NextGen College Investing Plan. An investment for a lifetime of achievement

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1 NextGen College Investing Plan An investment for a lifetime of achievement

2 An investment for a lifetime of achievement... begins today Education is the soul of a society as it passes from one generation to another. G.K. Chesterton, Late British author Merrill Lynch Wealth Management makes available products and services offered by Merrill Lynch, Pierce, Fenner & Smith Incorporated ( MLPF&S ), a registered broker-dealer and member SIPC, and other subsidiaries of Bank of America Corporation ( BAC ). Investment products: Are Not FDIC Insured Are Not Bank Guaranteed 2 May Lose Value

3 Giving future generations an opportunity to succeed Time flies. Before you know it, the next generation will be in charge of shaping our local, national and international communities. Your children will be out there, forging ahead in a fast-changing, complex and competitive world. As parents or grandparents, you want to give your family s next generation every opportunity to be happy, productive and successful. One of the best advantages you can provide for them is the gift of higher education. Think of it as an investment for a lifetime of achievement. Determining the appropriate steps and starting as soon as possible can give your children or grandchildren the resources they need to attend college or graduate school. Consider the Merrill Lynch NextGen College Investing Plan when determining the right steps for you. It s a way for you to invest in the future of your children the next generation. In this brochure, we ll discuss: The rising cost of a college education. The lifelong benefits and rewards of a college degree. Benefits and features of the NextGen plan. Professional investment management options. Frequently asked questions. NextGen is a nationally offered Section 529 plan sponsored by the state of Maine and administered by the Finance Authority of Maine. Merrill Lynch, Pierce, Fenner & Smith Incorporated is the program manager, underwriter and distributor of the plan. 3

4 The rising cost of a college education The basic yearly costs of attending college tuition, room and board, fees and books have increased dramatically over the last two decades. During this period, average annual increases in college costs have exceeded annual inflation rates (as measured by the Consumer Price Index) almost every year. Everyone knows that sending your children to a private high school, college or graduate school is expensive. But look at how quickly the cost of college education is rising. If your children are very young and will enter college 10, 15 or 18 years from now, the total costs are estimated to be even higher. By 2031, the College Board estimates that the cost of attending college for four years will be $267,801 at an in-state public institution and $527,236 at a private institution. FOUR-YEAR COST OF COLLEGE IS GOING UP Projected four-year costs at an in-state public and a private college today and in 18 years. Costs projected to escalate at 6% per year. Public College 2013 $99, $267, $195,797 Private College 2031 $527,236 Source: College Cost Calculator as of October

5 The lifelong benefits and rewards of a college degree Despite the substantial costs, a college degree really pays off. According to a 2013 survey conducted by the U.S. Bureau of Labor Statistics, a person with a bachelor s degree earned on average 70 percent more than a typical high school graduate. Someone with an advanced degree made 26 percent more than someone with a bachelor s degree. As the chart below demonstrates, higher education equates to higher earnings potential. And according to the College Board, college graduates and graduate degree holders receive significant intangible benefits and rewards compared with high school graduates: Higher education is an investment in human capital. Katherine Haley Will President, Gettysburg College Enjoy better employee benefits. More likely to vote and take an interest in their communities. Exhibit better health-related behavior patterns. Experts believe the earnings gap will widen as mature economies look to science, technology and research to generate growth and jobs. In short, the value of higher education is increasing as knowledge-based industries expand. A COLLEGE DEGREE LEADS TO HIGHER INCOME Median weekly earnings (dollars) Advanced degree $1,387 Bachelor s degree $1,101 Associate degree $751 High-school graduate $647 Not High-school graduate $477 Usual weekly earnings of wage and salary workers second quarter Source: Bureau of Labor Statistics, 5

