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As you grow older, your housing needs will likely change. Maybe you’ll get tired of doing yardwork. You might want to retire in Florida or live close to your grandchildren in New York. Perhaps you’ll need to live in a nursing home or an assisted-living facility. Or, after considering your options, you may even decide to stay where you are. When the time comes to evaluate your housing situation, you’ll have numerous options available to you.
Every housing arrangement has its pros and cons, and there are no “one-size-fits-all” housing solutions. By pondering and addressing the questions presented in this article, you will get a better feel for your ideal living situation during your golden years.
Are you able to take care of your home by yourself? Even if your answer is no, that doesn’t necessarily mean it’s time to move. Maybe a family member can help you with chores and shopping. Or perhaps you can hire someone to clean your house, mow your lawn, and help you with personal care. You may want to stay in your home because you have memories of raising your family there. On the other hand, change may be just what you need to get a new perspective on life.
To evaluate whether you can continue living in your home or if it’s time for you to move, consider the following questions:
- How willing are you to let someone else help you?
- Can you afford to hire help, or will you need to rely on friends, relatives, or volunteers?
- How far do you live from family and/or friends?
- How close do you live to public transportation?
- How easily can you renovate your home to address your physical needs?
- How easily do you adjust to change?
- How easily do you make friends?
- How does your family feel about you moving or about you staying in your own home?
- How does your spouse feel about moving?
Moving in with Children
If you are moving in with your child, will you have adequate privacy? Will you be able to move around in your child’s home easily?
If not, you might ask him or her to install devices that will make your life easier, such as tub or shower grab bars and easy-to-open handles on doors.
You’ll also want to consider the emotional consequences of moving in with your child. If you move closer to your child, will you expect him or her to take you shopping or to include you in every social event? Will you feel as though you’re in their way? Will your child expect you to help with cooking, cleaning, and babysitting? Or, will he or she expect you to do little or nothing? How will other members of the family feel? Get these questions out in the open before you consider moving in.
Talk about important financial issues with your child before you agree to move in. This may help avoid conflicts or hurt feelings later. Here are some suggestions to get the conversation flowing:
- Will he or she expect you to contribute money toward household expenses?
- Will you feel guilty if you don’t contribute money toward household expenses?
- Will you feel the need to critique his or her spending habits, or are you afraid that he or she will critique yours?
- Can your child afford to remodel his or her home to fit your needs?
- Do you have enough money to support yourself during retirement?
- How do you feel about your child supporting you financially?
Assisted-living facilities typically offer rental rooms or apartments, housekeeping services, meals, social activities, and transportation. The primary focus of an assisted-living facility is social, not medical, but some facilities do provide limited medical care. Assisted-living facilities can be state-licensed or unlicensed, and they primarily serve senior citizens who need more help than those who live in independent living communities.
Before entering an assisted-living facility, you should carefully read the contract and tour the facility. Some facilities are large, caring for over a thousand people. Others are small, caring for fewer than five people. Consider whether the facility meets your needs:
- Do you have enough privacy?
- How much personal care is provided?
- What happens if you get sick?
- Can you be asked to leave the facility if your physical or mental health deteriorates?
- Is the facility licensed or unlicensed?
- Who is in charge of health and safety?
Reading the fine print on the contract may save you a lot of time and money later if any conflict over services or care arises. If you find the terms of the contract confusing, ask a family member for help or consult an attorney. Check the financial strength of the company, especially if you’re making a long-term commitment.
As for the cost, a wide range of care is available at a wide range of prices. For example, continuing care retirement communities are significantly more expensive than other assisted-living options and usually require an entrance fee above $50,000, in addition to a monthly rental fee. Keep in mind that Medicare probably will not cover your expenses at these facilities, unless those expenses are health-care related and the facility is licensed to provide medical care.
Nursing homes are licensed facilities that offer 24-hour access to medical care. They provide care at three levels: skilled nursing care, intermediate care, and custodial care. Individuals in nursing homes generally cannot live by themselves or without a great deal of assistance.
It is important to note that privacy in a nursing home may be very limited. Although private rooms may be available, rooms more commonly are shared. Depending on the facility selected, a nursing home may be similar to a hospital environment or may have a more residential feel. Some on-site services may include:
- Physical therapy
- Occupational therapy
- Orthopedic rehabilitation
- Speech therapy
- Dialysis treatment
- Respiratory therapy
When you choose a nursing home, pay close attention to the quality of the facility. Visit several facilities in your area, and talk to your family about your needs and wishes regarding nursing home care. In addition, remember that most people don’t remain in a nursing home indefinitely. If your physical or mental condition improves, you may be able to return home or move to a different type of facility. Contact your state department of elder services for guidelines on how to evaluate nursing homes.
