Q&A: Best savings vehicle for a baby

Dear Liz: I recently gave birth to a little boy. I am wondering about the best savings vehicle that would offer flexibility for when family gives him money. I don’t want to tie it up in a 529 college savings plan in case he doesn’t want to go to college or has other needs.

Answer: If you want your child to have a reasonable shot at a middle-class lifestyle in the future, some kind of post-secondary education will be necessary. It may not be a four-year degree; it could be a one- or two-year training program, and a 529 college savings plan can help pay for that. Money contributed to a 529 plan grows tax-deferred and can be used tax-free at nearly all colleges, universities and community colleges as well as many career and technical schools.

You will remain in control of the account and can withdraw money for other purposes if necessary, although you would owe income taxes and a 10% federal penalty on any gains.

If you really can’t accept any limitations on how the money is used, then you can open a brokerage account in your own name and invest the money there. Putting the money in his name could hurt his chances for financial aid if he does decide to go to college.

Q&A: State tax breaks for 529 plans

Dear Liz: You recently answered a question from grandparents who were contributing $20,000 to their grandson’s college education. You correctly told them they did not qualify fdownloador federal education tax credits or deductions because he was not a dependent. You might let grandparents know, however, that they may get a state tax break for contributing to a 529 college savings plan.

Answer: Most states that have state income taxes offer some sort of a tax break for 529 college savings plan contributions. (The exceptions are California, Delaware, Hawaii, Kentucky, Massachusetts, Minnesota, New Jersey and North Carolina, according to SavingForCollege.com. Tennessee has a tax on interest and dividends but no 529 tax break.) In some states, even short-term contributions qualify for a deduction, so grandparents could contribute money that’s quickly withdrawn to pay qualified higher education expenses and still get the break. SavingForCollege has details on each state’s tax benefits.

Tuesday’s need-to-know money news

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4 Ways Your House Payment Could Unexpectedly Go Up
Don’t get caught off guard.

Grandparents: Don’t Make a 529 Plan Mistake
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Now Could Be the Right Time to Refinance Your Student Loans
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6 reasons early retirement might be wrong for you
What sounds like a good idea might not be.

Q&A: Uniform Transfers to Minors Act

Dear Liz: My in-laws have gifted stock to our children through the Uniform Transfers to Minors Act (UTMA) to help pay future college expenses. The value of the stock has increased significantly over the past few years.

We would like to sell the shares and move the proceeds into more stable investments for our children. What are our options for those funds? Do you recommend one option over another? I don’t expect them to get much need-based financial aid.

Our household income is approximately $95,000 a year. We have 529 plans for each of our three children and account currently has $6,000 to $9,000.

Answer: If you only have one child in college at a time, then you’re right that you probably won’t get much need-based aid.

If, however, your kids are close enough in age that more than one will attending college simultaneously, you may qualify for more help than you think. One way to find out is to use the EFC Calculator at the College Board website, which can give you an estimate of the amount your family is expected to contribute to higher education costs.

If your kids may get need-based financial aid, then they probably shouldn’t have money in UTMA or other custodial accounts. UTMA accounts and their predecessor, Uniform Gift to Minors Act or UGMA accounts, used to be a good way to save on taxes but changes to the so-called “kiddie tax” rules have made them less appealing.

Income from the accounts above $2,000 a year for children under 19 and full-time college students under 24 is now taxed at the parent’s rate. What’s more, these custodial accounts count heavily against families in financial aid calculations.

Often it’s best to spend down the money by the child’s junior year in high school (by paying for tutoring, a laptop, private school or other expenses that benefit the child.)

Another option is to transfer the proceeds to a 529 college savings plan, since these state-run investment accounts typically are viewed favorably in financial aid formulas. What’s more, the plans offer professional management and diversified portfolios known as “age-weighted” options that grow more conservative as a child approaches college age.

You’ll want to talk to a tax pro about what makes sense in your specific situation, especially since selling the shares all at once may trigger a big tax bill.

Q&A: 529 plans vs. education tax breaks

Dear Liz: You recently mentioned in your column that you can’t use any of the three education tax breaks — the American Opportunity Credit, the Lifetime Learning Credit or the tuition and fees deduction — for expenses paid with 529 college savings plan money. This has me wondering if those 529 plans are really worth it.

Wouldn’t you have to have a really large amount invested to have enough earnings to make it worth not taking one of the credits?

Answer: If college were cheap, that might be a problem. But most people have far more college expenses than they can write off on their tax returns.

The average net price for one year at a four-year college — the published cost minus free financial aid such as grants and scholarships — was just under $13,000 last year, including tuition, fees, room and board. The average net price was around $6,000 at two-year public colleges and $23,550 at private four-year schools.

Many people pay a lot more, as the sticker prices at colleges continue to rise.

As mentioned in the previous column, the three available tax breaks are mutually exclusive, so you can’t take more than one in any given year.

The most generous credit, the American Opportunity Credit, reduces taxes dollar-for-dollar for the first $2,000 of college expenses and then by 25% of the next $2,000 — for a total of $2,500 per student.

