These Strategies Saved My Family Over $50,000 in Taxes HOW TO PAY FOR EDUCATION EXPENSES. With TAX-FREE DOLLARS

Transcription

1 These Strategies Saved My Family Over $50,000 in Taxes -David Fenoglio HOW TO PAY FOR EDUCATION EXPENSES With TAX-FREE DOLLARS Strategies for taking advantage of the Coverdell Education Savings Account (CESA) BY WALTER R. WOFFORD

2 DISCLAIMER This publication is intended to provide accurate and authoritative information with regard to the subject matter covered. It is offered with the understanding that neither the publisher nor the author is engaged in rendering legal, tax or other professional services. If legal, tax or other expert assistance is required; the services of a competent professional should be sought. From the Declaration of Principles Jointly adopted by a committee of the American Bar Association and a committee of Publishers and Associations committee of Publishers and Associations This book is intended for instructional purposes only. Every effort has been made to reflect the applicable laws as of the date of the publication of this book. However, this is a dynamic field of endeavor in which new laws are enacted, old laws revised, and/or reinterpreted on a continuing basis and where statues, rulings and case law are constantly changing. Readers are advised to proceed with the techniques described herein with caution. The author, speakers, printers, licensees nor distributors makes no warranties, express or implied about the merchantability or fitness for any particular use of this product. Copyright 2013 * TAX FREE EDUCATION DOLLARS Internet: All rights are reserved under State and Federal Copyright Law. No part of this book may be reprinted, reproduced, paraphrased or quoted in whole or in part by any means. Walter Wofford, Real Estate Broker, Landlord & Investor and has 30+ years of successful investing in the Jackson MS area both as a Seller Financing Expert and Self Directed Retirement Account Expert. Phone #: Address: 121 Parkhurst Dr., Jackson, Mississippi WalterWofford@gmail.com As a Real Estate Professional, I focus exclusively on increasing the net worth in IRAs and Retirement Accounts for families and individuals by taking advantage of today s unprecedented residential real estate bargains in the Jackson MS Area with Seller Financing. If I can ever help you, just give me a call Here is a Walter Promise: You ll never know what you can accomplish until you try. 2

3 Part 1: Tax Free Education Dollars Setting the Stage for Living a Portion of your Life Tax Free. Page 4 What s the CONCEPT behind Coverdell ESA s? Page 5 Where are the Rules for CSAs Established?..... Page 5 What are the trends in Education Costs?... Page 6 Tuition equals Heartburn Page 7 Who Makes the Annual Contribution?.... Page 7 How to Establish a Coverdell Page 8 The Difference Between Contributions and Generated Profits.. Page 10 REAL CASE STUDY #1: ASSIGNING A CONTRACT TO PURCHASE.... Page 10 Show me the Money...The Distribution Money Page 11 REAL CASE STUDY #2: PURCHASING A RENTAL PROPERTY WITH YOUR CSA Page 12 Do Qualified Expenses include Prom Night?.... Page 12 Will An IPad Fit Into My Granddaughter s Christmas Stocking?... Page 13 REAL CASE STUDY #3: LENDING MONEY WITH YOUR CSA FUNDS... Page 14 Special Needs Kids Are Special.. Page 14 How to Pass on Your CSA when it is no longer needed.. Page 15 REAL CASE STUDY #4: BUYING AN OPTION WITH YOUR CSA FUND.. Page 16 Coverdell ESAs, 529s and Federal Financial Aid..... Page 15 Part 2: Investment Strategies Don t Be Confused About a Truly Self Directed Account..... Page 19 How To Take the Next Step in Setting Up Your Self-Directed Coverdell ESA.. Page 19 3

