Create a College Funding Strategy – By Ian Filippini

With all the other expenses competing for your monthly income – mortgage, car payment, 401(k) plan contribution, and the like – carving out a small sum of money to save every month for college isn’t easy. However, the earlier you start the more you’re likely to accumulate.

Let’s compare two hypothetical examples. The Smiths and Jones both want to send their children to a college whose four-year total cost is approximately $40,000. The Smiths start saving as soon as Junior is born, putting away $100 per month earning 8% per year. By the time Junior is ready for college, they will have saved $48,749 – more than enough to cover the entire cost plus account for inflation.

The Jones, however, wait until Precious is 10 years of age before starting to save. Even though they can put away $250 per month, when Precious is ready for college eight years later they have only saved $34,163 – meaning they’ll have to make up any shortfalls out of pocket.

Of course, these hypothetical examples are for illustration purposes only and do not represent the return of any specific investment. Also, taxes, fees, and other costs are not considered. But the message is clear: The earlier you start, the less you’ll need to save each month and the more you’re likely to end up with by the time you send your child or children off to State U.

Fortunately, several savings and investment strategies exist to help you accumulate assets for college.


College Funding Ideas

1. Assess your needs. To determine how much to save, you need to estimate the future cost of tuition at public and private institutions. With education cost rising an average of over 8% a year for four-year institutions, you must save with inflation in mind.

2. Save early and often. The sooner you begin to set aside funds for college, the less you will have to save on a monthly basis. Allow your investments to grow along with your child.

3. Set up a systematic savings plan. Try to save monthly or quarterly, just as you would if you were paying off a car or a mortgage. (Please note, such a period savings or investment plan does not assure a profit and does not protect against loss in declining markets.)

4. Keep a separate college account. The most popular are custodial accounts. These accounts ease the tax burden by allowing parents to shift some of their assets to the child at the child’s lower tax rate.

5. Involve the family. Children are more aware of family finances and accept responsibility when they are involved. It also becomes easier for you if the child is able to contribute to the fund.

Create an incentive program with your child. Offer to match the money the child makes to his own account. Teach him or her to work and help contribute to their fund – they will value their education even more.

College funding takes discipline, effort, and planning. It’s also becoming more complex every year. Rely on our financial planning expertise to help design a program that best fits your family’s needs and situation.

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The Skyrocketing Cost of College-By Ian Filippini

Despite a decade of low inflation, the price of higher education has seemed to defy gravity. According to The College Board, a not-for-profit membership association whose mission is to help students and parents prepare and pay for college, tuition and fees at both private and public institutions have nearly doubled in constant dollars over the last 20 years.1

But a college education is clearly an investment that pays big dividends down the road. The College Board, citing U.S. Census Bureau statistics, estimates that individuals with a bachelor’s degree earn over 70% more, on average, than those with only a high school diploma.2 Over a lifetime, that earnings gap translates into more than one million dollars – more than enough return to justify the investment, even if the rise in prices is outpacing inflation.3

Help is on its Way

The College Board’s latest annual report, “Trends in Student Aid 2005,” reveals that $129 billion was distributed to students and their families from federal, state, and institutional aid sources. That’s an increase of $10 billion over 2004.

The average cost of tuition and fees at a four-year private institution in 2005-2006 is estimated at $21,235, up 5.9% from last year, while a four-year public institution will run $5,491 for 2005-06, an increase of more than 7%. Add in room and board, books, travel expenses, and other miscellaneous costs, and one thing becomes clear: Funding a college education for your children is going to take some careful planning and long-term dedication.

Some parents, especially those of young children, put off planning on the assumption they can make up for lost time later. Even if your children are very young, however, it’s not too soon to begin thinking about ways to prepare for helping them with the rising costs of a higher education. Given the proven power of compounding over time, starting early to save smaller sums of money each month can make a dramatic difference in the amount you can manage to put away over time.

1,2,3,5) “Trends in College Pricing 2005,” The College Board

  1. “Trends in Student Aid 2005,” The College Board

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Deferring Compensation By Ian Filippini

In addition to providing qualified plans to employees, many business owners implement nonqualified alternatives in order to supplement retirement benefits. These selective benefit plans are generally offered to key employees and owners. One popular nonqualified benefit is deferred compensation.

