Introduction/Legal Note

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Wealth Management Strategies: 529 Plans

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How To Maximize Their Hidden Value

in 2014

Presented by: Presented by:

Chris Stack, Esq.

Managing Consultant Managing Consultant

This presentation may not be reproduced or distributed for any purpose without the express written consent of Savingforcolleg

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Your clients should consider the investment objectives, risks, charges, and expenses of any 529 Plan Investment Options caref Your clients should consider the investment objectives, risks, charges, and expenses of any 529 Plan Investment Options carefullully y before investing. This and other information is contained in the 529 Plan disclosure Document, which should be read carefull before investing. This and other information is contained in the 529 Plan disclosure Document, which should be read carefully .y . Before Before investing, your clients should read the Plan Disclosure Statement carefully and consider whether their state of residency

investing, your clients should read the Plan Disclosure Statement carefully and consider whether their state of residency—— or tor their heir intended Designated Beneficiary’s state of residency

intended Designated Beneficiary’s state of residency——offers any benefit, such as a state tax deduction, which is only availableoffers any benefit, such as a state tax deduction, which is only available for for investments in that state’s 529 savings program.

investments in that state’s 529 savings program.

Investment Products: Not FDIC Insured / May Lose Value / Not Bank Guaranteed Investment Products: Not FDIC Insured / May Lose Value / Not Bank Guaranteed

Introduction/Legal Note

• SFC is a well known independent resource and authority on 529 plans.

• Chris Stack has been a member of the NYS Bar for over 20 years and leads SFC educational and training • SFC is a well known independent resource and authority on 529 plans.

• Chris Stack has been a member of the NYS Bar for over 20 years and leads SFC educational and training y g efforts. He has served as author of 529 state legislation for several states and is very familiar with relevant provisions of Section 529 and various state programs and opened two 529 accounts in 1997. • SFC and its affiliates are not broker-dealers, not affiliated with American Century or any product

sponsor or broker-dealer of its affiliates and are not in the business of selling or offering securities and do not make recommendations to buy or sell securities of any kind. We do, however, receive fees from many managers of these programs, for a variety of products and services that we furnish, including a fee from American Century for speaking before you today and others other times.

IRS Ci l 230 N ti T li ith i t i d b th IRS i f d

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efforts. He has served as author of 529 state legislation for several states and is very familiar with relevant provisions of Section 529 and various state programs and opened two 529 accounts in 1997. • SFC and its affiliates are not broker-dealers, not affiliated with American Century or any product

sponsor or broker-dealer of its affiliates and are not in the business of selling or offering securities and do not make recommendations to buy or sell securities of any kind. We do, however, receive fees from many managers of these programs, for a variety of products and services that we furnish, including a fee from American Century for speaking before you today and others other times.

IRS Ci l 230 N ti T li ith i t i d b th IRS i f d

• IRS Circular 230 Notice: To ensure compliance with requirements imposed by the IRS, you are informed that any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding U.S. tax penalties.

• This presentation does not constitute tax advice and investors should consult their tax

advisors prior to making contributions to a 529 plan.

• IRS Circular 230 Notice: To ensure compliance with requirements imposed by the IRS, you are informed that any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding U.S. tax penalties.

• This presentation does not constitute tax advice and investors should consult their tax

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Most Clients Have the Same 2

Long-Term Financial Goals

1. 1. Safe & secure retirement

Safe & secure retirement

2. 2. Education of family members

Education of family members

Why Should Every Advisor Promote

College Savings & Investing?



Client Need Their HelpClient Need Their Help



The client’s (grand)kids are 1 year closer to college yearsThe client’s (grand)kids are 1 year closer to college years



College costs continue to rise 2x CPI College costs continue to rise 2x CPI



Meaningful financial aid is NOT available for most clientsMeaningful financial aid is NOT available for most clients



Most financial aid consists of loans; increasing the costMost financial aid consists of loans; increasing the cost



Numerous Benefits are Available beyond a college accountNumerous Benefits are Available beyond a college account

= Need to Plan and Prepare Clients! = Need to Plan and Prepare Clients!

