Tuesday, December 29, 2009

The Costs & Rewards of a College Education

Part 8 - The Basics of Financial Aid: Grants

As nervous as college freshmen may be, their cash-strapped parents are probably trembling more.  Disciplined savings using any or a combination of the options mentioned above may not cover the full expense of a college education.  As they have for the last ten years, college costs rose faster than inflation this year.  For the 2009-10 school year, a college freshman can expect to pay anywhere between $15,000 and $60,000 for a full year of tuition, room and board, books, etc.

But many college students don’t pay full sticker price.  63% of students receive some form of aid, either loans, grants, or both, according to the National Association of Student Financial Aid Administrators.

This year's College Board data on financial aid show that almost $143 billion in student aid was distributed in academic year 2007-08—almost $10 billion more than the previous year. In addition, students borrowed almost $19 billion dollars from nonfederal sources to help finance their education.  On average, undergraduate students received an average of $8,896 in aid in the form of grants and tax benefits.  Graduate students received an average of $20,320 in aid.

College financial aid departments will require the Department of Education's Free Application for Federal Student Aid (FAFSA) form, available at www.fafsa.ed.gov, which provides financial details of the parents and student.  It is important to file the FAFSA form early as some grants are given on a first-come-first-serve basis.

Financial aid is intended to make up the difference between what a family can afford and what college costs. The federal government and all public college financial aid offices use a “need formula” that analyzes a family’s financial circumstances and compares them with other families.  The results will vary by college and by state, but the Expected Family Contribution (EFC) formula assumes family contributions are met with savings, income and borrowing.  If a shortfall of college funds does exist, financial aid is awarded. This aid can be in the form of grants, loans, and work-study programs.


Gift-aid programs include the Federal Pell Grant Program and the Federal Supplemental Educational Opportunity Grant (FSEOG) Program. These grants are generally available only to students who do not yet have bachelor's degrees. In some cases they might be awarded to students enrolled in post-baccalaureate teacher certification programs.

Pell Grants

A Federal Pell Grant, unlike a loan, does not have to be repaid. Pell Grants are awarded usually only to undergraduate students who have not earned a bachelor's or a professional degree. (In some cases, however, a student enrolled in a post-baccalaureate teacher certification program might receive a Pell Grant.) Pell Grants are considered a foundation of federal financial aid, to which aid from other federal and nonfederal sources might be added.

Starting July 1, 2009, the maximum Pell grant annual allowance will increase from $4,731 to $5,350 for the 2009-10 school year, the largest increase since the program began.  It will increase again to $5,550 for the 2010-11 school year.  The increased grant will cover approximately one-third of the total annual cost of attendance, room and board included, at the average public, four-year in-state school, or about 15 percent of one year at the average private college or university, according to the College Board.  The increased Pell grant doesn't just sweeten the pot for those who already qualify for the award; it also means a greater number of students are now eligible for the grant.

The maximum amount can change each award year and depends on program funding. The amount you get, though, will depend not only on your financial need, but also on your costs to attend school, your status as a full-time or part-time student, and your plans to attend school for a full academic year or less.

The school the student is attending can apply Pell Grant funds to your school costs, pay you directly (usually by check), or combine these methods. The school must tell you in writing how much your award will be and how and when you'll be paid. Schools must disburse funds at least once per term (semester, trimester, or quarter). Schools that do not use semesters, trimesters, or quarters must disburse funds at least twice per academic year.

Federal Supplemental Educational Opportunity Grants (FSEOG)

The Federal Supplemental Educational Opportunity Grant (FSEOG) program is for undergraduates with exceptional financial need. Pell Grant recipients with the lowest expected family contributions (EFCs) will be considered first for a FSEOG. Just like Pell Grants, the FSEOG does not have to be repaid.

You can receive between $100 and $4,000 a year, depending on when you apply, your financial need, the funding at the school you're attending, and the policies of the financial aid office at your school.

If you're eligible, your school will credit your account, pay you directly (usually by check), or combine these methods. Your school must pay you at least once per term (semester, trimester, or quarter). Schools that do not use semesters, trimesters, or quarters must disburse funds at least twice per academic year.

FSEOGs have a few limitations that Pell Grants don't. For one, the amount of your FSEOG can be reduced if you receive other forms of student aid. Also, each school receives a limited amount of FSEOG money; when it's gone, it's gone. That's why it's very important to apply for financial aid as early as you can. You'll have a better chance of obtaining FSEOG money if you're eligible for it.

Next week I will discuss the other two options of financial aid - loans and work-study programs.

Tuesday, December 22, 2009

The Costs & Rewards of a College Education

Part 7 - Tax Incentives for Higher Education Expenses: The Lifetime Learning Credit

The lifetime learning credit provides a tax credit of 20% of up to $10,000, or up to $2,000, of qualified expenses per taxpayer per year.  It is available for all years of post-secondary education and for courses taken to acquire or improve job skills.  This credit is available even if the student is enrolled in just one course at an eligible institution.  There is no limit on the number of years the lifetime learning credit can be claimed for each student.

Generally, the same expenses that either qualify or do not qualify for the Hope credit apply to the lifetime learning credit.  See the summary of these expenses in the Hope credit summary above.  Additionally, the same prohibited actions for the Hope credit applies to the lifetime learning credit.

You cannot claim the Hope and the lifetime learning credit for the same student in the same year.  To claim the Hope Credit or Lifetime Learning Credit, complete IRS Form 8863.

Comparison of Education Credits

Amount of Credit      
Hope Credit - Up to $1,800 credit per eligible student 1
Lifetime Learning Credit - Up to $2,000 credit per return

When Available
Hope Credit - Available ONLY until the first 2 years of post- secondary education are completed.1
Lifetime Learning Credit - Available for all years of post-secondary education and for courses to acquire or improve job skills.

Educational Pursuit  
Hope Credit - Student must be pursuing an undergraduate degree or other recognized education credential.
Lifetime Learning Credit - Student does not need to be pursuing a degree or other recognized education credential

Enrollment Requirements
Hope Credit - Student must be enrolled at least half time for at least one academic period beginning during the year.
Lifetime Learning Credit - Available for one or more courses

Prior Legal Issues
Hope Credit - No felony drug conviction on student’s record.
Lifetime Learning Credit - Felony drug conviction rule does not apply

1    For 2009 and 2010, these features fall under the provisions of the American Opportunity Tax Credit.  Please refer to these features as described in the Hope Credit section of this report.

Next week I will begin discussing the basics of financial aid, including discussions on grants, loans, and steps to take now to increase your chances of obtaining financial aid for yourself or your child.

Tuesday, December 15, 2009

The Costs & Rewards of a College Education

Part 6 - Tax Incentives for Higher Education Expenses: The Hope Tax Credit

There are two tax credits available to help you offset the costs of higher education by reducing the amount of your income tax. They are the Hope Credit and the Lifetime Learning Credit, also referred to as education credits.  A tax credit reduces the amount of income tax you may have to pay. Unlike a deduction, which reduces the amount of income subject to tax, a credit directly reduces the tax itself.  This week, I will be focusing on the Hope Tax Credit

Hope Tax Credit

Traditionally, the Hope credit provides a tax credit of up to 100% of the first $1,200 of qualified education expenses plus 50% of the next $1,200, per student per year.  However, in February, 2009 the American Recovery and Reinvestment Act of 2009 was passed which modified the provisions of the Hope credit.  These new provisions are explained in greater detail below and are applicable for 2009 and 2010 only.

