College Pricing Trends
October 29, 2009 by Jean Keener, CRPC, CFDP · Leave a Comment
Every October, the College Board releases its Trends in College Pricing report that highlights college cost increases and trends. While costs can vary significantly by region and individual college, the College Board publishes average cost figures, which are based on its survey of 3,500 colleges across the country.
Here are highlights from its latest report:
- At four-year public colleges for in-state students, tuition, fees, and room and board increased by 5.9% from last year, with the total cost for 2009/2010 averaging $19,388
- At four-year public colleges for out-of-state students, tuition, fees, and room and board increased by 6.0% from last year, with the total cost for 2009/2010 averaging $30,196
- At four-year private colleges, tuition, fees, and room and board increased by 4.3% from last year, with the total cost for 2009/2010 averaging $39,028
“Total average cost” includes tuition and fees, room and board, books and supplies, transportation, and a small amount for miscellaneous expenses.
To read the Trends in College Pricing report, visit www.trends-collegeboard.com.
Student aid trends
The College Board is quick to point out that the average “sticker price” cost figure is not necessarily representative of what most students pay. That’s because almost two-thirds of undergraduate students receive grants that reduce the actual price of college. The largest provider of grant aid is individual colleges, followed by the federal government, private sources and employers, and state governments.
For the 2009/2010 year, the College Board estimates that students at public colleges will receive an average of $5,400 in grant aid from all sources and federal tax benefits, and students at private colleges will receive an average of $14,400 in grant aid from all sources and federal tax benefits. Federal tax benefits include the American Opportunity tax credit (formerly called the Hope credit), the Lifetime Learning tax credit, and the deduction for qualified higher education expenses.
Every year, the College Board also releases a sister report to Trends in College Pricing, called Trends in Student Aid, that examines student financial aid in more detail. To read this report, visit www.trends-collegeboard.com.
Funding early retirement
October 26, 2009 by Jean Keener, CRPC, CFDP · Leave a Comment
Most are familiar with the magic ages of 59 ½ when you can start withdrawing from retirement savings without paying the 10% IRS penalty and 62 when you can start taking social security. But sometimes retirement comes before these ages either voluntarily or involuntarily, and you may need income. In those situations, many are not aware that you still have options to tap your retirement savings without penalties.
The first option is available if you are at least age 55 and you stop working for your employer. If your employment terminates during or after the year you turn 55, you are eligible to start drawing funds from that employer’s 401(k) without penalty. If you have multiple retirement accounts, this exception doesn’t apply to all of them. It only applies to those employer retirement accounts where you “separate from service” after turning 55. If you roll the employer plan funds into an IRA, the exception also no longer applies. For qualified public safety employees who take a distribution from a government defined benefit plan, this exception kicks in at age 50.
Another option is called “substantially equal period payments” or 72(t) distributions. You can start taking funds from your retirement accounts (401(k), IRA, 403(b), etc.) at any age with this option, although it doesn’t apply to any employer retirement plans when you’re still working for that employer. To use this option, you are required to begin taking a “substantially equal” amount each year and continue without variation for at least 5 years or until you reach age 59 ½ (whichever comes later). You have a choice of 3 different calculation methods of your payment. Once you start, you are committed to using the same method for the duration of the payments, with the exception of one adjustment allowed from two of the methods to the third one.
The IRS is quite picky about the precise calculations of 72(t) distributions and imposes steep penalties for any mistakes. An error in one year can cause back-penalties on all previous distributions taken. So you really need to consult a professional to have your distributions calculated. And once you start, you absolutely have to stick with the program.
With either of these options, it’s important to look at the big picture of your overall retirement funding. Starting to withdraw from your savings too early can result in a significantly reduced standard of living later on, or it may be just fine in your situation.
Of course, you will still owe taxes on any distributions taken from tax-deferred accounts, and it’s a good idea to plan for those taxes when considering these strategies.
Quoted in Dallas Morning News on 2010 Roth conversions
October 25, 2009 by Jean Keener, CRPC, CFDP · Leave a Comment
I had the opportunity to talk with Pamela Yip, personal finance columnist at the Dallas Morning News, a couple weeks back about 2010 Roth IRA conversions. Her article provides a good synopsis of the changes for 2010, and quotes me on when conversion makes the most sense. Click here to read the article.
Texas Tomorrow Fund Deadline Rapidly Approaching
October 21, 2009 by Jean Keener, CRPC, CFDP · Leave a Comment
For participants in the Texas Guaranteed Tuition Plan (also known as the Texas Tomorrow Fund) an important refund deadline is approaching. Any refund requests received before November 30 will be processed according to the current rules. The current rules allow for a refund of the original contribution plus earnings based on the rate of tuition inflation for a child who is age 18 or older. For those under 18, an actuarial value is calculated based on the date you bought the contract, the number of years until your child graduates from high school or turns age 18, and the number of payments made compared to the total number of payments required. After November 30, the new rules allow for only a return of the contributions, less expenses. Big Difference!
If you bought into the Texas Tomorrow Fund and your child plans to attend an accredited school in Texas, this change likely doesn’t affect you. You still have their tuition costs locked in and you have a terrific guarantee that no matter how high tuition goes, the plan credits you purchased will cover the costs. So you really wouldn’t want a refund.
However, if your child plans to attend school out of state or not attend college at all, you may wish to consider taking action now. In this case, you have several options.
You can request a refund from the plan and do a roll-over to another 529 plan. This would be a good option if your child plans to attend college out of state and you want access to control the investments prior to your child’s college enrollment. If you complete the roll-over within 60 days, you will not be subject to any taxes or penalties.
