Financial aid for college: Does getting a job help or hurt your student’s eligibility?

August 19, 2013

Remember the good ole days? Back when you could have a summer job working as a camp counselor, a babysitter or a lifeguard, and help fund a significant portion of your college expenses?

While these were – and still are – noble endeavors that can teach young adults valuable lessons about social and financial responsibility, when it comes to paying for college these days, they’re simply not that useful anymore.

In fact, depending on how much one makes, it may actually be doing some harm.

Why? Because the federal financial aid formula factors in a student’s income. In fact, a student’s income and assets are the biggest piece of the financial eligibility formula. Any income over a base protection amount ($6,130 earned in 2012 for the 2013-14 school year) is heavily assessed, and all assets held in the student’s name are assessed at a maximum of 20%. Student assets can include things like their own bank accounts, trust accounts, UGMA/UTMA custodial accounts and education trusts. Retirement assets like Roth IRAs are not included.

For example, if Junior has $10,000 in a Roth IRA, it won’t impact his financial aid eligibility one iota. If he has $10,000 in his bank account, though, his eligibility may drop by $2,000.

This isn’t to say that Junior shouldn’t take that amazing (paid!) internship at a local law firm, but from a college planning perspective, it may be in both his and your best interest to take the income he receives from that job and place it in an account in your name, since parental assets are assessed at a much lower rate than a student’s (approximately 5% versus 20%).

Junior can also avoid taking a major financial aid hit by getting a work-study position on campus, which doesn’t factor into financial aid considerations. He’ll still get the benefits of a regular job – income and discipline – without the financial aid penalty. Moreover, since most work-study positions are on campus, he likely won’t have to take a portion of his income to pay for transportation to and from his job.

Planning for college funding is complicated – and we’re here to help. If you feel overwhelmed by the number of options available to you, consider attending our upcoming webinar, “Education Planning and Funding: 4 Steps to Help Ensure Your Plan Makes the Grade,” on August 21, 2013.

 

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Post-DOMA Financial Planning

July 23, 2013

In late June, the U.S. Supreme Court found that Section 3 of the federal Defense of Marriage Act (also known as DOMA) violates the equal protection clause of the Fifth Amendment of the Constitution. This monumental decision carried with it significant implications for same-sex couples, particularly when it comes to financial planning issues like tax strategies, education planning and retirement accounts.

Generally speaking, planning for same-sex married couples will be very similar to opposite-sex married couples, as same-sex married couples will file either Married Filing Jointly (MFJ) or Separately. For most, but not for all, this should be a benefit from having to file single or head of household due to differences in marginal tax brackets (and corresponding rates) as well the standard deduction, personal exemptions, and Adjusted Gross Income (AGI) phase-out levels. Incomes (and deductions) will be combined, and since each situation is a little different, some taxpayers may be eligible for more benefits, others less.

Read on for a brief overview of how certain areas of financial planning are impacted by this ruling:

Marriage Penalty

  • There are marriage “penalties” for certain items, such as the Net Investment Income surtax that begins in 2013, hitting MFJ taxpayers at $250K in MAGI, versus $200K for single/head of household filers ($250K is a far ways off from the $400K that would be double the single level).
  • Other items subject to a marriage penalty: itemized deduction and personal exemption phase-out levels, ordinary income and long term capital gains rates, child tax credits, IRA deductibility, and Roth IRA contributions.

Education Planning

  • One might find that a single person whose income might have been too high to qualify before for tax credits, such as the American Opportunity/Lifetime Learning Credits, now might be able to via filing jointly.
  • Spouses can now withdraw funds without penalty from their IRA for education expenses for the other spouse. This was not previously available to same-sex couples.

Retirement Accounts

  • Same-sex spouses can now rollover a deceased spouse’s IRAs via spousal rollover, versus treating as a non-spouse beneficiary with an inherited IRA.
  • Same-sex couples can use both spouses’ earned income for purposes of retirement account contributions, in the case that one spouse had earned income and the other did not.
  • Same-sex spouses now receive spousal rights to 401(k)s, pensions, etc.

Overall, same-sex married couples will now enjoy many of the same benefits that were previously only available to opposite-sex married couples. The financial benefits of marriage could be all for naught, though, if you don’t have an effective financial plan in place. If you have questions about how your marital status may affect your plan, meeting with a financial advisor can help clarify what strategies may work best for your specific situation.


Financial Confidence

December 10, 2012

You know investor confidence. Various measures of it are announced periodically to explain movements in the equity and bond markets and, since the housing bust, even in the housing market.

You know consumer confidence. The University of Michigan and the Conference Board each measure it monthly because consumer spending accounts for 70 percent of U.S. gross domestic product.