Nursing homes are expensive. If you need nursing home care in the future, do you know how you will pay for it? Will you use private savings, or will you rely on Medicaid to pay for your care? If you have time to plan, consider purchasing long-term care insurance to pay for your nursing home care.
There’s No Place Like Home
Before jumping into a new housing situation, it is imperative to be open about communicating your needs and desires. While open communication within your family unit should be your top priority, you may also benefit from the insight of various experts in the field of senior living.
Our CAS team has a wealth of experience in this arena, and can also connect you with professionals from a wide range of senior living communities in your area.
Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
Spring is just around the corner! Now is the perfect time to start sorting through your official documents and reduce the clutter after tax season.
Organizing and preserving your official documents will save you time and effort in the long run, simplifying the financial planning process. While keeping detailed records is crucial for the well-being of your financial plan, it is equally important to discard your outdated records on a regular basis.
Given the wide variety of documents you have in your archives, you may find it difficult to determine which records you need to keep and how long you should maintain them. Here are some useful guidelines for maintaining your official documents.
Records to Keep for a Lifetime
There are numerous records that you should keep throughout your entire lifetime. In order to avoid damaging or misplacing these records, you should store these files in a locked safety deposit box or fireproof safe. You may also elect to store them electronically in a password-protected online vault.
Regardless of your method, make sure to preserve the following documents in a secure location that your loved ones will be able to access:
•Retirement plan and IRA adoption agreements
•Complicated tax returns (discuss with your financial advisor to determine which annual returns, if any, should be preserved)
•Social security cards and passports
•Birth certificates, marriage certificates, and death certificates
•Divorce papers or settlements
•School transcripts and diplomas
•Immunization records and records of any hospital stays and surgeries
•Military discharge papers
•Estate documents including wills, trusts, prenuptial agreements, advanced medical directives, do not resuscitate orders and other instructions
How Long to Keep Other Important Documents
While all of the above documents should be kept indefinitely, there are different retention guidelines to observe for your other documents. See the following list of suggested timelines for maintaining the rest of your key documents. Of course, you should check with your advisor to confirm that these guidelines are appropriate for your financial situation.
•Tax records including annual tax returns, W-2s, 1099s, cancelled checks, receipts, and the first two pages of Form 1040: Seven years.
Note: Tax returns can generally be audited for any reason for up to three years after filing; or up to six years if the IRS suspects underreported income. For this reason, it is wise to preserve all of your returns for at least seven years (and even longer if a specific return is complicated or unusual – discuss with your advisor for more details).
•Property records including deeds, titles, and loan and lease agreements: The entire duration of ownership plus seven years.
•Home improvement records including receipts, contracts, and records of cost: Until you sell the property and tax liability is settled.
•Insurance policies including coverages, policy numbers, and contracts: Life of the policy plus four years.
•Bank statements and deposit slips: Seven years.
•Charitable contribution documentation: Seven years.
•Investment records including investment purchase receipts, dividend reinvestment records, mutual fund annual statements and year-end brokerage account statements: The entire duration of ownership plus seven years.
Note: Most custodians will keep your cost-basis records for you.
•Savings bonds and accounts and support documents such as certificate of deposit, bank holdings, account numbers, and banker and branch information: The entire duration of ownership plus seven years.
•Credit card records: Keep statements for seven year; maintain receipts for one year after purchase.
In addition to observing these guidelines for record retention, you can further simplify your financial life by creating a master checklist of all your assets and liabilities. By doing so, you can ensure that you have all the official documentation to prove your portfolio holdings – and easily identify any information that is missing in your records.
Also, as mentioned earlier, you should always store your records in a secure location that is easily accessible for your family members and loved ones.
As a result of keeping your financial and legal records for an appropriate length of time, you will prevent many of the complications that can arise when managing your finances. Use this handy guide to make sure you are maintaining everything you need!
Losing a spouse is a stressful and emotionally draining experience. Even if you’ve done all the preparation in the world, you may find it difficult to know where to start amidst the sorrow and grief of losing your loved one.
Fortunately, you can follow these time-tested steps for simplifying your financial affairs in a way that is both efficient and less stressful.
When your spouse dies, your first step should be to contact anyone who is close to you and your spouse, and anyone who may help you with funeral preparations. Next, you should contact your attorney and other financial professionals. You’ll also want to contact life insurance companies, government agencies, and your spouse’s employer for information on how you can file for benefits.
Getting expert advice when you need it is essential. An attorney can help you go over your spouse’s will and start estate settlement procedures. Your funeral director can also be an excellent source of information and may help you obtain copies of the death certificate and applications for Social Security and veterans benefits. Your financial advisor or insurance agent can assist you with the claims process, or you can contact the company’s policyholder service department directly. You may also wish to consult with a financial professional, accountant, or tax advisor to help you organize your finances.
