Your family is growing and the children are getting older. It’s time to start thinking about saving (and investing) for college. But where do you start?
Most families rely on their local Certified Financial Planner, Investment Broker or Banker and that’s a very good start, but what plan do they usually put your money into?
I saw one planner recommend Certificate of Deposit (CD) or the traditional 529 plan. Why would they recommend either? For one, they are safe to recommend and more importantly it adds to their “investments under management”.
CDs simply do not provide a high enough rate of return. Anything around 1 to 3 percent is not enough to keep up with inflation.
529s have their own set of challenges. It is packed full of restrictions. Click here to see 529 restrictions. There is a way to avoid the 529 pitfalls and that is with a Private Education Program PEP.
Here is a scenario to redirect money from the IRS back into a private educational college fund:
How to fund your student’s college fund.
According to the IRS, one cannot deduct the cost of funding college or private school tuition, so what is the next best thing? Get the money “from” the IRS to pay the tuition. Actually, that is even better than just receiving a deduction.
There are strategies to help mitigate the costs of education. Let’s talk look at a few of the alternatives. There are 529 plans, a favorite of the banks, brokerage firms, the government, corporate educational reimbursement plans, scholarships/endowment plans and private education programs (PEP), to name a few.
Perhaps the simplest to implement and most beneficial in both the short term is the PEP plan. Allow us to walk you through the necessary steps in structuring a PEP for you and your students.
The key to PEP is the conversion of personal expenses to business deductions. This leads to income tax reduction thus freeing up funds for the other purposes. Put simply, pay tuition instead of income tax (Note 1). One can achieve this through the use of a schedule C when preparing you form 1040 at tax time. This requires that one has a business, preferably a home-based business. We suggest home-based business (HBB) because it provides for the greatest conversion of personal expenses to business deductions. See the example below:
Personal Expenses (Per Month) Business Deductions (Per Month)
Cell phone $100 $100
Rent/ Mortgage $1600 $160
Utilities $300 $30
Maintenance $100 $10
Mileage (500) $275 $275
Internet $50 $50
Phone / Fax $25 $25
Meals / Entertainment $100 $100
Postage $10 $10
Supplies $15 $15
Equipment $100 $100
Furniture $100 $100
Dental expense $500 $500
Total $3,275 $1475 X 12 = $17,700
At a combined tax rate of approximately 30% the savings, assuming one made no income from their HBB, would be $17,700 X 30%= $5,310.
Experts like Dr. Ron Mueller, M.B.A., Ph.D. estimate that a typical family will save $5,000 to $6,000 a year if they have a HBB.
Congratulations you just covered your college funding or tuition cost.
Now it gets better if your student is at least six years old but under the age of 18. This year, 2014, you can your child/student up to $6,200 and deduct it on schedule C. The child does NOT file or pay taxes on it AND you do not recapture the income! WOW!
There is much more to discuss. Just know that it gets better and better!
Note 1. This is for illustration purposes only. We do not give tax advice. Please consult your tax adviser.