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College Costs are High Now

and Still



2x CPI:

2013

2013--2014 Cost of attendance

2014 Cost of attendance

x 4 yearsx 4 years = = Cost not <Cost not <

Baylor $54,086 $216,344

University of Chicago $63,860 $255,540

University of Florida (non

University of Florida (non--res)res) $42,498$42,498 $169,992$169,992

George Washington (DC) $62,618$62,618 $250,472$250,472 Notre Dame Notre Dame $60,117$60,117 $240,468$240,468 NYU NYU $64,047$64,047 $256,188$256,188 Ri Ri $54 291$54 291 $217 164$217 164 © 2014 Savingforcollege.com LLC Rice Rice $54,291$54,291 $217,164$217,164 SMU SMU $61,767$61,767 $247,068$247,068 TCU TCU $50,530$50,530 $202,120$202,120 UT Austin UT Austin $27,096$27,096 $108,384$108,384 U So. Cal U So. Cal $62,245$62,245 $248,980$248,980

What about Financial Aid?

Two basic forms of financial aid:

 Merit aid – to induce an exceptional student to attend a particular college or university – mostly funded by a college

 Needs-based aid – based upon the difference between the college cost and the federal formula’s determination of the

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 Merit aid – to induce an exceptional student to attend a particular college or university – mostly funded by a college

 Needs-based aid – based upon the difference between the college cost and the federal formula’s determination of the

f il ’ bilit t M t id l

family’s ability to pay; Most aid = loans

The 2013 graduate had an average of > $35,000 of loans The 2013 graduate had an average of > $35,000 of loans11

1_Fidelity

family’s ability to pay; Most aid = loans

The 2013 graduate had an average of > $35,000 of loans The 2013 graduate had an average of > $35,000 of loans11

1_Fidelity

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What about 529 Accounts

and Financial Aid?

529 accounts are treated as assets of the account owner, thus –

Who is the 529 account owner?

 Grandparent – Zero impact

 Parent – eligible asset = 5.6% counted

 Student/UGMA – none 529 investment: 20% of assets Who is the 529 account owner?

 Grandparent – Zero impact

 Parent – eligible asset = 5.6% counted

 Student/UGMA – none 529 investment: 20% of assets

 Student – owning a 529 acct through UGMA = 5.6%

= No penalty for owning a 529; = No penalty for owning a 529;

treatment is no different than many/most other assets treatment is no different than many/most other assets

 Student – owning a 529 acct through UGMA = 5.6%

= No penalty for owning a 529; = No penalty for owning a 529;

treatment is no different than many/most other assets treatment is no different than many/most other assets

Why Should We

Use 529 Plans?



 “The Best Way To Save for College”: SFC“The Best Way To Save for College”: SFC



 2nd leading reason for long term saving/investing 2nd leading reason for long term saving/investing

= “STICKY ASSETS” = “STICKY ASSETS”



 One of the biggest obstacles to the preservation and One of the biggest obstacles to the preservation and growth of individual and family wealth over time is: growth of individual and family wealth over time is:

 Improper asset allocation/bear marketsImproper asset allocation/bear markets 

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Taxes have risen: 2013 rates

Why Are 529 Plans

the Solution?

I.

I. 529 accounts grow free of federal and state taxes529 accounts grow free of federal and state taxes

II.

II. Qualified withdrawals free of federal and state taxes (except AL) Qualified withdrawals free of federal and state taxes (except AL)

III.

III. Most college and graduate school expenses are qualifiedMost college and graduate school expenses are qualified

IV.

IV. No age, time, or income limit on owner/accountNo age, time, or income limit on owner/account

V.

V. No residency requirementNo residency requirement

VI.

VI. No penalty for financial aid awardsNo penalty for financial aid awards

VII

VII Generous gift and unique estate tax treatmentGenerous gift and unique estate tax treatment

VII.

VII. Generous gift and unique estate tax treatmentGenerous gift and unique estate tax treatment

VIII.

VIII. Federal/state creditor protection may be available Federal/state creditor protection may be available (Title 5 (Title 5 –– TX Property Code)TX Property Code)

IX.

IX. Beneficiary never has any access to accountBeneficiary never has any access to account

X.