Locate Important Documents and Financial Records
Before you can begin to settle your spouse’s estate or apply for insurance proceeds or government benefits, you’ll need to locate important documents and financial records (e.g., birth certificates, marriage certificates, life insurance policies). Keep in mind that you may need to obtain certified copies of certain documents.
For example, you’ll need a certified copy of your spouse’s death certificate to apply for life insurance proceeds. And to apply for Social Security benefits, you’ll need to provide birth, marriage, and death certificates.
Set Up a Filing System
If you’ve ever felt frustrated because you couldn’t find an important document, you already know the importance of setting up a filing system. Start by reviewing all important documents and organizing them by topic area. Next, set up a file for each topic area. For example, you may want to set up separate files for estate records, insurance, government benefits, tax information, and so on.
Finally, be sure to store your files in a safe but readily accessible place. That way, you’ll be able to locate the information when you need it.
Set Up a Phone and Mail System
During this stressful time, you probably have a lot on your mind. To help you keep track of certain tasks and details, set up a phone and mail system to record incoming and outgoing calls and mail. For phone calls, keep a sheet of paper or notebook by the phone and write down the date of the call, the caller’s name, and a description of what you talked about. For mail, write down whom the mail came from, the date you received it, and, if you sent a response, the date it was sent.
Also, if you don’t already have one, make a list of the names and phone numbers of organizations and people you might need to contact, and post it near your phone. For example, the list may include the phone numbers of your attorney, insurance agent, financial professionals, and friends – all of whom you can contact for advice.
Evaluate Short-term Income and Expenses
When your spouse dies, you may have some immediate expenses to take care of, such as funeral costs and any outstanding debts that your spouse may have incurred (credit cards, car loan, etc.). Even if you are expecting money from an insurance or estate settlement, you may lack the funds to pay for those expenses right away.
If that is the case, don’t panic – you have several options. If your spouse had a life insurance policy that named you as the beneficiary, you may be able to get the life insurance proceeds within a few days after you file. And you can always ask the insurance company if they’ll give you an advance. In the meantime, you can use credit cards for certain expenses. Or, if you need the cash, you can take out a cash advance against a credit card. Also, you can try to negotiate with creditors to allow you to postpone payment of certain debts for 30 days or more, if necessary.
Avoid Hasty Decisions
- Don’t think about moving from your current home until you can make a decision based on reason rather than emotion.
- Don’t spend money impulsively. When you’re grieving, you may be especially vulnerable to pressure from salespeople.
- Don’t cave in to pressure to sell or give away your spouse’s possessions. Wait until you can make clear-headed decisions.
- Don’t give or loan money to others without reviewing your finances first, taking into account your present and future needs and obligations.
The Ciccarelli Advisory Services family team is always here to guide and support you during this difficult transitional period.
Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
When you think about estate planning, you probably focus on the transfer of financial assets and personal belongings to your heirs. While the financial aspect of estate planning is critical, your estate plan should encompass more than money and tangible assets. In fact, some of the most valuable resources you possess – your insights, values and experiences – have no monetary value.
By establishing a comprehensive plan for transferring your tangible and intangible assets – and openly communicating your wishes with your loved ones – you can create an enduring legacy that will impact your family for generations.
Connect with Your Family
Your estate planning decisions will directly impact your family: what assets you leave behind, how you distribute your assets, who you chose to act as an executor, and so on. Above all, your choices will reflect your financial philosophy and core values – the crux of your legacy.
Given the deeply personal nature of these decisions, you may find it difficult to discuss end-of-life considerations with your family members. That being said, engaging in open communication with your family and loved ones is essential to ensuring a smooth transition when you pass. This is your opportunity to help your loved ones prepare for life after you are gone.
Involving your family in the estate planning process can help to prevent a myriad of future complications. By embracing a communicative approach with your family and loved ones, you can:
- Reduce estate and gift tax burdens, and avoid probate;
- Prepare your heirs to handle your bequests responsibly;
- Implement an effective strategy for addressing long-term care and retirement needs
Perhaps the most important channel of communication is between you and your spouse. If you are married, you should actively work with your spouse to reach a consensus about your personal wishes. After all, the decisions you make today could greatly impact your spouse tomorrow – and vice versa.
Leave a Lasting Legacy
Your estate plan also serves as the perfect platform for conveying your personal desires, values and wisdom to your loved ones, empowering them to achieve a lifetime of success.
By meticulously preparing and executing your estate plan, you have the opportunity to bridge past and future generations, strengthen your relationships with your beneficiaries, and preserve your personal legacy for years to come.
Our Ciccarelli Advisory Services family can help you design a plan for preserving your family’s financial future. In addition, we can facilitate open communication between you and your beneficiaries – providing you with the perfect opportunity to discuss your final wishes and enrich your legacy for generations to come.
By Kim Ciccarelli Kantor, CFP®, CAP®; and Jill Ciccarelli Rapps, CFP®
The sunshine, soft ocean breezes and lower taxes make Florida a popular place to live. Generally speaking, Florida domicile carries tax advantages over domicile in other states – with respect to income taxes, state estate taxes and homestead.
