Spotlight – Managing Your 529 College Savings Plan Amid the Pandemic

Spotlight – Managing Your 529 College Savings Plan Amid the Pandemic

Due to the pandemic, colleges across the United States are starting to rethink their approach to how to provide an education. In response, many families are wondering whether paying for a college education is worthwhile right now.

Recent statistics bear out this trend. In October, the National Student Clearinghouse Research Center reported that undergraduate enrollment is down 4%. Experts attribute the decrease to concerns about contracting COVID-19, a dislike of online learning, and issues with families not being able to afford tuition. Some students are opting to take a gap year or to postpone college.

While reconsidering your college plans may be an option for some, financial planners advise families to continue saving—at least in some form—for their children’s college education. The following is some information and advice on how to manage your 529 college savings plan as the educational system navigates COVID-19.

Community College An Option

One popular option for students who don’t want to virtually attend a pricey university is to enroll in community college, which is generally a less expensive choice. Some financial advisors recommend that parents pay the lower tuition for community college out-of-pocket rather than draw on their student’s 529 plan, a popular education savings plan that allows families to invest money that has already been taxed into several investment options. Your earnings grow tax-free, and withdrawals for qualified expenses are not taxed.

This approach offers several benefits. Parents can continue contributing to their child’s 529 account and increase its long-term growth potential. In addition, they will not be withdrawing money from their student’s college savings account and taking a loss during an economic downturn. Students can also take out separate loans for community college and use the 529 proceeds later to repay up to $10,000 of those loans (principal and interest), a one-time option now available under the recently passed SECURE Act. As an added bonus, up to $10,000 in 529 plan distributions can be put toward the educational debt of each of the beneficiary’s siblings, including stepsisters and stepbrothers.

Continue to Contribute

The market ups and downs over the last year may set off warning alarms for your 529 college savings plan. Your account balance may drop, which may make the plan seem less valuable. The statistics back this up. According to data from the College Savings Plans Network, the average account reached a high of $26,054 in 2019, but now it is down to an average of $25,657.

Even with so much uncertainty, advisors recommend that families continue contributing to their 529 college savings plans as much as they can. Recent research finds that many are doing just that—total investments in 529 plans have risen to nearly $374 billion, a record. Investors value the savings plans’ tax-free deductions when the funds are used for qualified educational expenses such as tuition and books.

“When it comes to 529 college savings, staying the course is an essential component of a successful long-term savings strategy,” stated Michael Frerichs, the chairman of the College Savings Plans Network, in a recent interview with CNBC.

Other Ways to Use the Money

COVID relief legislation that was passed earlier this year allowed families who had paid for tuition from their 529 plans—before classes were moved online due to the pandemic—to receive refunds from the colleges. As long as the money was deposited back into the 529 plan within 60 days, the withdrawal was not taxed.

While families have the option to leave the money untouched, there are other ways they could use it because the law allows for 529 funds to be used to pay for a variety of qualified educational expenses. Up to $10,000 per year can be spent on private school tuition for each younger child per year (private, public, or religious education for students in kindergarten through 12th grade), and in many states that amount can be applied to reduce the taxable income of the parent or grandparent who started the fund.

The money also can be used to pay for apprenticeship programs, vocational school, and other post-secondary institutions that participate in the U.S. Department of Education student aid program. Qualified expenses also include computer software, textbooks, and supplies.

The Long-Term Outlook

For families with younger children, now may be a good time to think about what higher education will look like in a decade. Some experts predict that post-COVID, the cost of a college education will become even more expensive. In order to compensate, you can change the asset allocation of your 529 plan portfolio, making it more aggressive or conservative based on your feelings about the market.

Parents may want to explore other savings options, as well, so that they can work around the restrictions on the 529 plan. Other good investment choices include U.S. Treasury bonds, one of the safest—and slowest—investments, or stocks, which will be more volatile but could provide a much larger payoff. Parents also could consider a Roth IRA savings account, which offers the tax savings of a 529 account without the restrictions.

