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Posts Tagged ‘529 Plans’

Where Can I Invest My Daughter’s Money That She Receives for Birthdays and Holidays?

Q: I Would Like to Save My Daughter’s Money That She Receives for Birthdays and Holidays. Where is the Best Place to Put It?

A: It’s great that you are thinking of your daughter’s financial future. That shows that you are a conscientious and loving mom – two traits I’m sure your child will appreciate (if not now, then certainly down the road). Why not use that gift money wisely by putting it into a college savings account to help pay for future educational expenses? Open a 529 Plan in order to reduce the amount of cash you’ll have to pay later toward tuition, room and board and other college costs. A 529 Plan is a state-sponsored college savings program. It’s a great ways to save for college because the money is put into mutual funds that grow over time. What’s more, you can get tax deductions for contributing to a 529 Plan in some states. That money your daughter gets for her birthdays and holidays will also help reduce the need to take out college loans. Learn everything you need to know about 529 Plans at http://www.SavingforCollege.com.

How Can I Lower My Income Taxes?

Author: The Money Coach

Q: How Can I Lower My Income Taxes? My Wife and I Make About $140,000 Combined a Year. We have Two Young Children. We Live in Massachusetts. We Owed Money Last Year and This Year We Owe About $4,600.

A: I know it hurts to get a big tax bill, and it’s not fun to find out that you owe the government nearly five thousand bucks. But there are some ways you can start to lower your taxes in the future. Here are six strategies I’d recommend:

Adjust Your Withholdings At Work
Since you said that you owed money last year also, and that your wife was recently laid off for two months, it very well could be the case that your W-4 withholdings need to be tweaked at work – possibly at both of your places of employment. In essence, you need to adjust your withholdings so that more taxes are taken out over the course of the year. Even though this is still paying taxes, it’s spread out. So you’re less likely to feel the sting of it. Also, by prepaying the proper amount of taxes due over the year, you’ll avoid those nasty IRS penalties for under-payments. Publication 919 from the IRS has more details about properly adjusting your withholdings to that you don’t wind up paying too much tax. The IRS also has a Withholding Calculator available online. Click the following link for more info. http://www.irs.gov/individuals/article/0,,id=96196,00.html.

Max Out Your 401(k)
If you have a 401(k), a 403(b) or any other type of employer-sponsored retirement plan, try to contribute the maximum allowable. Not only might you get a matching contribution from your employer, but you will also reduce your taxable income because money put into a 401(l) plan is contributed on a pre-tax basis. In 2010, the maximum contribution for a 401(k) plan is $16,500. People who are 50 and older can put in an additional $5,500.
The 2010 maximum contribution amount is $5,000 for IRAs, and an additional $1,000 contribution to an IRA is allowable for those 50 and older. So max out that 401(k) plan. Ditto for your wife at her job.

Take Advantage of Health Savings Accounts and Flexible Savings Accounts
If your company has a Health Savings Account, and you haven’t already done so, do sign up for it. Since you have two young children, you can contribute up to $6,150 to an HSA on a pre-tax basis. If you’re going to have to pay for certain health-related costs anyway, why not get a tax break for doing so? Do the same thing with a flexible spending account, which currently has a maximum contribution of $5,000. So get prepared for your next open enrollment season at your job, when you’ll be able to make 2011 selections for your FSA.

Itemize and Boost Deductions
One other way to lower your taxes is to ramp up your deductions. If you don’t take the standard deduction, you obviously need to itemize your deductions. This calls for some good record-keeping. Even though many taxpayers could benefit financially from itemizing their deductions, the IRS reports that lots of people don’t do it – simply because of the extra work involved.

To boost your deductions, here are some ideas about what you can claim:

•   charitable contributions
•   mortgage interest
•   interest on student loan payments
•   business use of a home
•   state, local and foreign income taxes
•   real estate taxes
•   personal property taxes
•   state and local sales taxes
•   qualified motor vehicle taxes
•   any estimated taxes you paid to state or local governments during the year
•   any prior year’s state or local income tax you paid during the year
•   miscellaneous deductions (in excess of 2% of your adjusted gross income)

In your case, your 2010 miscellaneous deductions could be significant. Since your wife was recently out of work, she can claim job-search expenses (like resume preparation, headhunter services, postage for mailings, unreimbursed travel and hotel bills for interviews, etc.). Under the category of “miscellaneous deductions,” you can also take deductions for things like tax and investment advice, as well as unreimbursed employee expenses.