A person may have several residences at the same time, but in theory may be domiciled in only one place at any given time. The term “domicile” refers the place where you have your fixed, permanent home for legal purposes.
Domicile is a matter of intent that requires a serious commitment in lifestyle and the ability to break ties with your old state.
Considering Florida Domicile?
Many auditors consider five primary factors when considering domicile: home, active business involvement, time, important items and connections.
- An auditor may consider the size of your home in the old state in comparison to your state of domicile. For this reason, you should keep a record of any change of address forms.
- For a business, an auditor would determine your control, supervision and overall role in the business, as well as your pattern of activity (or non-activity, if the business is a passive investment).
- With respect to time, an important factor is the number of days spent in your old state versus the state of domicile. Your timing and duration of visits play an important role in determining your intent.
- Items that are near and dear to you should be kept in your domiciled state. Receipts and documents showing the transport of these items could be important to keep. Anything that has strong sentimental value, including family picture albums, should also be kept at your domiciled residence.
- Other associations, such as banking/investment relationships, various registrations and church affiliations, should also be maintained in your state of domicile. Be careful! Even a seemingly small affiliation with your previous state of residence could wreak havoc.
A Tax Break Paradise
Another benefit to establishing domicile in Florida is the state homestead exemption. The law largely protects your primary residence from creditors, gives you a credit against your home’s assessment (for tax purposes), and caps your property taxes to either 3% or the current rate of inflation – whichever is less.
In addition, the “portability” provision of the Florida homestead exemption allows you to move up to $500K of the “Save Our Homes” benefit from one Florida home to the next. Florida homestead may also protect your spouse’s inheritance with a life estate – or a 50% interest in lieu of the life estate – unless your spouse waives these rights.
To qualify for the homestead exemption, you must have declared Florida as your state of domicile as of January 1 of the current year. If you qualify, you can apply for the exemption and file with your county’s property appraisal office. Although the 2016 deadline for filing the exemption has passed, you can apply for 2017 exemption until March 1.
Lastly, domicile should be considered not only from a tax perspective, but also from an estate planning perspective: in other words, the rights of your spouse and children upon your death. An advisor who is well-versed in the process of new domicile can provide you with a complete package of instructions and discuss planning opportunities to help you effectively implement your decision to domicile.
If you are considering a change of domicile to Florida, it is important to discuss the advantages and disadvantages with your financial advisor, CPA and attorney.
The Social Security Administration has tightened security in order to prevent hackers and identity thieves. Now, when you log into your Social Security Administration account, you do what you’ve always done: type in your user name and password. Then, you receive a security code sent by text message, and enter that code to complete your login procedure.
In the cybersecurity trade, this is known as multifactor authentication.
The result is better security for people receiving Social Security benefits, but the new protections can cause a big hassle for some users. On the first day, Verizon customers weren’t getting their security codes; the problem has since been fixed. Many older Americans don’t text on their phones, creating an obstacle for those who have not yet embraced this technology. At the same time, multifactor authentication doesn’t prevent cyber criminals from fraudulently creating an online account in your name and siphoning away your benefits.
How should you respond to the new Social Security protections?
- If you don’t already have an account with the Social Security Administration, now would be a good time to create one – before an identity thief decides to do it for you. Visit this link to set up your Social Security account: https://secure.ssa.gov/RIL/SiView.do
- If you aren’t into texting, now would be a good time to get familiar with that feature of your smart phone. If you’re having trouble, ask your grandchild or a younger family member for some quick tech support.
Don’t roll the dice on your social security!
An important part of managing your personal finances is keeping your financial records organized. Whether it’s a utility bill to show proof of residency or a Social Security card for wage reporting purposes, there may be times when you need to locate a financial record or document–and you’ll need to locate it relatively quickly.
By taking the time to clear out and organize your financial records, you’ll be able to find what you need exactly when you need it.
What should you keep?
If you tend to keep stuff because you “might need it someday,” your desk or home office is probably overflowing with nonessential documents. One of the first steps in determining what records to keep is to ask yourself, “Why do I need to keep this?”
Documents you should keep are likely to be those that are difficult to obtain, such as:
• Tax returns
• Legal contracts
• Insurance claims
• Proof of identity
On the other hand, if you have documents and records that are easily duplicated elsewhere, such as online banking and credit card statements, you probably do not need to keep paper copies of the same information.
How long should you keep your records?
Generally, a good rule of thumb is to keep financial records and documents only as long as necessary. For example, you may want to keep ATM and credit card receipts only temporarily, until you’ve reconciled them with your bank and/or credit card statement.
On the other hand, if a document is legal in nature and/or difficult to replace, you’ll want to keep it for a longer period or even indefinitely.