6 Benefits and features of the NextGen plan Today s cost of higher education is significant for most families, particularly if several children are destined for college. Most parents use a combination of sources to manage and fund the costs, including financial aid such as grants, scholarships, personal loans and savings. NextGen can help you with your college funding goals. The NextGen College Investing Plan offers certain tax and financial benefits and a variety of versatile features to help you invest for future higher education expenses. Tax advantages Tax-deferred earnings growth potential: Any earnings on NextGen investments have the potential to grow free from federal (and possibly state) income taxes, allowing your account assets to potentially grow and accumulate faster than in taxable investment accounts. Tax-free withdrawals: Any earnings generated will be federal (and possibly state) income tax-free as long as withdrawals are used for qualified higher education expenses (like tuition, room and board, and other expenses). 1,2 Any earnings withdrawn that are not used for such expenses are subject to federal income tax and a 10 percent additional federal tax, as well as applicable state and local income taxes. The additional tax is waived under certain circumstances. No federal gift tax: You can make annual contributions of up to $14,000 ($28,000 for a married couple) without incurring a federal gift tax. Contributions to plan accounts are considered completed gifts and are excluded from your estate for federal estate tax purposes, even though you (the account owner) retain control of the account assets. Estate tax management: Under a special five-year gift rule, you may be eligible to make a special gift-tax election and make NextGen account contributions of $70,000 ($140,000 for a married couple) for each beneficiary in one year, and elect to prorate it over five years, as long as no additional contributions or other gifts to the designated beneficiary are made during the five-year period. 3 This election generally will not incur a gift tax liability or reduce your federal unified estate tax credit. For contributions between $14,000 and $70,000 made in one year, if the account owner dies before the end of the five-year period, a prorated portion of the contribution may be included in his or her taxable estate. Grandparents take note. By funding accounts for several grandchildren, this special election can be a useful tool to efficiently manage the size of your estate while leaving a lasting legacy for your loved ones. State-tax benefits: Certain states may offer tax or other benefits for investing in their Section 529 plan. Some states may reduce or eliminate those benefits for investments in Section 529 plans administered by a state other than your home state or your beneficiary s home state. It is important to carefully consider any benefits available in your home state (or the home state of your designated beneficiary), along with a plan s investment manager, investment options, plan performance and underlying fees and expenses prior to investing. Certain states also may require the recapture of all or part of previously claimed tax benefits if the proceeds are not used for qualified higher education expenses (as defined by the federal tax law) or if the assets are transferred to another state s Section 529 plan. Qualified and nonqualified expenses Broad definition of qualified expenses: As mentioned earlier, withdrawals from your NextGen plan account are free from federal (and possibly state) income tax if they are used to pay for qualified higher education expenses at accredited post-secondary schools. 4 These expenses include: Tuition, fees, books, supplies and equipment required for enrollment or attendance of the designated beneficiary at an eligible institution. 6

7 Room and board. 2 Certain expenses for services of a designated beneficiary with special learning or disability needs. Any earnings withdrawn that are not used for such expenses are subject to federal income tax and a 10 percent additional federal tax, as well as state and local income taxes. The 10 percent additional tax on nonqualified withdrawals is waived under the following conditions: If the beneficiary receives a scholarship or attends a military academy, you can withdraw up to the amount of the scholarship or the value of the attendance at the military academy. If the beneficiary becomes disabled. If the beneficiary dies and the withdrawal is paid to the beneficiary s estate. Versatile features Broad definition of account owners: Anyone age 18 or older with a valid social security number or U.S. taxpayer identification number can open a NextGen account. So grandparents, parents, aunts, uncles and even family friends can establish accounts. There are no income limitations. Keep control: A NextGen account owner retains legal control and may change the beneficiary to other family members of the original beneficiary at any time without any tax consequences. 5 High contribution limit: The NextGen contribution limit is $380,000 per beneficiary. Convenient investing: You can conveniently deposit automated bank transfers or payroll deductions into a NextGen account. Professional management: A wide array of professionally managed investment options is available (see next page for details). Increased savings from tax-free growth Tax exemption and compounding: Over time, the value of an investment account, such as NextGen, that is taxfree will exceed the value of a taxable investment account (see example below for details). If you also consider the compounding effect that occurs in a tax-free account, you will see that you potentially can accumulate assets faster than in a taxable account. Broad definition of beneficiaries: Children, grandchildren, nieces, nephews, spouses even non-relatives and yourself can be named as beneficiaries. TAX-FREE GROWTH MAKES A BIG DIFFERENCE For both accounts, this chart assumes a 7% rate of return, compounded annually, and that $10,000 is invested in each on January 1 every year for 18 years. For the Section 529 plan account, earnings are not taxed. For the taxable account, earnings are taxed at 28%. This chart is illustrative only. It does not reflect an actual investment in the NextGen plan. Investments are subject to market and other investment risks. Returns are not guaranteed and may be less than or more than the amount invested. It does not take into account the fees or expenses associated with either the Section 529 plan or investing outside the Section 529 plan. Account Balance $400, , , , , , ,000 50,000 Section 529 plan account $363,790 Taxable account $67,182 $296, Years Source: Merrill Lynch 7