The credit is based on qualified education expenses you pay for yourself, your spouse, or a dependent for whom you claim an exemption on your tax return.  Further, the Hope credit is only available for full-time students in the first two years of post-secondary education at an eligible institution.

For purposes of the Hope credit, qualified education expenses include tuition and certain related expenses required for enrollment or attendance at an eligible educational institution.  Student-activity fees and expenses for course-related books, supplies, and equipment are included in qualified education expenses only if the fees and expenses must be paid to the institution as a condition of enrollment or attendance.  Expenses such as room and board, insurance, and medical expenses (including student health fees) do not qualify for the Hope credit.

Generally, the credit is allowed for qualified education expenses paid in a calendar year for an academic period beginning in that year or in the first 3 months of the following year.  For example, if you paid $2,000 in December 2008 for qualified tuition for the Spring 2009 semester beginning in January 2009, you may be able to use that $2,000 in figuring your 2008 credit.

The amount of your Hope credit for 2008 is gradually reduced (phased out) if you are filing single and your modified adjusted gross income (MAGI) is between $48,000 and $58,000 ($96,000 and $116,000 if you file a joint return). You cannot claim a credit if your MAGI is $58,000 or more ($116,000 or more if you file a joint return).  For most tax-payers, MAGI is simply their adjusted gross income (AGI) as figured on their federal income tax return.

To claim the Hope tax credit, the student for whom you pay qualified education expenses must be an eligible student. This is a student who meets all of the following requirements:
  •  The student did not have expenses that were used to figure a Hope credit in any 2 earlier tax years.
  • The student had not completed the first 2 years of postsecondary education (generally, the freshman and sophomore years of college) before the current calendar year.
  • For at least one academic period beginning in the current calendar year, the student was enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential.
  • The student has not been convicted of any federal or state felony for possessing or distributing a controlled substance as of the end of the current calendar year.
Per IRS regulations, the following actions are prohibited with the Hope Credit:
  • Deduct higher education expenses on your income tax return (as, for example, a business expense) and also claim a Hope credit based on those same expenses.
  • Claim a Hope credit in the same year that you are claiming a tuition and fees deduction for the same student.
  • Claim a Hope credit and a lifetime learning credit based on the same qualified education expenses.
  • Claim a Hope credit based on the same expenses used to figure the tax-free portion of a distribution from a Coverdell education savings account (ESA) or qualified tuition program (QTP), such as a 529 plan.
  • Claim a credit based on qualified education expenses paid with a tax-free scholarship, grant, or employer-provided educational assistance.

As mentioned earlier in this section, the American Recovery and Reinvestment Act of 2009 temporarily modified some of the provisions of the Hope credit.  For 2009 and 2010 the American Opportunity Tax Credit is the new name of the Hope credit program.  The new law temporarily enhances the existing Hope education credit for 2009 and 2010 only in:
  • Amount – The maximum amount of the Hope Credit increases from $1,800 to $2,500 per student.
  • Availability – The Hope Credit can now be claimed for the first four years of post-secondary education, and
  • Phase-out level – The credit is phased out (gradually reduced) if your modified adjusted gross income (AGI) is between $80,000 and $90,000 ($160,000 and $180,000 if you file a joint return).

Under the new credit, the maximum $2,500 per year would be allowed on $4,000 in qualifying payments (100 percent of the first $2,000 and 25 percent of the next $2,000). Although this credit would be made retroactive to January 1, 2009, it does not automatically apply to a college semester that begins in 2009. Tuition paid late in 2008 for an upcoming 2009 semester qualifies only for a 2008 credit under existing rules.  Further, forty percent (.40) of the Hope Credit is now a refundable credit, which means that you can receive up to $1,000 even if you owe no taxes.

Next week, I will focus on the Lifetime Learning Credit and how it can be an additional benefit for college expenses.

Monday, December 7, 2009

The Costs & Rewards of a College Education

Part 5 - College Funding Options: IRAs, Insurance, and Rebate Programs

There are other, less recommended, alternatives in funding a child’s education.  Examples include taking distributions from your IRA accounts, variable life insurance policies, and using reward/rebating programs.

IRA Distributions

Generally, if you take a distribution from your IRA before you reach age 59½, you must pay a 10% additional tax on the early distribution. This applies to any IRA you own, whether it is a traditional IRA (including a SEP-IRA), a Roth IRA, or a SIMPLE IRA. The additional tax on an early distribution from a SIMPLE IRA may be as high as 25%.  However, you can take distributions from your IRAs for qualified higher education expenses without having to pay the 10% additional tax. You may owe income tax on at least part of the amount distributed, but you may not have to pay the 10% additional tax. The part not subject to the additional tax is generally the amount of the distribution that is not more than the adjusted qualified education expenses for the year.

For purposes of the 10% additional tax, these expenses are tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution. They also include expenses for special needs services incurred by or for special needs students in connection with their enrollment or attendance.  In addition, if the student is at least a half-time student, room and board are qualified education expenses.

Variable Life Insurance Policies

Variable Life combines life insurance with a tax-deferred investment account, and provides tax-free access to the cash value of the policy. Some insurance companies promote variable life insurance policies as a college savings vehicle because the value of the policy is sheltered from financial aid need analysis formulas.

The advantages of a variable life policy are as follows:

§    The money is sheltered from the financial aid need analysis process and has no impact on financial aid.
§    Very high limits on the amounts you can invest.
§    The parent retains control over the money.
§    One can withdraw or borrow contributions tax-free without penalty.

The disadvantages to such policies are as follows:

§    Variable life insurance products tend to be expensive, with high commissions and expenses. The total return after subtracting costs often makes such policies less attractive when compared with other college saving options.
§    The premiums on a variable life insurance policy will eat into the gains you could make from the money you are paying.
§    Premiums are not tax deductible.
§    Withdrawals from a variable life policy will reduce the death benefit.
§    If you withdraw more money than the premiums you paid into the policy, you will pay income taxes on the difference.
§    Withdrawals from a variable life policy cause the insurer to move a portion of the remaining balance into a fixed-return account to minimize the company's risk.

Loyalty Reward / Rebating Programs

Loyalty programs, also known as affinity programs, provide a rebate to the consumer in exchange for shopping at particular retailers or purchasing particular products or services.

Typically, such programs do not require you to show a membership card to get the rebates. Instead, you register your credit cards with them and they track the purchases you make at participating merchants using the cards. You can also earn rebates by shopping online through the company web sites. This makes the programs a painless way to earn a little extra money for college.

Affinity programs with a college savings emphasis include:

BabyCenter:  (http://www.babycenter.com/index.htm)
BabyMint (https://www.babymint.com/)
FutureTrust:  (http://www.futuretrust.com/)
LittleGrad:  (http://www.littlegrad.com/)
SAGE Tuition Rewards Program:  (http://www.tuitionrewards.com/)
Upromise:  (http://www.upromise.com/)

Of these, Upromise has the largest retailer network, followed by BabyMint. LittleGrad has the largest online retailer network, and all programs listed are completely free to the user.

A key benefit of all of these programs is that you do not need to change your purchasing habits to earn rebates for college savings. The retailer networks associated with these programs are large enough that most families will earn some rebates without altering their spending patterns. Of course, by carefully targeting your purchases, you can maximize your rebates.

