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  • Providing for Your Child's Education: An Educational Funding Review
  • Kfs education

    1. 1. © 2013 VSA, LP Valid only if used prior to January 1, 2014. The information,general principles and conclusions presented in this report are subject to local,state and federal laws and regulations, court cases and any revisions of same.While every care has been taken in the preparation of this report, neither VSA,L.P. nor The National Underwriter is engaged in providing legal, accounting,financial or other professional services. This report should not be used as asubstitute for the professional advice of an attorney, accountant, or otherqualified professional.Providing forYour Child’s EducationAn Educational Funding Review
    2. 2. Your Earning Power$ 50,000 $ 100,000 $ 250,000 $ 500,000$ 2,000,000 $ 4,000,000$10,000,000$20,000,000$ 1,500,000 $ 3,000,000 $ 7,500,000$15,000,000$ 1,000,000 $ 2,000,000 $ 5,000,000$10,000,000$ 500,000 $ 1,000,000 $ 2,500,000 $ 5,000,000$ 250,000 $ 500,000 $ 1,250,000 $ 2,500,000Your Future Earning PowerIf Your Family Income Averages:Years toAge 65:403020105The question is,how much of thismoney will beavailableto help pay for yourchild’s education?Few people realize that a 30-year-old couple will earn3.5 million dollars by age 65 if their total familyincome averages $100,000 for their entire careers,without any raises.Your IncomeSpouse’s IncomeOther IncomeInvestment IncomeYour ability to earn an income is your most valuable asset.
    3. 3. How Much Will a College Education Cost?Approximate Undergraduate Charges (2012-2013) toAttend a Four-Year College*According to the College Board’sEducation Pays 2010, full-time workersages 25 and older with a bachelors degreeearned a median income in 2008 of$55,700, almost 65% more than the$33,800 earned by a full-time worker withonly a high school diploma. Those withmaster’s degrees earned a median incomeof $67,300, which rose to $100,000 forthose with a professional degree.As further proof of the value of aninvestment in higher education, EducationPays 2010 reports that "the typicalbachelors degree recipient can expect toearn about 66% more during a 40-yearworking life than the typical high schoolgraduate earns over the same period."That percentage increases to 97% for amasters degree recipient and 174% morefor those with professional degrees.Do You Know… the value of aninvestment in higher education?* Source: The College Board Trends in College Pricing 2012** Includes tuition, fees, room and board; in-state residency is assumedfor public schools.*** Includes tuition and fees only.While these are the average published tuition,fee and room and board charges, manystudents actually pay less due to grant aid andfederal tax benefits.Note:Annual costPublic schoolResident student** $17,860Commuter student*** $8,655Private schoolResident student** $39,518Commuter student*** $29,056
    4. 4. What Is the Impact of Inflation on College Costs?Unfortunately, college costs have been rising at a faster rate than the general inflationrate.For the 12 months ending December 2012, the inflation rate was 1.7% (source:Consumer Price Index; CPI-U; Percent Change December to December). For a similarperiod of time, tuition and fees at four-year colleges increased an average of 4.2% atprivate non-profit colleges and 4.8% at public colleges (source: The College BoardTrends in College Pricing 2012).continued on next slideFailing to consider theimpact of inflation oncollege costs couldundermine your ability toprovide for your child’seducation.Over the past decade (2002-03 to 2012-13), total in-state tuition and fees in inflation-adjusted dollars atfour-year public colleges have increased an averageof 5.2% per year, while tuition and fees at privatenonprofit four-year colleges have increased anaverage of 2.4% per year (source: The College BoardTrends in College Pricing 2012).
