Fortunately, business owners have a couple of advantages when funding college expenses. Here are a few ways small-business owners might save money while their children are in college.

Hire Your Children at Your Business

Employing your children may be a great way to shift income from your business in their direction while they are still in a low tax bracket. For the 2023 tax year, tax filers as single individuals (or married filing separately) do not have to pay any federal income taxes on the first $13,850 in income.² A business owner who employs a person (including a family member) may deduct this payment for the employee as a business expense.

If your child is a diligent saver, they may be able to set aside the first $6,500 in income (the maximum annual contribution in 2023) in a Roth IRA.⁵ Not only may Roth contributions grow tax-free for decades, but they also do not count against your child’s expected family contribution (EFC) on the Free Application for Federal Student Aid (FAFSA).⁴

Use Section 127 or 132 Benefits

If your child is working at your business, you may be able to take advantage of the Section 127 educational benefit. This rule allows the parent-employer to provide up to $5,250 annually in educational benefits to their child-employee. This benefit is tax-free to the employee and tax-deductible to the employer.³

There are a couple of caveats, though. If you offer this benefit to your child as an employee, you must also offer it to other employees. And this benefit is available only if your child is at least 21 and is not a dependent of the business owner.

Meanwhile, Section 132 allows employers to provide (and deduct) other tax-free fringe benefits, including educational costs. Section 132 has its own restrictions, including requiring the educational expenses to be job-related. The education the employee receives also may not qualify the employee for a new trade; it must aid the employee in the position or career they are currently doing.

These deductions are available to businesses of all sizes and types, so do not feel you need a retail storefront to take advantage. If you have a side business like a sole proprietorship or an LLC, hiring your children to help your business during college may provide them with invaluable work experience while also helping them set aside funds for their college education.

Important Disclosures:

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

This article was prepared by WriterAccess.

LPL Tracking #1-05374528

Footnotes

¹ Survey Says Parents Are More Worried about Paying for College https://www.savingforcollege.com/article/survey-says-parents-are-more-worried-about-paying-for-college

² Standard Deductions for 2022 and 2023 Tax Returns, and Extra Benefits for People Over 65
https://www.forbes.com/advisor/taxes/standard-deduction/

³ 26 U.S. Code § 127 – Educational assistance programs
https://www.law.cornell.edu/uscode/text/26/127

⁴ How a Student’s IRA Is Counted for Financial Aid
https://www.kiplinger.com/article/college/t032-c001-s001-how-a-student-s-ira-is-counted-for-financial-aid.html

⁵ Roth IRA Contribution Limits for 2023 Are Better Than Ever
https://www.fool.com/retirement/2022/11/19/roth-ira-contribution-limits-for-2023-are-better-t/

The post A Business Owners’ Guide to Tax-Smart College Planning  appeared first on Tribox Private Wealth.

In the past, many parents prioritized saving for their child’s college or trade school. However, today students are taking steps to cover the cost of their own higher education and keep their student loan debt to a minimum. 

Benefits of Saving for College or Trade School

When students make an effort to save for their education after high school, they get a head start on life with minimal debt. Instead of spending years trying to pay off their student loans, they can focus on other financial goals such as buying a house or saving for retirement. Saving for college or trade school may also motivate students to choose a major that provides job opportunities and encourages them to complete their degree.

How Students Can Save for Higher Education

There are a number high school or college-aged students can save for higher education: 

• Apply for Scholarships: Scholarships provide money for college that students don’t have to repay. If they’ve excelled in academics, athletics, or extracurricular activities, it may be in their best interest to apply for scholarships. Even small scholarships can help save hundreds or thousands of dollars on the overall cost of secondary education.
• Enroll in AP Classes: A high school student can earn college credits by taking Advanced Placement or AP classes in high school. The fewer credits they need to complete their degree while in college, the more money they’ll save. 
• Work: While balancing classes, homework, and studying while working can be difficult, it’s not impossible. If your student can work part-time or occasionally during the school year or summer, they can save money and build their resume. 
• Open a College Savings Account: Your child can help contribute to a college savings account to help grow the money they’re saving for their education.
• Delay College: If your student is serious about graduating debt-free, they may delay college or trade school and work for a few years. Once they have enough saved up, they can begin their higher education journey.
• Attend a Community College: If your student completes prerequisites at a community college initially and then transfers to a public or private four-year university or college, they may save on tuition depending on secondary education costs in your area.