This Is How the Presidential Election Could Impact Your Investments

This Is How the Presidential Election Could Impact Your Investments

While the 2020 U.S. presidential race remains front-page news, the outcome of the Nov. 3 election could significantly impact your income, tax bracket, and tax burden, as any changes in government officials could potentially alter the federal tax code in 2021. While neither presidential candidate has released a detailed tax plan, the information provided during recent campaigning has offered some clues as to how each candidate might approach tax policy. The composition of the U.S. House and Senate after the election will also determine the future of US tax policy, as bills altering the tax code must pass through Congress.

Here’s what we know about where the U.S. presidential candidates stand on issues of taxation:

Capital gains and dividends—Currently, the top tax rate on capital gains and dividends is 20% for individuals with incomes over $441,450 and for married couples filing jointly who make more than $496,600. President Donald Trump has indicated that he would reduce the capital gains tax rate from 20% to 15%, while Democratic candidate Joe Biden would remove exemptions for capital gains and dividends for incomes that exceed $1 million.

Estate tax exemption—For 2020, the estate tax exemption is approximately $11.6 million, and it’s scheduled to revert to $5.8 million in 2025. Trump supports an extension of the exemption, while Biden would keep the planned 2025 reversion.

Individual tax rates—For individual with incomes of more than $518,400 and married couples filing jointly with incomes of over $622,050, the top marginal rate is 37%. Trump would retain this rate and add a 10% rate cut for middle-class taxpayers. The current rate of 22% applies to individuals with incomes of over $40,125 and married people filing jointly who have incomes of over $80,250. Biden has indicated that his policy would restore the pre-2017 rate of 39.6% for taxable income of more than $400,000.

With this information in mind, financial planners are offering advice on how to manage your finances in order to maximize your wealth throughout the upcoming months.

Pre-Election Financial Strategies to Consider

Roth IRA—In order to reduce the tax burden on your individual retirement savings, financial planners recommend converting traditional IRA accounts to Roth IRAs. The reason? When you withdraw money from a traditional IRA, it’s taxed, and right now the income tax rates are relatively low. If a Democratic majority takes office in 2021, income tax rates could increase, and traditional IRA withdrawals would be taxed at the higher rate. While deposits into a Roth account are taxed, the balance will grow tax-free.

While switching to a Roth account will trigger a tax bill for making a withdrawal, you will likely will be financially better off in the long term with a Roth IRA. Additionally, don’t forget to claim losses this year on deductible items, such as depreciation on an eligible rental property that you own. The savings may be enough to offset any fees charged in a Roth IRA conversion.

Estate planning—One tax strategy to consider is to give to your heirs a financial gift before the end of 2020, as it’s unclear what will happen to the estate tax exemption. Currently, due to tax revisions passed in 2017, the estate tax exemption was doubled to more than $23 million per couple. While this benefit is set to expire in 2025, a change in the governing majority could move up the expiration date and reduce the exemption amount to pre-2017 levels.  Financial advisors recommend taking advantage of tax-free gifts to heirs now and giving up to the annual exemption level.

Sell Stocks

Americans have enjoyed a relatively low tax rate on profits from the sale of investments that they have owned for more than a year. However, Democrats have discussed the possibility of increasing tax rates on long-term capital gains above the rates set during the 2017 tax overhaul. For high earners, this could mean as much as a two-fold increase in the top capital gains tax rate.

If the possibility of an increase in the long-term capital gains rates looks likely in 2021, a good strategy could be selling off profitable stocks now in order to take advantage of a lower tax rate.

Wait Before Making Any Major Decisions about Your Finances

Since it’s impossible to predict exactly how the election results will affect your taxes, financial advisors recommend that you wait before making any big decisions about your investment strategies. Some point to the lessons learned from 2012, when people sold more than they could afford based on speculation.

Some advisors recommend thinking through a 10-15 year investment plan and making decisions within that framework—even with the uncertainty that lies ahead. If you are compelled to rethink your investments now, consider compromising. For example, you could convert part of your traditional IRA to a Roth IRA now and then decide about whether to convert the remaining balance after the election.

