalty on the earning from the savings. There is no hardship rule that I know of that would exempt you from the penalty.

What age or when do you HAVE to withdraw the 529 Plan funds?

There generally is no age or time limit for withdrawals.

Could the 529 Plan act as a nest egg fund for my children?

Using the 529 Plan for anything other than educational expenses would be an inefficient use of the plan. If you’re looking for a place to stash some emergency savings, consider an FDIC insured high-interest savings account.

Should I consult a CPA, CFP, and understand the plan I’m getting into?

Yes, yes, yes! Please visit a fee only financial professional to understand your full range of college savings options. There are other options like Coverdell ESAs that might be a better for your situation.

And each State plan and tax implications have an impact on your decision. Lastly, take time to research the plan you’re getting into. Read the guidelines of the plan. Call up your State’s plan administrator and have them explain it to you.

Good luck getting started with your college savings!

Photo by cogdogblog

Upromise Review: A Little Extra Savings for College

PT — Thu, 12 Nov 2009 05:03:36 +0000

I joined Upromise a couple of weeks ago to start saving money for little Miss PT’s college education. I had heard of Upromise before, but didn’t bother signing up…because I’m a dork. I’m going to give you the full review below. But if you want to make better use of your time, just sign up with Upromise and get started. This is really one of those things you and I both should have started a long time ago.

Upromise is a free, set-it-once-and-forget-it type program that will earn you free money towards a college education. The savings aren’t lucrative. But it’s extremely easy to set up and then you’re free to just go about your business.

Who is Upromise?

Upromise was founded by Michael Bronner, Founder and Chairman Emeritus of Digitas, a leading marketing services firm. In August 2006, SLM Corporation, commonly known as Sallie Mae and the nation’s leading paying-for-college company, acquired Upromise, Inc. Upromise has given away over $500M in tuition assistance since 2001.

How Upromise Works

In short, you get a kickback from Upromise just by buying from their partners. They cut you in on the commission.

You simply sign up and enter your credit card, debit card, or store loyalty card information. Upromise handles the rest. They track your spending and provide a % payout to you when you buy from one of their partners. Upromise’s partners include ExxonMobil Corporation, JCPenney.com, LandsEnd.com, Sears.com, and hundreds of others.

What makes this so great is that you don’t even have to be conscious of where you’re spending your money. Upromise is partnered with most of the places you will go anyway. There are some ways to optimize your savings with Upromise (see below), but those things aren’t necessary to get the base level of savings.

When you’re ready to withdraw your funds, just make a request for a check, transfer to a 529 Savings Plans, or use it to pay for your own student loans. To request a withdrawal, use this form. (h/t Bargaineering)

What’s the Catch?

There really is no catch. Upromise is a completely free service. They make their money from the Upromise partners, who pay to participate and for marketing opportunities.

How Much Can You Really Save?

I’m just getting started with Upromise. So I can’t exactly boast about my huge savings from the program. I think I have around 21 cents saved since I started a couple of weeks ago. Ha! But, others have gone before me. And they have some significant dollars to show:

Paul at Fiscal Geek saved over $700!
Sun from Sun’s Financial Diary saved over $400 (as of 2007).
Thrify Florida Mama saved over $500 (as of 2007).
I’ve also seen blog comments from people who have claimed to have earned in the thousands by fully utilizing what Upromise has to offer.

Those numbers are by no means going to cover your kid for their 4 years at Harvard, but they will provide some assistance. And if you can earn that amount without really doing anything extra then you’ve succeeded. Free money!

How to Optimize Your Upromise Savings

Want to make the most of the Upromise system? You should look into their extra services:

TurboSaver Internet Browser Toolbar
Upromise Credit Card ($25 Bonus After 1st Purchase)
Invite Family Members to Sign Up
Shop Online Using Upromise.com
Open a Sallie Mae Online Savings Account (10% Annual Savings Match)

Final Thoughts

As I warn with any savings system like this, don’t let the opportunity to save affect your buying decisions. For instance, don’t just browse the Upromise list of merchants to find something to buy so you can save for college. But if you’re already planning to buy, check out their list of merchants and consider using their link.

Also, be conscious of how Upromise might affect your decisions to use your credit or debit card more than you normally would. Bottom line, as long as you can set this up for yourself and don’t really change your spending, it’s going to be a plus for you.

