Maximize FAFSA Financial Aid

Posted On October 25, 2020 By Scott Stratton, CFP(R), CFA In College Savings /

We are going to discuss three specific strategies:

Moving Assets from reportable sources to non-reportable locations
Reducing cash by paying down debt
Avoiding assets in the child’s name

Before we get to the details, a few caveats. First, some of the expected family contribution is based on the parent’s income. If you have a high income, your reported assets may not make a big difference in financial aid. Second, it’s possible that the college’s solution to your financial need will be to offer more loans, rather than a scholarship. We want to be careful about taking large loans for college, as these are increasingly becoming a significant burden for students and parents. Some schools have a generous amount of need-based financial aid available and at those schools, these strategies may increase the scholarships your student receives.

Non-Reportable Assets on the FAFSA

Non-reportable assets include:

All Qualified Retirement Accounts, such as 401(k), 403(b), IRA, Roth, SEP, and SIMPLE plans
Your home
Small businesses
Household items and personal possessions

If you are planning on a child going to college in a few years, you may want to put as much as you can into your non-reportable assets, such as retirement accounts, and not into a savings account or taxable investment account. If you have a lot of cash, look at maximizing your 401(k) and IRAs to shift your investments into retirement accounts.

Paying Down Debt

If you have credit cards, car loans, or a home mortgage, that debt does not get considered on the FAFSA. Your cash, however, will be counted towards your expected Family Contribution. If you want to maximize your eligibility for student aid, you could pay down debt. This will reduce the cash you have as a reportable asset. And your home, cars, and personal assets are not considered on the FAFSA.

Obviously, you want to make any changes well in advance of applying for financial aid and make sure you keep enough cash for your emergency fund.

Avoid Assets in the Child’s Name

Assets of the child will have an expected contribution of 20% a year, whereas an asset of the parent has a maximum contribution of 5.64%. Having a lot of money in the name of a college kid will reduce their financial aid eligibility. This is a problem with the UGMA account for minors – colleges expect that this account will be fully available for tuition and expenses.

If your pre-college student has earned income, it may be preferable to put their assets into a Roth IRA than into a savings account. In the year of the FAFSA application, a retirement contribution is typically counted as eligible income, but not as a reportable asset. The assets in a Roth IRA accumulated before college are not a reported asset. This way, the money your child earns before college can start to grow for them and not get sucked into college expenses.

College funding is an important part of financial planning. A lot of people think college planning means getting a 529 plan. There is more to it than just 529 plans. By managing your reportable assets, you can maximize your FAFSA financial aid.

Do You Have a College Fund?

Posted On August 21, 2020 By Scott Stratton, CFP(R), CFA In College Savings /

Do you have a college fund set up for your children or grandchildren? It is back to school time and that’s a little bit different this year. No one knows if the online classes will permanently change the process of education in the world. Still, I think there will be no substitute for the career benefits of having a degree in an in-demand field from a top notch school. Not everyone needs college, but overall, a higher education is strongly correlated to future earnings and career satisfaction.

The cost of a college education continue to climb. Student debt has become a crippling problem for many young adults I meet. They were told it would be worth it to get their degree, regardless the expense or their future earnings potential. Every parent wants the best for their kids, for them to have the opportunities we did not have. We want for them to be able to pursue their dreams and find their own unique greatness. Helping to pay for college goes a long way to setting up your kids to find their own Good Life.

Like most big financial goals, I think the best way to create a successful college fund is by making it automatic. Establish a 529 college savings account and make automatic contributions each month. If you can only start with $100 a month, great, just get started. Later, you can gradually bump that up to $200 or $300 a month or more.

How Much Should You Save?

A 529 plan will allow you to invest into a diversified allocation. The 529 Plan I use has Vanguard, iShares, and State Street index funds, just like I recommend in our Premiere Wealth Management portfolios. While no one knows future returns, let’s consider how your money might grow at 1%, 3%, or 6%. And then let’s also consider if you start at age zero, 5, and 10 for your kids. This would equate to 18, 13, and 8 years of growth to age 18 and the start of college.

Here is how $250 a month would grow:

There are two main points I think this chart makes. First, it pays to start your college fund early for compound interest. If you wait until your kids are 10, you might have only one-third the amount saved, compared to starting at birth. Second, you aren’t going to grow much if your money is in a bank account earning one percent. (By the way, at $250 a month, or $3,000 a year, you would have contributed a cumulative $54,000 over 18 years, $39,000 over 13 years, or $24,000 over 8 years.)