“The election will happen, and we’ll know the results. But we won’t know what the tax plan will be this year,” said Bryan D. Kirk, Fiduciary Trust International director of estate and financial planning, in a New York Times article.

How to Navigate the New Unemployment Benefit

How to Navigate the New Unemployment Benefit

Federal unemployment benefits prompted by pandemic job losses expired at the end of July, and a recent flurry of government activity resulted in an executive order issuing $400 a week to people who are unemployed.

The weekly benefit will help the more than 30 million Americans now claiming unemployment as well as the hundreds of thousands of new applicants each week. The details surrounding this round of benefits have not been finalized, however, and it remains unclear as to who will be eligible, exactly how much they will receive, and when the payments will begin.

Here’s what we do know.

$400 a Week Isn’t Guaranteed

While this payment program, called Lost Wages Assistance, will come on top of state unemployment benefits, it looks like not everyone eligible will receive the full $400 each week. The reason? One stipulation of this new benefit is that states must provide 25 percent, or $100 of each payment, unlike the recently expired program, which was fully federally funded.

Some states aren’t in a financial position to supplement federal unemployment and may take advantage of a loophole that will lower the payment. The federal government has noted that states can count existing benefits they pay an unemployed worker toward their share of the new supplement. That would reduce the federal payment to $300 per week.

One expert believes few states will provide the additional $100 on top of state unemployment benefits. Many states are facing budget shortfalls due to decreased tax revenue during coronavirus lockdown—the Center on Budget and Policy Priorities predicts state budget shortfalls could total $555 billion.

“They’re stretched,” Andrew Stettner, a senior fellow at the Century Foundation, recently told the New York Times. “They don’t have money for masks for the teachers in their schools. They’re probably not going to come up with an extra $100 for everyone on unemployment insurance.”

In late August, the states of Kentucky, West Virginia, and Montana announced that they would provide the $100 in matching funds so that unemployed workers will receive the full $400 weekly federal benefit. South Dakota has opted out of the program entirely, and other states have announced that they will not provide the extra money. In those states, eligible people who receive unemployment will get $300 each week.

Not Everyone Will Qualify

Unfortunately, new Labor Department guidelines for the Lost Wages Assistance program could exclude the people who need it most, including people who freelance or work part-time.

People who qualified for the Pandemic Emergency Unemployment Compensation or Pandemic Unemployment Assistance programs through the Coronavirus Aid, Relief, and Economic Security (CARES) Act and can continue to provide self-certification that they lost their job because of COVID-19 should receive the new unemployment benefits. To ensure that they receive the new benefit, however, they should be careful to state on the application that they are unemployed or underemployed due to COVID-19.

Another loophole could be problematic as well. People who receive less than $100 a week in state unemployment benefits won’t be eligible for the federal weekly $300. Experts estimate this could exclude as many as 1 million workers, including low-wage earners and people who work part-time.

When will the benefits be paid?

Right now, there’s no clear guidance on when the first Lost Wages Assistance checks will be sent. Some estimate it could take months, as states that are already managing huge loads of unemployment filings will have to administer their portion of the program. Precedent may be helpful; some states took months to send out checks under the initial pandemic federal unemployment assistance program.

One Department of Labor official who works in Hawaii recently said in a media interview that the state’s computer system will have to be reprogrammed to meet federal requirements, a problem many states with older computer systems are facing. States with updated computer systems also may not be able to get payments out quickly, according to some estimates.

State offices are busy fielding questions about the new benefits—one New Mexico government official told a news outlet that his office received thousands of calls the first workday after the initial stimulus bill was signed into law in March.

The Upside

While much about the Lost Wages Assistance program remains up in the air, there is some good news. The program is retroactive to August 1, so qualified recipients will receive a large first payment at some point.

