How Many Errors Can YOU Spot?

[DHK]

Even in our own industry publications, if you don't have a solid understanding of the subject matter, you can be swept away by someone else's opinions that are simply not true.

Paying For Tuition Trumps Retirement Savings, Survey Finds

Always remember that Licensing does NOT equal Competence.

And just because something is in PRINT... doesn't mean that they know what they are doing either.


If our own INDUSTRY publications can't get it right... what hope does the consumer have who listens to financial entertainers and read "Money" magazine?

 

[goillini52]

Even in our own industry publications, if you don't have a solid understanding of the subject matter, you can be swept away by someone else's opinions that are simply not true.

Paying For Tuition Trumps Retirement Savings, Survey Finds

Always remember that Licensing does NOT equal Competence.

And just because something is in PRINT... doesn't mean that they know what they are doing either.


If our own INDUSTRY publications can't get it right... what hope does the consumer have who listens to financial entertainers and read "Money" magazine?

7..............................

 

[HoosierLife]

Well what are some good options to help save for kids college?

 

[DHK]

A maximum funded cash value life insurance policy is an excellent option.

Why?
1 - Loans or withdrawals during the years you file a FAFSA are not counted as income. (Even a Roth IRA's tax-free withdrawal would still be counted as income, just not taxed.)

https://www.irahelp.com/slottreport...strategy-use-roth-ira-distributions-pay-loans

2 - If you borrow from a permanent life policy with a variable loan, the original amount can continue to grow as though you never touched it... as long as the annual loan interest is paid out of pocket every year.

3 - The asset isn't counted as an asset in the FAFSA calculation, which can help increase the total amount of maximum aid that can be granted.

 

[BigSteve]

A maximum funded cash value life insurance policy is an excellent option.

Why?
1 - Loans or withdrawals during the years you file a FAFSA are not counted as income. (Even a Roth IRA's tax-free withdrawal would still be counted as income, just not taxed.)

https://www.irahelp.com/slottreport/clever-financial-aid-strategy-use-roth-ira-distributions-pay-loans

2 - If you borrow from a permanent life policy with a variable loan, the original amount can continue to grow as though you never touched it... as long as the annual loan interest is paid out of pocket every year.

3 - The asset isn't counted as an asset in the FAFSA calculation, which can help increase the total amount of maximum aid that can be granted.

DHK, these are great points, thanks for posting them!

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A maximum funded cash value life insurance policy is an excellent option.

Why?
1 - Loans or withdrawals during the years you file a FAFSA are not counted as income. (Even a Roth IRA's tax-free withdrawal would still be counted as income, just not taxed.)

https://www.irahelp.com/slottreport/clever-financial-aid-strategy-use-roth-ira-distributions-pay-loans

2 - If you borrow from a permanent life policy with a variable loan, the original amount can continue to grow as though you never touched it... as long as the annual loan interest is paid out of pocket every year.

3 - The asset isn't counted as an asset in the FAFSA calculation, which can help increase the total amount of maximum aid that can be granted.

DHK these are great points, thanks for posting them. Do you think this a better vehicle to fund education than a college savings plan?

 

[DHK]

It all depends on the client, time horizon for needing/wanting access, your product line, and the structure of that product/premium, etc.

Remember that 529 plans have some inherent flaws (in my opinion):
1. Must be used for Qualified Educational Expenses, or it is penalized.
2. Are typically invested in risk-based investments, subject to capital loss.
3. Counts against you in the EFC for FAFSA purposes.

Here's a bigger point. Let's assume that you have a child and by the time you're done paying for school, you've paid $50,000 out of your pocket. (Perhaps more if you use 401k money with taxable distributions - even if they are free of penalties.) And let's assume that you had another 20 years to go before you plan to retire.

Assuming a 7.2% return (rule of 72 to keep math simple) on $50,000 would've grown to $200,000 in 20 years, if you were able to leave it alone and grow for retirement purposes.

That college education just cost you $200,000 in future retirement funds that you could've had... if you just left it alone.

Now, see my post above for point #2.

 

[scagnt83]

Tax free munis are one of the best ways to help fund college imo. That and loans.

I cant relate to the article. Many clients I speak to are perfectly fine with partially funding and then letting the kids take out loans for the rest. Especially the ones who actually have money.

It is close to impossible for the average family to fund a 4 year college education for a single child, much less multiple children. Parents are fools to use retirement savings. Half of these kids are relying on parents helping them financially after graduation anyway.

