How To Use Your Tax Return To Boost College Savings Wednesday Webinar February 2014 Hosted By Jessica Whittier

Transcription

1 How To Use Your Tax Return To Boost College Savings Wednesday Webinar February 2014 Hosted By Jessica Whittier Copyright 2013 Finance Authority of Maine

2 The Case For Saving You Tax Return Ways To Save Putting You Tax Return To Work How Savings Will Impact Financial Aid How Saving Can Impact Student Debt Agenda

3 The Case For Saving Students with college savings are almost twice as likely to have college aspirations. Students with college savings are more likely to get better grades and complete more years of education. With as little as $3,000 in savings, they re also more likely to graduate from high school, regardless of household income. The cost of a 4 year degree has risen 538% since Public 4 Year = $18,391/year Private 4 Year $40,917/year The average Maine graduate holds almost $29,000 in student loan debt.

4 Ways To Save 529s Coverdell Accounts Roth IRA Savings Bonds Taxable Investment Accounts UGMA/UTMA

5 529s Ways To Save 529s Earnings on contributions are tax-free if withdrawn for Qualified Higher Education Expenses (tuition, fees, books, supplies & equipment) Account owner retains control, account is not considered child s asset Maine offers a $250 state tax deduction for some filers No age limits Generous contribution and account limits Qualified Expenses Only: Be fairly certain that the student will pursue higher education (or that funds can be used for another member of the family) Limited to investment choices offered in the plan

6 Coverdell Education Savings Account Currently can be used for K-12 expenses as well Ways To Save Coverdell Accounts Earnings on contributions are tax-free if withdrawn for Qualified Higher Education Expenses OR Qualified Elementary and Secondary Education Expenses Account owner retains control Greater choice in investments Can only fund until age 18 $2,000 limit per year

7 Ways To Save Roth IRA Roth IRA Using an IRA to fund education stems from the exception to the 10% penalty rule for education expenses Roth IRA: Only the earnings are taxed, basis (your original contributions) is always tax-free Broad choice in investments Parent retains control - if funds are not used for education, they are available for retirement $5,000 per year IRA contribution limits ($6,000 if over 50) Caution against using valuable retirement assets for education

8 Savings Bonds Ways To Save Savings Bonds Series EE (fixed rate) and Series I (fixed rate plus inflation rate) bonds Interest can be excluded under certain conditions if used for qualified higher education expenses Interest is always excluded from state and local taxes Easy to purchase and issued in values as low as $25 Maximum purchase of $5,000 annually Is the asset of person named on the bond

9 Taxable Investment Account Most flexible, least tax benefit Income and capital gains taxes apply to account earnings Ways To Save Taxable Investment Accounts Good choice when all other options are exhausted (or are not available) or when a high degree of flexibility is needed Broad choice in investments No risk of over-funding Asset of those named on the account

10 Ways To Save UGMA/UTMA UGMA/UTMA Always the asset of the child Child gains control of assets at age 21 or older Unfavorable treatment for financial aid Can t transfer the assets to a different beneficiary

11 How Savings Impacts Financial Aid FAFSA Free Application for Federal Student Aid EFC Expected Family Contribution APA Asset Protection Allowance

12 How Savings Impacts Financial Aid Parent income usually plays the largest role in financial aid eligibility Assets usually play a smaller role and in some cases are not considered at all Assets are: bank accounts, investment plans, second homes, rental properties Assets are not: primary residence, retirement funds, small businesses or family farm 20% of a student s assets effect EFC Johnny s $3000 = $3000 x.20 = 600 Parent assets max out at 5.6% of assets above APA Parent s $33,000 = $33,000 - $30,000 = $3000 x.056 or less = $168 or less Visit ifap.ed.gov and look for the EFC formula Guide

13 How Savings Impacts Financial Aid Simplified Need Test Criteria Anyone included in the parents household received benefits from Supplemental Security Income (SSI) Program, Supplemental Nutrition Assistance Program (SNAP), Free and Reduced Price School Lunch Program Temporary Assistance for Needy Families (TANF) Special Supplemental Nutrition Program for Women, Infants, and Children (WIC) Or if 2013 income of the student s parents is $49,999 or less If this criteria is met, NO ASSETS are included!

14 Putting Your Tax Return To Work Average Tax Return - $3000 Average Maine Family - 2 children Saving $1500/year for 10 years for each child 15,000 added to college savings plan for each student Invested at avg. growth of 4% = $18,420

15 How Savings Can Impact Student Debt Average Maine Student Debt = $29,000 Monthly Payment = $333/month for 10 years Interest Paid = $11,048 If you were able to use your $18,420 instead of taking out student loans. New Student Loan Debt = $10,580 Monthly Payment = $121/month for 10 years Interest Paid = 4,030

16 Final Thoughts Students who have college savings accounts get better grades, graduate at higher rates and start planning for college sooner. Saving for college is always going to be better than not saving for college. Even smaller amounts of savings can make a big difference in student loan debt. Visit famemaine.com/education to find student loan debt and savings calculators. Start planning ways to put your tax return to work for students in your life.

17 Thank you for joining us for this month s Wednesday Webinar. Jessica Whittier Finance Authority of Maine 5 Community Drive P.O. Box 949 Augusta, ME education@famemaine.com