The benefits are scheduled to continue through the week of December 6, which means recipients will receive financial help for another four months. This will provide some certainty for families and individuals as they make decisions about budgeting and spending this year. While the money does have an endpoint, federal elected leaders may implement another round of unemployment benefits at that time if Americans still need additional financial help due to the pandemic.

Why You Need A Financial Plan Now

Why You Need A Financial Plan Now

While the world may feel chaotic as the coronavirus pandemic continues to disrupt daily life, there’s no better time to get a hold on your finances. The future may seem uncertain, but having a strategy for managing your finances will help navigate whatever lies ahead.

If you’ve never created a financial plan, here are some commonly asked questions to get you started.

What Is a Financial Plan?

A financial plan outlines your financial goals and how you can plan to reach them. Possible goals can be paying off debt, saving for retirement, sticking to a monthly budget, or creating an investment plan.

These kinds of financial strategies are not just for wealthy people. Anyone who’s interested in taking charge of their finances and working toward long-term goals can make a financial plan by either working with a financial planner or creating one themselves.

What’s the Benefit of a Financial Plan?

The benefits of a financial plan are many, but the most important is that you establish control over your money and grow in confidence as you stick to a budget, save, and invest wisely. Financial plans can look decades ahead while allowing for flexibility for big life events such as the loss of a job or a child’s wedding.


How Do I Get Started Creating a Financial Plan?

Whether you work with a certified financial planner or build your own financial plan, your first step should be writing down your financial goals. You’ll want to consider both short- and long-term goals, such as a short-term plan for paying for a college tuition in the next five years or retiring decades from now. The more specific you are, the more you can define your financial strategy.

Start by writing down your financial goes for the next five, 10, and 20 years. Think about how much you’d like to save, what big (expensive) life events are coming up, and how much money you’ll need to fund the retirement you dream of. The more detailed your goals, the more motivated you’ll be to prioritize and follow through with them.

What Documents Do I Need to Create a Financial Plan?

To get an accurate overview of your financial situation, you’ll need to review documents detailing everything from your mortgage to your retirement savings account. As you evaluate these documents, you’ll gain a better understanding of your spending history, income, investments, and liabilities. This information will give you a strong foundation to work from as you build a realistic financial plan and work toward your goals.

What Kinds of Goals Should I Consider Including in My Financial Plan?

While every financial plan is personalized, it’s beneficial to consider goals that will strengthen your savings and help you reach your financial goals. Here are some examples.

Preparing for emergencies. Financial experts recommend building up a savings of three to six months of expenses in case of a catastrophe such as a sudden job loss. This savings should be a priority—as COVID-19 has shown, financial situations can take a turn for the worse unexpectedly. A savings buffer will help you pay bills if you are suddenly looking for a new job or facing cutbacks at work.

Dealing with debt. If you have significant debt, your financial plan should prioritize paying it off—starting with high-interest loans or balances such as unpaid credit card debt. Paying off these balances will free you from paying interest on money you’ve borrowed and free up more cash for you to save or invest. You can approach this goal from several angles, including taking out a debt consolidation loan or directing money from a second job toward loan payments.

Retirement savings. No matter what age you are, it’s wise to save for retirement. The younger you are, the more benefit you will receive from compounding interest that will quickly build your retirement account. One way to quickly grow your retirement savings is to enroll your employer’s matching savings program.

Big purchases. If you are considering an expensive purchase, such as a second home or a new car, you’ll want to not only save for this purchase but also build up your credit so that you’ll qualify for a good loan. You can do this by paying bills on time and paying off high-interest debts.

How Do I Stay Motivated to Stick to My Financial Plan?

Financial plans can be daunting, especially if you’ve never had one before. Instead of becoming overwhelmed, focus on small goals that serve as milestones on your journey toward financial health. You’ll find that small victories can snowball—paying off a high-interest credit card balance will free up more money to invest, save, or pay toward other debts.

Once you have a plan in place and are following it, you’ll gain a new sense of control and confidence as you build savings, pay off debt, and being to shore up your finances against unforeseen circumstances.