This just goes back to my recent comments in another thread about financial literacy in this nation. Whenever I am asked about college funding I ask how much they can contribute per month... most people say $100-$200... which is a joke!!
I then explain the numbers to them and explain that they are better off taking care of their own financial future so they can just co-sign a loan for the kid.

Current cost of a 4 year college- $30,000
Average tuition inflation rate- 6%
Average cost in 15 years- $72,000 (for a public out of state school)

$200/m at 8% over 15 years- $70,000

So $200/m would maybe cover a single year of a 4 year college in 15 years...
It would take around $800/m to cover all 4 years.

Most people barely put away $400/m in their 401k... which is about 1/4 - 1/3 of what they need to have a comfortable retirement...


The ones using retirement money must plan on living off of the kids with the super high paying jobs that their liberal arts degree is going to get them

 

[DHK]

Agreed. That's why I focus on maximizing financial aid opportunities and THEN funding out of pocket... if they want to.

If they can accumulate a large enough policy, they can set up intra-family loans with their children to repay them... instead of traditional student loans. It's an idea that can show that there's "no free ride for school on parent's dime".

And kids should be choosing degrees in fields that are in high-demand... not "underwater basket-weaving philosophies". If they don't know what to major in, they should just get their general education courses out of the way at a community college. Universities (and their costs) are for serious students... not for "finding yourself".

 

[scagnt83]

by the time you're done paying for school, you've paid $50,000 out of your pocket. (Perhaps more if you use 401k money with taxable distributions - even if they are free of penalties.)

Obviously we are in agreement about the reality of funding college and what a parents priorities should be.

But you are not taking into account the fact that 401k funds are using discounted money in the first place.
Assuming a 20% tax bracket, it takes $12,500 in after-tax savings, to equal $10,000 in pre-tax savings.
Or reverse that and for every $10,000 you save after-tax, you could save $12,500 pre-tax... that is like getting an immediate 20% return on your money compared to after-tax savings.

Yes, there are lower taxes on the back end for the after tax money. But dont forget to add the state capital gains tax to the 15% fed rate. That makes it a min of 20% in the majority of states, many are more than 20% combined. (I think CA is something like 33% for non high earners)
That really takes a toll when the pre-tax bucket starts at a higher amount AND the yearly returns are not reduced by taxes each year.

And that is just the simplistic look at the after tax bucket... if you are in managed funds you are usually getting both short and long term capital gains taxes each year, which could possibly mean an even higher combined (meaning short & long) rate.

Then there is the whole issue of the 401k contributions helping to reduce your AGI and possibly helping to put you in a lower overall tax bracket...

So it is a bit unfair to just look at the taxation on distributions without taking into account the tax benefits during accumulation. You cant compare $10k pre vs. $10k after without making the appropriate adjustments on one side or the other.

 

[DHK]

Do we really want to get into a debate of the intricacies of 401k plans?

1) Maximum loan available: $50,000. Take out the loan, and it reduces the amount that's left for compounding (or losing) with the selected asset allocation.

Repayment of said loan... is with after-tax dollars which are taken out of the employee's paycheck. If employee leaves... loan is "called" within 60 days, or it is deemed an early distribution and a 10% penalty on the balance.

I know you didn't bring that up, but I thought I'd start with that. So, if we're talking about the efficiency of a 401k plan for an employee, this is a vital disclosure that most people may not think about.

And I'm pretty sure that a 401(k) loan is not considered reported income when filing for FAFSA for the subsequent year because it's a loan, not "income".

2) Maximum # of loans: Last I checked, 401k plans only allow 1 type of loan at a time - personal and residential and a maximum total outstanding loan of $50,000. So, if we're going to compare liquidity provisions... let's be sure we get it ALL out of the table. You'd have to have no current outstanding personal loan in order to obtain a new maximum loan. Don't get smaller loans, unless you can repay it and then obtain a higher loan amount.

3) Yes, your BALANCE in the 401k plan will be higher - probably for the first 10 years compared to a permanent life insurance policy. So yes, there may be more CAPITAL available for the reasons you mentioned. That doesn't mean it's a smart source to borrow from.

If they WITHDREW the money from their 401k plan - under a hardship provision, to NET $50,000... they'd probably have to liquidate an additional (mandatory) 20% for federal withholding ($60,000) and a 10% penalty (make it $66,000). (10% Penalty applies to 401k, but not to traditional IRA.)

If we want to use the same calculation, $66,000 at 7.2% for 20 years = $264,000. Yet, compounding in a fully taxable vehicle, all $264,000 will be fully taxable income when distributed in retirement.