Some of the loyalty programs allow one to redeem the rebates as cash instead of investing them in a section 529 college savings plan. Some also allow one to transfer the rebates to repay student loans.

The rebates received from a loyalty program are not subject to income tax or sales tax. (Many states charge sales taxes on all gross receipts from sales, including rebates for which the retailer is reimbursed. However, the consumer already paid sales tax on the amount of the rebate when they purchased the product or service that generated the loyalty program rebate, so no additional sales tax is due when the rebate is received.)

We do not recommend spending more money just to earn a rebate. If two products provide equivalent value, but the more expensive item offers a rebate, sometimes it is better to buy the less expensive item. Compare net prices after subtracting the amount of the rebate. The average rebate is between 4% and 5%.

Over the next few weeks I will begin discussing the various income tax incentives for college savings and expenses.  More specifically, I will be outlining how the Hope Tax Credit and the Lifetime Learning Credit can be utilized to give you a more advantageous tax liability each year.

Tuesday, November 24, 2009

The Costs & Rewards of a College Education

Part 4 - College Funding Options: Savings Bonds & UGMA/UTMA Accounts

Education Bond Program

529 Plans and Coverdell Education Savings Accounts are good bets for some, but if you think your child may opt not to go to college, or if you just want more control over your investments, you may want to consider education bonds.

EE bonds and Series I bonds are both part of the Education Bond Program created by the Treasury Department in 1990.  A benefit of this program over the 529 plans is that with these investments you won't have to pay a penalty if you decide not to use them for your child's (or your own) education. If you do use them to pay for school, you will not be required to pay federal income tax on the interest you earn.  Bonds are available in denominations from $50 to $10,000 for EE bonds, and from $50 to $5,000 for I bonds.

EE bonds are purchased at 50% of their face value.  Therefore, a $100 EE bond will cost $50 to purchase it.  In contrast, I bonds are purchased at face value; therefore a $100 I bond will cost $100.

The Department of the Treasury sets the fixed rate for Series EE Savings Bonds administratively. The rate is based on 10-year Treasury note yields and adjusted for features unique to savings bonds, such as the tax deferral feature and the option to redeem the savings bonds at any time after the initial holding period.  Series EE Savings Bond rates are set every May 1st and November 1st, with each new rate effective for all bonds issued in the six months following the adjustment.

Series EE Savings Bonds issue dated on or after May 1, 2005 will earn a fixed rate of interest for 20 years, at which time the bond should have reached its face value. If the bond has not reached its face value, the Treasury will make a one time adjustment up to the face value. These EE bonds will increase in value every month instead of every six months. Interest is compounded semiannually. After the initial 20 yr period an additional 10 year extension and rate update will be initiated, for a total of 30 years of interest earning.

I bonds are inflation-indexed bonds with yields pegged to the inflation rate. You can learn more about these bonds online at www.savingsbonds.gov.  The bonds come with their share of caveats, so be sure you meet the requirements before you make a purchase.

Because of the $20,000 total bond limitation which began Jan. 2008 - you can now only purchase a maximum face value of $10,000 ($5,000 cash) in paper EE Savings Bonds a year. You may also purchase up to $5,000 in Electronic EE Savings Bonds, $5,000 in paper I Savings Bonds and $5,000 in Electronic I Savings Bonds - all in one calendar year.

To qualify for the tax exclusion, you must meet certain income guidelines when you redeem the bonds. For the 2008 tax year, for example, a single taxpayer's modified adjusted gross income must be less than $67,100 to take full advantage of the exclusion. The exclusion begins to be reduced at that point, and is eliminated for adjusted gross incomes of $82,100 and above. For married taxpayers filing jointly, those two numbers are $100,650 and $130,650, respectively. The good news is that those numbers are adjusted annually, so the ceilings may be much higher when you redeem your bonds.
Keep in mind that your adjusted gross income for the year you redeem your bonds includes all the interest earned on the bonds you cashed in. Ironically, this may actually push some families past the cut-offs, reducing or even eliminating their exclusion.

You can use the proceeds for tuition and fees, but not for room and board or books. Qualified expenses must also take into account any scholarships, fellowships, or other forms of tuition reduction and you must incur the expenses the same year you redeem the bonds.

If you redeem more cash in bonds than you use for educational expenses, the interest you earn will be taxed on a pro-rated basis.  For example, if you have a $10,000 bond consisting of $8,000 principal and $2,000 interest, and have $6,000 in expenses, you could exclude 60 percent of the earned interest, or $1,200. The other $800 would be subject to taxes.

UGMA/UTMA Custodial Accounts

A custodial account provides a way for a donor (usually parents or grandparents) to gift cash and/or assets to a minor via a simple and cost effective account.  The Uniform Gift to Minors Act (UGMA) or Uniform Transfer to Minors Act (UTMA) account enables the custodian to provide management of the account and to direct distributions for the benefit of the child until the child reaches the age in which they can control the account, usually age 18 or 21.  For estate tax purposes, if the donor and the custodian is the same person and if they predecease the beneficiary before the age of majority, the gift amount will not be considered a completed gift.  Specific terms of UGMA and UTMA accounts are determined by state statute.

Neither the donor nor the custodian can place any restrictions on the use of the money when the minor becomes an adult. At that time the child can use the money for any purpose whatsoever without requiring permission of the custodian, so there's no guarantee that the child will use the money for education purposes. Since UGMA and UTMA accounts are in the name of a single child, the funds are not transferable to another beneficiary.

The income from the custodial account must be reported on the child's tax return and is taxed at the child's rate. There is no special tax treatment for UGMA/UTMA accounts.

Uniform Transfer to Minors Act (UTMA) is the most common custodial account and allows for a minor to own securities and other types of property, such as real estate, fine art, patents and royalties, and for the transfers to occur through inheritance.  The Uniform Gift to Minors Act (UMGA) allows for a minor to own securities.  UTMAs are slightly more flexible than UGMAs.   For college financial aid purposes, custodial accounts are considered assets of the student. This means there is a high impact on financial aid eligibility.

Next week I will touch on some final, less popular, college funding options which include using your IRA accounts, using variable life insurance policies, and the loyalty/rebate programs.

Thursday, November 12, 2009

The Costs & Rewards of a College Education

Part 3 - College Funding Options: Coverdell Education Savings Accounts

The Coverdell Education Savings Account is also referred to as an Education IRA, although it is important to note that a Coverdell Education Savings Account is not an IRA.  It allows qualified taxpayers (usually parents and grandparents) to establish and contribute up to $2,000 per year for each designated beneficiary under the age of 18; current tax law prohibits contributions once the designated beneficiary reaches the age of 18.

Contributions are nondeductible but can be invested in any U.S. stock, bond or mutual fund.  A contributor’s income could potentially limit the amount of contributions made in a given year.  To contribute fully in 2009, a person must make no more than $95,000 if filing as a single taxpayer, $190,000 if married filing jointly.  Limited contributions are allowed for single taxpayers earning up to $110,000 and married couples making up to $220,000.  Beyond those higher income levels, a person cannot contribute.  However, there are no requirements that contributions come from earned income.  Therefore, if a parent or grandparent is not eligible to make a contribution due to their income they can simply gift the amount to the child who can then make a contribution into their account.