Some financial records may have more specific timetables. For example, the IRS generally recommends that taxpayers keep federal tax returns and supporting documents for a minimum of three years up to seven years after the date of filing. Certain circumstances may even warrant keeping your tax records indefinitely.
Listed below are some recommendations on how long to keep specific documents:
Records to keep for one year or less
• Bank or credit union statements
• Credit-card statements
• Utility bills
• Auto and homeowners Insurance policies
Records to keep for more than a year
• Tax returns and supporting documentation
• Mortgage contracts
• Property appraisals
• Annual retirement and investment statements
• Receipts for major purchases and home improvements
Records to keep indefinitely
• Birth, death, and marriage certificates
• Adoption records
• Citizenship and military discharge papers
• Social Security card
Keep in mind that the above recommendations are general guidelines, and your personal circumstances may warrant keeping these documents for shorter or longer periods of time.
Out with the old, in with the new
An easy way to prevent paperwork from piling up is to remember the phrase “out with the old, in with the new.” For example, when you receive this year’s auto insurance policy, discard the one from last year. When you receive your annual investment statement, discard the monthly or quarterly statements you’ve been keeping. In addition, review your files at least once a year to keep your filing system on the right track.
Finally, when you are ready to get rid of certain records and documents, don’t just throw them in the garbage. To protect sensitive information, you should invest in a good quality shredder to destroy your documents, especially if they contain Social Security numbers, account numbers, or other personal information.
Where should you keep your records?
You could go the traditional route and use a simple set of labeled folders in a file drawer. More important documents should be kept in a fire-resistant file cabinet, safe, or safe-deposit box.
If space is tight and you need to reduce clutter, you might consider electronic storage for some of your financial records. You can save copies of online documents or scan documents and convert them to electronic form. You’ll want to keep backup copies on a portable storage device or hard drive and make sure that your computer files are secure.
You could also use a cloud storage service that encrypts your uploaded information and stores it remotely. If you use cloud storage, make sure to use a reliable company that has a good reputation and offers automatic backup and technical support.
Once you’ve found a place to keep your records, it may be helpful to organize and store them according to specific categories (e.g., banking, insurance, proof of identity), which will make it even easier to access what you might need.
Consider creating a personal document locator
Another option for organizing your financial records is to create a personal document locator, which is simply a detailed list of where you have stored your financial records. This list can be helpful whenever you are trying to locate a specific document and can also assist your loved ones in locating your financial records in the event of an emergency.
Typically, a personal document locator will include the following information:
• Personal information
• Personal contacts (e.g., attorney, tax preparer, financial advisor)
• Online accounts with username and passwords
• List of specific locations of important documents (e.g., home, office, safe)
Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
Just as with other investments, there are pros and cons to investing in gold and silver. Some of the positives are that it serves as a useful hedge against inflation, as well as a safety tool during market uncertainty and political upheaval. But most importantly, it may serve as a good diversifier to other asset classes. Some of the negatives include the volatility that comes from short-term market speculation.
The last two points, market speculation and volatility, are of particular interest. It’s hard to miss news about how well gold and silver have done so far this year as compared to the S&P 500, which is used as a proxy to the overall market. However, viewing these numbers in isolation or in a short-term time frame is like looking at a work of art from only a few inches away. In order to see the true picture, you have to step back to appreciate it. The same is true when looking at investment returns.
So, if we expand our time frame from over a decade or more, history shows us high growth and extreme volatility relative to the market. We now start to see a very different picture: one where the market outperforms by multiples, while gold and silver remain flat.*
At Ciccarelli Advisory Services, we believe in creating a fully diversified portfolio. What does that mean? Well, it means investing in a diverse group of asset classes over the long term. The asset classes have a low level of correlation between each other, allowing some investments to do well when others are not.
In the case of gold, silver, and other precious metals, adding this asset class as part of a fully diversified portfolio may make sense based on the financial plan that you and your financial advisor have designed.
Fortunately, the proliferation of investment products have made it easier to invest in gold and silver, which were once considered esoteric asset classes. For the regular investor, this can be done through ETF’s or ETN’s (Exchange Traded Funds or Notes), as well as through mutual funds, managed accounts, stocks of mining companies, futures contracts, and in the physical form of coins and bars.
In conclusion, gold and silver can be a good investment, but it has to be done for the right reasons – as part of a fully diversified portfolio over the long term.
*The Morningstar Gold & Silver Commodity ER USD benchmarks represent the excess return performance of a fully collateralized position in gold futures where futures contracts are rolled monthly to the nearest contract at least 2 months out. The index is multi-factor weighted and is rebalanced annually.
Section 529 plans can be a great way to save for college – in many cases, the best way – but they’re not the only way. When you’re investing for a major goal like education, it makes sense to be familiar with all of your options.