4 Part 1: Tax Free Education Dollars Setting the Stage for Living a Portion of your Life Tax Free Imagine a Ferris wheel at your county fair. There are multiple buckets in which excited passengers climb in for a turn. Liken those seats to government created tax-free or tax deferred tax codes and you are able to ride in all of the buckets at the same time. Living a tax reduced life is the goal. The first bucket is Section 121 of the Internal Revenue Code: This allows the owner of a primary residence to sell the property and pay no tax. You have to live there 2 out of 5 years and there is a ceiling on the value of the house. Meaning, if you have a huge gain there might be some taxes. The second bucket is the ROTH IRA which allows your retirement account to grow tax-deferred and can be distributed tax free for a qualified distribution, if you meet the test. The test is that the account has to be opened for 5 years and you must be at least 59 ½ years of age. The next 5 buckets are the TRADITIONAL IRA, SIMPLE, SEP, 401K and the Solo 401K. Each one has their own separate bucket with benefits and limitation but the amounts contributed and earned in the account are taxed when you tax a distribution just as if you received additional income. There is a new feature with the 401Ks to allow a portion to have tax-free distributions. Bucket Eight is SECTION This allows you to delay paying tax on appreciate real estate if you move the money to another similar property. You can delay paying the taxes till your death. Bucket Nine is the HEALTH SAVINGS ACCOUNT. You get a deduction for making a contribution to the HAS and then don t have to pay any taxes on the growth or distribution if you spend the money on Qualified Health Related Expenses. Bucket Ten is the COVERDELL EDUCATION SAVINGS ACCOUNT (CSA). Congress gave us the gift of a Perpetual Tax Free Education Fund for your family AND their descendants... Forever! This is important to parents and grandparents who their want family members to get a good education. This is a Real Story about how to take advantage of the gift of the COVERDELL EDUCATION ACCOUNT (CSA). This is MY STORY! Here we go... We had everything lined up for my daughter, Peyton, to go to college almost. We had the student (my daughter), who made her choice of schools (expensive 4 year Ithaca College in upstate New York). She was accepted in the department she wanted (Visual Arts), 4

5 booked the flight (4 flights to get to Ithaca from Mississippi). We had the desire, good attitude and clothes packed. What we didn t have was the money! And the college had their hands out! I solved that financial crisis with an Education Savings Account, called a Coverdell. Let me tell you more. What s the CONCEPT behind COVERDELLS? A Coverdell Education Savings Account (also known as an Education Savings Account, an ESA, a Coverdell ESA, CESA, or Coverdell Account and formerly known as an education individual retirement account), is a Tax-Advantaged Investment Account in the United States designed to encourage savings to cover future education expenses for Kindergarten, Elementary, Secondary or College. This includes tuition, books, uniforms, etc. It is found at section 530 of the Internal Revenue Code (26 U.S.C. 530). Senator Paul Coverdell pushed the bill through Congress in the early 2000 s. In January 2013 Congress made several features permanent and breathed new life in this terrific tax savings account. It is worth a financial visit. The CONCEPT is to: 1. make the annual contribution for your child, through gifting, then 2. create and direct safe profitable Investments on behalf of the student. The earnings are then sent directly to the school without having to first pay income taxes. You give your child or grandchild student a 40% increase on their total educational funds by avoiding state and federal taxes. It never hits your tax return! Where are the rules for CSAs Established? Go to IRS.Gov and search for Publication 970 in the search box. 5

6 What Are the Trends in Education Costs? The DOUBLE WHAMMY CHART 6

7 Tuition Equals Heartburn I certainly had my share of heartburn. My 3 kids, now adults, attended a church sponsored private school though high school 36 Kiddie tuition years and then college 14 more Kiddie tuition years for a total of 50 annual tuition bills! not to mention summer school in Hawaii, London and Oxford MS. Several years we had an annual education expense of over $50,000. OUCH! The specialized knowledge in this report is designed to help parents, grandparents and future students navigate through the financial mine fields with some real world strategies for paying tuition totally Tax-Free. Many people have told me that these strategies have contributed at least 40% more toward their total education expense including tuition, room, books, computers and transportation. Who Makes The Annual Contribution? The Total Contributions for the Beneficiary of this account may not exceed $2,000 in any one year, no matter how many accounts have been established. A BENEFICIARY is someone who is either UNDER AGE Or... is SPECIAL NEEDS. There are also contribution limits for taxpayers based on the contributor s Modified Adjusted Gross Income. If your Modified Adjusted Gross Income (MAGI) is less than $110,000 ($220,000 if filing a joint return), you may be able to establish a Coverdell ESA to finance the qualified education expenses of a designated beneficiary. For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return. What if your Income is Too High? Are there permissable workarounds? YES. Contributions to a Coverdell ESA may be made until the due date of the contributor s return, without extensions. There is no limit on the number of separate Coverdell ESAs that can be established for a designated Beneficiary. However, Total Contributions for One Beneficiary in any One Year cannot exceed $2,000, regardless how many accounts have been established. This Benefit applies Not Only to Higher Education expenses but also to Kindergarten, Elementary and Secondary Education expenses. This is looking even better Isn t it? 7