For members of the military and their families, if you received a military death gratuity or a payment from Servicemember's Group Life Insurance (SGLI) after October 6, 2001, you may roll over all or part of the amount received to one or more Coverdell ESAs for the benefit of members of the beneficiary's family. Such payments are made to an eligible survivor upon the death of a member of the armed forces.  This rollover contribution is subject to the contribution limits discussed earlier. The amount you roll over cannot exceed the total survivor benefits you received, reduced by contributions from these benefits to a Roth IRA or other Coverdell ESAs.  The contribution to a Coverdell ESA from survivor benefits received after June 16, 2008, cannot be made later than 1 year after the date on which you receive the gratuity or SGLI payment. If you received survivor benefits before June 17, 2008, with respect to a death from injury occurring after October 6, 2001, you can contribute to a Coverdell ESA no later than June 17, 2009.  The amount contributed from the survivor benefits is treated as part of your basis (cost) in the Coverdell ESA, and will not be taxed when distributed.  The limit of one rollover per Coverdell ESA during a 12-month period does not apply to a military death gratuity or SGLI payment.

Coordination of contributions should be closely monitored.  The annual exclusion for making gifts to any individual is $13,000 for 2009.  If a parent is making contributions for a child to both a Coverdell Education Savings Account and, say, a state-sponsored 529 savings plan that parent needs to make sure they do not put more than the annual exclusion amount collectively into both plans.  Unlike 529 plans, there is no 5-year averaging allowed for Coverdells.

Withdrawals are tax-free if the money is used for qualified higher education expenses.  One of the main advantages of Coverdell Education Savings Accounts, as compared to other educations savings vehicles such as 529 plans, is that distributions can be used for educational expenses of any grade level; like parochial elementary, private high school or a public college.  The educational expenses that qualify are broken into two categories: Qualified Elementary and Secondary Education Expenses, and Qualified Higher Education Expenses.

Qualified Elementary and Secondary Education Expenses are related to enrollment or attendance at an eligible elementary or secondary school.  To be qualified, some of the expenses must be required or provided by the school.  The following expenses must be incurred by a beneficiary in connection with enrollment or attendance at an eligible elementary or secondary school: tuition and fees, books, supplies, and equipment, academic tutoring, and special needs services for a special needs beneficiary.  Other qualified expenses must be required or provided by an eligible elementary or secondary school in connection with attendance or enrollment at the school:  room and board, uniforms, transportation, and supplementary items and services (including extended day programs).  The purchase of computer technology, equipment, or internet access and related services is also a qualified elementary and secondary education expense if it is to be used by the beneficiary and the beneficiary’s family during any of the years the beneficiary is in elementary or secondary school.

Qualified Higher Education Expenses are expenses related to enrollment at an eligible postsecondary school.  To be qualified, some expenses must be required by the school such as tuition and fees, books, supplies, and equipment and some must be incurred by students who are enrolled at least half-time, such as room and board.  These expenses must be reduced by the amount of tax-free benefits received, such as scholarships, to determine how much can be distributed without incurring a taxable event.

There are a few key limitations of the Coverdell Education Savings Account.  Any balances not used by a child’s 30th birthday must be distributed or transferred to another family member (can include niece and nephew).  If not, the balance will go to the child and will be subject to income tax and a 10% penalty.   Additionally, the $2,000 contribution limit is per beneficiary, regardless of the number of accounts opened for the child.  Any excess contributions are subject to a 6% excise tax penalty.  Excess contributions, and any earnings on the excess contributions, can be withdrawn before May 31st of the following year without incurring the 6% penalty.  The earnings, however, will be subject to income tax.

In the past, distributions could not be used in conjunction with the Hope or Lifetime Credit, which are described in more detail below.  The Internal Revenue Service now allows a distribution from the account in the same year that the Hope or Lifetime Learning Credits are claimed as long as the money is not used to pay for the same expenses.

As with 529 plans, if a parent owns the plan it is considered a parental asset and therefore has a minimal effect on the amount of financial aid available.

Please do not hesitate in contacting me with any questions you may have regarding the Coverdell Education Savings Account.  I welcome any and all comments and suggestions!

Next week, I will discuss the basics of yet a few other college savings options - U.S. Savings Bonds and UTMA/UGMA Savings Accounts.

Wednesday, November 4, 2009

The Costs & Rewards of a College Education

Part 2 - College Funding Options: 529 Plans

Recognizing the economic and social benefits of promoting education, federal and state lawmakers have developed a number of investment plans, government programs, and tax incentives to make higher education financially accessible to more Americans. 

Probably the most recognized savings vehicle for funding college educations today is the 529 Savings Plan.  Named after the section of the federal tax code that allows them, they offer significant tax benefits.  There are three basic types of 529 plans: the State-Sponsored 529 Savings Plan, the State-Sponsored 529 Prepaid Tuition Plan, and the Independent 529 Plan. 

State-Sponsored 529 Savings Plan

With a 529 Savings Plan, earnings accumulate tax-deferred and withdrawals can be made, tax-free, when it’s time to pay for a child’s college expenses including tuition, fees, room and board, and books.  Investment minimums are low, as little as $25 per month, and there is no restriction on how much you can contribute every year unless the account is nearing the lifetime cap.  For 2009 each individual is allowed to gift $13,000 per year to any individual gift-tax free.  A special caveat to this applies to funding 529 plans:  You may contribute as much as $65,000 in one year ($130,000 with your spouse) without incurring gift taxes, provided you do not make any further gifts for the following five years.  Each state determines its own lifetime contribution limits, ranging from $100,000 to over $300,000.  Contributions can only be made in cash; transfer of securities into plans is prohibited

Each program sponsored by a state offers an array of stock and bond funds for a participant to invest in.  There is also an ‘age-based’ portfolio option given to investors.  An aged-based portfolio will automatically adjust its allocation towards a more conservative position as your child grows older.  Therefore, by the time your child is of college age, the portfolio will be almost exclusively in fixed income and cash positions.  Under IRS rules, you may reallocate investments within a plan once a year.  A special provision was created for the 2009 calendar year which allows an account owner to reallocate up to two times during the year.  Unless extended, the original provision of one reallocation per year will return in 2010.  Further, you can move from one state plan to another state plan with no tax consequences.  As in the case of changing allocations, you can only move between state plans once a year.  You will also want to pay attention to any fees you may incur by moving between state plans. 

Many states do provide added benefits on their own in-state plans by providing state income tax deductions on contributions and exemption from state income tax for qualified plan distributions. Additionally, certain plans are provided asset protection from lawsuits and creditors.  For example all 529 accounts, including out-of-state 529 accounts, having a Texas resident as owner or beneficiary is provided creditor protection by the Texas government.

What if your child does not go to college or doesn’t require the use of the funds set up for their benefit?  You can get a full refund, but you’ll pay taxes plus a 10% penalty on your investment earnings.  These penalties are waived if your child becomes disabled or dies.  Further, if your child receives a scholarship, most plans will waive the penalties on withdrawals up to the scholarship amount. 

An alternative to withdrawing the money is to change the plan’s beneficiary to another child or family member.  A change of beneficiary must be to a first cousin or closer to the original beneficiary; otherwise, there may be adverse tax consequences.  Each state has its own definition of ‘family member’ so be sure to contact your plan’s administrator if any clarification is needed.