U.S. savings bonds
U.S. savings bonds are backed by the full faith and credit of the federal government. They’re very easy to purchase, and available in face values as low as $50 ($25 if purchased electronically). Two types of savings bonds, Series EE (which may also be called Patriot bonds) and Series I bonds, are popular college savings vehicles.
Not only is the interest earned on them exempt from state and local tax at the time you redeem (cash in) the bonds, but you may be able to exclude at least some of the interest from federal income tax if you meet the following conditions:
Your modified adjusted gross income (MAGI) must be below $92,550 if you’re filing single and $146,300 if you’re married filing jointly in 2016
- The bond proceeds must be used to pay for qualified education expenses
- The bonds must have been issued in 1990 or later
- The bonds must be in the name of one or both parents, not in the child’s name
- Married taxpayers must file a joint return
- The bonds must have been purchased by someone at least 24 years old
- The bonds must be redeemed the same year that qualified education expenses are being paid
But a 529 plan, which includes both college savings plans and prepaid tuition plans, may be a more attractive way to save for college. A college savings plan invests primarily in stocks through one or more pre-established investment portfolios that you generally choose upon joining the plan. So, a college savings plan has a greater return potential than U.S. savings bonds, because stocks have historically averaged greater returns than bonds (though past performance is no guarantee of future results).
However, there is a greater risk of loss of principal with a college savings plan. Your rate of return is not guaranteed–you could even lose some of your original contributions. By contrast, a prepaid tuition plan generally guarantees you an annual rate of return in the same range as U.S. savings bonds (or maybe higher, depending on the rate of college inflation).
Perhaps the best advantage of 529 plans is the federal income tax treatment of withdrawals used to pay qualified education expenses. These withdrawals are completely free from federal income tax no matter what your income, and some states also provide state income tax benefits. The income tax exclusion for Series EE and Series I savings bonds is gradually phased out for couples who file a joint return and have a MAGI between $116,300 and $146,300. The same happens for single taxpayers with a MAGI between $77,550 and $92,550. These income limits are for 2016 and are indexed for inflation every year.
However, keep in mind that if you don’t use the money in your 529 account for qualified education expenses, you will owe a 10% federal penalty tax on the earnings portion of the funds you’ve withdrawn. And as the account owner, you may owe federal (and in some cases state) income taxes on the earnings portion of your withdrawal, as well. Plus, there are typically fees and expenses associated with 529 plans. College savings plans may charge an annual maintenance fee, an administrative fee, and an investment fee based on a percentage of total account assets, while prepaid tuition plans typically charge an enrollment fee and various administrative fees.
At one time, mutual funds were more widely used for college savings than 529 plans. Mutual funds do not impose any restrictions or penalties if you need to sell your shares before your child is ready for college. However, if you withdraw assets from a 529 plan and use the money for non-educational expenses, the earnings part of the withdrawal will be taxed and penalized.
Also, mutual funds let you keep much more control over your investment decisions because you can choose from a wide range of funds, and you’re typically free to move money among a company’s funds, or from one family of funds to another, as you see fit. By contrast, you can’t choose your investments with a prepaid tuition plan, though you are generally guaranteed a certain rate of return or that a certain amount of tuition expenses will be covered in the future. And with a college savings plan, you may be able to choose your investment portfolio at the time you join the plan, but your ability to make subsequent investment changes is limited.
Some plans may let you direct future contributions to a new investment portfolio, but it may be more difficult to redirect your existing contributions. However, states have the discretion to allow you to change the investment option for your existing contributions twice per calendar year or when you change the beneficiary. Check the rules of your plan for more details.
In the area of taxes, 529 plans trump mutual funds. The federal income tax treatment of 529 plans is a real benefit. You don’t pay federal income taxes each year on the earnings within the 529 plan. And any withdrawals that you use to pay qualified higher education expenses will not be taxed on your federal income tax return. (But if you withdraw money for non-educational expenses, you’ll owe income taxes on the earnings portion of the withdrawal, as well as a 10% federal penalty.)
Tax-sheltered growth and tax-free withdrawals can be compelling reasons to invest in a 529 plan. In many cases, these tax features will outweigh the benefits of mutual funds. This is especially true when you consider how far taxes can cut into your mutual fund returns. You’ll pay income tax every year on the income earned by your fund, even if that income is reinvested. And when you sell your shares, you’ll pay capital gains tax on any gain in the value of your fund.
Traditional and Roth IRAs
Traditional IRAs and Roth IRAs are retirement savings vehicles. However, because withdrawals for qualified higher education expenses are exempt from the 10% premature distribution tax (also called the early withdrawal penalty) that generally applies to withdrawals made before age 59½, some parents may decide to save for college within their IRAs.
In order to be exempt from the premature distribution tax, any money you withdraw from your IRA must be used to pay the qualified higher education expenses of you or your spouse, or the children or grandchildren of you or your spouse. However, even if you’re exempt from the 10% premature distribution tax, some or all of the IRA money you withdraw may still be subject to ordinary federal (and possibly) state income tax.