How to Get Started

A 529 College Savings Plan is an efficient way to create a College Fund, as distributions for qualified education expenses are tax-free. You can even start a 529 for an unborn child and change it to their name once they are born. The important thing is to get started early. Each state sponsors their own 529 Plan. If your state has income taxes, there may be a benefit for using the In-State plan. For Texas, since we don’t have an income tax, there is no inducement to use the Texas plan versus one from any other state. You can use any plan at any college in the country.

While you could save in a regular account for college, there are valuable tax benefits in 529 Plans. Most investors prefer to have different buckets for different goals. This helps address savings goals. Even if your kids are 10 or older, it’s not too late to start your college fund. We are accepting new clients and want to help you get started.

If you’d like an estimate what it might cost to send your kid to a specific University, send me that information. I’m happy to prepare a report for you. We will estimate future costs and calculate a saving and investing plan. (Be prepared to be shocked if you plan to pay for 100% of four years at a private university.)

Learn More About 529s

Looking for details on how a 529 Plan works? Here’s what you need to know.

Want to compare different 529 Plans? Check out SavingForCollege.com

529 Plans are a way for Wealthy Families to create an inter-generational transfer of millions of dollars, potentially tax-free. This linked article calculates that parents who fund $1 million dollars into 529 Plans could be able to cover the college educations of four grandchildren, eight great-grandchildren, and 16 great-great-grandchildren. That’s because when you over-fund a 529 plan, you can always change the beneficiary to a younger generation later. The successor owners of your 529 Plans can keep the accounts open and change beneficiaries, even after you are gone.

Giving Strategies, Now and Later

Posted On November 10, 2019 By Scott Stratton, CFP(R), CFA In Financial Planning /

If you have a significant estate and are thinking about how to give money to charity or individual beneficiaries, you might want to consider if it would be possible to make some of those gifts during your lifetime. Today, we are going to look at the tax benefits or implications of different large gift strategies.

A gift to charity from your estate will reduce your your taxable estate. However, with the estate tax threshold presently at $11.4 million per person, most people will never pay any estate taxes. This was not the case 15 years ago when the estate tax threshold was just $1.5 million. For married couples, the threshold is doubled to $22.8 million. So if your past estate plan was based on estate tax avoidance, it may be time to update your plans and revisit your charitable strategies.

Charitable donations remain eligible as an itemized deduction, although many tax payers will not have enough deductions to exceed the 2019 $12,200 standard deduction ($24,400 married). However, if you are contemplating a large charitable donation, you can deduct up to 60% of your Adjusted Gross Income (AGI) when making a cash donation to a public charity. (This was increased from 50% under the 2017 Tax Cuts and Jobs Act.) If making a donation of non-cash property, such as appreciated shares of stock, the limit is 30% of AGI. In both cases, you can carry forward any excess donation for five years.

Here are seven principles for giving to charities and to individuals, such as your children or grandchildren:

1. If you have stocks or funds with a large gain, you can give those shares to charity, get the full tax deduction and avoid capital gains tax. The charity will not pay any taxes on the shares they receive and sell.

2. If you leave an IRA to a charity, that is name a charity as a beneficiary of your IRA rather than a person, they will pay no tax on receiving your IRA.

3. For individual beneficiaries of your estate, they will have to pay income tax on inheriting your IRA. Presently, there is a Bill which has passed the House which will eliminate the Stretch IRA. However, beneficiaries will receive a step-up in cost basis on inherited taxable accounts. The most tax efficient split is to leave your Traditional IRA to charity and your taxable assets and Roth IRAs, to your heirs. Then neither will pay income taxes on the assets they receive.

4. If you are over age 70 1/2, you can make up to $100,000 a year in gifts from your IRA as Qualified Charitable Distributions, which count towards your RMD. You do not have to itemize to use the QCD.

5. You can give $15,000 a year to any individual; this is called the annual gift tax exclusion. A couple could give $30,000 to an individual. This includes your adult children. Additionally, you can directly pay medical or educational expenses for any individual without this limit.

Where many people are confused: exceeding the gift tax exclusion does not automatically require you to pay a gift tax. It simply requires filing a gift tax return, which will reduce your lifetime Gift/Estate tax limit, which again is $11.4 million per person (2019). For example, if you give someone $17,000 this year, the $2,000 over the $15,000 limit will be subtracted from your $11.4 million estate tax exemption when you die.

6. If you want to create college funds for your grandchildren or other relatives, you can fund up to five years upfront into a 529 Plan without exceeding the gift tax exemption. That is $75,000 per beneficiary, or up to $150,000 if coming from both Grandma and Grandpa. You can retain control of the funds, even change the beneficiary if desired, and the money grows tax-free for qualified higher education expenses.