Fund a 529 Plan for Each of the Kids
Since you mentioned having a 5-year-old and an 8-year-old, it’s possible that you’ve already thought about saving money for their future. One great way to do it is by opening a 529 Plan. That’s a state-sponsored college savings plan. Money invested in a 529 plan grows tax free and when you later take the money out to pay for college, the appreciation or gains that have been racked up in a 529 plan are also tax free. Best of all, many states offer a tax deduction for 529 Plan contributions. In 2009, you could put up to $13,000 in a 529 plan without triggering any federal gift taxes. In Massachusetts, where you live, unfortunately there is no direct state tax deduction or credit for contributions. However, according to SavingforCollege.com, which offers great information about 529 plans, Massachusetts does exempt qualified distribution from 529 plans, in conformity with federal law. The state also allows for tax-free treatment of 529 rollovers (i.e. earnings rolled into or out of a 529 plan). Again, if you’re already saving for your kids’ college education, or had planned to do so, you can get some serious bang for your buck with these tax-advantaged 529 plans.

Professional Help Wouldn’t Hurt
In addition to the strategies I’ve just recommended, as a practical matter, it would certainly not hurt you to also do some front-end planning with an accountant or financial advisor. This means you should get going now on tax-reduction activities, ahead of the April 15th tax filing deadline, and continue to make some smart money-moves all year long. A qualified CPA or other tax/financial expert should be able to review your overall financial picture, and give you even more specific advice about how to lower your tax bill.

If you use all these options, chances are by the time next year rolls around, you won’t find yourself having to write yet another big check to Uncle Sam.

The 529 Plan – A State-Sponsored College Savings Plan

Author: The Money Coach

One of my lucky readers just got $5,000 from a family member — not for her, but for her young daughter’s college education. Her question: what to do with it? My answer: Put it in a 529 Plan.

A 529 Plan is a state-sponsored college savings program. In my opinion, these are hands-down the single best way to save for a college education.

Here’s how a 529 plan works. You basically put money into the plan and it’s invested in mutual funds. The mutual funds are managed by professional investment advisers who are selected by the state. A 529 plan is offered by every state in the country, and you can pick any one; it doesn’t have to be a 529 plan from the state in which you live. For example, in our case, we live in NJ, but we picked the New York plan for our 3 children because we think it’s a very good one.

Some highlights to know:

The money you put into a 529 plan grows tax-free
All the money comes out tax-free as long as it’s later used for higher education (i.e. tuition, room/board, lab fees, books, supplies, etc).
Money in a 529 plan is portable — meaning your daughter can take it with her and use it any any college in the country (it doesn’t have to be a college in her state, or in the state in which the 529 plan was set up)
Money in a 529 plan is transferable. Let’s say your daughter decides not to go to college (fingers crossed; that won’t happen!). But assume she doesn’t for whatever reason. If you have another child, you can transfer the money in the 529 plan to him, so that he can use it for college. Even if you or your husband decide to go back to school, you could use the money to pay for your expenses.

With a 529 plan, the money is controlled by you (the donor), and is counted (for financial aid purposes and tax purposes) as an asset in your name; your daughter is listed as the beneficiary. This can help in three ways:

First of all, because you control the money, she can’t just have it when she’s 18 or 21 (the legal “age of majority” in most states). With some funds, like trusts, when a young person turns 18 or 21, they can essentially tell mom & dad “I want a new car” or “I want to travel and find myself” and then proceed to blow their college savings on those things… and there’s nothing the parent can do, because legally the money belongs to the child. That’s not the case with 529 plans.
Also, since the asset is in your name, that can help with student financial aid down the line when your daughter does go to college. All schools look at your families finances, and determine something called your EFC, or Expected Family Contribution. In the simplest terms, that’s the amount of money they expect you/your family to put toward paying for college. (Then the school offers other aid, like scholarships, grants, work study, loans, etc.). Well, in determining your EFC, many colleges will count 20% of an asset owned by a child/student in the calculation for the EFC. However, only 12% of an asset owned by the parent counts toward the EFC. Again, each school is different. But this is a general guideline.
Thirdly, many states offer a tax break to you, as the donor, for making a 529 contribution. Same deal applies for grandparents and others who contribute.Tax benefits vary, of course, based on factors such as amount contributed, income, age, and marital status.

For more info on 529 plans, visit this website: http://www.savingforcollege.com/

And remember, if you have a child: it’s never too early to start saving for college!

Ask The Money Coach

Posts Tagged ‘529 Plans’

Where Can I Invest My Daughter’s Money That She Receives for Birthdays and Holidays?

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How Can I Lower My Income Taxes?

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The 529 Plan – A State-Sponsored College Savings Plan

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