Also, any withdrawals for college expenses will reduce your retirement nest egg, so you may want to think carefully before tapping your retirement funds.
A custodial account holds assets in your child’s name. A custodian (this can be you or someone else) manages the account and invests the money for your child until he or she is no longer a minor (18 or 21 in most states). At that point, the account terminates and your child has complete control over the funds. Many college-age children can handle this responsibility, but there’s still a risk that your child might not use the money for college. But you don’t have to worry about this with a 529 plan because you, as the account owner, decide when to withdraw the funds and for what purpose.
A custodial account is not a tax-deferred account. The investment earnings on the account will be taxed to your child each year. Under special rules commonly referred to as the “kiddie tax” rules, children are generally taxed at their parent’s (presumably higher) tax rate on any unearned income over a certain amount. In 2016, this amount is $2,100 (the first $1,050 is tax free and the next $1,050 is taxed at the child’s rate).
The kiddie tax rules apply to: (1) those under age 18, (2) those age 18 whose earned income doesn’t exceed one-half of their support, and (3) those ages 19 to 23 who are full-time students and whose earned income doesn’t exceed one-half of their support. The kiddie tax rules significantly reduce the tax savings potential of custodial accounts as a college savings strategy. Remember that earnings from a 529 plan will escape federal income tax altogether if used for qualified higher education expenses; the state where you live may also exempt the earnings from state tax.
But a custodial account might appeal to you for some of the same reasons as regular mutual funds. Though the funds must be used for your child’s benefit, custodial accounts don’t impose penalties or restrictions on using the funds for non-educational expenses. Also, your investment choices are virtually unlimited (e.g., stocks, mutual funds, real estate), allowing you to be as aggressive or conservative as you wish. As discussed, 529 plans don’t offer this degree of flexibility.
Note: Custodial accounts are established under either the Uniform Transfers to Minors Act (UTMA) or the Uniform Gifts to Minors Act (UGMA). The two are similar in most ways, though an UTMA account can stay open longer and can hold certain assets that an UGMA account can’t.
Finally, there is the issue of fees and expenses. Depending on the financial institution, you may not have to pay a fee to open or maintain a custodial account. But generally you can count on incurring at least some type of fee with a 529 plan. College savings plans may charge an annual maintenance fee, an administrative fee, and an investment fee based on a percentage of total account assets, while prepaid tuition plans typically charge an enrollment fee and various administrative fees.
Though trusts can be relatively expensive to establish, there are two types you may want to investigate further.
Irrevocable trusts: You can set up an irrevocable trust to hold assets for your child’s future education. This type of trust lets you exercise control over the assets through the trust agreement. However, trusts can be costly and complicated to set up, and any income retained in the trust is taxed to the trust itself at a potentially high rate. Also, transferring assets to the trust may have negative gift tax consequences. A 529 plan avoids these drawbacks but still gives you some control.
2503 trusts: There are two types of trusts that can be established under Section 2503 of the Tax Code: the 2503c “minor’s trust” and the 2503b “income trust.” The specific features and tax consequences vary depending on the type of trust that is used, and the details are beyond the scope of this discussion. Suffice it to say that either type of trust is much more costly and complicated to establish and maintain than a 529 plan. In most cases, a 529 plan is a better way to save for college.
Note: Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing. More information about specific 529 plans is available in the issuer’s official statement, which should be read carefully before investing. Also, before investing, consider whether your state offers a 529 plan that provides residents with favorable state tax benefits. As with other investments, there are generally fees and expenses associated with participation in a 529 savings plan. There is also the risk that the investments may lose money or not perform well enough to cover college costs as anticipated.
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When investing in a mutual fund, you may have the opportunity to choose among several share classes, most commonly Class A, Class B, and Class C. The differences among these share classes typically evolve around how much you will be charged for buying the fund, when you will pay any sales charges that apply, and the amount you will pay in annual fees and expenses.
This multi-class structure offers you the opportunity to select a share class that is best suited to your investment goals.
Costs Associated with Mutual Funds
Mutual funds have costs that are passed on to investors. It’s important for you to understand what the different costs are, since these are usually deducted from the money you’ve invested and can affect the return of your investment over time.
Typically, mutual fund costs consist of sales charges and annual expenses. The sales charge, often called a load, is the broker’s commission, deducted from your investment when you buy the fund, or when you sell it. The annual expenses cover the fund’s operating costs, including management fees, distribution and service fees (commonly known as 12b-1 fees), and general administrative expenses. They are generally computed as a percentage of your assets and then deducted from the fund before the fund’s returns are calculated.
Note: Before investing in a mutual fund, carefully consider its investment objectives, risks, fees, and expenses, which can be found in the prospectus available from the fund. Read it carefully before investing.