7. You can make a large donation to a Donor Advised Fund to receive an upfront tax deduction and then make small donations in the years ahead. For example, it would be more tax efficient to make a $100,000 donation into a DAF and make $10,000 a year in charitable distributions for 10 years from the DAF, than to make regular $10,000 donations each year for 10 years.

Even if you know all of this information, I think many potential donors are still looking for more flexibility in their giving plans. What if you need money later? How much should you keep for your own expenses and needs? Creating a comprehensive retirement analysis is an essential first step, and then we can help you consider other more advanced giving strategies.

There are many ways of structuring charitable trusts which can split assets and income between the creator of the trust, a charity, and/or beneficiaries. Generally, the donor is able to receive an upfront tax deduction for the present value of a gift, based on their expected lifetime or duration of the trust. The present value is calculated using your age and a specific discount rate, known as the Section 7520 rate, which is published monthly by the IRS. It is based on intermediate treasury bonds and is currently 2.2% for trusts created in September 2019. This rate is down from 3.4% from last August.

With a very low interest rate being used for the discount rate today, it is quite unappealing to establish a Charitable Remainder Trust (CRT). The low rate means that the tax deduction is very small compared to trusts that were established when the rate was higher. That’s unfortunate, because a CRT is an ideal structure: the creator receives income from the trust for life (or a set period of years) and then the remainder is donated to the charity when you pass away (or at the end of the term).

A more effective structure for a low interest rate environment is a Charitable Lead Trust (CLT). In this type of trust, a charity receives income for a period of years (say 10 years) and then any remaining principal is distributed to your beneficiaries, free from gift or estate taxes. This might hold some appeal for tax payers who would be subject to the estate tax and who do not need or want income from some portion of their assets. But it doesn’t offer much appeal to donors who want income or flexibility from their trusts.

If you are thinking about charitable giving or where your money might eventually go, let’s talk about which strategies might make the most sense for you.

How Much Will it Cost to Send Your Kids to College?

Posted On August 1, 2016 By Scott Stratton, CFP(R), CFA In College Savings /

I am in favor of college students “having some skin in the game” in sharing in the cost of their education, but many graduates are leaving colleges with crippling student debt today. For parents and grandparents, it’s never too early to start saving for this investment in your child’s future. As part of my education planning for clients, I use specific colleges to estimate how much a future college education may cost and to suggest how much to save monthly. Ready for some sticker shock?

Example 1: Max is 6 years old and his parents hope he will attend their alma mater, Texas A&M. Today, in-state costs (tuition, room/board, books and fees) are $19,702. The projected costs when Max goes to school will be $117,520 for four years. To save this amount, invest $454 a month, starting immediately.

Example 2: Carla is 3 years old and her parents would like for her to be able to attend a private university, such as Southern Methodist University. Today’s annual cost is $61,385. Projected future expense: $400,105. Invest $1,164 a month.

Assumptions

Student attends college for 4 years at age 18. Of course, many take more than four years, especially if they change majors or decide to pursue graduate studies.
These calculations assume 3% inflation. In recent decades, college costs have increased by 5-6%. Hopefully, these increases will moderate as overall inflation is currently quite low.
We are assuming a 6% rate of return on the investments, and tax-free withdrawals from a 529 Plan. Although this is a fairly conservative assumption, it is, of course, not guaranteed.

We can adjust these assumptions, which will change the estimated costs and savings requirements. The calculator gives us a ballpark idea of just how significant an expense it is to send a child to college today, let alone two or three kids. Typically, we run a couple of scenarios to give a range of possible costs for parents.

A 529 College Savings Plan is a great tool for this job. Withdrawals from a 529 are tax-free when used for qualified higher educational expenses. There is no expiration on funds in a 529 and the account owner can change the beneficiary of the account, if one child does not need all the funds. The biggest benefit of a 529 is the tax-free growth, which means that we want to start a 529 as soon as possible for a child to receive many years of compounding. Once they’re 16 or 17, it’s too late to receive much of a tax benefit.

Link: 8 Questions Grandparents Ask About 529 Plans

Want to estimate how much it will cost for your child or grandchild to get the same college education you received, or wish you had received? Send me the details and I’ll get back to you with an estimate. If you’re ready to add college savings to your overall financial plan, I am here to help!

Five Ways To Invest Tax-Free

Posted On February 29, 2016 By Admin In Financial Planning /

“It doesn’t matter how much you make, but how much you keep.” Over time, taxes can be a significant drag on returns, especially for those who are in the higher tax brackets. Today, many families are also hit with the 3.8% Medicare surtax on investment income. If you are in the top tax bracket, you could be paying as much as 43.4% (39.6% plus the 3.8% Medicare surtax) for interest income or short-term capital gains.