If your qualified education expenses exceed $4,000, as they probably will, those tax-free 529 plan withdrawals will come in handy.

Weekend reading: Purging paperwork, unpayable taxes and saving for college

taxesOne of the great things about being a columnist is getting access to experts who can help you with problems in your own life–under the guise of helping your readers, of course. Recently I was lucky enough to interview three smart CPAs who had great advice about purging paperwork from our lives, and have already implemented their suggestions. Paperlessness, here I come!

Another column that got a good amount of attention was one on two-year degrees that pay well. Not everyone wants or needs to go to a four-year school, and some are better off. Here are those stories plus the other columns I did for Reuters last month.

Financial records: What to keep, what to toss

I don’t make New Year’s resolutions. Instead, I resolve every tax season to get a better handle on my paperwork — with mixed results. This year, I turned to three certified public accountants to find out what apps, software and strategies they use to keep track of everything.
Two-year degrees can really pay off
Steven Polasck of Corpus Christi, Texas, liked math and science in high school. He considered attending a four-year college but ultimately decided to use his strengths to get a two-year degree in instrumentation from Texas State Technical College. He has not looked back. “I went to work on the Monday after graduation,” said Polasck, 27, who monitors and fixes systems at a Valero Energy Corp refinery. “The first year I made almost $80,000.”

College savings take a dive – study
Average amounts saved for college have fallen 25 percent since last year and fewer middle-income families are saving for higher education, even as parents overwhelmingly endorse its value as an investment, according to “How America Saves for College 2015,” the latest survey by education lender Sallie Mae.
What to do when you can’t pay your tax bill
Affluent clients facing a big tax bill often have one of two reactions, according to CPA and financial planner Jerry Love: They either try to avoid filing or they want to negotiate a deal. Neither is a good strategy, he said.
College watch list a ‘caution light’
Regulators recently made public a once secret watch list of 556 colleges under scrutiny for financial irregularities. But inclusion on the list doesn’t automatically mean the schools are about to fail, according to Department of Education regulators, college officials and even the reporter who triggered the release of the list with his Freedom of Information Act requests.

Wednesday’s need-to-know money news

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6 ways to cut your monthly bills
Every little bit helps.

The Biggest Mistakes People Make Saving For College
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Starting Your Retirement Savings Late Doesn’t Mean You’re Screwed
There’s still time.

10 things everyone should know about credit scores
Deciphering the mysteries.

How to Develop a Foolproof Plan to Pay Off Debt
Create your escape plan.

What you need to know about paying for college

My recent Reuters columns have focused on some of the most common issues families face in trying to pay for college, from getting the most financial aid to how to cope when you haven’t saved enough. Read on, and please share these columns with people you know who might benefit.

Increase economic mobility by busting college myths

One way to improve economic mobility in the United States may be to fix the misconceptions that high-achieving, low-income teenagers often have about college.

Avoid easy-to-make mistakes on your financial aid application

One of the worst mistakes you can make with college financial aid is simply failing to file the all-important Free Application for Federal Student Aid. But there are plenty of other ways to mess up this application.

Last-minute moves to boost financial aid

Financial aid filing season starts Jan. 1. It may be too late to rearrange your finances this year, but here are some ideas for maximizing what you can get in future years. First, though, make sure your hopes are realistic.

What to do if you have not saved enough for college

Soaring college costs and stagnant incomes mean many families will not be able to save enough to pay for a typical undergraduate education. But there are still ways to find a college degree you can afford. The good news is that most people will pay significantly less than the sticker prices.

Busting the myths of haggling for college aid

My daughter learned this little ditty in preschool: “You get what you get, and you don’t get upset.” Parents who are convinced they can haggle their way to a better financial aid package might want to learn it, too.

No need for irrational fears of student loans

The next generation of college students has heard the message loud and clear about the perils of taking on too much student loan debt – so much so that many are unwilling to go into debt at all in order to attend college. The drawback to this wariness is that most of those who do not borrow are unlikely to get four-year degrees.

Thursday’s need-to-know money news

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6 Ways Student Loan Servicers Are Trying to Trick You
Pay close attention to every correspondence.

7 Times to Use a Debit Card Instead of a Credit Card
Don’t pay the interest unless absolutely necessary.

How Much Do You Plan on Saving for Your Kids’ College Education?
Planning for one of life’s biggest expenses.

10 Ways to Get Out — and Stay Out — of Debt
Good advice.

Does Bad Credit Last Forever?
Waiting it out.

Monday’s need-to-know money news

22856641_SAToday’s top story: How Americans sabotage their savings. Also in the news: Ways you can make your children’s college dreams come true, the best credit cards for holiday shopping, and the multitude of ways you can get a free copy of your credit score.

5 Ways Americans Sabotage Their Savings
Stop doing them.

The Simple Path to Making Your Children’s College Dreams Come True
Relatively speaking.

3 Best credit cards this holiday season
Maximizing bonuses.

The Many Ways You Can Get a Free Copy of Your Credit Score
You have no excuse not to get one.

Babies born today get free $500 mutual fund investment
One day only!