    5. 5. What Is the Impact of Inflation on College Costs?Consider the funds that may be needed when an 8-year-old childis ready to attend college in 10 years: ** Source: The College Board Trends in College Pricing 2012** Includes tuition, fees, room and board; in-state residency is assumed for public schools.*** Includes tuition and fees only.Today’s average annual cost:Average Annual Cost in 10 YearsAssumed College Inflation Rate:3% 4% 5% 6%Public schoolResident student** $17,860 $24,002 $26,437 $29,092 $31,985Commuterstudent***$ 8,655 $11,632 $12,812 $14,098 $15,500Private schoolResident student** $39,518 $53,109 $58,496 $64,371 $70,771Commuterstudent***$29,056 $39,049 $43,010 $47,329 $52,035
    6. 6. How Much Should You Save for Your Child’s College Education?Based on the College Board’s Trends in College Pricing 2012, which estimates average annual costs of $17,860 at public collegesand $39,518 at private non-profit colleges (includes tuition, fees, room and board). In-state residency is assumed for publicschools. Table assumes 5% annual increase in college costs and a 7% after-tax annual return on investment, based on monthlycompounding. No additional investments are assumed once the child starts college.Years untilcollege4-Year Total Cost Monthly SavingsPublic Private Public Private2 $84,869 $187,786 $3,305 $7,3124 $93,568 $207,034 $1,695 $3,7506 $103,158 $228,255 $1,157 $2,5608 $113,732 $251,651 $887 $1,96310 $125,390 $277,446 $724 $1,60312 $138,243 $305,884 $615 $1,36115 $159,918 $354,099 $505 $1,11720 $204,101 $451,931 $392 $868
    7. 7. Some Educational Funding OptionsThere may be certain tax advantages to maintaining a separate educationalfund in the child’s name. By setting up a custodial account under theUniform Gifts to Minors Act (UGMA) or, in some states, under the UniformTransfers to Minors Act (UTMA), you can realize any available tax savings andstill maintain some control of the funds.Each parent and grandparent can gift up to $14,000 in 2013 to each childwithout any gift tax consequences.The primary problem with borrowing is that it adds to the cost of educationand may possibly divert funds that are needed to accomplish other importantfinancial objectives, such as saving for retirement. If borrowing becomes anecessity, your child may qualify for a student loan, although that source ofcollege funding may become less available or attractive in the future. Inmost states, you can take a home equity loan for education purposes andbenefit from tax-deductible loan interest.CustodialAccountsTransferringFunds to Childrencontinued on next slideBorrowing
    8. 8. Some Educational Funding OptionsYou can begin a systematic savings plan today to help finance your child’sfuture education costs. If life insurance is one of your education fundingchoices and you die prematurely, the death benefit could be used to helpfund your child’s education. In addition, certain types of life insuranceprovide a tax-deferred accumulation of cash values. These cash values couldserve as a source of education funds, in addition to being available foremergencies or other opportunities (withdrawals and loans will reduce thepolicy’s death benefit and cash value available for use).A variety of education tax incentives are available in 2013, including theAmerican Opportunity Tax Credit, the Lifetime Learning Credit, QualifiedTuition and Related Expenses Deduction and Education Savings Accounts. Inaddition, interest paid on qualified education loans is deductible up tospecified limits.EducationSavingsPlanEducation TaxIncentivesThe potential impact on the availability of student loans and grants should also beevaluated in selecting educational funding options.Note:
    9. 9. Education Tax Incentives Available in 2013May be elected during all four years of a taxpayer’s, spouse’s ordependent’s college education.American OpportunityTax Credit (AOTC) Tax credit of up to 100% of the first $2,000 and 25% of the next$2,000 of qualified tuition and related expenses paid in 2013(maximum of $2,500).Phased out as 2013 adjusted gross income exceeds $80,000 forsingle taxpayers and $160,000 for married couples filing jointly.If certain requirements are met, 40% of the credit is refundable.Equal to 20% of the first $10,000 of qualified tuition and related fees paid for all eligiblestudents in 2013 (maximum of $2,000).Lifetime Learning CreditAvailable for undergraduate, graduate-level and course work that improves job skills.Phased out as 2013 adjusted gross income exceeds $53,000 for single taxpayers and $107,000for married couples filing jointly.Either the AOTC or Lifetime Learning credit may be taken for the same student in any one year,but not both.continued on next slide
    10. 10. Education Tax Incentives Available in 2013Up to $2,500 can be deducted in 2013 for interest paid on qualified education loans if incomelimits are met.Student Loan Interest DeductionThe modified gross income phase-out ranges for the deductibility of interest paid on qualifiededucation loans in 2013 are equal to $60,000 to $75,000 for single filers and $125,000 to$155,000 for joint filers.The phase-out ranges are indexed for inflation.continued on next slideAmounts can be withdrawn penalty-tax-free from an IRA for higher educationexpenses of the taxpayer and the taxpayer’s spouse, child and grandchild.Income tax, however, may be payable on all or a portion of the distribution.Withdrawalsfrom IRAs
