building bridges with college funding beyond 529 plans: advanced college funding strategies
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Building Bridges with College Funding Beyond 529 Plans: Advanced College Funding Strategies. Rick Darvis, CPA, CCPS 1-800-765-2031 [email protected] www.solutionsforcollege.com. Agenda. The College Funding Opportunity College Funding vs. Retirement - PowerPoint PPT PresentationTRANSCRIPT
Building Bridges with College FundingBeyond 529 Plans: Advanced College Funding StrategiesBuilding Bridges with College FundingBeyond 529 Plans: Advanced College Funding Strategies
Rick Darvis, CPA, CCPS1-800-765-2031
AgendaAgenda
• The College Funding Opportunity
• College Funding vs. Retirement
• Education Tax Strategies
Building Bridgeswith College FundingBuilding Bridgeswith College Funding
• Bridge to existing and prospective clients
• Product has lost its sizzle
• Added Value is the key
• College funding will provide a niche
• College funding is HOT and recession proof
• Ultimate door-opener to premium clients
College is EXPENSIVE!College is EXPENSIVE!
$16,000$16,000
$32,000$32,000
$48,000$48,000
5,000
15,000
25,000
35,000
40,000
$45,000
30,000
20,000
10,000
Average Public
University
Average PrivateCollege
ElitePrivateCollege
*Source of college costs is from the College Board.
If You Haven’t Saved for College…You May Have A Retirement Issue!If You Haven’t Saved for College…You May Have A Retirement Issue!
? ?How are you
going to fund your
own retirement after
paying for college?
How old will you
be when your last child
graduates from
college?
Assumes 5% investment rate, one child in college, after-tax dollars
College Dollars Spent Equals Retirement Dollars LostCollege Dollars Spent Equals Retirement Dollars Lost
Years UntilRetirement
15
20
Public$80,000
$166,320
$212,240
Private$160,000
$332,640
$424,480
Elite$240,000
$498,960
$636,720
Solving the Dilemma…Solving the Dilemma…
How can I determine the most efficient way to fund college and retirement without going broke?
EducationFunding
RetirementFunding
College is Paid with After-Tax DollarsCollege is Paid with After-Tax Dollars
*Assumes additional 5% state and local tax and only ONE child’s college expenses
TaxBrackets
25%
28%
33%
35%
Five-Year College After-Tax Cost
Public$80,000
$114,286
$119,403
$129,032
$133,333
Private$160,000
$228,571
$238,806
$258,065
$266,666
Elite$240,000
$342,857
$358,209
$387,097
$400,000
Education Tax StrategiesEducation Tax Strategies
• A new-found tax benefit is the same as a “tax scholarship”
• The higher the income tax bracket, the greater the benefitof any tax strategy
• All tax strategies MUST be reviewed with a tax advisor
Using the IRS to Help Fund College
Introduction to Tax CapacityIntroduction to Tax Capacity
• Opportunities in the child’s tax return
• Child’s tax capacity definition
• Income shifting to utilize tax capacity
Age 0-13 $1,600Age 14-HS $34,700College $37,900 + HC/LC
The term “Tax Capacity” is from Practitioners Publishing Company
Example: College YearsExample: College Years
$ 7,442
Tax Scholarship
Wages
IRA Withdrawal
Capital Gain
Personal Exemption
Standard Deduction
Taxable Income
Tax Rate
Tax
Hope Tax Credit
Child’s Tax Liability
$ 5,000
$ 12,000
$ 10,000
(3,100)
(4,850)
19,050
X 5/15%
$1,508
(1,500)
$ 8
Income Shifted
Parents’ Tax Rate
Parents’ Tax Liability
$ 27,000
X 15/35%
$ 7,450
Case Study #1 — FactsCase Study #1 — Facts
• Income — $145,000
• Assets — $140,000 (outside of retirement)
• Medical expense of $9,000 per year
• Ineligible for aid at$35,000/year college
• Pay undergraduate & graduate school
Case Study #1 — StrategiesCase Study #1 — Strategies
1) Sole Proprietor• Employ Mother in the business• Establish SIMPLE IRA (Mother & Father)• Employ the two children in the business
Case Study #1 — StrategiesCase Study #1 — Strategies
1) Sole Proprietor• Employ Mother in the business• Establish SIMPLE IRA (Mother & Father)• Employ the two children in the business
2) Tax Strategy• Medical reimbursement plan• First year depreciation election
Case Study #1 — StrategiesCase Study #1 — Strategies
1) Sole Proprietor• Employ Mother in the business• Establish SIMPLE IRA (Mother & Father)• Employ the two children in the business
3) Junior Year• Employer Education Assistance• Gift and leaseback of equipment• Gifts of appreciated securities• Life Insurance or Federal PLUS Loans
2) Tax Strategy• Medical reimbursement plan• First year depreciation election
Case Study #1 — Added ValueCase Study #1 — Added Value
• Eligible for $43,240 of financial aid
• Tax Scholarships of $36,125
• IRC 105 & SIMPLE IRA tax benefit of $73,850
• IRC 127 tax benefit of $9,870
• Tuition Deduction tax benefit of $2,880
TOTAL BENEFITS - $165,965RETIREMENT DOLLARS - $345.041SIMPLE IRA CONTRIBUTIONS - $140,000
• Income - $624,000/year
• Assets - $4,017,000
• Newborn child
• Save and pay for K-12 private & college
• Grandparents havedesire to help
Case Study #2 — FactsCase Study #2 — Facts
Case Study #2 — StrategiesCase Study #2 — Strategies
1) Birth• Grandparents fund Coverdell ESA and 529 Plan
• Fund UTMA with municipal bond fund
Case Study #2 — StrategiesCase Study #2 — Strategies
2) Teenager• Employ child and invest wages in IRA (age 10)• Gift and leaseback of equipment (age 14)
1) Birth• Grandparents fund Coverdell ESA and 529 Plan
• Fund UTMA with municipal bond fund
3) College• Employer Education Assistance (age 21)• Grandparents contribute to CRT• Gifts of appreciated assets as needed
Case Study #2 — StrategiesCase Study #2 — Strategies
2) Teenager• Employ child and invest wages in IRA (age 10)• Gift and leaseback of equipment (age 14)
1) Birth• Grandparents fund Coverdell ESA and 529 Plan
• Fund UTMA with municipal bond fund
• Tax scholarships of $98,601
• IRC 127 tax benefit of $4,515
Grandparents
• Avoid tax on income of $123,005 from the 529 Plan & CESA
• Remove $226,000 from estate
• Receive a charitable tax deduction of $78,791
• Avoid tax on $80,000 of appreciation
Case Study #2 — Added ValueCase Study #2 — Added Value
ReviewReview
• The College Funding Opportunity - Added value is the key
- Network with other professionals- Attract premium clients, including grandparents
• College Funding vs. Retirement - Paying for college is a retirement problem
- College dollars saved are retirement dollars gained
• Education Tax Strategies - Use “tax capacity” to add value and increase
cash flow for investing- Unique opportunities for business owners- Employees also have opportunities
The Next StepsThe Next Steps
The College Funding Opportunity
- How to maximize financial aid eligibility- How to maximize the education tax incentives- Methods and investments to
fund college & retirement
- A roadmap to meet financial goals
Building Bridges with College Funding