Friday’s need-to-know money news

Zemanta Related Posts ThumbnailToday’s top story: The consequences of never checking your credit report. Also in the news: How your smart phone can help your budget, how bad America is at saving for college, and are memberships to big box stores worth it?

What Happens if I Never Check My Credit Report?
You really, really don’t want to do that.

How Your Phone Can Boost Your Budgeting
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How Bad Is America at Saving for College?
Needs improvement.

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Q&A: How to get the maximum in financial aid

Dear Liz: I’m having trouble finding information about how to structure my finances to get the maximum financial aid for my kids when they enter college. For example, will contributing to an IRA instead of a taxable investment account matter? Should I focus on paying off my mortgage or should I buy a bigger house and acquire debt in the process if I want my kids to qualify for more aid? There’s plenty of advice out there about how to minimize taxes — for example, by contributing to 401(k)s or selling losing stocks at year-end. But I’m interested in legally and ethically shielding my assets from the family contribution calculations used by the Free Application for Federal Student Aid. Any idea how I can learn more about the inner workings of the FASFA formula?

Answer: Before you rearrange your finances, you need to understand that most financial aid these days consists of loans, which have to be repaid, rather than scholarships and grants that don’t. Wanting your kids to qualify for more aid could just lead them to qualify for more debt.

Also, the FAFSA formula weighs income more heavily than assets. If you have a six-figure income and only one child in college at a time, you shouldn’t expect much need-based financial aid, regardless of what you do with your assets.

That said, there are some sensible ways to shield assets from the formula, and often they’re things you should be doing anyway: maxing out your retirement contributions, for example, and using any non-retirement savings to pay down credit cards, car loans and other consumer debt.

Using non-retirement savings to pay down mortgage debt helps with the federal formula, but may not help much with private schools that include home equity in their calculations. Either way, taking on a bigger mortgage with college looming is rarely a good idea.

You can get some idea of how much the federal formula expects you to pay for your children’s educations by using the “estimated family contribution” calculator at FinAid.org. Another great source of information is the book “Filing the FAFSA: The Edvisors Guide to Completing the Free Application for Federal Student Aid” by Mark Kantrowitz and David Levy.

Friday’s need-to-know money news

Zemanta Related Posts ThumbnailToday’s top story: What numbers identity thieves want the most. Also in the news: How identity thieves will sell those numbers, expecting the unexpected if you retire at 67, and should you be saving for your retirement or your child’s education?

8 Numbers Identity Thieves Want to Steal From You
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Wednesday’s need-to-know money news

Zemanta Related Posts ThumbnailToday’s top story: Why new graduates need to keep a close watch on their identities. Also in the news: How to get someone to resolve your banking complaints, why travel medical insurance is essential for international travel, and five ways to start saving for your child’s education.

4 Ways New Grads Are Vulnerable to Identity Theft
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How to Get Your Banking Complaints Resolved
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Travel Medical Insurance: Don’t Leave Without it
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5 Ways to Save for Your Child’s College Education
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My Dream Retirement: 5 People Reveal Their Strategies
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Money rules of thumb: College savings edition

Zemanta Related Posts ThumbnailA college degree today is what a high school diploma was 60 years ago, a college consultant told me. Meaning: the bare minimum for staying in the middle class.

There will be exceptions, of course, but your kid is unlikely to be one of them. So here, in my ongoing “rules of thumb” series (previous editions include retirement and cars), are a few guidelines about saving for college:

So here, in my continuing “Rules of thumb” series, are three guidelines regarding cars: – See more at: http://asklizweston.com/page/3/#sthash.BwXsoYOC.dpuf

Save yourself first. No one’s going to lend you money for retirement, so that has to remain your top priority–hard as that is for parents to hear. Think of it this way: by saving for yourself first, you’re reducing the odds that you’ll have to move in with your kid in old age. Trust me, she’ll appreciate that someday.