8 Professional investment management options What distinguishes the NextGen plan from other Section 529 plans is its array of investment choices. The NextGen Client Select Series offers a variety of investment options. Age-Based Diversified Portfolios: These portfolios provide an investment strategy that varies based on the age of the child and when the child is expected to need the assets for higher education expenses. Funds are invested most aggressively when the child is young and are automatically shifted to more conservative investments as the child approaches college age. Selecting an age-based portfolio may be appropriate if you prefer not to actively manage the investments. 6 Diversified Portfolios: These portfolios have specific investment objectives, such as growth or income. Unlike the Age-Based Diversified Portfolios, each Diversified Portfolio has a consistent allocation that does not change over time. These portfolios allow you to help build a strategy best suited to your investment needs. Single Fund Portfolios: These portfolios invest in one underlying investment, allowing you to customize your allocations based on the range of underlying investments. They may be appropriate if you prefer a hands-on approach and want to customize an asset allocation with the selected investment portfolio. 8 NextGen Savings Portfolio: This portfolio is comprised exclusively of an interest-bearing FDIC-insured bank account (the Bank Deposit Account ) at Bank of America, N.A. (the Bank ), and is designed as an option for investors whose primary objective is protection of principal. The NextGen Savings Portfolio offers FDIC insurance up to $250,000 7 combined with the flexibility and benefits of a tax-advantaged Section 529 account. You may want to consider this portfolio if you are seeking preservation of assets and liquidity, or if you are nearing the time you will need to pay for qualified higher education expenses. Principal Plus Portfolio: This portfolio may invest in one or more guaranteed investment contracts issued by one or more insurance companies, corporate fixedincome investments and/or similar instruments and may make deposits to the Bank Deposit Account. 7 The Principal Plus Portfolio may be an option to consider if you have a lower risk tolerance or a short time horizon before paying for college. Please remember there s always the potential of losing money when you invest in securities.

