Contact Us
Firm Overview
Why Legend Is Different
Client Types
Professional Biographies
Frequently & Rarely Asked Questions
Risk Spectrum
Investment Strategies
Second Opinion
Global Investment Pulse
Event Calendar
Press Center
Legend News
Clients Only
Career Opportunities
Directions
Newsletter Sign-up
Site Search
Site Map
Home
Tell A Friend About This Website
 
 
 
Financial Briefs

 

Phone: (412) 635-9210
  (888) 236-5960
Connect With Legend:
Subscribe to me on YouTube

New Baby? Consider An Education Savings Plan

Sure, some people make $500,000 a year, but the vast majority of us do not, and your children’s and grandchildren’s college education could impose a financial burden.  Your 50s and 60s could become a time of terrible stress unless you do a few things right in your 20s, 30s, 40s, or are lucky enough to have grandparents who can help you out.

Parents and grandparents should consider setting up Education Savings Accounts as soon as a new child is born. Education Savings Accounts and Qualified Tuition Programs, including 529 Plans, are given special tax treatment under federal law.  Over a long period, tax-free compounding turbocharges gains.  Uncle Sam gives you tax-free growth and tax-free withdrawals because the money must be used to pay for tuition and books — not room and board, by the way. 

Keep in mind, grandparents get a special benefit.  Grandparents can pay for a child’s education expenses and it does not count against the annual gift exclusion.  To be clear, in 2015, the exclusion enables each grandparent to give each grandchild $14,000, and neither the child nor the grandparent would owe any tax on that transfer of wealth, and that exclusion is not reduced additional gifts directly made by paying a grandchild’s qualified education expenses. 

In early 2015, President Obama floated a proposal to tax 529 Education Savings Plans but it was shot down fast.  This tax break is likely to be one the government will have difficulty eliminating anytime soon.  It’s silly not to use it.

When a new child is born and a 30-year-old mother or father put away $5,000 in an education savings plan, here’s what happens.  Assuming a 6% average annual return before taxes and a 25% average annual tax rate, investing in taxable bond funds results in about $12,000 of savings after 20 years. 

Investing the $5,000 in stock funds for 20 years that average a 6% return annually give provides a better result, $13,000. Why do stocks returning 6% do better than bonds returning 6%?  Because stock gains 15% are taxed at the capital gains rate, which is more favorable than the 25% tax rate owed on income generated by the bond portfolio.  And we are conservatively assuming a buy and hold strategy in which just 10% of the stock portfolio is sold and replaced annually. 

But the big tax advantage comes from investing the $5,000 in an Education Savings Account for the same 20-year period at the same 6%, resulting in more than $17,000 of savings for your college student.  The difference is substantial. And if the parents or grandparents make annual contributions to the Education Savings Account, the effects would be compounded. 

If you need help setting up an educational savings plan and following through on a long-term plan, please let us know.