X. Owner always has daily liquidity and controlOwner always has daily liquidity and control

Clients must be informed that depending upon the laws of their home state, favorable state tax treatment of funding a Section 529 plan may be limited to investments made into plan offered by their home state.

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Federal Income Tax Rules



Qualified withdrawals: 2 prong testQualified withdrawals: 2 prong test

1

1 Wh t tWh t t ff hh l? Sl? S

1.

1. What type of school? See: What type of school? See:

http://www.savingforcollege.com/eligible_institutions/ http://www.savingforcollege.com/eligible_institutions/

2.

2. What type of expense: Tuition, fees, room & board, What type of expense: Tuition, fees, room & board, books, supplies & equipment required for attendance books, supplies & equipment required for attendance ––

, pp q p q

no transportation & no beer $ no transportation & no beer $

Federal Income Tax Rules



Qualified withdrawals from a 529 plan are excluded from Qualified withdrawals from a 529 plan are excluded from federal income taxes:

federal income taxes:

–

– Hypothetical Example:Hypothetical Example:

 If $100,000 is contributed today for an 11If $100,000 is contributed today for an 11--year oldyear old  Assume growth over 7 years @ 6% to $150,000Assume growth over 7 years @ 6% to $150,000

= $50,000 of earnings is excluded from federal and 49 = $50,000 of earnings is excluded from federal and 49

states’ income taxes (if any) when withdrawn for states’ income taxes (if any) when withdrawn for

states income taxes (if any) when withdrawn for states income taxes (if any) when withdrawn for qualified expenses!

qualified expenses!

The hypothetical return does not represent the return of any particular investment. The hypothetical return does not represent the return of any particular investment.

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What Happens if

Not Used for College?

If owner decides not to use for designated beneficiary’s If owner decides not to use for designated beneficiary’s

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college expenses, they have three options: college expenses, they have three options:

1.

1. Change beneficiary to member of beneficiary’s familyChange beneficiary to member of beneficiary’s family

2.

2. Do nothing and continue to earn on taxDo nothing and continue to earn on tax--deferred basisdeferred basis

3.

3. Withdraw funds for any other purpose and pay taxes and Withdraw funds for any other purpose and pay taxes and

penalty on earnings withdrawn penalty on earnings withdrawn

Federal Law: Non-Qualified

Withdrawals



Redemptions/Withdrawals are proRedemptions/Withdrawals are pro--rata principal and earnings rata principal and earnings

Basis/value of account x distribution = principal portion



 Earnings portion taxed to “distributee” (Earnings portion taxed to “distributee” (account owner or account owner or beneficiary at his/her lower tax rate

beneficiary at his/her lower tax rate) as ordinary income*) as ordinary income* 

 Federal penalty (10% of the Federal penalty (10% of the earningsearningsportion portion onlyonly)) 

 Penalty exceptionsPenalty exceptionsfor beneficiary’s death disability receipt offor beneficiary’s death disability receipt of

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

 Penalty exceptionsPenalty exceptionsfor beneficiary s death, disability, receipt of for beneficiary s death, disability, receipt of a

a scholarshipscholarship or use of other tax credits for expensesor use of other tax credits for expenses 

 NO Net Investment Income TaxNO Net Investment Income Tax

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Federal Income Tax Rules



NonNon--Qualified withdrawal of Qualified withdrawal of earningsearningsare taxable to are taxable to “distributee”

“distributee”at ordinary federal tax rates plus 10% penaltyat ordinary federal tax rates plus 10% penalty --Hypothetical Example:Hypothetical Example:

 $100,000 grows to $150,000 over 7 years @ 6% $100,000 grows to $150,000 over 7 years @ 6%

 A $30,000 withdrawal for A $30,000 withdrawal for nonnon--qualified expenses only qualified expenses only == 100/150K x 30 = $20,000 ROP = no tax 100/150K x 30 = $20,000 ROP = no tax

$10,000 earnings @ 10% tax rate = $1,000 $10,000 earnings @ 10% tax rate = $1,000 $10,000 earnings x 10% penalty

$10,000 earnings x 10% penalty = $1,000= $1,000 Total federal tax and penalty

Total federal tax and penalty = $2,000 = $2,000 NO NIIT ON ANY WITHDRAWAL!! NO NIIT ON ANY WITHDRAWAL!!

