Don’t let your financial planning take a vacation
By Bob McNamara
With all due respect to Martha and the Vandella’s, it is not just time for Dancin’ in the Streets, backyard barbeques, summer vacations, and hopefully, a pennant race. With all these really important things going on you might as well let all that financial planning stuff take some time off too, right? Think again. Taking a vacation from your financial planning is a serious mistake because the subject is too important.
Since this is the time for graduations and thoughts of the future I’d like to discuss a few things related to kids, taxes and college. I know, we financial planners harp on this subject, but there are many people out there still not listening. The financial benefits of a college education are substantial. The average earnings of a high school graduate in 2005 were $29,488; with a bachelor’s degree it increased to $54,589. The disparity has risen significantly over the last 30 years and the long-term economic impact grows even more so. The logic is indisputable: more income equals more savings, a better standard of living, and by the way, more taxes. That genie always seems to pop out out of the bottle.
So the prevailing wisdom is to get a degree of some sort. A slight caveat when discussing post high school education: it is not just those that go to college that benefit, but also electricians, plumbers and specialized craftsman of all sorts.
The next item that is always the biggest question most of my clients ask is how to pay for it all. With the average private college well over $40k and state schools half of that, it might be somewhat daunting if you have not prepared and even more complicated if you have more than one child enrolling at the same time.
The most efficient way to save for college is to take advantage of the 529 programs that are sponsored by each state and deposit a single lump sum at the birth of the child. I realize that most of us don’t always have the wherewithal to do this; therefore a monthly deposit makes sense (just like you save for retirement, right?). As mentioned in previous articles, the money is never taxed if used for education and if there is money left in the account you can change the beneficiary to the next child. This is also a great estate planning tool for the grandparents. There are two primary programs in this state that also give you a tax deduction that should not be overlooked—Van Guard and Columbia Funds (advisor driven).
For the tax year of 2007, some thought might be given to transferring some shares of a highly appreciated stock for sale into the child’s name, therefore paying the Capital Gain at a much lower rate. I make mention of this because in 2008 it changes and they pay the tax at the parent’s rate until age 24. Remember to consult you tax advisor before doing this.
Lastly, if the situation is right you may want to consider using the Roth IRA as a vehicle to stash cash for college. It will accumulate tax free and will be taxable at withdrawal. If not, it can sit for as long as necessary and be used for something else.
As always, every case is different and they are many ways to accomplish any goal. Your job is to identify and prioritize those goals and if you need help, seek it. Have a happy summer and see you at the beach!
Robert J. McNamara – Financial Consultants (Financial Planning for Families) is located at 132. S. Swan Street, Albany. For more information call 434.4383.