INDEX
  • Why Aren't More Millennials Moving On Up And Out?
  • Taking Socially Responsible Investing To The Next Level
  • Don't Be Caught Red-Handed By The Wash Sale Rule
  • Leading Economic Indicators Hit 10-Year High
  • Avoid These 6 Mistakes In Stretch IRA Planning
  • More Flexibility Allowed In Flex Spending Accounts
  • Individual Bonds-Ugh!
  • Set Aside The Funds One Might Need For A Rainy Day
  • Protect Against Possible Terrorist Attack
  • U.S. Leading Economic Indicators Rose Again
  • Fed Chair Strikes A More Cautious Tone, But Still Expects Moderate Growth
  • Count Off 3 Tax Breaks For Higher Education
  • Don't Be Victimized By These 10 Common Scams
  • Retirement Plan Choices For The Self-Employed
  • New Law Says Tax Debtors May Lose Their Passports
  • Compare Minor's Account To 529 Plan
  • Are You Being Socially Responsible?
  • 8 Smart Moves For College Grads
  • Seeking Financial Aid: Don't Fear The FAFSA
  • New Baby? Consider An Education Savings Plan
  • HOW THE IRS RESOLVES AN IDENTITY THEFT CASE:
  • 3 Ways To Deduct Mortgage Interest
  • HOW THE IRS RESOLVES AN IDENTITY THEFT CASE
  • Understanding Deflation
  • Don't Play Up Super Bowl Outcome In Stock Decisions
  • When Should Millennials Start Retirement Saving?
  • Have Your Child Kick Into A Roth With A Reward To Boot
  • Sizing Up The Energy Boost To The Economy
  • A Stock Plunge Amid Strong Economic Data
  • 14 Top Year-End Tax Moves For Individuals In 2014
  • Drill Down For Three Key Oil And Gas Tax Breaks
  • When It Pays To ID Security Sales
  • GDP Growth Data Masks Strength Of The Recovery
  • Be On The Lookout For Crimes Involving An Elder Fraud
  • UNDERPERFORMANCE/OVERPERFORMANCE
  • S&P 500's New All Time High Wednesday Will Probably Continue Over Upcoming Months, But Other Indexes Are Struggling
  • U.S. Stock valuations are within the top 10 valuations of all time but probably won't crash. Why?
  • Seven Steps To Digging Your Way Out Of Deep Debt
  • 5 Steps To Protect The Digital Assets You Own
  • The Long-Term Fiscal Status Of The United States
  • Margin Debt At Record Levels
  • What To Do When You're Suddenly Widowed
  • A Common Error In Powers Of Attorney
  • Should You Move To A Different State?
  • Tax Cost Of Being Your Own Landlord
  • Why Do GRATs Remain In Such High Demand?
  • Don't Wait To Harvest Your Losses
  • The Best States To Move To For Tax Purposes
  • 10 Reasons For The IRS To Flag Your Return
  • Many Women Face Special Challenges As Retirement Nears
  • Nine Reasons To Consolidate Debt
  • Straight Talk About Living Trusts
  • SEPPs From An IRA: Don't Change Horses Midstream
  • New Regulations Fill In Gaps On 3.8% Surtax
  • Do You Know Life Insurance Basics?
  • Top Income-Earners Drive U.S. Economic Growth
  • Give IRA Cash To Charity: Heads You Win, Tails You Win
  • Four Wash Sale Strategies To Help Clean Up Taxes
  • College Savings: How Much Do You Need Each Month?
  • Surprising New Research: Large Caps Top Small Caps
  • Newly Widowed Face 401(k), IRA Options
  • Retirement Saving Takes Time And Must Be A Priority
  • Divide-Conquer To Convert To Roth IRA
  • What Is Probate And What Does It Protect?
  • A Research Surprise On Bond Funds
  • After New Tax Law, Do You Still Need A Bypass Trust?
  • Start Estate Planning For Your Child Now
  • Seven Tax Ideas To Use Throughout The Year
  • A Comprehensive Way To Plan For College Savings
  • Bulletproofing Your Will Before Death
  • IRS Mercy on 60-Day IRA Rollover Error
  • Feds Warn Of Life Settlement Dangers
  • Know The Tax Rules On Charitable Gift Deductions
  • IRS Ruling Boosts IDTs as Estate Planning Technique
  • A Defined Benefit Plan Lets You Sock Away Large Amounts If You Can Overcome Some Obstacles
  • Economic Shifts Bring New Pitfalls And Prizes
  • Evaluating Great Companies
  • Inflation Versus Deflation
  • Jeremy Grantham And Lou Stanasolovich Discuss Market Valuations
  • Ramifications Of A Weakening Dollar
  • Secular Versus Cyclical Bear Markets
  • Small Business And Work Opportunity Tax Act
  • Time To Plan For Estates, Wills, & Trusts



  • ©2017 Legend Financial Advisors, Inc.®. All rights reserved.