    11. 11. Education Tax Incentives Available in 2013Allow for contributions of up to $2,000 per year per student for the benefit of a beneficiarywho has not reached age 18.Education Savings AccountsWhile contributions are non-deductible, earnings are not taxed and withdrawals are excludedfrom income, provided they are used for qualified education expenses. An AOTC or LifetimeLearning credit can also be claimed for the eligible student in the year of withdrawal if thewithdrawal and the credit cover different eligible expenses.Phased out as adjusted gross income exceeds $95,000 for single taxpayers and $190,000 formarried couples filing jointly.A $4,000 above-the-line deduction for qualified higher education tuition and relatedexpenses, available through 2013. Phased out as adjusted gross income exceedsspecified levels. Cannot be claimed in the same year as an AOTC or Lifetime LearningCredit for the same studentCollege Tuition Deduction
    12. 12. Understanding Education Savings AccountsSingle taxpayers with adjusted gross income of up to $95,000 or marriedcouples filing jointly with adjusted gross income up to $190,000 maycontribute up to $2,000 per beneficiary (generally a child under age 18) peryear to an Education Savings Account. The age 18 restriction is eliminated incases where a beneficiary has "special needs." Contributions for the tax yearmay be made by April 15 of the following year. The contribution amount isgradually reduced to zero for adjusted gross income levels between $95,000and $110,000 for single taxpayers, and between $190,000 and $220,000 formarried couples.Contributions to an Education Savings Account are not deductible. Instead,earnings grow tax-deferred and are distributed tax free, provided they areused to pay the beneficiary’s post-secondary education expenses.EligibilityDeductibilitycontinued on next slide
    13. 13. Understanding Education Savings AccountsDistributions from an Education Savings Account are not included in grossincome to the extent that the distribution does not exceed the qualifiededucation expenses incurred by the beneficiary during the year in which thedistribution is made.Qualified education expenses for which non-taxable withdrawals can be usedinclude expenses for qualified elementary and secondary schools (grades K-12;public, private or religious), in addition to the expenses of higher education.Qualified education expenses include tutoring, room and board, uniforms,computers and extended day program costs.The AOTC or Lifetime Learning credits are coordinated with the tax exclusionfor Education Savings Account distributions, meaning both can be used in thesame year, so long as the credit and the exclusion cover different expenses.If total distributions exceed qualified higher education expenses during the taxyear, a portion of the Education Savings Account earnings will be included inincome and may be subject to a 10% penalty tax.Distributions
    14. 14. Understanding Qualified State Tuition (Section 529)ProgramsThere are no income or age restrictions on participating in a qualified statetuition program, also known as a Section 529 plan. In addition, some stateplans are available to non-residents of that state.The maximum amount that can be contributed to a Section 529 plan variesfrom state to state, but can be substantial.Contributions to a Section 529 plan are not deductible for federal income taxpurposes. Some states, however, allow residents to deduct contributions fromstate tax returns.Earnings on Section 529 plan contributions grow tax free for as long as themoney remains in the plan.Qualified distributions: If used to pay for qualified higher education expenses(e.g., tuition, fees, books, supplies, computers and computer technology),distributions from both state-sponsored and privately-sponsored tuition plansare free from federal income tax.Non-qualified distributions: The earnings portion of the distribution is subjectto federal income tax plus a 10% penalty tax.EligibilityContributionsDeductibilityEarningscontinued on next slideDistributions
    15. 15. Understanding Qualified State Tuition (Section 529)ProgramsThe donor remains in control and decides when withdrawals are taken and forwhat purpose.Amounts can be rolled over tax free from one Section 529 plan to another asoften as once every 12 months without the need to change beneficiaries.States offering prepaid tuition plans generally will allow the value (asdetermined by the state) to be transferred for use at a private or out-of-stateschool.The qualified beneficiary of the plan can be changed at any time.While subject to income tax and possibly a penalty tax (see above), non-qualified withdrawals can be made from the plan for any purpose.Made permanent by the Pension Protection Act of 2006.Flexibility
    16. 16. Educational Funding Action ChecklistDecide how much of your child’s educationyou wish to fund (all or part?).Based on the type of school your child will beattending, select a target annual educationalcost that you will aim to fund.Determine to what degree you want to takeinflation into account.Estimate the total educational fund that willneed to be available when your child enterscollege.After subtracting any amounts you havealready accumulated, determine the amountyou must systematically save, based on anassumed interest rate, in order to reach youreducational funding goal.The Analysis… The Plan…Evaluate and select appropriate educationalfunding vehicles, available education taxincentives and savings vehicles.Commit to a systematic educational savingsplan.“It’s by managing your finances thatyou write the story of your life. Youare both the author and the story’sprincipal character.Resolve to perform what you ought.”-- Benjamin Franklin