Now financial confidence is getting attention. A large insurance company devotes a portion of its website to helping African-Americans develop financial confidence. A large financial advisor company offers a quiz to help potential clients measure their financial confidence. And books, magazines and websites are offering financial confidence advice to women.

There’s definitely something in it. A serious academic study in the Journal of Behavioral Decision Making recently concluded that people with greater confidence in their financial abilities are more likely to be planning for retirement and more likely to be minimizing investment fees. This was true even if their financial knowledge wasn’t high. It seems that confidence is a necessary ingredient in one’s ability to begin the difficult and complex retirement planning process.

No one is born with financial confidence but, if you’re reading this, you’re capable of growing your own.

Start by writing down your goals. Divide them into less than a year, one to five years, and longer than five years. Put a dollar amount on each. Then, match up your finances with your goals. Even if they’re not matching particularly well, you’ll have gained confidence simply by understanding your situation.

Max out your 401(k) contributions to leverage the tax advantages and the employer matching contributions. There’s no easier or more efficient way to grow your financial assets and therefore your financial confidence.

Many sources recommend managing risk with disability, life and long-term care insurance as a way to gain confidence.

While these may be fine starting points, we think your next step should be learning by working with a professional. Find a fee-based financial planner that you like, and make those product-purchasing decisions jointly with your planner. The surest marker of financial confidence is the willingness to seek a partnership with a professional who knows more than you do. After all, financial confidence isn’t an end in itself. It’s a means to begin planning for a successful retirement, and the best way to do that is with a financial advisor.


Dream a Little Dream: Know where you want to go

July 10, 2012

People often think defining an investment strategy is the first step in creating a solid financial plan. Slow down. Before you even begin to gather all the information you’ll need to form an investment strategy, sit down on the porch or patio or in front of the fireplace (with your spouse or partner if you have one) and let your mind roam.

What do you really want from life? If you could do anything you want, what would you do? Don’t put financial restrictions on yourself now. Dream. Stretch a little. Once you have that dream defined and you know roughly where you want to go, you can begin to determine what role a financial plan can have in helping you live that dream. 

A good investment strategy begins by identifying your specific individual goals and the time you have to achieve them. Those highly personal decisions, very often driven by your love of others, will suggest your strategy. Your strategy may include shorter- and longer-term objectives.

Are you investing to buy a house, pay for college or to retire with sufficient income to support the lifestyle you desire? How much money will you want for each objective? When will you need it? How can you get there? Will you have to make trade-offs to achieve those goals? Which take the highest priority?

The answers to all of those questions will help you determine your individual strategy. Without that strategy it is nearly impossible to know how to invest.


Will it be a “bearish” summer?

June 15, 2012

Lately, the weaker-than-expected economic data globally and the deepening of the European sovereign debt crisis have prompted market observers to sound the warning bells for a bear market. Some are comparing the current downdraft to what happened in 2010 and 2011, implying much further downside. Others—including international policy makers—have compared the current environment to the summer of 2008, likening the fall of Lehman Brothers to a Greek exit from the eurozone and emphasizing the unknowable “unknowns” and the spillover effects that could follow such an exit.

It seems as though a bearish sentiment has become increasingly pervasive. The American Association of Individual Investors’ sentiment survey has shown a significant increase in bearish sentiment in recent weeks. From our perspective, this level of bearishness is in sharp contrast to the year-to-date total return of 2.6% in U.S. equities! So the question is…whether such bearishness is warranted.

We are highly skeptical of the “doom-and-gloomers” or any forecaster with a strong view of how markets will perform in the near future. Markets and the events that shock markets are nearly impossible to predict on a consistent basis. A broader review of the economic data seems to indicate that while the U.S. economy might be in another “soft patch,” there is still meaningfully positive growth and that growth is likely to continue.

The media is focusing on Europe as the potential catalyst to knock the United States off its path of positive growth; we view this as unlikely. While peripheral Europe has serious solvency and liquidity issues, core Europe is growing and is not in recession, which gives Germany and France room to act to stabilize the economy. Political actions are almost as difficult to predict as the markets; however, the cost of a eurozone breakup would be much greater than the cost of a bailout to the core European countries. So if core Europe acts rationally, it’s difficult to imagine that the European Union would break up, even if it means large additional bailouts or, more likely, major structural reform.

Furthermore, Greece is relatively insignificant. A Greek exit could send a troubling message and start the game of “who’s next,” but on its own, it is a non-event. And, we believe that a Greek exit is unlikely. Returning to the Drachma doesn’t solve any of Greece’s problems; in fact, it enhances them by leading to potential hyperinflation and restrictive capital controls, making an exit even more unlikely. 