Federal Income Tax Rules



NonNon--Qualified withdrawal requires tax onQualified withdrawal requires tax onearningsearnings plus a plus a 10% penalty

10% penalty

IF

IF: $100,000 achieves : $100,000 achieves nonogrowth or earnings; remains flat growth or earnings; remains flat

A $30,000 withdrawal for

A $30,000 withdrawal for nonnon--qualified expenses only qualified expenses only == 100/100k x 30 = $30 000 return on principal 100/100k x 30 = $30 000 return on principal © 2014 Savingforcollege.com LLC 100/100k x 30 = $30,000 return on principal 100/100k x 30 = $30,000 return on principal = No federal tax

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What About

Gift and Estate Taxes?

What Are the Potential

Gift/Estate Tax Benefits?

What Are the Potential

Gift/Estate Tax Benefits?



 Contributions to a 529 account are completed gifts to designated Contributions to a 529 account are completed gifts to designated beneficiary

beneficiary 

 The annual $14,000 gift tax exclusion applies to funding The annual $14,000 gift tax exclusion applies to funding 

 One may elect to apply five years’ worth of annual exclusions (upOne may elect to apply five years’ worth of annual exclusions (up to 70,000 for single filers; $140K joint) at once* (use Form 709) to 70,000 for single filers; $140K joint) at once* (use Form 709) 

 New Unified/Lifetime Gift Tax Credits per person are also New Unified/Lifetime Gift Tax Credits per person are also available

available ($5.34M)($5.34M)



 Some states have their own estate tax (including CT, NJ, NY, MA, WA) Some states have their own estate tax (including CT, NJ, NY, MA, WA)

Funding = Gifting removes the asset from the donor’s taxable estate Funding = Gifting removes the asset from the donor’s taxable estate

*The Donor must be alive on January 1 of the year for which they claim such annual exclusion or that portion of the contribution must be added back to the Donor’s estate for determining the taxable estates

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An

An ExampleExample::

J h d hi ife e f di f 529 t i e h

Maximizing the Value

of a 529 Account

John and his wife compare funding four 529 accounts naming each of four grandchildren, versus funding a taxable account in 2012:

With

With 529 Accounts529 Accounts Without Without 529 accounts529 accounts

$100,000 x 4 accounts x $400,000 x 4.2% (6%

x 6% x 7 years (no annual taxes) - taxes @ 30%*) x 7 years

* Illustration is only hypothetical & does not represent the return of any specific investment return. Reflects potential * Illustration is only hypothetical & does not represent the return of any specific investment return. Reflects potential--in in state & federal tax rates. Lower maximum tax rates on capital gains and dividends would make the investment return for the state & federal tax rates. Lower maximum tax rates on capital gains and dividends would make the investment return for the taxable investment more favorable, thereby reducing the difference in performance between the accounts shown and higher taxable investment more favorable, thereby reducing the difference in performance between the accounts shown and higher tax rates would likewise increase the difference

tax rates would likewise increase the difference..

If they did invest in 2013 and died 7 years later in 2020, their heirs (not 529 beneficiaries) inherit either:

Maximizing the Value

of a 529 Account

With 529 Accounts Without 529 accounts

$601,452(full account) $320,100 after 40% federal & state

with noestate taxes due estate tax* of $213,400

= $281,352 more after 7 years on original $400,000 having invested in the four accounts

(assumes estate tax credits applied to other assets in taxable estate)

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Evenif the estate tax is eliminated or modified with no

An example:

Maximizing the Value

of a 529 Account

Evenif the estate tax is eliminated or modified with no application to them, then they still:

Have >$68K more after 7 years due to income tax deferral

Continued to own and control those assets in 529 account

Transfer 529 accounts to successor owner with no probate

p

 Many Many trusts are set up to fund educational expensestrusts are set up to fund educational expenses

How May a Trust Benefit?