Suggested State-Sponsored 529 Savings Plans

The general selection criteria for a savings plan program is usually centered on (1) fees and expenses, (2) investment options, and (3) other incentives that may be offered to in-state residents.   A few suggestions when reviewing plans are: avoid high annual expense ratios and loaded funds, review the quality of the fund selection by each asset class, review extra benefits like state income tax deductions and asset creditor protection.

The quality of each 529 plan, rules and regulations, may vary dramatically by each program sponsor and by state plan.  Some of these limitations can include age contributions limits, required distribution for beneficiaries over a specified age, minimum contributions amounts, and additional fees for out of state residence.  It is very important to review the program details to insure complete understanding of the plan agreement before applying.   More information on 529 plans can be found at www.savingforcollege.com. 

Other factors such as risk tolerance, time frame and family financial situation may affect what college savings vehicle or method is optimal for you.  A prepaid tuition plan may offer features that provide greater advantages for your particular circumstances than a savings plan. Please contact MTR Financial Services for additional information and considerations.

Review established 529 plans periodically to evaluate investment performance, plan agreement changes, and to monitor your specific college-funding objective. 

State-Sponsored 529 Prepaid Tuition Plans

A Prepaid Tuition Plan lets you purchase units of tuition for any state college or university at today’s prices.  A semester’s worth of prepaid tuition purchased at 2009 prices would pay for a semester’s worth of tuition at any future date, no matter what the cost of tuition is at that time.  Prepaid plans are simple in design and offer better rates of return on investment than bank savings accounts and certificates of deposit. The plans also involve no risk to principal, and often are guaranteed by the full faith and credit of the state.

Prepaid plans are typically more restrictive than 529 Savings Plans in that (1) enrollment qualifications require the beneficiary or account owner be a resident of the state, (2) the enrollment period is only open during a limited time frame during the year, (3) the plan is only available to children within a certain age range or grade level (4) plan benefits must begin distributions prior to certain age and (5) prepaid plans are most beneficial for in-state tuition and undergraduate degrees.  Also, due to market conditions in the past several years, some state’s are now charging a premium for their prepaid plans over current tuition prices or revamping in order to regain financial stability, due to lower investment returns over the past several years.  

Prepaid tuition plans are most attractive to conservative investors since the plan guarantees to pay for their student's tuition. Similarly, prepaid tuition plans might be a wise choice for students who are three to seven years away from college since, with such a short investment time horizon, they should be playing it safe. Again, since the risk of being able to cover the rising costs of tuition is being assumed by the plan, you'll pay a premium; you can't expect someone to take on a financial risk for nothing. Also, keep in mind that most prepaid tuition plans do not allow enrollment of students beyond the 9th or 10th grades. 

Some prepaid plans cover just tuition and fees; other plans will also pay for room and board. If you participate in a plan that does not cover room and board, you'll have to save separately for those expenses. Like the other college savings options, a prepaid tuition plan can be transferred to another family member.  Review all plan details carefully, before taking any action.

Independent 529 Plans

The Independent 529 Plan is a national prepaid tuition plan exclusively for a select list of private and independent colleges.  Created in 1998 by a group of 18 southern colleges, it now has over 247 participating private colleges in 38 states and the District of Columbia.  Its members include a wide range of institutions including large research institutions (Stanford, University of Chicago), traditional liberal arts colleges (Amherst, Middlebury), women’s colleges (Smith, Wellesley), historical black colleges (Spelman, Dillard), religiously-affiliated colleges (Notre Dame, SMU), and technically-oriented institutions (Rice, MIT).  A full list of colleges and universities currently participating can be found at www.independent529plan.org.

The allure of Independent 529 Plans is that a parent or grandparent can lock in future tuition costs at less than today’s price.  Member colleges offer discounts to current year tuition rates, typically between 0.5% and 1%.  When an account is established, the account owner will ‘choose’ a college from the list of schools currently participating and base their contributions on that school’s current discount and tuition rate.  The college chosen as a benchmark has no bearing on admission to that school.  It simply establishes a starting point for future contributions.  Account owners will have the opportunity to select up to five ‘sample’ colleges to monitor.  Quarterly reports will be sent to the account owner displaying the value of the account in terms of the accumulated tuition benefit based on these ‘sample’ colleges.

To illustrate, if the account owner chooses to base their contributions on the current tuition of the University of Notre Dame, and Notre Dame currently offers a 0.5% annual discount through the Plan, then the account owner will know that a payment of $35,135 today will pay for one year’s tuition at Notre Dame 10 years from now ($36,847 ‘08-09 tuition less 0.5% discount annually over 10 years = $35,135).  Assuming the annual increase in college tuition remains at 6%, one year’s tuition at Notre Dame ten years from now will be close to $66,000.  Therefore, by prepaying $35,135 today, the account owner will realize a tax-free savings of almost $31,000.

This unique way of paying for college tuition offers the security of a guarantee against tuition inflation and the flexibility to choose from some of the nation’s top colleges. 

There are certain contribution limits to Independent 529 Plans.  The most that can be contributed in any given account is based on five years of undergraduate tuition at the highest-priced participating institution in the program today.  For the 2008-09 program year the maximum lifetime contribution limit was $183,000. 

As is the case with State-Sponsored 529 Plans and Prepaid Tuition Plans, the Independent 529 Plan offers potentially significant estate and gift tax benefits.  For 2009, the annual gift tax exclusion is $13,000, meaning any individual is able to gift this amount to any number of individuals during the year without triggering a gift tax in that year.  If you are married, your spouse may elect to split the gifts made to purchase a tuition certificate for a beneficiary, thereby doubling the amount of the annual gift tax exclusion from $13,000 to $26,000.  All 529 Plans benefit from a 5-year averaging provision with contributions, meaning you can elect to treat up to $65,000 as having been made in 5 equal gifts of $13,000 over a 5-year period.  If married and file a joint tax return, this amount can double to $130,000.  Caution must be taken if you are able to take advantage of this provision – no additional contributions can be made by the account owner, and spouse if applicable, to the account over the next five years.  Any additional contributions made during the five-year period by the account owner and/or spouse could result in gift taxes being owed in the year of excess contribution.

With the growing popularity of the Independent 529 Plan, more private colleges will be adding their names to the list of participating institutions in the years to come.  These institutions, when added to the list, are obligated to honor all certificates purchased prior to its inclusion in the Plan, provided the beneficiary is admitted into the college or university.  What happens when a college or university removes itself from the list of participants?  If a college should ever withdraw from the Independent 529 Plan, it would still be obligated to honor all certificates that were purchased prior to its withdrawal.  No certificates purchased after its withdrawal will be honored by that specific college.

Certificates purchased can only be redeemed for undergraduate tuition and mandatory fees at participating institutions.  Mandatory fees are those fees required to be paid by all students attending the particular college as a condition of enrollment.  Currently, costs for other expenses including room and board, text books, supplies, and miscellaneous expenses are not covered under the Independent 529 Plan.  Once a certificate is purchased, it must be held for 36 months before it can be used.  Further, the certificates must be used within 30 years from the date of purchase or else it will mature.  Once a certificate matures the account owner has the following options:

1.    Receive a refund, explained below, and retain all the tax benefits for the withdrawal portion if used for qualified higher education,
2.    You can change the beneficiary, or
3.    You can roll over an Independent 529 Plan account tax-free into a state-sponsored 529 plan.