How to Handle Your 529 Plan During Coronavirus

How to Handle Your 529 Plan During Coronavirus

The coronavirus pandemic has wreaked havoc on many aspects of people’s financial lives. Despite this, many people report that they have not stopped contributing to their children’s 529 college savings plans.

In early May, released survey results showing the pandemic’s economic impact on families saving for college. About two-thirds of respondents reported seeing a decrease in their 529 plan’s value since January. Approximately one fourth said that someone in their household had lost a job or was making less money. However, most also said they hadn’t changed their strategy for saving for college.

As the situation developed, though, and economic hardship continued, more families (although not a majority) did report an impact on their college savings. A CollegeBacker survey in May reached out to 1,200 American adults. About 16 percent said they had paused their college savings contributions. Additionally, 17 percent planned to withdraw money from their college savings accounts, and 13 percent had decreased the amount they were contributing.

The June 2020 State of Savings report from Ascensus, which analyzed 529 plans with fewer than 500 participants between early 2019 and May 31, found about a 21 percent decrease in the amount of one-time contributions between the end of March and the end of May. However, Ascensus’ analysis showed hardly any change in automated contributions during that time period.

“There are many families facing a tougher situation so you do see some occasional monthly reductions in their contribution rates, but overall it hasn’t been as dire as you might expect,” Jordan Lee, founder and CEO of CollegeBacker, said in a press statement. Here’s what you need to know about 529 plans during the pandemic:

This Is How 529 Plans Work

The value of a 529 plan is that it allows adults, primarily parents or grandparents, to save money for a designated beneficiary. The account will grow tax-deferred, and money can be withdrawn tax-free for qualified expenses related to education.

The money can be withdrawn for other expenses (financial planners recommend this option only be used as a last resort) if times are hard. However, the plan’s earnings would then be subject to a 10 percent penalty, and the account holder would also be charged federal income tax on the withdrawal.

Extensions Were Granted to Return Money Refunded as a Result of the Pandemic

Federal regulators offered one break, however, for 529 plans during the pandemic. In some cases, families paid for college expenses for spring 2020 out of their 529 plans and may have received a refund for tuition or room and board due to schools closing their physical campuses and going online for much of the semester.

In a typical year, account holders would be required to reinvest the refund into their 529 plan quickly or be penalized. This year, the Internal Revenue Service allowed families 60 days (the deadline was July 15) to return the money without a penalty.

529 Plans Are Good Investments

The pandemic has forced many families into tough situations, as working members of families have faced layoffs, furloughs, and other economic hardships. However, 529 plans remain an excellent investment, as rules for how the money can be used have been relaxed over the years. Qualified expenses can include everything from tuition for vocational and trade schools to paying off student loans to some costs associated with K-12 education.

Federal laws restricting gifts to $15,000 each year are less stringent for 529 accounts. This means that grandparents or other adults who want to invest in a child’s education can give as much as $75,000 in a single contribution. In addition, if the account’s recipient decides not to go to college, another family member can use the money.

Your Budget May Be More Flexible Than You Think

Experts advise families to keep making contributions to their 529 plans—and even increase them if possible—during the pandemic. Some financial planners point out that typical budget items, such as eating out and vacations, may not be spent and the money could instead be allocated to college savings.

Families also should regularly review their budget and financial planning outlook. The current economic situation is changing rapidly due to ongoing questions about employment and the market. However, college will still be an expense in most cases, and a 529 college savings plan remains an excellent way to save for college even if you find yourself in financial hardship.

Plans May Be Uncertain, but 529s Are Flexible

The pandemic has forced many to change their plans, and your student may even be considering putting college off or choosing a different route all together. Restrictions on indoor gatherings have required many American colleges to remain online, an educational format that is less appealing to many students.

The good news is that 529 plans are designed for flexibility. This means you can continue saving while your student’s educational future unfolds, and the plan likely will cover other educational expenses if your student decides to pursue a nontraditional educational opportunity. And if your student foregoes education entirely to work or travel, the 529 plan can be transferred to a qualified relative whose education can benefit from the savings.