But save something. Even if it’s just $25 or $50 a month to start, putting something away for college helps solidify it as a goal–and anything you can save will reduce your child’s future debt load (since most financial aid is actually loans, not grants or scholarships).

Use a good 529 plan. Money saved in 529s is tax free when used for college education costs, and most of these state-run plans are pretty good these days, thanks to better investment options and lower fees. Morningstar runs an annual list of the best and worst plans.

The more you make, the more you’re expected to save. Federal financial aid formulas aren’t adjusted for regional differences in cost of living. There’s no exception made for families that have experienced hard financial times in the past. The higher your income, the more the formula expects you will have saved…to the point where someone with an income over $100,000 could be expected to fork over a third of it for college costs. There are ways to reduce college costs, but knowing the reality of financial aid formulas will help you to understand the maxim that “if you CAN save for college, you probably SHOULD.”

 

Should you hide assets to get more financial aid?

Dear Liz: We have a son who is a high school junior and who is planning on going to college. We met with a college financial planner who suggest we put money in a whole life insurance policy as a way to help get more financial aid. Is that a good idea?

Answer: Your “college financial planner” is actually an insurance salesperson who hopes to make a big commission by talking you into an expensive policy you probably don’t need.

The salesperson is correct that buying a cash-value life insurance policy is one way to hide assets from college financial planning formulas. Some would question the ethics of trying to look poorer to get more aid, but the bottom line is that for most families, there are better ways to get an affordable education.

First, you should understand that assets owned by parents get favorable treatment in financial aid formulas. Some assets, such as retirement accounts and home equity, aren’t counted at all by the Free Application for Federal Student Aid or FAFSA. Parents also get to exempt a certain amount of assets based on their age. The closer the parents are to retirement, the greater the amount of non-retirement assets they’re able to shield.

Consider using the “expected family contribution calculator” at FinAid.org and the net cost calculators posted on the Web sites of the colleges your son is considering. Do the calculations with and without the money you’re trying to hide to see what difference the money really makes.

Most families don’t have enough “countable” assets to worry about their effect on financial aid formulas, said college aid expert Lynn O’Shaughnessy, author of “The College Solution.” Those that do have substantial assets have several options to reduce their potential impact, including spending down any custodial accounts, paying off debt and maxing out retirement plan contributions in the years before applying for college.

Another thing to consider is that most financial aid these days comes as loans that need to be repaid, rather than as scholarships or grants that don’t. So boosting your financial aid eligibility could just mean getting into more debt.

Meanwhile, it’s generally not a good idea to buy life insurance if you don’t need life insurance. The policy could wind up costing you a lot more than you’d save on financial aid.

If you’re still considering this policy, run the scheme past a fee-only financial planner—one who doesn’t stand to benefit financially from the investment—for an objective second opinion.

Should you bail on your 529 plan?

Education savingsLong-time readers know I’m a big fan of using state-run 529 college plans to save for higher education expenses. (Remember the mantra: if you can save for college, you should!) Money in these plans grows tax-free when used for qualified college costs and doesn’t have much impact on financial aid (which is going to be mostly loans, anyway).

But the plans aren’t created equal–in fact, they’re so diverse it’s kind of daunting to track and compare them. Investment research firm Morningstar does just that, though, and every year creates a list of the best (and worst) plans. That list gives us 529 investors a chance to compare our plans against a gold standard and consider whether we need a change.

I’ve changed plans once, from California’s then-middling plan to Nevada’s top-rated one, and was surprised by how easy it was. (We still have some money in California’s plan, which is now higher in Morningstar’s ratings.) Some people are tied to their state’s plan by tax breaks or other incentives, but many aren’t. If you’re not happy with your plan, it’s time to consider a change.

You can read more about it in my Reuters column this week, “Is it time to switch 529 college savings plans?

Monday’s need-to-know money news

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How much college savings is enough?