Basically, nonqualified deferred compensation refers to an arrangement between an employer and an employee in which compensation for current services is postponed until some future date or the occurrence of a future event. The effect is to postpone taxation for the employee until compensation is received – usually at retirement or disability.

Types of Deferred Compensation

Deferred compensation plans can be categorized several different ways. Plans can be:

Funded or unfunded.

Forfeitable or nonforfeitable.

Defined benefit or money purchase.

They can also provide one or a combination of death benefits, disability benefits and retirement benefits.

Funded plans generally involve a trust fund or escrow account where the employer transfers money at a later date for its “promise to pay” deferred compensation. These are not very popular as the participant may be deemed to have “constructive receipt” of such funds and therefore inherits a current tax liability when funded.

IRS Revenue Ruling 60-31, 1960-2 CB 174, states that an employee’s right to receive deferred compensation, backed during the deferral period solely by an employer’s “naked promise” to pay, produces no currently taxable income for the employee. A deferred compensation plan is not regarded as funded merely because the corporation purchased and owns a life insurance policy or annuity contract to make certain that funds will be available when needed.

Rabbi Trusts

One of the problems with a typical unfunded deferred compensation plan is that the employee has no guarantee that future payments will be made. If the employer defaults in making promised payments, becomes insolvent, or files bankruptcy, the employee simply becomes a general creditor waiting in line with all the other creditors hoping to recoup some of their receivables.

The rabbi trust protects an executive from an employer’s future unwillingness or inability to pay promised benefits while retaining the benefits of deferred income taxation. The IRS has stated in a series of private letter rulings that an irrevocable trust or an escrow account can be established to fund a deferred compensation agreement as long as the assets placed into the rabbi trust remain subject to the claims of general creditors. If this condition is met, the employee will not be deemed to have “constructive receipt” of the assets, and, therefore, will not have received a current economic benefit. Hence, the employee will not be required to pay taxes until the payments are made at a future date.

The rabbi trust gives the employee security in knowing that the employer is, in fact, setting aside money to fulfill its obligation under a deferred compensation agreement.

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Qualified Retirement Plans for Small Businesses By Ian Filippini

For the small-business owner, attracting and retaining valuable employees can be a daunting challenge. One way to make working for your business more attractive to current and potential employees alike is to implement a qualified retirement plan for you and your employees. Besides greater appeal to your workers, qualified plans can also provide you with numerous tax advantages, including:

Contributions for all participants are 100% tax-deductible to the business up to certain limits.

Annual contributions by the business are not considered taxable income to the plan participants.

Capital gains and interest earned are deferred from taxation during the accumulation years. Income taxes are payable upon withdrawal.

At retirement, favorable tax treatments may apply such as spreading payments over the participant’s lifetime and special averaging formulas.

Non-Tax Advantages

In addition to the obvious tax and employee hiring/retention advantages, there are many other, equally important, reasons to implement a qualified plan. For example, plan assets are creditor-proof. The assets of the plan are not subject to malpractice lawsuits or bankruptcy rulings.

These and other advantages combine to help improve morale as the participants realize that their company provides the mechanism to help secure their retirement.

Types of Plans

The two most common types of qualified retirement plans are pension and profit-sharing plans. A business can also sponsor an IRA or SEP (simplified employee pension plan).

Pension Plans. There are three major types of pension plans — defined benefit, money purchase, and target benefit.

1. A defined benefit plan is one where the retirement benefit is determined by a plan formula – usually based on years of service.

2. A money purchase pension plan is one where the plan formula specifies the percentage of each participant’s compensation that will be contributed each year.

3. A target benefit plan is a hybrid. It starts out as a defined benefit plan, which determines the benefit. Once the benefit is calculated, the plan converts to a defined contribution or money purchase plan.

Profit-Sharing Plans. The most popular type of profit-sharing plans is 401(k) plans. Elective deferrals to these plans are limited to $15,000 for the year 2006 ($20,000 for people 50 years of age and older, including catch-up provisions). Annual contributions to a profit-sharing plan are generally not required; instead, they can be discretionary each year.

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