Consult Your Financial Professional

Together we can review your financial situation and develop the ideal college savings plan for your student. Contact us today to get started.

Important Disclosures:

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

Prior to investing in a 529 Plan investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.

All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

LPL Tracking # 1-05182676

The post Why Save for Higher Education? appeared first on Tribox Private Wealth.

How long until your child starts college?

A longer time period helps a 529 plan grow more, while a shorter one might make a prepaid plan safer.

• If you have a longer time horizon, a 529 plan may be best for you.

• If you have a shorter time horizon, a prepaid plan may be more suitable.

Is there a possibility your child will attend an out-of-state or private school?

A 529 plan works for various schools, but prepaid plans usually cover only in-state public ones. Think about your child’s possible schools when choosing.

• If you want more flexibility for school choices, a 529 plan may be the better option.

• If you are confident your child will attend an in-state public school, a prepaid plan may be more suitable.

Are you concerned about the rising cost of college tuition?

A prepaid plan fixes tuition costs now, which is good if you are concerned about rising prices. A 529 plan depends on investments growing to pay for future tuition.

• If you are concerned about rising tuition costs, a prepaid plan may be the better choice.

• If you are comfortable relying on investment growth, a 529 plan may be more suitable.

What is your risk tolerance regarding investments for your child’s education?

A 529 plan has market risks but may earn more, while a prepaid plan locks tuition and is safer. Think about your comfort with risk for your child’s education savings.

• If you have a higher risk tolerance, a 529 plan may be the better option.

• If you prefer more certainty and stability, a prepaid plan may be more suitable.

How important is flexibility in terms of contribution limits and frequency?

529 plans let you contribute more and offer flexible payments, while prepaid plans need set payments. Check your budget and how much flexibility you want.

• If you prefer more contribution flexibility, a 529 plan may be the better choice.

• If you are comfortable with fixed contributions, a prepaid plan may be more suitable.

How important is your child’s eligibility for financial aid?

Each plan affects financial aid differently. 529 plans usually impact aid less than prepaid plans. Think about possible financial aid needs when picking a plan.

• If maintaining financial aid eligibility is crucial, a 529 plan may be the better option.

• If financial aid eligibility is not a significant concern, either plan could work depending on your other preferences.

Are there state-specific tax benefits for either plan in your state?

Some states provide tax breaks for 529 or prepaid plans. Review your state’s tax rules to see if they impact your choice.

• If your state offers tax benefits for a 529 plan, it may be the better choice.

• If your state offers tax benefits for a prepaid plan, it may be more suitable.

Prior to investing in a 529 Plan, investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.

LPL Financial Tracking #438384

The post 529 vs. Prepaid Checklist appeared first on Tribox Private Wealth.

529 plans

Since their creation in 1996, 529 plans have become to college savings what 401(k) plans are to retirement savings — an indispensable tool for saving money for a child’s or grandchild’s college education. That’s because 529 plans offer a unique combination of benefits.

There are two types of 529 plans — savings plans and prepaid tuition plans. Though each is governed under Section 529 of the Internal Revenue Code (hence the name “529” plans), savings plans and prepaid tuition plans are very different savings vehicles.

Note: Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing; specific plan information is available in each issuer’s official statement. There is the risk that investments may not perform well enough to cover college costs as anticipated. Also, before investing, consider whether your state offers any favorable state tax benefits for 529 plan participation, and whether these benefits are contingent on joining the in-state 529 plan. Other state benefits may include financial aid, scholarship funds, and protection from creditors.

529 savings plans

The more popular type of 529 plan is the savings plan. A 529 savings plan is a tax-advantaged savings vehicle that lets you save money for college and K-12 tuition in an individual investment-type account, similar to a 401(k) plan. Some plans let you enroll directly, while others require you to go through a financial professional.

The details of 529 savings plans vary by state, but the basics are the same. You’ll need to fill out an application, name a beneficiary, and select one or more of the plan’s investment portfolios to which your contributions will be allocated. Also, you’ll typically be required to make an initial minimum contribution, which must be made in cash.