9 Frequently asked questions Q: What are some of the differences between Section 529 plans (like NextGen), Coverdell Education Savings Accounts (ESAs) and Uniform Gift/Transfers to Minors Act (UGMA/UTMA) accounts? A: Several distinctions exist between these savings and investing vehicles. Like a Section 529 plan, any earnings from a Coverdell ESA are free of federal (and possibly state) income tax if withdrawals are used for qualified education expenses. 8 However, the maximum contribution to a Coverdell ESA is $2,000 per beneficiary per year, and you can make contributions until the beneficiary is 18. The maximum contribution for Section 529 plans is higher. Another key difference is that your ability to make Coverdell contributions phases out at certain income levels. If single or joint filers exceed a specified amount of income, they may not make Coverdell contributions. Section 529 plans have no income limitations. UGMA/UTMA accounts also have no contribution limits but are subject to the annual gift exclusion. UGMA/UTMA contributions become the property of the beneficiary, who may assume total control of the account upon reaching the age of majority (typically age 18 or 21). Contributions to Section 529 plans are owned and controlled by the account owner, not the beneficiary. In most cases, a Section 529 plan account owner may change the beneficiary without any tax consequences and also can close the account, although not using the earnings in the account for qualified higher education expenses will result in those earnings being subject to income tax and possibly the 10 percent additional federal tax, along with applicable state and local tax. Q: Can I use UGMA/UTMA account assets to fund a NextGen account? example, any earnings are federal (and possibly state) income tax-free upon withdrawal as long as the withdrawn amounts are used for qualified higher education expenses, improved federal financial aid treatment of the assets for a dependent beneficiary and elimination of the need to file an annual tax return for the UGMA/UTMA assets in future years. Because you may contribute only cash to a NextGen account, you will need to liquidate the UGMA/UTMA assets, and you may have a capital gains tax liability. When funding a Section 529 plan with these assets, the owner of the UGMA/UTMA account loses control of the funds once the beneficiary reaches the age of majority. Before initiating this strategy, you should consider any potential tax and legal consequences, as well as expenses and sales charges associated with selling an investment and buying a new one. Talk to your Merrill Lynch Financial Advisor and your tax and legal advisors to learn more and to determine whether this strategy is appropriate for you. Q: Are the assets in a NextGen account forfeited if the beneficiary decides not to attend college? A: No. The account owner can designate another beneficiary, close the account or keep the account open in case the beneficiary decides to attend college later. 5 Q: How do I balance my education savings goals with my other financial objectives and obligations? A: When you re working with a Merrill Lynch Financial Advisor, he or she can help you make informed decisions about which education funding strategies work best for you considering your unique financial situation. We can help you make decisions about your savings in the context of your liquidity, retirement plan, estate plan, portfolio investing and day-to-day cash management. A: Yes. This is a popular planning strategy for many parents and grandparents. By using these assets to fund a NextGen account, you may realize several benefits. For 9

10 Call your Merrill Lynch Financial Advisor Free college planning analysis Call your Merrill Lynch Financial Advisor for your free college planning analysis that will analyze how much college may cost and how much you should consider investing to help meet these expenses. Your Financial Advisor can help you use this information to decide whether the NextGen plan is the right education funding vehicle for you and your family. Genius without education is like silver in the mine. Benjamin Franklin, American statesman 10

11 Work with your Merrill Lynch Financial Advisor to help you achieve your education funding goals. Visit call MERRILL or call your Merrill Lynch Financial Advisor today. 11

