Announcer:
It’s time now on KROS for Financial Focus, brought to you by NelsonCorp Wealth Management. The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. Any indices mentioned are unmanaged and cannot be invested into directly. Registered representatives, securities offered through Cambridge Investment Research Incorporated, a broker dealer member, FINRA SIPC. Investment advisor representative, Cambridge Investment Research Advisors INC., a registered investment advisor. Cambridge and NelsonCorp Wealth Management are not affiliated. Cambridge does not offered tax advice.
Announcer:
Now here’s today’s Financial Focus program.
Nate Kreinbrink:
Good morning and welcome to this week’s Financial Focus brought to you each and every Wednesday morning right here on KROS. Well, this is Nate, James joining me today. I would have to say it’s been quite the interesting start to November. The old weather man, Mother Nature, has definitely give us a variety of temperatures, of weather, of patterns going out there. I’ve seen the other week that we notched record low temperatures, so that’s a great thing that we have going for us so far.
James Nelson:
Yeah, not the record we want, right? Yeah, two measurable snows in November and-
Nate Kreinbrink:
Yeah, I don’t know.
James Nelson:
At least next week looks like it’s supposed to get back up to halfway decent temperatures, maybe get rid of the snow.
Nate Kreinbrink:
Get back up into the 40’s, feel like a heat wave again, and kids will not wear their coats again and everyone will be sick again and battling all that fun stuff and everything.
James Nelson:
Yeah, exactly.
Nate Kreinbrink:
So talking into today’s show, I know James and I, we talk a lot as far as the overall big picture and how all the different pieces kind of fit together. Tax planning’s a big thing. We’ve had Andy Ferguson with NelsonCorp Tax Solutions on the last couple of weeks talking taxes, some strategies to kind of utilize. Social security. I didn’t want to bring that up, but we have a workshop up at the office tonight, where I’ll be talking basic social security strategies, basic social security information and kind of talking about some of the misconceptions out there.
Nate Kreinbrink:
Because it’s important, like we always say, is that people understand all the options that are possibly out there for them. And knowing how to maximize it and the importance of when you claim your social security benefit fits into the big picture with tax planning, with retirement income, the draw down of some of your retirement account assets, things like that.
Nate Kreinbrink:
So again, we do have a few openings, I think. So if it is something of interest and you’d be curious to listen to a little bit on social security, Medicare, give us a call. I think, like I said, we do have a couple spots open. But again, looking at big picture-wise, one thing that continuously comes up routinely at meetings that we sit in with, James and I were just talking about it yesterday, is college planning. College funding, planning, for whether it’s your kid’s college, grandparent’s wanting to put some money away for their grandkids.
Nate Kreinbrink:
I think it’s important, again, that people also know all the options that are out there and understand that, “Okay, if I put money into this account, how is going to affects me currently on my tax return? If there is any impact, what’s it going to impact when the kid takes it out?” One other misunderstood thing is how it impacts your FAFSA form. When you go to fill that out, who is claiming those assets and how is it going to impact you?
James Nelson:
Yeah, and I think the reason it comes up so often is because the price keeps going up, right? Since 2000, college expenses have gone up 170%. So in 19 years, college expenses increased by 170%. I mean, it’s just nuts and there’s no sign of that number stopping. So yeah, people are forced to plan, to look into the future a little bit and figure out how they’re going to pay for this or how they can maybe help a child or a grandchild pay for at least some of their expenses. Probably the most common strategy is the 529 plan.
James Nelson:
Most people have at least heard of it, have an idea of what it is. But it’s basically an investment account, you can either open a 529 plan with a fund company or with your state plan. I think all 50 States have a 529 plan, certainly Iowa and Illinois do. The little advantage with the state plan, maybe not the best investment options, but you get the state deduction, so that would be the advantage there. Any contributions, it’s going to help the person making those contributions a little bit on their state income tax, a liability. So that’s an advantage for a parent or grandparent maybe helping make those contributions.
James Nelson:
Then that money grows, tax deferred and comes out tax-free, assuming it’s used for qualified education expenses. That’s room and board, tuition, computer books, all that good stuff. So pretty nice option. If somebody’s got at least a decent time horizon, they’ve got several years or even 10 years or more, I mean, 529 plan can make a big difference and can certainly let the money grow for a period of time.
James Nelson:
The 529 plan that’s with a fund company generally has a few more investment options, but the deduction doesn’t exist. So that’s, I guess, the positive and negative there. Maybe some more investment options, maybe hopefully a little bit better performance, if you can diversify potentially with that, but there’s no deduction. So that’s kind of a misconception. People, think, “Oh, I just put the money away, I get the deduction.” Well, it has to be a state 529 plan to qualify for that deduction. So the 529 plan’s just one option, there’s a couple other alternatives as well.
Nate Kreinbrink:
Right. I think another thing along with that 529 plan is on the FAFSA form, as I said, the form that you fill out as far as when you’re requesting financial aid when you go to a college or university, the 529 plans are technically considered an asset of the owner. So normally the parent, the grandparent, owns the account and then they name the child or the grandchild as the beneficiary of that account.
Nate Kreinbrink:
So on the FAFSA from, the 529 plan is counted as an asset of the parent, which is a better percentage when they go to calculate that, as far as the kid owning it. The kid just has to account for a little bit of that on their form, as far as accounting for that on the FAFSA form. So again, there’s some benefits to there, as far as how it’s calculated, how it’s used, when you fill out that FAFSA form. So understand that.
Nate Kreinbrink:
I think another thing with the 529 plans is sometimes the flexibility that it gives you. That beneficiary that you set, isn’t necessarily set in stone, you’re able to switch that at any time that you want to. So you have a kid, you put money away in there for them for some college planning, all of a sudden they don’t go to school or they don’t use it all. If you have another kid, another grandchild, you’re able to switch that beneficiary. So now all of a sudden all those funds that were available inside of there can be directed to another person of your choosing.