529 Plans: The Smart Way To Save For College

PT — Wed, 17 Jun 2009 18:00:54 +0000

Parents who are in the unenviable position of saving for their retirement and their child’s education must start early to ensure their financial goals are met. The controversial topic of which is more important retirement or college savings becomes less of an issue with proper planning well in advance.

State sponsored 529 plans have been around since 1996 but have been gaining popularity in the last few years with parents who choose to pay for all or some of their child’s education. The following information explains the benefits and risks associated with these accounts.

What Are 529 Plans?

To put it simply a 529 plan is an investment account that offers tax advantages which make it very appealing as a way to save for college education.

Each state offers a 529 plan and you also can choose between a prepaid plan or a savings plan. If you want flexibility in your plan you may opt for the savings plan which is generally offers less growth but can be used at any institution. The prepaid plan on the other hand is used to pay for tuition at today’s rate at a specific institution. If you use your states 529 plan you may be eligible for state tax deductions. Interest earned in the account (when used for college expenses) is exempt from federal and possibly state taxes.

Benefits Of Using A 529 Plan

This method of saving for college expenses offers benefits beyond tax breaks and deductions such as:

Parents retain control of the fund. This is important if you worry that your child may grow up and decide to use their college savings for a trip abroad or a new car. You have control over the account and make the decisions when and how the money will be used.
Until you decide to withdrawal the money you will not have to worry about reporting information on your tax return. The year the money is taken out of the account will be the only time you receive a 1099 form to report taxable or nontaxable earnings.
These plans offer flexibility in that you can move your investment to another 529 savings plan or change the beneficiary in the event your child does not go to college or receives scholarships which cover the expenses.
Most 529 plans allow for substantial deposits which are not just limited to the parent. Grandparents, aunts and other individuals can contribute to your child’s education over the years. In most cases there are no age restrictions or income limitations for these plans.
Plans owned by a parent or other donor will not have a significant impact on your child’s ability to receive federal financial aid as is considered a “parental” asset.

Risks and Drawbacks

As you can see using a 529 plan can be an excellent way to put money back toward ever growing college expenses however they are not without certain risks or penalties.

Withdrawing money for anything other than college expenses will result in the owner of the account having to pay income tax on the earnings as well as a 10% penalty. If you have received a state tax deduction you may have to repay that as well.
Some colleges take into consideration family owned 529 plans when determining scholarship or grant recipients.
Certain savings plans have high administrative fees which can reduce your earnings. For this reason it is very important to carefully review all information before committing to a specific plan. Do your research, shop around and compare plans carefully to find the best option for your family.

Saving for future expenses, whether they are expected or unexpected is necessary in every household. For families with children going to college, using a 529 plan can make preparing for the high cost of education makes paying those expenses less of a drain on the household budget.

This is a guest post by DebtKid, who blogs about his debt management journey. He runs a small software development company in Seattle and just launched a new online coupons section on his blog.

5 Ways to Save for College

Guest — Mon, 08 Jun 2009 17:30:13 +0000

Today’s post comes from Jeff Rose, who I asked to shed some light on the different ways to save for college.

Choices. Choices. Choices. It’s always nice to have choices when it comes to making important decisions in your life. Sometimes though, having a multitude of choices can be overwhelming. Working with clients when it comes to planning for their kids college education is a perfect example. The are many ways that you can save for your kids’ college education. For somebody that feels overwhelmed, here’s a quick look at the five basic ways that you can save to pay that looming tuition bill down the road.

529 College Savings Plan

The 529 College Savings Plan is one of the more popular ways to save for college. For me, it’s the way that I save for my son’s college. If you happen to be a resident of my state, you can read a post I wrote on the Illinois 529 College Savings Plan Options. (Yes, the “S” is silent). If not, double check your own state to see what the options are.

With a 529 plan you can save for anyone – your child or grandchild, a niece or nephew, a friend or even yourself.