529 savings plans offer a unique combination of features that no other education savings vehicle can match:

Federal tax advantages: Contributions to a 529 account accumulate tax deferred and earnings are tax free if the money is used to pay the beneficiary’s qualified education expenses. (The earnings portion of any withdrawal not used for qualified education expenses is taxed at the recipient’s rate and subject to a 10% penalty.)

State tax advantages: Many states offer income tax incentives for state residents, such as a tax deduction for contributions or a tax exemption for qualified withdrawals. However, be aware that some states limit their tax deduction to contributions made to the in-state 529 plan only.

High contribution limits: Most plans have lifetime contribution limits of $350,000 and up (limits vary by state).

Unlimited participation: Anyone can open a 529 savings plan account, regardless of income level.

Wide use of funds: Money in a 529 savings plan can be used to pay the full cost (tuition, fees, room and board, books) at any college or graduate school in the United States or abroad that is accredited by the Department of Education, and for K-12 tuition expenses up to $10,000 per year.

Professional money management: 529 savings plans are offered by states, but they are managed by designated financial companies who are responsible for managing the plan’s underlying investment portfolios.

Flexibility: Under federal rules, you are entitled to change the beneficiary of your account to a qualified family member at any time as well as roll over (transfer) the money in your account to a different 529 plan once per calendar year without income tax or penalty implications.

Accelerated gifting: 529 savings plans offer an estate planning advantage in the form of accelerated gifting. This can be a favorable way for grandparents to contribute to their grandchildren’s education while paring down their own estate, or a way for parents to contribute a large lump sum. Under special rules unique to 529 plans, a lump-sum gift of up to five times the annual gift tax exclusion amount ($16,000 in 2022) is allowed in a single year, which means that individuals can make a lump-sum gift of up to $80,000 and married couples can gift up to $160,000. No gift tax will be owed, provided the gift is treated as having been made in equal installments over a five-year period and no other gifts are made to that beneficiary during the five years.

Transfer to ABLE account: 529 account owners can roll over (transfer) funds from a 529 account to an ABLE account without federal tax consequences. An ABLE account is a tax-advantaged account that can be used to save for disability-related expenses for individuals who become blind or disabled before age 26.

Variety: Currently, there are over 50 different savings plans to choose from because many states offer more than one plan. You can join any state’s savings plan.

But 529 savings plans have a couple of drawbacks:

No guaranteed rate of return: Investment returns aren’t guaranteed. You roll the dice with the investment portfolios you’ve chosen, and your account may gain or lose value depending on how the underlying investments perform. There is no guarantee that your investments will perform well enough to cover college costs as anticipated.

Investment flexibility: 529 savings plans have limited investment flexibility. Not only are you limited to the investment portfolios offered by the particular 529 plan, but once you choose your investments, you can only change the investment options on your existing contributions twice per calendar year. (However, you can generally direct how your future contributions will be invested at any time.)

529 prepaid tuition plans

Prepaid tuition plans are cousins to savings plans — their federal tax treatment is the same, but their operation is very different. A 529 prepaid tuition plan lets you prepay tuition at participating colleges, typically in-state public colleges, at today’s prices for use by the beneficiary in the future. Prepaid tuition plans are generally limited to state residents, whereas 529 savings plans are open to residents of any state. Prepaid tuition plans can be run either by states or colleges, though state-run plans are more common.

As with 529 savings plans, you’ll need to fill out an application and name a beneficiary. But instead of choosing an investment portfolio, you purchase an amount of tuition credits or units, subject to plan rules and limits. Typically, the tuition credits or units are guaranteed to be worth a certain amount of college tuition in the future, no matter how much college costs may increase between now and then.

However, if your child ends up attending a college that doesn’t participate in the plan, prepaid plans differ on how much money you’ll get back. Also, some prepaid plans have been forced to reduce benefits after enrollment due to investment returns that have not kept pace with the plan’s offered benefits.

Even with these limitations, some college investors appreciate not having to worry about college inflation each year and want to lock in college tuition prices today. The following table summarizes the main differences between 529 savings plans and 529 prepaid tuition plans:

Coverdell education savings accounts

A Coverdell education savings account (Coverdell ESA) is a tax-advantaged education savings vehicle that lets you save money for college, as well as for elementary and secondary school (K-12) at public, private, or religious schools. Here’s how it works:

• Application process: You fill out an application at a participating financial institution and name a beneficiary. Depending on the institution, there may be fees associated with opening and maintaining the account. The beneficiary must be under age 18 when the account is established (unless he or she is a child with special needs).