A refund may be received at any time after the one-year (12 calendar months) anniversary of purchase, adjusted for fund performance.  As with any 529 program, if you do not use the money for qualified higher education expenses, any increase in the value of your initial purchase amounts (the difference between your contribution amount and the amount refunded) will be subject to federal income tax as well as an additional 10% tax.  If you take a refund, rather than redeem your certificates for its intended purpose, the refund will be adjusted based on the net performance of the Program Trust, subject to a maximum increase of 2% per year and a maximum loss of 2% per year.

What happens if the student receives a scholarship or decides not to attend college at all?  If the student receives a scholarship that covers the costs of qualified expenses, you can withdraw the funds from your account up to the amount of the scholarship without penalty or additional tax.  Earnings that are refunded due to scholarships are taxable income but are not subject to the 10% additional federal income tax.  If the student decides not to go to college, you still have options:

1.    You can leave the account open for future use – for up to 30 years,
2.    You can change the beneficiary to another ‘member of the family,’ within the federal 529 rules, or
3.    You can take a refund adjusted for fund performance.

Financial aid concerns must also be considered if you are not able to fully you’re your child’s education.  Congress has passed a new law that significantly improves the financial aid rules governing prepaid 529 plans. Simply put, Independent 529 Plan accounts are now treated the same as any other parent asset, including 529 savings plans. This new law means that, beginning in 2006, prepaid 529 plans — such as the Independent 529 Plan — will no longer be treated as an available student resource when determining your potential financial aid award. Now, no more than 5.6% of your 529 college savings will be used to assess need if you apply for financial aid under federal guidelines.  The impact 529 plans have on financial aid will be discussed in greater detail later in the report.

Please do not hesitate in contacting me with any questions you may have regarding the various 529 plans available to everyone.  I welcome any and all comments and suggestions!

Next week, I will discuss the basics of another college savings option - the Coverdell Education Savings Account.  

Friday, October 30, 2009

The Cost & Rewards of A College Education

Part 1 - Education Pays

It should come as no surprise to a parent that the cost of sending a child to college is an expense which continues to rise year over year. The average annual total tuition and fees at four-year public colleges and universities in 2009-10 are $6,585. Throw in room and board and the total cost climbs to $14,333. This is 6.4% higher than they were in 2007-08. As staggering as this annual increase seems, it is significantly smaller than in preceding years. This 6.4% increase follows increases of 13% in 2003-04, 10% in 2004-05, and 7.1% in 2005-06.

How does the cost at a four-year private college compare? Average total charges, including tuition, room and board, and fees are $34,132 for 2008-09. This is 5.6% higher than last year, and has been the average over the preceding three years.

Come graduation day, the typical parent will have spent almost $58,000 for public universities and $137,000 for private or out-of-state universities.

However, to most Americans the skyrocketing cost of sending a child to college seems to overshadow the long-term benefits of a college education. Numerous studies have been done indicating a direct relationship between the level of education an individual receives and that individual’s earnings potential. These studies show that, monetarily, a college education is an investment that pays off over a lifetime. In 2008, the typical full-time worker with a four-year college degree earned $50,856. This is 65% more than the $30,732 earned by a full-time worker with only a high school diploma. A worker with a master’s degree earned over twice as much, $63,856, as the high school graduate. In fact, the earnings gap for college graduates versus high school graduates is estimated to exceed $1 million over an individual’s lifetime.

The information contained in this report attempts to summarize the various savings vehicles and college funding options available to most Americans today. While the costs to attend college may be imposing for many families, the costs associated with not going to college are likely to be much greater.

How Are Parents Saving Today?

A recent Gallup survey commissioned by Sallie Mae revealed that three-quarters (75%) of the 1,200 parents surveyed thought it was "highly likely" their children would be attending some form of higher education after high school. Of this group of parents, 62% (but only 32% among those with household income below $35,000) of them have saved or invested for college.

The survey found that only 33% of parents are investing in 529 savings plans, and only 20% of households earning $150,000 or more are taking advantage of them. A majority (59%) used savings, money market accounts, or CDs while 41% saved with stocks or bonds. 35% of those not saving for college anticipate scholarships or financial aid to cover the cost.

Estimated 2009-10 College Costs for Selected Colleges

Below are total costs for some of the top universities in the United States, as ranked by U.S. News & World Report. These figures represent the total cost of sending a Texas-resident student to each school for the 2009-10 school year, including tuition, room and board, fees, books, and miscellaneous expenses.

For colleges in Texas:

Public Universities:
University of Texas - $25,284
Texas A&M University - $20,531
Texas Tech University - $18,464
University of Houston - $16,418
Stephen F. Austin University - $11,360

Private Universities:
Rice University - $45,685
Southern Methodist Univ. - $43,295
Baylor University - $42,898
University of St. Thomas - $30,906
St. Mary’s University - $30,266

Other colleges in the United States:

Exclusive Universities:

Stanford University - $53,652
Harvard University - $52,000
Brown University - $50,560
Dartmouth College - $49,974
Princeton University - $49,190

Private Universities:
Georgetown University - $55,130
Vanderbilt University - $54,718
Northwestern University - $53,608
Tulane University - $52,240
Notre Dame University - $51,300

Public Universities (Non-TX):
UCLA - $46,420
University of Michigan - $44,797
Miami (OH) University - $41,864
University of Colorado - $38,365
Louisiana State University - $22,195

With college costs increasing at alarming rates, advanced planning is required to make these costs affordable for your children and/or grandchildren. Time and the power of compounding are your most valuable assets.

In the coming weeks, I will be posting more information on the various savings vehicles parents should be aware of, including 529 Plans, Coverdell Savings, Education Savings Bonds, and UTMA/UGMA accounts. Other topics will follow, including the basics of financial aid, tax incentives available for educational expenses, and programs designed specifically for members of the military. Please check back regularly for more updates. Better yet, click on 'Follow' on the home page to be notified when items are posted to this blog.

Friday, October 16, 2009

Key Planning Opportunity For 2010

As with the start of every New Year, some key financial planning opportunities will be available to all investors beginning in 2010. One opportunity that has not received nearly as much press as others is the upcoming changes in the Roth IRA rules.

Roth IRA Background
Roth IRAs were created with the Tax Payer Relief Act of 1997. The attractiveness of a Roth IRA is very apparent. Not only do funds placed in a Roth IRA, whether through annual contributions or conversions from traditional IRAs, appreciate tax-free, all distributions from a Roth IRA are tax-free as well. Additionally, unlike traditional IRAs where you are required to withdraw a certain amount each year starting at age 70 ½, there are no required minimum distributions (RMDs) with Roth IRAs.

For the most part, though, the benefits mentioned above were only available to those families who’s modified adjusted gross income (AGI) was less than $100,000 each tax year. This restriction kept the Roth benefits out of reach for higher income earners – the ones who would gain the most from the benefits.

However, a provision in the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) removes the income limitation on Roth IRA conversion eligibility beginning in 2010 – and this is a key planning opportunity for everyone, regardless of annual income.

New Roth Conversion Rules
Beginning January 1, 2010, anyone can convert a traditional IRA to a Roth IRA, regardless of income. This new tax window opens the door to a tremendous tax-planning opportunity for millions of people, who hold more than $1 trillion in traditional IRAs.

It is important to understand that the conversion process is a taxable event. The amount you decide to convert is deemed income, and you will owe taxes on that amount at ordinary income tax rates. However, the provision within TIPRA states that taxes recognized due to conversions made in 2010, and 2010 only, can be spread over two years. Therefore, half of the taxes due can be paid in 2011 and the other half paid in 2012.