So while it might feel reminiscent of the summers of 2008, 2010 and 2011, it’s the summer of 2012. The situation today is materially different from those of previous years. The United States is growing, core Europe is creatively (if too slowly) dealing with the problems of the peripheral countries, and central banks around the world are working to coordinate and promote growth. Overall, the data indicates a heightened level of concern, but nothing that should distract us from staying focused on the long term.

Wealth Enhancement Group


Perspective: JPMorgan’s big losses

May 15, 2012

JPMorgan Chase’s surprise $2 Billion loss is exactly what’s not supposed to happen anymore, but we are not surprised. Before 2008, big Wall Street banks had a great deal going with the American people. If the banks bet big and won, their employees were paid handsomely; if they bet big and lost, well then, American taxpayers were on the hook. The Volcker Rule, part of the sweeping Dodd-Frank bank reform measures that were passed in response to the financial crisis, was supposed to change that by taking the ability to make big, short-term bets on risky assets away from banks that are considered “too big to fail” and, therefore, implicitly backed by taxpayer money. However, the Volcker Rule won’t take effect for another two years, and this recent blunder by JPMorgan will be additional ammunition for bank critics who want to impose more regulation.

These big bets, though, tend to be really profitable. The highly skilled traders that banks can attract, coupled with their knowledge of the markets and technological prowess, means that banks’ trading desks can win more often than Main Street investors. Given that greed tends to rule (and greed is not always bad), it’s no surprise to us that JPMorgan found its way back into the business of betting its own money in a big way. These bets have been very profitable and, up until the surprise announcement, had been almost a bragging point for JPMorgan’s revered CEO Jamie Dimon.

But there is no return without risk, and the risk finally caught up with them. Dimon attributes the loss to “many errors, sloppiness and bad judgment.” He makes it sound as though taking risk doesn’t always lead to some unexpected losses, and if they could have had “more control” over the risk they were taking, the losses wouldn’t have occurred. That’s just not true. The lesson here is that when big bets are taken, both big gains and big losses are possible, regardless of how good you are at managing risk.

 

Wealth Enhancement Group

 

The opinion voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The opinions expressed in this material do not necessarily reflect the views of LPL Financial. To determine which investment(s) may be appropriate for you, consult with your financial advisory prior to investing.

Be It Resolved: Meet Your 2012 Money Goals

January 4, 2012

The time for those New Year’s resolutions is upon us.

In my opinion, making financial resolutions doesn’t have to be painful. If you follow some simple guidelines, financial and other resolutions don’t have to be overwhelming. Remember that the key to reaching any goal is to make it specific, achievable and measurable. Celebrate and reward yourself once you get there. And realize that it’s perfectly acceptable – and smart – to ask for a little help when needed.

Be it resolved: Health first
Before getting into financial resolutions, I want to mention how important it is to consider your health and make it a priority. This is a great place to start with resolutions because there are so many ways to improve health without spending much money. You can go for more walks, which are absolutely free. Or take an exercise class or buy (and use!) a cookbook that focuses on healthy foods. Try a healthy new activity and see if it gives you some extra energy and enthusiasm for your financial resolutions.

Be it resolved: Save and invest more
Based on my conversations with clients, family members and friends, saving more and spending less always seem to be the most popular financial resolutions. The two things go hand in hand and may sound simple, but many people find it difficult to build their savings to the level they desire. You need the right perspective and a specific, achievable savings goal in order to succeed.

Saving really boils down to paying yourself first. For most people, a realistic goal is to save 10 percent of your income. If your employer offers a retirement savings plan with matching contributions, resolve to make the most of it and contribute as much as you can. It is one of the best ways of boosting your savings. You may also want to open and begin making regular contributions to a Roth IRA, which allows you to make tax-free withdrawals of your direct contributions at any time.

Be it resolved: Pay off inefficient debt
If you are one of the many people who want to dump a debt burden this year, you need to know that not all debt is created equal.

Efficient debt isn’t so bad, but you will want to get rid of inefficient debt as soon as possible. Efficient debt works for you because it is tax-deductible and/or appreciates in value. Examples include a home mortgage or an investment in education that can increase your earning power. Inefficient debt includes high-interest credit card debt and debt used to buy things that depreciate and are not deductible, like automobiles and many other consumer goods. Resolve to pay off inefficient debt first.

Be it resolved: Consult a financial advisor
If you feel overwhelmed just thinking about financial resolutions, it’s the perfect time to consult with a financial advisor. A professional can help you get organized, identify goals, save time and find ways for you to maximize your financial efficiency this year.

Best wishes for a healthy and prosperous 2012!

Wealth Enhancement Group