You can contribute up to $13,000 ($26,000 for married couples) annually without gift-tax consequences. Under a special election, you can invest up to $65,000 ($130,000 for married couples) at one time by accelerating five years’ worth of investments.
You can contribute until your account value reaches $350,000. (I don’t think I’ll have a problem with this)
Earnings can grow tax-free. (Just like the Roth IRA)
Withdrawals for qualified higher education expenses are free from federal tax. Withdrawals for non-qualified expenses are subject to ordinary federal income tax plus a 10% penalty on the earnings.
There are no income limits. You can contribute no matter how much you earn.
You maintain control of the assets.

Editors Note: I actually opened my 529 Plan with Ohio CollegeAdvantage. For more information, see 529 Plans: The Smart Way to Save for College.

Coverdell Education Savings Account

Coverdell Education savings accounts can be used to pay for your child’s qualified expenses from kindergarten through high school, as well as for higher education. I see less and less people using Coverdell ESA’s as college savings options, but one does turn up every now and then.

You can contribute up to $2,000 a year.
Earnings can grow tax-free.
Withdrawals for qualified expenses are free from federal tax.
There are income restrictions. If your income exceeds certain limits, you will not be eligible to contribute.
You can change investment options as often as you wish.

UGMA/UTMA Custodial Accounts

UGMA/UTMA custodial accounts let you take advantage of your child’s lower tax rate while saving for your child’s education. Personally, I’m not the biggest fan of these because of the control issue. I know how I was at 18, and don’t expect my kids to be any more mature than I and being able to manage a large sum money. I’ll be happy if they prove me wrong.

There are no contribution limits.
Beware of the Kiddie Tax. For children under age 19 and full-time students under age 24 whose earned income is less than one-half of their support, the first $950 of earnings is tax-free. Earnings between $950 and $1,900 are taxed at the child’s rate; earnings above $1,900 are taxed at the parents’ rate.
There are no income limits. You can contribute no matter how much you earn.
The beneficiary gains control of the assets at age of majority, which is age 18 or 21 in most states.

Your Own Investment Account

Saving for your child’s education through your own investment account allows you maximum control of the assets.

There are no contribution limits.
Earnings are taxed to the owner.
There are no income limits. You can contribute no matter how much you earn.
You maintain control of the assets and decide when withdrawals will be made.

Your Roth IRA

I know what you are thinking. “A Roth IRA is for retirement not college savings”. Yes, that’s true. I’ve encountered a few times where people are extremely gun-ho about saving for the kids’ college, and put their own retirement on the back burner. By utilizing the Roth IRA, you ensure that you are saving for retirement and if your kid does goes to school you can pull out your contributions with no problem and just pay the tax on any gains.

Can only contribute $5000 per year ($6000 if over the age of 50).
There are income limits over better known as Roth IRA phaseout limits.
You are in control of the assets and decide when to withdraw the money.

I hope that gets you in the right direction in saving for college.

Editor’s Note: I really like this idea of using the Roth IRA. See my guide for opening a Roth IRA.

Jeff is an Illinois Certified Financial Planner and co-founder of Alliance Investment Planning Group. He is also the author of Good Financial Cents, a financial planning and investment blog. You can also learn more about Jeff at his website Jeff Rose Financial.

Money Advice for New Graduates Heading to the Real World

PT — Fri, 29 May 2009 21:44:50 +0000

Know a recent high school or college graduate in need of a few tips for managing their money? I know I needed help with my finances back in those days.

I had the pleasure of guest blogging over at the Quicken Online blog today, and shared an article titled, Your Future with Finances: From College to the Real World. Here’s an excerpt:

“Post college, we get a strong desire to step up to better accommodations, a new ride, nicer clothes, etc. The feeling that you should reward yourself isn’t a bad one. Just don’t let it get out of hand and start living at or above your new means. If you can maintain that frugal college mindset and keep your spending under control for just a few more months or even an extra year, you’ll be so much further ahead.” …read more.

So as not to leave the high schoolers out, here’s an article I wrote a couple of years ago: Open Letter to a High School Graduate. An excerpt:

“You may not be earning much over the next few years, but very little is needed now in order to have a big impact later. It’s true that there is more time to save later, but your saving will never be as effective as it is right now. So, if you haven’t already, begin saving and make it a part of your normal routine.” …read more.

Have any good money tips for graduates? Leave them in the comments below..

Can You Afford a Baby?