• Contribution rules: You (or someone else) make contributions to the account, subject to the maximum annual limit of $2,000. This means that the total amount contributed for a particular beneficiary in a given year can’t exceed $2,000, even if the money comes from different people. Contributions can be made up until April 15 of the year following the tax year for which the contribution is being made.

• Investing contributions: You invest your contributions as you wish (e.g., stocks, bonds, mutual funds, certificates of deposit) — you have sole control over your investments.

• Tax treatment: Contributions to your account grow tax deferred, which means you don’t pay income taxes on the account’s earnings (if any) each year. Money withdrawn to pay college or K-12 expenses (called a qualified withdrawal) is completely tax free at the federal level(and typically at the state level too). If the money isn’t used for college or K-12 expenses (called a nonqualified withdrawal), the earnings portion of the withdrawal will be taxed at the beneficiary’s tax rate and subject to a 10% federal penalty.

• Rollovers and termination of account: Funds in a Coverdell ESA can be rolled over without penalty into another Coverdell ESA for a qualifying family member. Also, any funds remaining in a Coverdell ESA must be distributed to the beneficiary when he or she reaches age 30 (unless the beneficiary is a person with special needs).

Unfortunately, not everyone can open a Coverdell ESA — your ability to contribute depends on your income. To make a full contribution, single filers must have a modified adjusted gross income (MAGI) of less than $95,000, and joint filers must have a MAGI of less than $190,000. And with an annual maximum contribution limit of $2,000, a Coverdell ESA can’t go it alone in meeting today’s college costs.

Custodial accounts

Before 529 plans and Coverdell ESAs, there were custodial accounts. A custodial account allows your child to hold assets — under the watchful eye of a designated custodian — that he or she ordinarily wouldn’t be allowed to hold in his or her own name. The assets can then be used to pay for college or anything else that benefits your child (e.g., summer camp, braces, computer). Here’s how a custodial account works:

• Application process: You fill out an application at a participating financial institution and name a beneficiary. Depending on the institution, there may be fees associated with opening and maintaining the account.

• Custodian: You also designate a custodian to manage and invest the account’s assets. The custodian can be you, a friend, a relative, or a financial institution. The assets in the account are controlled by the custodian.

• Assets: You (or someone else) contribute assets to the account. The type of assets you can contribute depends on whether your state has enacted the Uniform Transfers to Minors Act (UTMA) or the Uniform Gifts to Minors Act (UGMA). Examples of assets typically contributed are stocks, bonds, mutual funds, and real property.

• Tax treatment: Earnings, interest, and capital gains generated by the account are taxed to your child each year under special “kiddie tax” rules that apply when a child has unearned (passive) income. Under the kiddie tax rules, a child’s unearned income over a certain threshold ($2,300 in 2022) is taxed at parent income tax rates. The kiddie tax rules generally apply to children under age 18 and full-time college students under age 24 whose earned income doesn’t exceed one-half of their support.

A custodial account provides the opportunity for some tax savings, but the kiddie tax reduces the overall effectiveness of custodial accounts as a tax-advantaged college savings strategy. And there are other drawbacks. All gifts to a custodial account are irrevocable. Also, when your child reaches the age of majority (as defined by state law, typically 18 or 21), the account terminates and your child gains full control of all the assets in the account. Some children may not be able to handle this responsibility, or might decide not to spend the money for college.

U.S. savings bonds

Series EE and Series I bonds are types of savings bonds issued by the federal government that offer a special tax benefit for college savers. The bonds can be easily purchased from most neighborhood banks and savings institutions, or directly from the federal government. They are available in face values ranging from $50 to $10,000. You may purchase the bond in electronic form at face value or in paper form at half its face value.

If the bond is used to pay qualified education expenses and you meet income limits (as well as a few other minor requirements), the bond’s earnings are exempt from federal income tax. The bond’s earnings are always exempt from state and local tax.

In 2021, to be able to exclude all of the bond interest from federal income tax, married couples must have a modified adjusted gross income of $128,650 or less at the time the bonds are redeemed (cashed in), and individuals must have an income of

$85,800 or less. A partial exemption of interest is allowed for people with incomes slightly above these levels.

