Active Strategic Management
Management / Financial Planning
Wealth management is an investment advisory discipline that incorporates financial planning, investment portfolio management and a number of aggregated financial services. Contact a Paisley Financial Associate to learn more about how we can provide for you.Learn more
401 K Plans
A 401k retirement plan is a special account funded through pre-tax payroll deductions. Funds in the account can be invested in stocks, bonds, mutual funds or other assets, and are not taxed on any capital gains, dividends, or interest until withdrawn.Learn more
An IRA is an Individual Retirement Account, and provides either a tax-deferred or tax-free way of saving for retirement. There are many varieties of IRA's please read more on the link below to see which is right for you.
A 529 plan is a tax-advantaged investment vehicle in the United States designed to encourage saving for the future higher education expenses of a designated beneficiary. Many different plans exist. Learn more to see which is right for you.
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There are many varieties of Educational Plans available that allow you to provide for your children's future. Making the right decision can be difficult based on many circumstances so it is always recommended that you talk to a Paisley Advisor before selection has been made. Below you will find some useful information that will get you up to speed on some of the top plans.
A 529 plan is a tax-advantaged investment vehicle in the United States designed to encourage saving for the future higher education expenses of a designated beneficiary.
There are two types of 529 plans: Prepaid Plans and Savings Plans.
Prepaid plans allow one to purchase tuition credits, at today's rates, to be used in the future. Therefore, performance is based upon tuition inflation.
There are two types of 529 plans: Prepaid Plans and Savings Plans.
Savings plans are different in that all growth is based upon market performance of the underlying investments, which typically consist of mutual funds. Most 529 savings plans offer a variety of age-based asset allocation options where the underlying investments become more conservative as the beneficiary gets closer to college age. The big question in today's volatile markets is what type of downside protection do you have sitting solely in Mutual Funds, even if more conservative options are available? In 2008, even bond funds went down so now, more than ever it is important to work with an Advisor you feel is capable of navigating you through the boom times as well as bust times.
Money from a 529 plan can be used for tuition, fees, books, supplies and equipment required for study at any accredited college, university or vocational school in the United States and at some foreign universities. The money can also be used for room and board, as long as the fund beneficiary is at least a half-time student. Off-campus housing costs are covered up to the allowance for room and board that the college includes in its cost of attendance for federal financial-aid purposes. Note that qualified education expenses do not include student loans and student loan interest.
A distribution from a 529 plan that is not used for the above qualified educational expenses is subject to income tax and an additional 10% early-distribution penalty on the gains portion only unless one of the following conditions is satisfied:
designated beneficiary dies, and the distribution goes to
another beneficiary or to the estate of the designated
o The designated beneficiary becomes disabled. A person is considered disabled if there is proof that he or she cannot do any substantial gainful activity because of a physical or mental condition. A physician must determine that the individual's condition can be expected to result in death or continue indefinitely.
The designated beneficiary receives any of the following:
o A qualified scholarship excludable from gross income
o Veterans' educational assistance
o Employer-provided educational assistance
o Any other nontaxable payments (other than gifts, bequests or inheritances) received for education expenses
Why Start a 529 Plan?
Although contributions are not deductible from the donor's federal income tax liability, many states provide state income tax deductions for all or part of the contributions of the donor. Beyond the potential state income tax deduction possibilities, a prime benefit of the 529 plan is that the principal grows tax-deferred and distributions for the beneficiary's college costs are exempt from tax.
The donor maintains control of the account. With few exceptions, the named beneficiary has no rights to the funds. Most plans even allow you to reclaim the funds for yourself any time you desire, no questions asked. However, the earnings portion of the "non-qualified" withdrawal will be subject to income tax and an additional 10% penalty tax.
A 529 plan can provide a very easy hands-off way to save for college. Once one decides which 529 plan to use, one completes a simple enrollment form and makes a contribution or signs up for automatic deposits. The ongoing investment of the account is handled by the plan, not by the donor. Plan assets are professionally managed either by the state treasurer's office or by an outside investment advisor, like Paisley Financial. The donor will not receive a Form 1099 to report taxable or nontaxable earnings until the year of the withdrawals.