Financial Planning in the Time of Covid

Financial Planning in the Time of Covid

During economic crises, it can be instinctive to change course with your finances as uncertainty and perhaps even panic set in. However, it will benefit you financially to avoid making quick decisions about your money, particularly during a recession. Financial stability, especially during the COVID-19 pandemic, will reduce stress on your family and keep you moving toward your financial goals.

Here are some sound options for managing your finances during the pandemic.


Pad your emergency savings


While the pandemic has hurt many aspects of the American economy, personal savings rates have soared. CNBC recently reported that the US Bureau of Economic Analysis showed a personal savings rate (the percentage of disposable income that people save) of 33 percent in April, the highest it’s been since the 1960s, when the agency began keeping track. Nationwide stay-at-home orders have encouraged savings, as people have drastically reduced their spending on travel, shopping, and entertainment and eating out.

If you continue to have a steady income, this is an excellent time to build an emergency fund for situations ranging from job loss to an unexpected medical bill. Financial experts recommend saving between three and six months of living expenses to make sure that you can weather unforeseen hardships, including the pandemic if it stretches out.

A good place to start would be saving any lump sum of money you receive, such as a tax refund, work bonus, or a commission. You could also decrease the amount you contribute to your 401(k) temporarily and move the difference into your emergency fund.


Adjust your budget

Millions of Americans have been affected by COVID-19 shutdowns, whether they have been furloughed, laid off, or experiencing a reduction in wages. The economic fallout is far from over, so even those who have yet to be impacted by COVID-19 could as companies examine their long-term revenue and adjust their plans in the coming months.

Regardless of your job situation, this is a good time to make adjustments to protect yourself against job loss or wage reduction. You can think through your long-term income potential and job security and consider ways to insulate your family from income loss as the impact of COVID-19 unfolds over the coming months and years. You may also want to make your budget more conservative, increase your savings, and reduce non-essential spending.


Look at payment reduction options

While your income may seem stable now, that may not be true a few months down the road as the economic crisis stretches out. To be prepared for financial difficulties, familiarize yourself now with programs that allow for payment deferment or reduction on key debts.

Mortgage payments: If a time comes when you can’t make your mortgage payment, call your bank. Many states will allow property owners to take a “holiday” from mortgage payments if their cash flow has been impacted by COVID-19. Lending institutions may allow you to postpone payments without incurring late fees, extra interest, or a negative impact on your credit score.

Credit card payments: In the wake of COVID-19 financial hardship, many credit card companies are offering relief to their clients in the form of lower interest rates, reduced fees, and delayed monthly payments. Contact your credit card company for details about their COVID-19 relief plan.

Federal student loan payments: The US Department of Education currently has reduced the interest rates on federally-backed student loans to 0 percent for a minimum of 60 days, and graduates can also take a break from payments for at least two months if they call 1-800-4FED-AID and request it.


Reconsider your real estate

Your biggest monthly budget item is likely your rent or mortgage. Financial setbacks, such as a job loss, can become severe if you can’t pay it. If you’re a renter and you’re anticipating or experiencing a financial hardship, ask your landlord for a temporary reduction in your monthly payment or if you can apply your security deposit toward rent. In a more extreme scenario, you may need to get out of your lease early and move to a more affordable rental.

If you’re a homeowner, call your bank and ask for mortgage relief, such as deferred payments or temporarily paying interest only on your mortgage. With interest rates extremely low, this may be an ideal time to refinance your mortgage to decrease your payments or shorten your loan terms so that you can pay it off more quickly.


Is it time for more investments?

While your inclination may be to save right now, you may be missing out on excellent investment opportunities. Many stock prices are low, making it a good time to enter the long-term investment market or temporarily increase contributions to your 401(k). Bear markets have rebounded above average for several years, a historic trend that could play out again when the COVID-19 recovery begins.

As with any risk, however, caution is always advised. Before you step further into the market, make sure you have a generous emergency savings fund, stable expenses, and job security.