Nate Kreinbrink:
So I think that flexibility is key, as far as being able to put it in there and then also being able to change who it is that you’re marked for.
James Nelson:
Yeah, that’s a good point, because that’s always the fear, right? I put all this money away and then what if the child or grandchild doesn’t go to school? Well, if you were just to withdraw the money, there’s a 10% penalty and tax on any of that growth. Having the option to switch beneficiaries is huge, if we’re talking about multiple kids in a family or multiple grandchildren. So that’s a key point there.
James Nelson:
The other alternative, of course, if somebody had that fear that maybe the child or grandchild’s not going to go to school, it’d be a UTMA account. UTMA account isn’t as tax-friendly. There is tax due on any of the gains, but it’s taxed at the child’s level. If we’re not talking about a huge dollar amount in this account, it’s going to be very minimal. So UTMA account can also accommodate for that fear of, hey, the child, the grandchild, are not going to go to school, but they could use this money to purchase a car or a down payment on a house or anything like that.
James Nelson:
I think that sometimes makes people feel a little bit better, knowing that they have total flexibility with that account, you can use it for whatever you want.
Nate Kreinbrink:
Right. I think on the flip side, as far as talking about the FAFSA with the UTMA account, the 529 was counted basically as an asset of the parent or the grandparent, the UTMA is counted as an asset of the student. So it’s a little less friendly when you fill out the FAFSA form, but you do get a little more flexibility on the backside, as far as if they don’t go to school, if they don’t need it for secondary education, things like that. So again, there’s give and takes, there’s trade-offs for both ways, understanding kind of where it best fits into your situation.
Nate Kreinbrink:
I know James and I were just talking up on the way up here too, as far as another way that people are starting to kind of save for college is through a Roth IRA. Now again, you’re probably saying, “Okay, a Roth IRA, that’s a retirement account.” Overall from big picture scheme, yes it is. But if you think about how a Roth functions, you put after tax money in, it grows. As long as you take it out after 59 and a half, everything that’s going to come out is going to come out tax-free. The principle that you put in is able to come back out, it’d be the earnings that would have the 10% penalty if you take it out pre 59 and a half.
Nate Kreinbrink:
So where does this come into play? I could put money into a vehicle, I get the tax benefits like I do with the 529 plan and things like those. But yet again, it’s your market, it’s growing, it’s going to be able to come out tax-free. So again, there’s some limitations as far as your contributions amount that you can put into it. Now obviously you started for a child, it can’t be in the child’s name, you can serve it as a custodian account or you can just keep it in your name and then be able to pull some things out.
Nate Kreinbrink:
But again, there’s some options that look into that way as well, where then, again, if they don’t go to school, you basically have a Roth IRA, that started form, that’s an earmarked form, that’s going to come out in a very tax-friendly environment.
James Nelson:
Yeah, and the key here is just hitting that five-year mark. Once that account’s been open, even if there’s 50 bucks in the account to start, once we hit that five-year window, that’s the triggering point where the money can come out, and at least [inaudible 00:10:21] can come out and be used for pretty much whatever you want. Again, it’s nice to, even if it’s in the parent or grandparent’s name to start, this is a retirement account, if the funds aren’t used, so what? It’s in a Roth IRA, you’re going to use it down the line for maybe your retirement expenses or whatever. But yeah, you don’t have that fear of money locked up in a 529 plan and I can’t get it without taxes and penalty. That doesn’t really exist with a Roth IRA.
Nate Kreinbrink:
Right. There are some things too when we look too, again comparing this of how this fits on a FAFSA form. The money that is taken out of a Roth that is used to fund the college is technically treated as income to the child on the FAFSA form. Now it’s not treated as income on your regular tax return, it’s not going to raise your tax liability or whatever, but it’s treated as income to the child on the FASFA form. So again, it’s not really treated very well.
Nate Kreinbrink:
So if we want to go this route with a Roth, we’re probably looking at not using that money until late in the junior year, senior year, after we’ve filled out the last FAFSA form. Now we can use that money, as far as paying for some of that college expenses. So again, a lot of planning, just because we start one, there’s still some things on the back-end to make sure we maximize this.
Nate Kreinbrink:
But again, a lot of things that can come into it. We sit down with a lot of people that say, “Hey, Christmas is coming up, I don’t want to just buy them a gift, I want to start putting money into an account for them to benefit them. Birthdays, things like that.” These are some great things to look at.
James Nelson:
Yeah, those are all good points. So, please let us know if you have any questions or if you’d like to pop in for the social security workshop tonight. Like Nate said, I think we’ve got just a couple seats available, if people are interested.
Nate Kreinbrink:
Real quick. Want to mention that every Friday NelsonCorp is wearing jeans for charity. Money raised in the month of November will be donated to the Shop with a Cop of Clinton program.
Nate Kreinbrink:
James, appreciate you joining me.
James Nelson:
Sure.
Nate Kreinbrink:
Again, Nate and James with NelsonCorp Wealth Management, bringing you this week’s Financial Focus. Thanks again for tuning in and have a great rest of your week.
Announcer:
Financial Focus is a production of NelsonCorp Wealth Management in Clinton in Davenport. The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. Any indices mentioned are unmanaged and cannot be invested into directly. Registered representatives, securities offered through Cambridge Investment Research Incorporated, a broker dealer member, FINRA SIPC. Investment advisor representative, Cambridge Investment Research Advisors INC., a registered investment advisor. Cambridge and NelsonCorp Wealth Management are not affiliated. Cambridge does not offer tax advice. For more information, visit our website at www.NelsonCorp.com.