529 plans generally have very low minimum start-up requirements and low contributions. The fees, compared with other investment vehicles, are low, although this depends on the state administering the plan. Everyone is eligible to take advantage of a 529 plan, and the amounts that can be put in are substantial (over $300,000 per beneficiary in many state plans). Generally, there are no income limitations or age restrictions.
Things to Consider
While the number and types of 529 plans is growing, not all investment vehicles are available in 529 form.
The earnings portion of money withdrawn from a 529 plan that is not spent on eligible college expenses will be subject to income tax and an additional 10% federal tax penalty, and the possibility of a recapture of any state tax deductions or credits taken.
The 529 account is counted as an asset that may affect the eligibility of financial aid such as loans and grants. If the parent owns the 529 account, then the financial aid office will only take into consideration 5.64% of the entire value; if owned by the student it will also be considered at 5.64% of the entire value for calculating EFC (Expected Family Contribution).[verification needed] A potential workaround is for the plan owner to be someone other than the student or the parent (such as a grandparent).
Tax Advantages and Considerations
Due to the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), 529 plans gained their current prominence and tax advantages. Distributions from 529 plans for qualified higher education expenses are exempt from federal income tax.
A final rather unusual advantage of the assets in a 529 plan is that although they can be reclaimed by the donor (subject to income tax and the 10% additional penalty on any gains) the assets are not counted as part of the donor's gross estate for estate tax purposes. Thus 529 plans can be used as an estate planning tool to move assets outside of one's estate while still retaining some measure of control if the money is needed in the future. A beneficiary must be designated and the income tax savings are still only obtained if the money is eventually spent for education, though in some cases estate taxes can be reduced without spending the money on education.
In certain circumstances where a 529 account has experienced investment losses over the term of its existence, the contributor to the account may withdraw the funds and have the losses deducted from taxable income but may not be counted as such for Alternative Minimum Tax purposes.
Contributions to 529 plans are considered gifts under the federal gift tax regulations and hence any contributions in excess of $13,000 ($65,000 if filing single over five years) or $26,000 ($130,000 if filing married jointly over a five-year period) per donor count against the one-time gift/estate tax exemption. The five-year period is known as the five-year carry-forward option: Once the single donor puts in $65,000 or the married jointly donor puts in $130,000, they are not be able to make another contribution (gift) to that individual (without using part of their lifetime gifting exclusion) for five years.
Since tuition payments are not subject to the annual gift limitation, parents who are trying to minimize estate taxes may be better off making their annual gifts to another vehicle such as a Uniform Transfers to Minors Act (UTMA) account and then paying the tuition directly.
Coverdell ESA Plans
A Coverdell Education Savings Account
(also known as an Education Savings Account, a
Coverdell ESA, a Coverdell Account, or just an ESA and
formerly known as an Education Individual Retirement
Account), is a tax-advantaged investment account in
the United States designed to encourage savings to
cover future education expenses (elementary, secondary
or college), such as tuition, books, uniform, etc. It
is found at section 530 of the Internal Revenue Code
(26 U.S.C. § 530).
The tax treatment of Coverdell ESA's is much the same as that of 529 plans with a few important differences. Like a 529 plan, Coverdell ESA's allow money to grow tax deferred and proceeds to be withdrawn tax free for qualified education expenses at a qualified institution. However the definition of qualified expenses in an ESA includes primary and secondary school, not just college and university.
Differences with 529 plans
• Coverdell ESA's have lower maximum contribution limits; currently $2,000 can be contributed per year per child, while 529 plans generally have no restrictions on contributions, up to the maximum lifetime contribution.
• Coverdell ESA's can allow almost any investment inside including stocks, bonds, and mutual funds, while 529 plans only allow a choice among a number of state run allocation programs. The rules for investments allowed in ESA's are the same as those for IRAs.
• Balances in a Coverdell ESA must be disbursed on qualified education expenses by the time the beneficiary is 30 years old or gifted to another family member below the age of 30 in order to avoid taxes and penalties; there is no age limit for 529 plans.
• Coverdell ESA's allow withdrawing the money tax free for qualified elementary and secondary school expenses; 529 plans do not.
• The income level of a donor may affect contributions into a Coverdell ESA, but would not affect contributions to a Section 529 plan.
Similarities to 529 plans
• Money in both a Coverdell ESA and a 529 plan is not considered the child's (beneficiary's) money when applying for federal financial aid as long as the owner of the account is someone other than the beneficiary, such as a parent. This works to increase the child's potential financial aid because parents are expected to contribute only around 6% of their assets to finance college education, as opposed to the child's 35%.