Ironically, the market downturn over the past 24 months actually benefits those who are looking to convert into Roth IRAs. Undoubtedly, your traditional IRA balance today is considerably less than it was when the market began its decline in September of 2007. As a result, you are converting a lesser balance thus generating lesser taxes – taxes that can be spread over two years. Given the long-term historical returns of the market, your new Roth IRA will eventually recoup, and surpass, your traditional IRA balance from 2007 and you will not have to worry about another income tax issue as long as you have your Roth. Combine that with the anticipation of higher tax brackets in the future, and this becomes a great opportunity.

So, if you have ever considered converting your retirement accounts to Roth IRAs, 2010 is the year you definitely want to consider doing so. Please contact MTR Financial Services, LLC should you have any questions or would like to discuss your situation in greater detail.

Thursday, July 16, 2009

Tips On Finding A Financial Planner

The time and research you should put in to finding a financial planner is no different than the time and research you should put into finding a good family doctor. You are looking for someone you can trust and guide your financial health, after all. But how should you start your search? According to the National Association of Securities Dealers (NASD) there are no fewer than 69 different financial credentials that you may run into. This article will attempt to help you narrow down your search before you even pick up the phone and start calling prospective planners.

As with a family doctor, the best place to start your search is referrals from friends and family and ask who they work with. The best planners out there will tell they get the majority of their new clients from referrals. You can also use the internet to look for planners in your area. A few websites out there provide good starting points: www.fpanet.org and www.napfa.com. The FPA website includes planners who are fee-only, fee-based, or commission-based. The National Association of Personal Financial Advisors (NAPFA) website only includes those planners who adhere to a fee-only compensation model. All three compensation models will be explained below.

When deciding what type of planner best fits you and your family’s finances there are four areas to consider: credentials, experience, how they are compensated, and to what regulatory standards must they adhere to.

Of all the credentials in the financial world, the four most common are CFP, CPA-PFS, ChFC, and CFA.

1. Certified Financial Planner (CFP) – Awarded by the Certified Financial Planner Board of Standards, or CFP Board, to individuals who meet the CFP Board’s education, examination, experience and ethics requirements. A professional with a CFP designation should have a broad knowledge of all aspects of financial planning including investments, estate planning, retirement planning, insurance and taxes. The designation means the person has passed rigorous examinations and met certain requirements.

2. Certified Public Accountant – Personal Financial Specialist (CPA-PFS) – CPAs, by trade, have a more extensive background in tax issues. A PFS designation is awarded by the American Institute of Certified Public Accountants to CPAs who have taken additional training or already hold a CFP or ChFC designation.

3. Chartered Financial Consultant (ChFC) – Earned through The American College in Bryn Mawr, PA, and designees tend to work in the insurance industry. A professional with the ChFC designation should have a broad knowledge of all aspects of financial planning, including investments, estate planning, insurance and taxes. The designation means the person has passed rigorous examinations and met certain requirements.

4. Chartered Financial Analyst (CFA) – Awarded by the CFA Institute to experienced financial analysts who successfully pass three examinations covering economics, financial accounting, portfolio management, securities analysis, and ethics. CFAs are more likely to work for mutual fund companies, institutional asset management firms, or pension funds. CFA charter holders are annually required to affirm their commitment to high ethical standards.

With the impending onslaught of baby boomers nearing and entering retirement, the financial planning profession has become a second-career choice for many new planners out there today. You will want to keep this in mind when you interview potential planners. Ideally, the planner has been in the profession for more than five to ten years and has an educational background in the profession. The number of colleges actually offering degrees in Personal Financial Planning and Counseling has exploded over the past decade. One of the most well-known programs today is right up the road in Lubbock, TX at Texas Tech. Although having a college degree in financial planning is preferable, it shouldn't be a reason to disqualify a prospective planner.

Understanding how – and how much – a planner is paid is an important part of establishing the relationship. Always consider whether a planner’s compensation requirements will interfere with their objectivity when it comes to your financial plan.

There are three general compensation categories that a planner will fall into: commission-based, fee-based, or fee-only.

1. Commission Based – Planners in this category earn their paycheck through commissions on sales of products, such as stocks, bonds, mutual funds, and insurance. Some commission-based advisors associated with banks or brokerage firms may have sales quotas they need to fill in order to keep their jobs, and the products they are recommending may not be the best option for you. If the planner is paid a commission it does not necessarily mean they are not looking out for your best interests. But the potential for conflict of interest is greater.

2. Fee-Based – Planners in this category usually have their compensation based on a flat fee or percentage of money under management as well as commissions on sales of products such as stocks, bonds, mutual funds, and insurance.

3. Fee-Only – Planners in this category do not sell any commission-based product, instead charging an agreed-upon flat fee or a percent of assets under management. It is argued that removing any incentive to buy or sell a particular investment for a client also removes any conflict of interest and the planner is making their recommendations based on what is best for the client, not the planner.

Which compensation model is the best? I’m willing to guess that planners in each category will make their argument as to why theirs is more advantageous to their clients. In the end, you must be not only comfortable with how your planner is compensated, but you should have an understanding as to how much they are being paid for each recommendation they make. If they do not volunteer that information to you, simply ask! If they value you as a client they will have no issues in providing that information.

Regulatory Standards
Financial planners will fall under one of two standards with their clients. These two standards are “suitability” and “fiduciary”.

Brokers, also known as ‘registered representatives’ may call themselves financial planners but they are basically employees of a stock exchange member firm who act as account executives for their clients. These brokers fall under the jurisdiction of the self-regulatory Financial Industry Regulatory Authority (or FINRA) and are held to a less stringent “suitability” standard. This means their recommendations must be “suitable” to their clients (e.g. be in line with the client’s risk tolerance and long-term goals). Therefore, a broker is legally free to recommend an investment that pays his firm (and himself) a higher commission over a similar lower-cost fund as long as the investment is suitable to the client’s situation.

In stark contrast, planners held to a “fiduciary” standard could not do that. If held to a fiduciary standard the planner, by law, must place the client’s interests first. CFPs and Registered Investment Advisors (RIA) are held to the strict fiduciary standard. (Registered Investment Advisors are simply planners who are not employed by, nor have any affiliation with, brokerage firms or other financial institutions, and must register with the U.S. Securities and Exchange Commission and/or state regulators)

If you are comfortable with your planner not being held to a fiduciary standard, at least ask them to explain precisely the reasons for their recommendations, including what’s in if for them.

In Summary
Finding a financial planner for your family ultimately comes down to trust. Regardless of the planner’s association to a certain firm, their compensation structure, or experience you must feel a strong connection between the two parties. Your relationship with a financial professional is, above all things, a partnership. It is worth taking the added time to find the right planner upfront because you want this relationship to last a lifetime.

Tuesday, July 7, 2009

The New Credit Card Law & How It Affects You

On May 22nd of this year, President Obama signed into law the Credit Card Accountability, Responsibility and Disclosure Act. Known simply as the Credit CARD Act (why do they do this??), the provisions attempt to provide more protection for the consumer and rein in some of the more flagrant practices in the credit card industry. Most, but not all, of the provisions favor the consumer.

Below are areas in which major changes will take place as a result of the law.