The bonds are backed by the full faith and credit of the federal government, so they are a relatively safe investment. They offer a modest yield, and Series I bonds offer an added measure of protection against inflation by paying you both a fixed interest rate for the life of the bond (like a Series EE bond) and a variable interest rate that’s adjusted twice a year for inflation. However, there is a limit on the amount of bonds you can buy in one year, as well as a minimum waiting period before you can redeem the bonds, with a penalty for early redemption.

Roth IRAs

Though technically not a college savings account, some parents use Roth IRAs to save and pay for college. In 2022, you can contribute up to $6,000 per year. Earnings in a Roth IRA accumulate tax deferred. Contributions to a Roth IRA can be withdrawn at any time and are always tax free. For parents age 59½ and older, a withdrawal of earnings is also tax free if the account has been open for at least five years. For parents younger than 59½, a withdrawal of earnings — typically subject to income tax and a 10% premature distribution penalty — is spared the 10% penalty if the withdrawal is used to pay for a child’s college expenses.

But not everyone is eligible to contribute to a Roth IRA — it depends on your income. In 2022, if your filing status is single or head of household, you can contribute the full amount to a Roth IRA if your MAGI is $129,000 or less. And if you’re married and filing a joint return, you can contribute the full amount if your MAGI is $204,000 or less.

Financial aid impact

Your college saving decisions can impact the financial aid process. Come financial aid time, your family’s income and assets are run through a formula at both the federal level and the college (institutional) level to determine how much money your family should be expected to contribute to college costs before you receive any financial aid. This number is referred to as your expected family contribution, or EFC. Your income is by far the most important factor, but your assets count too.

Note: Starting with the 2024-2025 FAFSA, the term “student aid index” (SAI) will replace EFC on the FAFSA. The change attempts to clarify what this figure actually is: an eligibility index for student aid, not an exact dollar amount of what a family can or will pay for college.

In the federal calculation, your child’s assets are treated differently than your assets. Your child must contribute 20% of his or her assets each year, while you must contribute 5.6% of your assets. For example, $10,000 in your child’s bank account would equal an expected contribution of $2,000 from your child ($10,000 x 0.20), but the same $10,000 in your bank account would equal an expected $560 contribution from you ($10,000 x 0.056).

Under the federal rules, an UTMA/UGMA custodial account is classified as a student asset. By contrast, 529 plans and Coverdell ESAs are counted as parent assets if the parent is the account owner. In addition, student-owned or UTMA/UGMA-owned 529 accounts are also counted as parent assets. For 529 plans and Coverdell accounts that are counted as parent assets, distributions (withdrawals) from the account that are used to pay the beneficiary’s qualified education expenses are not counted as parent or student income on the federal government’s aid form, which means that the money is not counted again when it’s withdrawn.

However, the situation is different for grandparent-owned 529 plans and Coverdell accounts. If a 529 plan or Coverdell account is owned by a grandparent instead of a parent, the account isn’t counted as a parent asset — it doesn’t count as an asset at all.

However, money withdrawn from a grandparent-owned account is counted as student income, and student income is assessed at 50% in the federal aid formula.

Note: Starting with the 2024-2025 FAFSA, distributions from a grandparent-owned 529 plan will no longer be counted as student income.

Other investments parents may own in their name, such as mutual funds, stocks, U.S. savings bonds, certificates of deposit, and real estate, are also classified as parent assets. However, the federal government doesn’t count retirement assets at all in its financial aid formula, so Roth IRAs aren’t factored in to aid eligibility.

Regarding institutional aid, colleges generally dig a bit deeper than the federal government in assessing a family’s assets and their ability to pay college costs. Most colleges use a standard financial aid application that considers assets the federal government might not, for example, home equity. Typically, though, colleges treat 529 plans, Coverdell accounts, UTMA/UGMA custodial accounts, U.S. savings bonds, and Roth IRAs the same as the federal government.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

The information provided is not intended to be a substitute for specific individualized tax planning or legal advice. We suggest that you consult with a qualified tax or legal professional.

LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.

This article was prepared by Broadridge.

LPL Tracking #1-05097080

The post Tax-Advantaged Ways to Save for College appeared first on Tribox Private Wealth.