• The custodian of both an ESA and a 529 plan can designate a new beneficiary without incurring taxes or penalties provided that the new beneficiary is an eligible family member of the previous beneficiary.
Bright Start Programs
Paisley Financial handles all types of
College savings plans and because we fully believe in the
importance of education we charge no fees directly or
indirectly for management of those assets so long as the owner
of the plan currently has their assets under management with
529 Plans are the most commonly used savings tool for college education nowadays. They are named after Section 529 of the Internal Revenue Code. 529 savings plans provide a tax-advantaged way to save for qualified higher education expenses such as tuition, books and room and board. Investments grow tax deferred, and qualified withdrawals are federal tax free. These plans are generally sponsored by individual states, while plan assets are professionally managed by independent investment firms or state government agencies. Anyone can open a 529 savings account regardless of income level and contribute up to $13,000 ($26,000 for married couples) a year without gift-tax consequences as of 2009.
Any U.S. resident can invest in a Bright Start program. There are no income or state residency restrictions. Corporations, partnerships, trusts, and charitable organizations can also establish and own accounts. Any U.S. resident can be the beneficiary of a Bright Start account. For instance, you can set up an account for your child, grandchild, spouse or someone who is not related to you. If you are planning to attend college or graduate school, you can open an account for yourself.
Funds can be used at any accredited public or private post-secondary institution in the United States and abroad. This includes most two-year and four-year colleges and universities, vocational and technical schools, graduate schools, professional, medical and law schools. Most schools assigned a federal school code by the Department of Education are eligible. We suggest you perform a Federal School Code search and confirm with the school.
Eligible higher education expenses include tuition, books, supplies and equipment required for enrollment. Room and board are also included during the academic year provided the beneficiary is enrolled at least half-time.
An important factor for determining federal financial aid eligibility is the expected family contribution. When figuring the role of 529 plan assets toward that contribution, the following points are considered:
o If the child's parent is the account owner, the account assets will be treated as assets of the parent
o If a dependent child is the account owner, or the beneficiary of a Bright Start account holding assets transferred from a Uniform Gift to Minors Act (UGMA) or Uniform Transfer to Minors Act (UTMA) account, the account assets will not be counted
If the beneficiary receives a scholarship for higher education expenses, you can withdraw an amount equal to the value of the scholarship from your account(s). Earnings on the amount you withdraw would be taxed at your tax rate but will not be subject to an additional 10 percent federal tax.
If my beneficiary does not go to college, as the account owner, you always have control of your withdrawals and have the following three options:
o Keep the funds in the account. Since there are no age restrictions on the investments, they will be available in future years if the beneficiary changes his or her mind about school
o Change the beneficiary. You can change your beneficiary at any time, provided that your new beneficiary is a qualified family member. You should consult your tax advisor to determine whether this may create a taxable gift
o Make a nonqualified withdrawal. Earnings will be subject to federal income taxes and any applicable state income tax, as well as an additional 10% federal tax
Coverdell Education Savings Accounts offer similar tax advantages but contributions are limited and may not be sufficient to adequately fund a college education. In addition, Coverdell accounts restrict who can contribute, based on income levels.
You can open a Bright Start account with as little as $25 and subsequent contributions can be as small as $15. The maximum contribution limit is $320,000. Plan contributions are deductible from your Illinois state taxable income, up to $10,000 ($20,000 if married and filing jointly) per year, including the contribution (but not earnings) portion of rollovers from other state 529 plans. Call us for information regarding deductions outside of Illinois. You can take money from your account at any time. However, if the money is not used to pay for qualified higher education expenses, earnings will be subject to ordinary federal income tax and any applicable state income tax, as well as an additional 10 percent federal tax.
You can open an account in Bright Start with money from my children's UGMA/UTMA account. You must first redeem your current UGMA/UTMA account. The conversion of non-cash UGMA/UTMA assets will be a taxable transaction. You may also roll over money from another 529 plan to Bright Start Savings. You can either make a withdrawal from the other Plan and send it to us within 60 days of the withdrawal, or have us obtain the money from the plan directly.
If you have any questions on saving for your children's future please give us a call to see how you can start. We are always there to discuss the future.