If you decide to do a roll-over, here are a couple of pointers: You are not required to use the state’s 529 plan where your child plans to attend school. Texas has no state income tax, so there’s really no incentive for using the Texas plan over any other plan. You are truly free to comparison shop and use any state’s plan that offers the best options for you. www.SavingforCollege.com is a good resource to start your search.
Another option is to simply take a withdraw. This may be the best option if your child does not plan to attend college and you have no eligible alternate beneficiary you wish to change to. If you go with this option, you will be subject to income taxes and a 10% penalty on the gains (gains are any amounts refunded in excess of what you contributed).
The Texas Guaranteed Tuition Plan website has a lot of really good information about this change and options available to you. You can log in and see your estimated account value to aid in your decision.
The important thing is to review the refund option based on your specific situation, calculate all of your options in advance of the deadline, and make a decision most beneficial to your family. There’s not one right answer for everyone.
Quoted in couples and money article
October 15, 2009 by Jean Keener, CRPC, CFDP · Leave a Comment
Associated Press Personal Finance Writer Eileen AJ Connelly interviewed me earlier this week about couples and money. Her questions were about whether joint accounts or separate accounts were better for couples to manage their money. The recent John and Kate debacle is what sparked public interest in the subject matter. But no matter what causes the attention, it’s always great to get couples talking with each other about money.
My answer: bottom line, there’s not one system that’s best for everyone. The important thing is to communicate well with each other and devise a system that makes sense to each of you and your relationship. It’s also really important that both people in the relationship are involved in managing the couple’s finances at least on some level. See her article on Oregon Live.
Partial Roth Conversion Strategy
October 13, 2009 by Jean Keener, CRPC, CFDP · Leave a Comment
When people find out how much tax they would have to pay to convert their IRA from traditional to Roth, it’s often times a conversion show stopper. Even if all the analysis shows that conversion would be clearly beneficial to their after-tax retirement income levels or provide estate planning benefits, there’s a gigantic psychological hurdle with writing a check to the IRS sooner rather than later. However, the conversion decision can become more attractive when you realize it’s not an all or nothing decision. You can choose to convert just part of your traditional IRA balance.
How do you decide how much to convert?
One reasonable way of determining how much to convert is doing enough to take you to the top of your current tax bracket without going into the next one. You might also determine how much of a tax bill you would be willing to pay, and then calculate the conversion amount based on that. For most, one of these two options will create the most appealing results.
There is a third option in the “fancy financial footwork” category.
This third option will result in far too much paperwork for many individuals to want to deal with it, especially for a smaller traditional IRA balance. But if you have a larger IRA – say $50,000 or more – the extra work might be worth the tax savings. Conversion is not an irrevocable decision until you get to the tax filing deadline of the next year (October 15 for most people). This 21-month window from January 2010 until the deadline to “recharacterize” the conversion creates a Roth Segregation Opportunity, pioneered by David Marotta of Marotta Wealth Management in Virginia and written up in a recent Financial Planning Magazine article.
Using the Roth Segregation Strategy, you convert your entire traditional IRA balance in January 2010. Let’s say the balance is $100,000 for easy math. Instead of putting the entire conversion in one account, you put $20,000 in each of 5 accounts. Each of these 5 accounts is invested in a different equity asset class – you might do 20% large cap growth, 20% large cap value, 20% small cap, 20% developed international, and 20% emerging markets. Then, around the beginning of October 2011, you assess which of these asset classes has performed the best. You keep the converted IRA with the best performance and recharacterize each of the other 4 back to traditional IRAs. This limits your tax liability (payable on 2011 and 2012 tax returns) to just the taxes on the $20,000. Of course, if multiple asset classes performed extremely well, you might choose to keep more of the conversions. Or if they all declined in value, you would likely recharacterize them all.
This strategy is not a simple one. It requires a lot of analysis and rigorous tracking of the paperwork to ensure that everything is completed properly. You would also want to ensure that going with such an aggressive equity allocation in your IRA over the 21-month period made sense within the larger context of your portfolio, time horizon, and risk tolerance. And for those that plan to do a full conversion vs. a partial, there’s no benefit to setting up all the different accounts.
But for those of you who relish a little financial creativity and don’t mind complexity, this can be a pretty cool opportunity to analyze and implement – and unique to the 2010 opportunity to spread taxes over 2011 and 2012.
Pink Slip Lemonade
October 5, 2009 by Jean Keener, CRPC, CFDP · Leave a Comment
As the economy begins its recovery but the job losses keep coming, many are finding the need to be creative with their careers and their financial situation. Last week, I had the pleasure of spending some time chatting with fellow Garrett Planning Network member Sherrill St. Germain, CFP®. Sherrill’s built a financial planning practice in New Hampshire around helping people make career transitions without wreaking havoc on their finances.
Because so much financial information is needed right now for career changers and those between jobs, I want to highlight a fantastic series of blog posts that Sherrill did in June. In this series aptly titled Pink Slip Lemonade, Sherrill – along with some guest bloggers — cover a range of financial planning topics relevant to the laid-off and the employed-but-worried, highlighting strategies that enable families to survive — and even thrive — in these difficult times, as well as better weather future financial storms. Click here to read Pink Slip Lemonade.
October 2009 Newsletter
October 2, 2009 by Jean Keener, CRPC, CFDP · Leave a Comment
The October newsletter is now available. It includes a reminder about the October 15 deadline to recharacterize 2008 Roth IRA conversions, a market update, how to calculate your net worth and why net worth is the financial number to watch, and more. To read the newsletter, click here.