Making Sense of College Savings

Saving for college is a daunting task. Over the past decade, tuition rates have been steadily rising and student financial aid is getting harder and harder to come by. The average college graduate had $26,500 of student loan debt in 2011, up almost 5% over the year before. To help ease the pain of rising tuition costs there are several college savings vehicles that help to save for college in tax-favorable ways. Let’s take a look at some of these plans.

A 529 plan is one of the most flexible ways to steadily save for college for your child, grandchild or other future student in your life. There are no income limitations on who can contribute to a 529 plan. Anyone can be an account owner and anyone can be a beneficiary. A contribution is considered a completed gift and is therefore excluded from a contributor’s estate. The contributions into the plan are not tax deductible but the earnings grow tax-free and there is no taxation on withdrawal as long as the withdrawal is used for qualified educational expenses.

529 plans fall under two categories – prepaid and savings. Prepaid plans lock in a tuition rate at an eligible public or private university. The contributions to the plan are only eligible to cover tuition and mandatory fees. Lump-sum installment plans are set up based on the beneficiary’s age and the number of years purchased; this is an advantage because it locks in lower tuition rate for the future. However, it impacts the student’s flexibility when choosing a university. Enrollment in these plans is also often limited to a certain time of year.  Read more

Bracing yourself for higher taxes

In 2013 a slew of new and increased taxes are set to be unleashed on individual taxpayers. Two of these taxes are the result of the 2010 Health Care legislation and will directly impact many of our clients.

Beginning January 1, 2013 an additional 0.9% Hospital Insurance (HI) tax will be imposed on “high-income” taxpayers who are defined as single individuals with $200,000 or more of wages or self-employed income per year, $250,000 for married filing joint and head of household filing statuses and $125,000 for married filing separate individuals. This tax effectively raises the current employee-portion of the medicare tax from 1.45% to 2.35% for wages or self-employed income earned in excess of the above limitations. The additional tax is required to be withheld when an individual taxpayer’s wages are more than $200,000, but that does not take into account a spouse’s earnings. Situations in which both spouses work but neither reach the $200,000 level individually may find themselves owing an additional 0.9% on their salaries come tax time. An adjustment of current withholding levels may be necessary, especially in dual income households, for taxpayers that may be subject to this additional tax. Read more

IRS Announces Round 3 of OVDI

Yesterday the IRS announced a third round of their highly successful Offshore Voluntary Disclosure Initiative (OVDI) program. The OVDI was highly publicized with the 2009 revelation that several large Swiss banks, including UBS, were going to be cooperating with the IRS in disclosing the names of US citizens and residents holding Swiss bank accounts. Read more

Roth Conversion Planning

With the end of the year coming up it seems appropriate to mention an often overlooked potential planning strategy. For some taxpayers who have very little ordinary income and still have deductions resulting in little to negative taxable income for the year, it may make sense to consider doing a Roth conversion on a portion of any tax-deferred retirement accounts. Read more

Roth IRA’s – Turn the Bad Market to Your Advantage

Thinking of converting your traditional IRA to a Roth IRA?

One advantage of this downturn in the market may be to convert your traditional IRA to a Roth IRA. Remember that you only pay tax on the value at the date of conversion (less your after tax contributions).

Did you already convert your traditional IRA to a Roth IRA in 2010?

If so you may still change your mind until October 17, 2011, even if you already filed your 2010 tax return. If the value of your Roth IRA has decreased since the original conversion, you should consider reversing back to a traditional IRA. After waiting 30 days, you may again convert the presumably lower value to a Roth IRA.

The rules for Roth IRA conversions and reversals are complex. Please contact your LMGW advisor before taking any action.