8 Contributions to a Coverdell ESA are Not Tax deductible, but contributions to the account grow Tax Free until distributed. Even at Distribution, the beneficiary will not owe any tax on the distributions if they are less than a beneficiary s qualified education expenses at an eligible institution. This benefit applies to qualified Higher Education expenses as well as to qualified Kindergarten, Elementary and Secondary Education expenses. Strategy #1: The Work Around for High Income Earners The Income of the parents really doesn t matter. Most people just gift the child $2000 and then make the contribution on behalf of the child. Virtually anyone 18 or younger can open and fund the account! Strategy #2: Organizations, such as Corporations and Trusts, can also contribute to Coverdell ESAs. There is no requirement that an organization's income be below a certain level. Do I need to say more? How about a little Tax Deductable Corporate Sponsorship! Strategy #3: If the student makes the contribution, it is considered as being owned by the student. Therefore, for Federal Student Aid, the parent s assets are Not considered for the child s eligibility for Student Aid. Also for Asset Protection, the account is not subject to lawsuits involving the parents because it was created by the student and for the benefit of the student. How to Establish a Coverdell Account Typically you open a Coverdell ESA at your local bank or Stock Broker I am suggesting you consider opening it with a Custodian or Third Party Administrator who allows SELF DIRECTION of investments for Non-Traditional Investing such as real estate, notes, options and other investments. More on that later... It s coming. To be treated as a Coverdell ESA, the account must be designated as a Coverdell ESA when it is created. This is the individual named in the document creating the trust or custodial account to receive the benefit of the funds in the account is called a Designated Beneficiary. The document creating and governing the account must be in writing and must satisfy the following requirements. 1. The Trustee or Custodian must be a bank or an entity approved by the IRS. 2. The document must provide that the trustee or custodian can only accept a contribution that meets all of the following conditions. a. The contribution is in cash. b. The contribution is made before the Beneficiary reaches age 18, unless the beneficiary is a Special Needs Beneficiary. c. The annual contributions cannot exceed $2,000 (not including rollover contributions). 8

9 d. Money in the account cannot be invested in life insurance contracts. e. Money in the account cannot be combined with other property except in a common trustt fund or common investment fund. 3. The balance in the account generally must be distributed within 30 days after the earlier of the following events. a. The beneficiary reaches age 30, unless the beneficiary is a Special Needs. b. The beneficiary's death. The HEART Act, signed into law in June 2008, allows military death benefit gratuities to be rolled into a Coverdell even if it exceeds the annual contribution limit. Contributions made to a Coverdell ESA for the preceding tax year are considered to having been made on the last day of the preceding year. They must be made by the due date (not including extensions) for filing your return for the preceding year. For example, if you make a contribution to a Coverdell ESA in February 2013, and you designate it as a contribution for 2012, you are considered to have made that contribution on December 31, There are two yearly contribution limits: 1. One limit on the Total Amount that can be contributed for each designated Beneficiary in any year, and 2. One limit on the amount that any One Individual can contribute for any one designated Beneficiary for a year. Although the Coverdell Education Savings Account can be opened or funded by anyone (depositor/contributor) for the benefit of the child (designated beneficiary), the legal guardians or the parents (Responsible Individuals) will retain control over the funds until the child attains legal age (18 in most states). The Responsible Individuals can also choose an option on the application to retain control of the funds after legal age until the designated beneficiary reaches age 30 or the funds are distributed, whichever comes first. The contributions and distributions in a CESA are always reported in the designated beneficiary's (child's) name and SSN. If the contributor is not a legal guardian, once the contribution is made, it is considered a completed gift and they have no say in the spending or the investing of the funds. 9