12 The NextGen Plan is a Section 529 plan administered by the Finance Authority of Maine. Before you invest in the NextGen plan, request a NextGen College Investing Plan Program Description from your Merrill Lynch Financial Advisor and read it carefully. The Program Description contains more complete information, including investment objectives, charges, expenses and risks of investing in the NextGen plan, which you should carefully consider before investing. You also should consider whether your home state or your designated beneficiary s home state offers any state tax or other benefits that are only available for investments in such state s 529 plan. Section 529 plans are not guaranteed by any state or federal agency, however, the portion of the underlying deposits in the Bank Deposit Account that is attributable to the Units held by a Participant in the NextGen Savings Portfolio or the Principal Plus Portfolio is eligible for FDIC insurance coverage of up to $250,000 per Participant, subject to applicable limits. Merrill Lynch, Pierce, Fenner & Smith Incorporated is the program manager, underwriter and distributor. Merrill Lynch and its representatives do not provide tax, accounting or legal advice. Any tax statements contained herein were not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state or local tax penalties. Please consult your own independent tax or legal advisor as to any tax, accounting or legal statements made herein. 1 To be eligible for favorable tax treatment afforded to any earnings portion of withdrawals from Section 529 accounts, such withdrawals must be used for qualified higher education expenses, as defined in the Internal Revenue Code. Any earnings withdrawn that are not used for such expenses are subject to federal income tax and may be subject to a 10% additional federal tax, as well as applicable state and local income taxes. 2 The beneficiary must be attending an accredited institution at least half time for room and board to be considered an eligible expense. 3 Contributions during 2013 between $14,000 and $70,000 ($28,000 and $140,000 for married couples filing jointly) made in one year can be prorated over a five-year period without subjecting you to gift tax or reducing your federal unified estate and gift tax credit. If you contribute less than the $70,000 ($140,000 for married couples filing jointly) maximum, additional contributions can be made without you being subject to federal gift tax, up to a prorated level of $14,000 ($28,000 for married couples filing jointly) per year. Gift taxation may result if a contribution exceeds the available annual gift tax exclusion amount remaining for a given beneficiary in the year of contribution. For contributions between $14,000 and $70,000 ($28,000 and $140,000 for married couples filing jointly) made in one year, if the account owner dies before the end of the five-year period, a prorated portion of the contribution may be included in his or her estate for estate tax purposes. For information on 2014 contributions, please ask your Merrill Lynch Financial Advisor. 4 Institutions must be eligible to participate in federal student financial aid programs. Some foreign institutions are eligible. 5 You are generally permitted to change the beneficiary to another member of the family (as defined under the Internal Revenue Code) without triggering income tax and 10% additional tax. 6 There can be no assurance that the strategy of any portfolio will be successful. 7 The portion of the underlying deposits in the Bank Deposit Account that is attributable to the Units held by a Participant in the NextGen Savings Portfolio or the Principal Plus Portfolio is (a) eligible for FDIC insurance coverage of up to $250,000 per Participant (calculated on a basis which aggregates that portion of the underlying deposits attributable to the Units held by the Participant in the NextGen Savings Portfolio or the Principal Plus Portfolio with all FDIC-insured assets held by the Participant at the Bank) and (b) for purposes of FDIC insurance coverage only, considered to be held in the same ownership capacity as a Participant s other single ownership accounts held at the Bank. However, neither Units of the NextGen Savings Portfolio nor the Principal Plus Portfolio are insured or guaranteed by the FDIC or any other agency of state or federal government, FAME, the Bank or the Program Manager, nor does a Participant have a direct beneficial interest or the rights of an owner in the underlying deposits in the Bank Deposit Account. Participants are responsible for monitoring the aggregated value of the portion of the underlying deposits of the NextGen Savings Portfolio or the Principal Plus Portfolio attributable to the Units of such Portfolios held by a Participant plus their other deposits held directly with the Bank, for purposes of the $250,000 FDIC insurance coverage limit. The percentage of the Principal Plus Portfolio that is invested in the Bank Deposit Account as of the end of each month will be posted on com/performance.html within ten business days of month-end. Deposits held in different ownership capacities, as provided in the FDIC rules, are insured separately. UGMA/UTMA Accounts are generally treated as assets of the Designated Beneficiary, and other types of trust Accounts may be treated as assets of the trustee, for purposes of the FDIC limit. Custodians of UGMA/UTMA Accounts and trustees of trust Accounts should consider how these assets will be treated for purposes of the FDIC limit. For more information, please visit 8 To be eligible for favorable tax treatment afforded to any earnings portion of withdrawals from Coverdell ESAs, withdrawals must be used for qualified higher education expenses or qualified elementary and secondary education expenses, as defined in the Internal Revenue Code. Any earnings withdrawn that are not used for such expenses are subject to federal income tax and may be subject to a 10% additional federal tax as well as state and local income taxes. The College Investing Plan for the Next Generation Program Administrator Merrill Lynch, Pierce, Fenner & Smith Incorporated, Program Manager Merrill Lynch Wealth Management and the Bull Symbol are registered trademarks of Bank of America Corporation. NextGen, NextGen College Investing Plan and The College Investing Plan for the Next Generation are registered trademarks of the Finance Authority of Maine Bank of America Corporation. All rights reserved. I ARPMHEDU I PM-1113