PT — Fri, 10 Apr 2009 16:27:01 +0000

So what does it mean to be ready financially for a child? Here are a few steps I’ve thrown together to help you think it through:

What it Costs to Have a Baby

I think most of us are pretty clueless when it comes to how a baby will affect our finances. The numbers are pretty daunting when you first see them:

“Childbirth and prenatal health care cost averaged $7,090 for normal delivery in the US… [The] US Department of Agriculture estimates that a US family will spend an average of $11,000 to $23,000 per year for the first 17 years of child’s life on a child born in 2007.” – wikipedia

I feel like those numbers are a bit high. Still, you’ve got to put some stock in them and realize that it’s worth your time to think about how much having a baby will cost you.

Pre-Labor and Delivery

Let’s look at some ways to get a good understanding of what it might actually cost you to go to all those doctor visits and to deliver your baby in a hospital:

Ask Your Friends, Co-workers, and Family – I’d start by asking a co-worker who recently had a baby. They’re more likely to have used your work’s health care plan and your local hospital. They can give you a good idea of what they had to pay out of pocket for the delivery.

Examine Your Health Care Coverage – Take an evening to understand exactly what your current health care plan will cover. You might be able to switch to a more beneficial plan, reducing your overall out of pocket expenses for the pregnancy and delivery. We’ve currently moved to our premium plan while we’re expecting and will re-evaluate plans soon now that our child is born.

Call the Doctor’s Office – If you already know what doctor you’ll likely be using for the delivery, place a call to his/her office and ask for a cost estimate for all the pre-labor visits and the actual delivery. They may even be able to give you an estimate based on your current insurance.

The First Year

Next, you should examine what the first year of your baby’s life will cost you. There are a lot of things to consider here. I’m not going to try and list them all, but I will refer you to a handy tool that helped me:

Use the Calculator at Baby Center – The baby cost calculator at BabyCenter.com is an all-encompassing tool for helping you estimate what it might cost you to have a baby and take care of them in the first year. The calculator considers the basic equipment and supplies and even factors in child care and loss of one income.

Take Action to Prepare for a Baby

Now that you’ve got a feel for what it costs to deliver and raise a kid for the first year, you need to take steps to prepare your finances. Here are some ideas:

Start Saving Up – A good place to start is to make sure you have enough money saved up so that you don’t have to go into debt as a result of delivery and first year costs. Make it your goal to save up your total estimated amount by the time your baby is born. If that’s too aggressive for you then shoot for the delivery costs and half of your first year expenses.

If you’re about to start trying to get pregnant, simply divide your total estimate by 10 months, and begin setting that much aside in a savings account every month. If you’re already expecting, just use the number of months you have left. Lastly, you need a place to put your savings. If you haven’t already, you should try a high-yield savings account.

Get Rid of the Excess Debts – Bringing a child into this world gives you the opportunity to press the reset button on your life somewhat. Take advantage of this change and plan to get rid of that nagging credit card debt or student loan payment. Use this nine months to knock it out and be ready to start a debt-free life with your new baby. This will make you feel better and it will free up room in your budget for these extra expenses.

Final Thoughts on Babies and Finances

The wonderful thing about preparing for a baby is that we have nine months to do it. So, even if your child wasn’t planned out perfectly on the calendar, there’s still time to get your financial act together. Take time to understand what your financial needs will be and then take action to prepare yourself.

Another version of this post was originally published at Bargaineering.com.

Photo by Kevin N. Murphy

How to be a Millionaire: As Explained by a 4th Grader

PT — Wed, 08 Apr 2009 11:00:37 +0000

Are you smarter than this 4th grader? Jenna Fink, of Frisco, TX knows her stuff. She drew the Elementary school grade category winning poster in the National Foundation for Credit Counseling (NFCC) 2009 Be Money Wi$e National Financial Literacy Poster Contest.

“The purpose of the contest is to introduce young people to the concept of financial literacy, and allow them to express their understanding of it through art. This year, more than 4,000 posters were received illustrating the theme of ‘I’m going to be a millionaire because I…’”

Jenna beat out a bunch of other entries. And you can see why…

Click on each section to explore a topic further.

I’m impressed by the vast array of topics this little 4th grader touches on: frugality, budgeting, credit cards, investing. It’s all in there. See the other winning posters and read more about the contest at the website www.moneywisepostercontest.org.