10 Questions Grandparents Ask About 529 Plans (Updated for 2026)

Posted On July 7, 2014 By Scott Stratton, CFP(R), CFA In College Savings / 1 Comment

1) What are the tax benefits of 529 plans?

529 plans grow tax-free, and qualified withdrawals for educational expenses are not subject to federal income tax. Some states also offer state income tax deductions or credits for contributions. There are no federal tax deductions for contributions, but tax-free growth and withdrawals for qualified purposes remain a core benefit.

2) Which 529 plan should I choose?

Some states offer a state tax incentive for residents who participate in their 529 plan (e.g., a state deduction), while other states do not. Even in states without income tax, you can choose low-cost plans from any state. Compare fees, investment options, and state tax benefits before selecting a plan.

3) What expenses can you use a 529 plan for?

Qualified expenses include tuition, fees, books, supplies, computers, and room and board (up to certain limits). You can also use up to $10,000 lifetime from a 529 plan to repay student loans for the beneficiary. Each state plan may vary slightly in how it treats various qualified costs.

4) Are there limits to 529 contributions?

Contributions are treated as gifts for gift tax purposes. There’s an annual gift tax exclusion, but you can elect to “superfund” five years of contributions in one year without consuming gift tax exemption. High contributions may require filing a gift tax return and count against your lifetime gift/estate tax exemption.

For 2026, the gift tax exclusion is $19,000 per beneficiary. For a married couple, they could give $38,000 ($19,000 each). Front loading contributions for 5 years is $95,000 from one person or $190,000 from a married couple.

5) How do assets in a 529 plan impact estate planning and eligibility for Medicaid?

529 plan assets are generally excluded from your taxable estate, which can reduce potential estate tax exposure. For Medicaid eligibility, states vary on how they treat 529 assets — some include them in asset tests. Always check rules for your state’s programs.

6) How do 529 plans affect students’ eligibility for financial aid?

Money in a grandparent-owned 529 plan isn’t reported on the federal financial aid application (FAFSA) as an asset, which can improve eligibility for need-based aid relative to assets in the parent’s or student’s name. However, distributions from a grandparent plan may count as student income when received, which can impact aid in subsequent years. It may be preferable, if possible, to save a grandparent 529 for the last year of college.

7) What if my student doesn’t need all the 529 plan funds?

There are multiple options for unused 529 funds:

Change the beneficiary to another qualifying family member (including siblings or cousins).
Use up to $10,000 for student loan repayment.
Leave the funds for future education costs, including for future children of the current beneficiary.
Take a non-qualified withdrawal (subject to tax on earnings and a penalty) if other options aren’t suitable.

8) Can leftover 529 funds be rolled into a Roth IRA?

Yes — under rules effective starting in 2024 through SECURE Act 2.0, families now have the option to move unused 529 plan funds to the Roth IRA of the plan beneficiary on a tax-free, penalty-free basis, subject to specific conditions:

Key points of this rollover option:

The 529 plan must have been open for the same beneficiary for at least 15 years.
Amounts rolled over are limited to lifetime total of $35,000 per beneficiary.
Annual rollovers can’t exceed the current Roth IRA annual contribution limit (e.g., $7,500 for 2026, higher if the beneficiary is age 50+).
The beneficiary must have earned income at least equal to the amount rolled over in the year of transfer.
Funds must transfer trustee-to-trustee directly into a Roth IRA to qualify.

This rollover option does not allow contributions into a Roth IRA for someone other than the beneficiary, and contributions (or earnings on them) made within the past 5 years may be ineligible.

This change offers a valuable way to repurpose leftover education savings into retirement savings — but the rules are technical and should be reviewed carefully with a planner or advisor.

9) How do 529 plans affect my own access to the money?

You, as the plan owner, can withdraw funds at any time. If used for non-qualified expenses, earnings are subject to income tax and a 10% penalty (except in certain exceptions). When withdrawing non-qualified amounts, the distribution is treated proportionally between contributions and earnings.

10) When does it make sense to pay tuition directly instead of using a 529 plan?

If a student is close to college age and account growth would be limited before spending, it may make sense to pay costs directly. Giving money directly to a student or grandchild can count against gift tax exclusion amounts and may affect financial aid eligibility. Establishing a 529 early in life typically offers the greatest tax-free growth potential.

529 plans remain a powerful tool for college savings — and the new Roth IRA rollover option adds flexibility for leftover funds when education expenses are covered. If you’d like a planning-first look at how 529 plans fit into your broader retirement and legacy goals, you’re welcome to Request an Introductory Conversation.