Dear Liz: My husband and I have three children, two in elementary school and one in middle school. Through saving and investing, we have amassed enough money to pay for each of them to go to a four-year college. In addition, we have invested 15% of our income every year toward retirement, have six months’ worth of emergency funds and have no debt aside from our mortgage and one car loan that will be paid off in a year. Considering that we have all the money we will need for college, should we move this money out of an investment fund and into something very low risk or continue to invest it, since we still have five years to go until our oldest goes to college and we can potentially make more money off of it?

Answer: Any time you’re within five years of a goal, you’d be smart to start taking money off the table — in other words, investing it more conservatively so you don’t risk a market downturn wiping you out just when you need the cash. The same is true when you have all the money you need for a goal. Why continue to shoulder risk if it’s not necessary?

You should question, though, whether you actually do have all the money your kids will need for college. College expenses can vary widely, from an average estimated student budget of $22,261 for an in-state, four-year public college to $43,289 for a private four-year institution, according to the College Board. Elite schools can cost even more, with a sticker price of $60,000 a year or more.

Another factor to consider is that it may take your children more than four years to complete their educations, particularly if they attend public schools where cutbacks have made it harder for students to get required courses in less than five years, and sometimes six.

So while you might want to start moving the oldest child’s college money into safer territory and dial back on the risks you’re taking with the younger children’s funds, you probably don’t want to exit the stock market entirely. A 50-50 mix of stocks and short-term bonds or cash could allow the younger children’s money some growth while offering a cushion against stock market swings.

A session with a fee-only financial planner could give you personalized advice for how to deploy this money.

Using a Roth for college: hazards and benefits

Dear Liz: My husband and I have been putting 5% and 6%, respectively, into our 401(k) accounts to get our full company matches. We’re also maxing out our Roth IRAs.

The CPA who does our taxes recommended that we put more money into our 401(k)s even if that would mean putting less into our Roth IRAs. We’re also expecting our first child, and our CPA said he doesn’t like 529 plans.

What’s your opinion on us increasing our 401(k)s by the amount we’d intended to put into a 529, while still maxing out our Roths, and then using our Roth contributions (not earnings) to pay for our child’s college (assuming he goes on to higher education)?

Our CPA liked that idea, but I can’t find anything online that says anyone else is doing things this way. I can’t help but wonder if there’s a catch.

Answer: Other people are indeed doing this, and there’s a big catch: You’d be using money for college that may do you a lot more good in retirement.

Contributions to Roth IRAs are, as you know, not tax deductible, but you can withdraw your contributions at any time without paying taxes or penalties. In retirement, your gains can be withdrawn tax free. Having money in tax-free as well as taxable and tax-deferred accounts gives you greater ability to control your tax bill in retirement.

Also, unlike other retirement accounts, you’re not required to start distributions after age 70 1/2. If you don’t need the money, you can continue to let it grow tax free and leave the whole thing to your heirs, if you want.

That’s a lot of flexibility to give up, and sucking out your contributions early will stunt how much more the accounts can grow.

You’d also miss out on the chance to let future returns help increase your college fund.

Let’s say you contribute $11,000 a year to your Roths ($5,500 each, the current limit). If you withdraw all your contributions after 18 years, you’d have $198,000 (any investment gains would stay in the account to avoid early-withdrawal fees).

Impressive, yes, but if you’d invested that money instead in a 529 and got 6% average annual returns, you could have $339,000. At 8%, the total is $411,000. That may be far more than you need — or it may not be, if you have more than one child or want to help with graduate school. With elite colleges costing $60,000 a year now and likely much more in the future, you may want all the growth you can get.

You didn’t say why your CPA doesn’t like 529s, but they’re a pretty good way for most families to save for college. Withdrawals are tax free when used for higher education and there is a huge array of plans to choose from, since every state except Wyoming offers at least one of these programs and most have multiple investment options.

Clearly, this is complicated, and you probably should run it past a certified financial planner or a CPA who has the personal financial specialist designation. Your CPA may be a great guy, but unless he’s had training in financial planning, he may not be a great choice for comprehensive financial advice.