So which share class should you choose? The answer to that depends on two factors: how much you want to invest and your investment time horizon.
Class A Shares
Class A shares may appeal to you if you’re considering a long-term investment of a large number of shares. When you purchase Class A shares, a sales charge, called a front-end load, is typically deducted upfront, thus reducing the actual amount of your initial investment.
For example, suppose you decide to spend $35,000 on Class A shares with a hypothetical front-end sales load of 5 percent. You will be charged $1,750 on your purchase, and the remaining $33,250 will be invested.
However, Class A shares offer you discounts, called breakpoints, on the front-end load if you buy shares in excess of a certain dollar amount. Typically, a fund will offer several breakpoints, so the more you invest, the greater the reduction in the sales load.
For example, let’s say that a mutual fund charges a load of 5 percent if you invest less than $50,000, but reduces that load to 4.5 percent if you invest at least $50,000 but less than $100,000. This means that if you invest $49,000, you’ll pay $2,450 in sales charges, but if you invest $50,000 (i.e., you reach the first breakpoint), you’ll pay only $2,250 in sales charges.
You may also qualify for breakpoint discounts by signing a letter of intent and agreeing to purchase additional shares within a certain period of time (generally 13 months), or by combining your current purchase with other investment holdings that you or your spouse and children have within the same fund or family of funds (called a right of accumulation). Since rules vary, read your fund’s prospectus to find out how you may qualify for available breakpoint discounts, or contact your investment advisor for more information.
Class A 12b-1 fees tend to be lower than those of other share classes, thus reducing your overall costs. This may make Class A shares more attractive to you if you wish to hold on to the fund for a longer period of time.
Class B Shares
Class B shares may appeal to you if you wish to invest a smaller amount of money for a long period of time. Unlike Class A shares, there is no up-front sales charge, so all of your initial investment is put to work immediately.
Class B shares have a back-end load, often called a contingent deferred sales charge (CDSC) that you pay when you sell your shares. The load usually decreases over time (typically 6 to 8 years), although this varies from fund to fund. By the end of the time period no charge applies. At that stage your shares may convert to Class A shares.
For example, suppose you invest $5,000 in Class B shares, with a 5 percent CDSC that decreases by 1 percent every year after the second year. If you sell your shares within the first year, you will pay 5 percent of the value of your assets or the value of the initial investment, whichever is less. If you hold your shares for 6 years, the CDSC will be reduced to zero.
Before you purchase Class B shares, however, make sure that this investment fits in with your overall goals. Class B 12b-1 fees can be considerably higher than for Class A shares, so the cost of investing large amounts over time might be more than you would like.
In addition, you don’t benefit from the breakpoint discounts available with Class A shares, and you must pay the CDSC if you sell your Class B shares within the time limit. You should also keep track of when your shares convert to Class A shares, especially if your account has been transferred from one brokerage to another.
Class C Shares
When you purchase Class C shares, a front-end load is normally not imposed, and the CDSC is generally lower than for Class B shares. This charge is reduced to zero if you hold the shares beyond the CDSC period, which for Class C shares is typically 12 months. For those reasons Class C shares may be appropriate if you have a large amount to invest and you intend to keep the fund for less than 5 years.
However, like Class B shares, the 12b-1 fees are greater for Class C shares than for Class A shares. Unlike Class B shares, these expenses will not decrease during the life of the investment, because C Class shares generally don’t convert to Class A shares. In addition, there are no breakpoints available for large purchases.
Some mutual funds may not offer all three share classes and others may offer different classes, such as hybrid load shares or mid-load shares. Another option you may consider is a no-load mutual fund that you can purchase directly from an investment company or through an investment advisor. As the name implies, these funds have no front-end or back-end loads, and their expenses are typically lower than for other share classes.
Before you decide if these shares are suitable for you, you should look at their past performance and also at any expenses that may apply.
- Check out the mutual fund in advance. Read the prospectus carefully, especially the discussion of fund classes and fees and how they apply to you.
- Make sure you understand how breakpoints work and how to take advantage of them.
- Compare the fees and expenses of different fund classes, to see how purchasing different share classes can affect your return. Take into account your investment amount, the length of time you plan to hold the fund, and the expenses and share load per share class.
- Review your mutual fund holdings regularly. Keep yourself informed of possible upcoming deadlines, such as an impending breakpoint, or when any Class B shares you may own are scheduled to convert to Class A shares.
- Keep your broker informed. To take advantage of all breakpoint discounts, you need to tell your broker about (a) your holdings within the mutual fund, and those of your family, (b) your holdings at other brokers, (c) any additional purchases you may have in mind.
As you consider how best to invest in mutual funds, keep in mind that there’s no guarantee any mutual fund will achieve its investment objective. You should discuss all of your investment goals with a qualified financial professional.