1. Restriction on Interest Rate Increases
  • Prior to this Act, credit card companies could increase your interest rate if you were even one day late on your payments. With the passage of this Act, credit card issuers may not raise rates on your existing balance unless you are more than 60 days late.
  • If the cardholder does go beyond the 60-day time frame and has his interest rate increased, the credit card issuer MUST restore the lower rate if the cardholder makes on-time payments for six consecutive billing cycles. However, this provision does not take effect until August, 2010.

  • Unless the card is issued under a promotional rate, rates cannot be raised in the first year of issuance (unless you go beyond the 60-day period mentioned above). Promotional, or teaser, rates must now last at least six months. Currently, there are no time limits for these rates to last.

  • Under the current Truth In Lending Act, card issuers can give cardholders as little as a 15-day notice of rate increases and key contract changes. With the new Act, cardholders must now be given a minimum of 45 days notice of those changes. This provision takes effect August 20th, 2009.
Where the Act falls short of further protecting the consumer is on capping interest rates charged by the issuer. The new rules do not cap interest rates. Thus, having a credit card with an interest rate of 25% - 35% is still a possibility for some consumers out there. Additionally, the provisions above do not apply to credit limit changes. Issuers can reduce your credit limits with little or no notice, unless the reduction triggers penalties such as over-the-limit fees.

2. Restriction on Fees
  • As a way of avoiding over-the-limit fees, cardholders can instruct their credit card company to decline any charge that would put them over their limit. If the cardholder does not do this and goes over their stated credit line, the credit card company may not charge more than one over-the-limit fee per billing cycle.

  • Fees for taking payments over the phone or internet are eliminated with the passage of this Act. However, fees may be imposed for expediting a payment.

  • Late fees will not be imposed on payments received by the due date, or the next business day if the bank does not accept mailed payments on the due date. If you make a payment at your local bank branch, your payment must be posted and credited on that same day.

  • For those who only qualify to receive sub-prime cards (i.e. those who are considered high-risk to credit card issuers), non-penalty fees cannot account for more than 25% of the credit limit. Currently a card can be issued, say by Capital One, with a $500 credit limit to a high-risk individual. Before the card is even used, it is not uncommon to have the annual fee and even a 'card processing' fee charged to the account. Before the cardholder even signs the back of the new card, that $500 limit is only $375. This new provision limits this practice.
3. Restriction on Credit Card Issuance
  • Consumers who fall into the ages of 18 to 21 who do not have adequate income or a co-signer, or who do not complete a certified financial literacy course, will not get approved for a credit card. Last year the average college student carried a balance of over $3,000 on their credit card(s), according to a recent Sallie Mae study. This is a record high since the first study was done in 1998. This new provision attempts to protect young adults from becoming a statistic in this study.
4. Restriction on Allocating Payments
  • Currently, credit card companies have full control over how they apply any excess payment received on an account. If you have an account with split rates (for example, you took advantage of a special balance transfer rate and you have a separate rate for normal purchases) more times than not they will apply the excess to the balance that is subject to the lowest interest rate first. The Act will require that all excess, or above-the-minimum, payments to be applied to the highest interest rate balance first.
5. Allowing More Time To Pay
  • Card companies must mail statements 21 days before a payment is due. Currently the law requires 14 days. This new provision is set to go into effect August 20th, 2009.

Here's The Secret!

After reading through the numerous articles and analysis done on this new Act to post this entry, I think I may have stumbled on the secret to avoiding all of this, and I'm willing to share it with everyone reading this......Want a way to totally become immune from all of this? The solution is quite simple: don't use credit cards!! If you discipline yourself (and your spouse, if married) to adhere to a cash-only mentality, Congress can pass whatever legislation they want in regards to consumer credit card protection and your pocketbook won't feel a thing.

Contrary to popular belief, credit cards are not a necessity in life. Somehow our grandparents found a way to survive in the pre-credit card era. If they could do it, so can you.....nothing has changed except the mentality that credit cards are necessary to survive these days. This is a warped mentality that can easily be changed by actually living within your means and paying cash for everything. Try it out sometime.....it's pretty cool!

Monday, July 6, 2009

What Topics Would You Like To See Blogged?

Blogging....I can easily see this becoming a new addiction for me! After publishing my first entry last week I have started drafting numerous articles for future postings.

I plan on posting something out here on a weekly basis at least. Most of my blogging will be on topics that attempt to educate the reader and spark interest in learning more on those topics. They may be as simple as 'How Do I Find A Financial Planner' to more advanced areas such as 'How To Utilize Trusts In Your Estate Plan'.

If there are certain areas of personal financial planning you would like to see discussed, please reply here or contact me via email. My contact information can be found on my website at www.mtrfinancial.com. I will be more than willing to post a blog on those topics as soon as possible.

Thank you, in advance, for your ongoing support to this site, and I look forward to hearing from you!

I hope everyone had a safe and enjoyable 4th of July holiday! Now if we could just get some rain......

Thursday, July 2, 2009

Family Finances – A Role For Both Spouses

Dad mows the yard, cooks all the meals, and handles all repair jobs. Mom does all the grocery shopping, is in charge of taxiing the kids to their ‘practice du jour’, and takes care of the laundry.

Division of household duties such as these sounds all too common these days. In most cases, the handling of family finances falls to a particular spouse as well. However, when it comes to the family finances, it is imperative that both spouses play a role. If not, the result could be a devastating blow when a spouse is left to pick up the pieces.

The primary risk faced by a household which has one spouse managing the family financial affairs alone is that the other spouse is left completely in the dark. Being the financial decision maker in the family, if something were to happen to you would your spouse be able to step in and manage the family wealth?

More times than not, the death of a spouse is the immediate situation people think of. But the same can be said about being a spouse of a soldier being sent half way around the world for the next year, or someone who is too ill to continue handling the family finances. Even if you expect your spouse will turn to a financial planner or advisor for help when you’re not available, will your spouse even know where to look for such help much less what questions to ask?

Taking a proactive approach to bringing your spouse up to speed on your family’s finances will pay huge dividends in case the time comes when you are not around to assist. Most financial advisors will agree that there are six questions your spouse needs to be able to answer regarding your family’s financial picture.

1. Who Do I Need To Contact?
o This first step is the most critical. Your spouse needs to have a well prepared list drawn up for him or her listing your important contacts.

2. Where Is Everything Located?
o Your next step is to outline what assets are held and where they are held. In addition to your investments, there are other important documents which must be located.

3. How Are We Doing Financially?
o Your spouse doesn’t need to know about every trade you make and every stock you may own; however, you should sit down as a couple from time to time and review your current financial picture.

4. In What Order Should I Access Our Assets?
o While some of your assets can be accessed at any time, drawing on other assets may result in unnecessary fees, penalties and taxes. Your spouse needs to know which accounts and assets to tap into first should the need arise.

5. Who Do I Turn To For Help?
o It can’t hurt to assume the possibility that your spouse will be in need of a financial planner or advisor.

6. Where Can I Learn More?
o Even with a financial planner or advisor in the wings, it is important for your spouse to know where to turn to build a basic foundation of financial literacy.

For more details on each question above please visit my website at www.mtrfinancial.com and click on the Free Reports link on the Home page. You will be directed to the full report which you can print and read at your leisure.

Nobody wants to think about life without their spouse. Not having your financial ducks in a row, along with a financially-educated spouse who will be able to pick up the baton and run, will only make the transition that much more difficult......both emotionally and financially. Take the time to sit down together and start this indispensable process.