 Trusts are subject to high federal and state income tax ratesTrusts are subject to high federal and state income tax rates 39.6% + 3.8% federal tax

39.6% + 3.8% federal tax rate on earningsrate on earnings> $> $12,150; 12,150; + some

+ some state rates > 9%state rates > 9%



 Trusts Trusts may invest in and own may invest in and own a taxa tax--free free 529 account(s)529 account(s)

 Irrevocable Irrevocable trusts may max trusts may max funding funding an account for each an account for each beneficiary

beneficiary 

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UGMAs UGMAs have lost their tax advantage they have lost their tax advantage they once enjoyed once enjoyed

What About UGMAs?



Tax rates for incomes > Tax rates for incomes > $2,000 $2,000 at parent’s rate at parent’s rate up to age up to age 1818 

 NowNow, taxed at parent’s rate , taxed at parent’s rate up to age up to age 24 24 for for fullfull--time studentstime students11



Solution

Solution:

:

Invest UGMA

(cash)(cash)

in a 529

in a 529 plan

plan

22



Tax Tax on earnings = 0% rather than parent’s rateon earnings = 0% rather than parent’s rate 

Already gifted: not subject to annual gifting amountAlready gifted: not subject to annual gifting amount



Already gifted: not subject to annual gifting amount Already gifted: not subject to annual gifting amount

1 _{Applies only to children whose earned income is not > one-half of the amount of their support.} 2 _{UGMAs are irrevocable and one cannot change UGMA beneficiary. 529 plans may only accept cash. In}

order to invest assets from an UGMA account into a 529 plan, the account owner may have to sell assets in the UGMA account, pay taxes on those assets, and then transfer the money to the 529 plan. Whereas the tax advantages of 529 plan earnings attach to withdrawals for higher education expenses, expenditures from an UGMA account may be less restricted.

Funding the 529 Account

A $4,000 investment ?

-- or a

or a

$400,000 investment?

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Why Would A Client

Not

Choose

to Fund the 529 Account?



 The client requires all invested assets for incomeThe client requires all invested assets for income 

 They have all of their assets in qualified plansThey have all of their assets in qualified plans 

 They believe they can net a higher return elsewhereThey believe they can net a higher return elsewhere 

 The client does not care for their child or grandchildThe client does not care for their child or grandchild 

 They don’t understand that they always maintain completeThey don’t understand that they always maintain complete



 They don t understand that they always maintain complete They don t understand that they always maintain complete control over the account and they are unaware that control over the account and they are unaware that the penalty is 10% on earnings withdrawn pro

the penalty is 10% on earnings withdrawn pro-- ratarata –

– not the full withdrawal!not the full withdrawal!

Managing the 529 Account



 Accounts are typically “tapped” before retirement accountAccounts are typically “tapped” before retirement account 

 There is a need to access funds in shorter time span = lessThere is a need to access funds in shorter time span = less 

 There is a need to access funds in shorter time span less There is a need to access funds in shorter time span less time to “recover” losses/underperformance

time to “recover” losses/underperformance 

 Investment reallocation is restrictedInvestment reallocation is restricted 

 Investment changes to account only 1x per yearInvestment changes to account only 1x per year 

 Rollovers Rollovers -- similar to IRAs similar to IRAs –– New plan transfers assets @ New plan transfers assets @

no cost, penalty or taxes if within 60 days or Trustee to no cost, penalty or taxes if within 60 days or Trustee to Trustee

Trustee 

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Selecting a 529 Plan



 Are you familiar with the underlying funds?Are you familiar with the underlying funds? 

 Are there multiple investment choices?Are there multiple investment choices? 

 Are there multiple investment choices?Are there multiple investment choices?



 How is the ageHow is the age--based portfolio structured?based portfolio structured? 

 Are there forms required to adjust account or withdraw?Are there forms required to adjust account or withdraw? 

 Are there hidden fees/restrictions? Are there hidden fees/restrictions? 



 Is there investment flexibility?Is there investment flexibility? 

 What is the plan’s What is the plan’s netnetperformance?performance? 

 What is the cost/value tradeWhat is the cost/value trade--off?off?

The views expressed in this material are the views of Savingforcollege.com and are subject to change without notice at any time based upon market and other factors.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

This information may contain certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those discussed There is no guarantee that may differ materially from those discussed. There is no guarantee that investment objectives will be achieved or that any particular investment will be profitable. Past performance does not guarantee future results.