10 The Difference Between Contributions & Investment Generated Profits Let s recap from earlier. The Concept of the Educational Savings Account is twofold. For Parents, Grandparents, Aunts, Uncles, Corporations or Trusts; 1. A Maximum of Two Thousand Dollars annually per child Contribution can be put into an Educational Savings Account for that child s use on educational expenses 2. This Educational Saving Account is then invested in a manner that generates a Profit and Growth. ALL of the Contributions and ALL of Investment Generated Profits are available for Current and/or Future educational needs on a TAX FREE basis a) provided that distributions are less than the qualified annual educational expenses and b) from a qualified institution. The Key Point is that although Contributions are capped at $2,000 maximum annually there is NO LIMIT on the amount of Profit that this Educational Saving Account can generate. Within the guidelines ALL of these Funds are TAX FREE. Although we will pursue this in greater detail later, let me give one just one of many of examples how this can work. REAL CASE STUDY #1: ASSIGNING A CONTRACT TO PURCHASE Imagine that you have just set up a Coverdell Educational Savings Account up with an initial $2000 contribution for your five-year old granddaughter a good thing to do. You, a business associate or other knowledgeable individual becomes aware of an opportunity. You know of someone selling a property for $100,000 while at the same time knowing of someone else willing to buy it for $115,000 a $15,000 difference. You direct the Custodian to sign the Contract to Purchase on behalf of the CSA with the right to assign to someone else and pay $100 as earnest money. Then, assign or transfer the Contract to Purchase for a fee. In this case, the fee was $15,000 without ever purchasing the home. The CSA collected $15,000 and had a cost of $100. Not Bad! The money was deposited with the Coverdell Custodian and then sent to the school for tuition. BINGO! You have just generated $15,000 (less $100) Tax Free Education Dollars for your granddaughter s Private School or College Expenses. At age 5 and realizing that she will not likely start college till 18, how many more deals like this would it take to fund her Education? Want to take action on this concept? Open your CSA with a custodian who allows self-direction. Find Realtor to present offers on houses you think you can sell quickly. Rinse and repeat. Better still. Look on Craigslist for homeowners looking to sell. 10

11 Show me the Money... The Distribution Money! Again the concept is to make that account grow Tax-Free and use the money out to pay for school and related expenses. The earnings from the Coverdell never hit the parent s or grand parent s personal tax return! Here are some things to remember about distributions from Coverdell Accounts: 1. Distributions are tax-free as long as they are used for qualified education expenses, such as tuition and fees, required books, supplies and equipment and qualified expenses for room and board. 2. There is no tax on distributions if they are for enrollment or attendance at an eligible educational institution. This includes any public, private or religious school that provides elementary or secondary education (including Kindergarten) as determined under state law. Eligible institutions also include any college, university, vocational school or other postsecondary educational institution eligible to participate in a student aid program administered by the Department of Education. Virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions are eligible. 3. The Hope & Lifetime Earning Credits can be claimed in the same year the beneficiary takes a tax-free distribution from a Coverdell ESA, as long as the same expenses are not used for both benefits. 4. If the distribution exceeds the Qualified Education Expenses the distribution amount in excess of Qualified Educational Expenses will taxable to the beneficiary and will be subject to an additional 10% tax. Exceptions to the additional 10% tax include the Death or Disability of the beneficiary or if the beneficiary receives a qualified scholarship. If there is a balance in the Coverdell ESA when the beneficiary reaches age 30, it must generally be distributed within 30 days. The remaining balance representing Earnings Only in the account will be taxable and subject to the additional 10% tax. The account owner or Beneficiary may avoid these potential taxes by rolling over the full balance into another Coverdell ESA for another family member. If the designated Beneficiary dies before reaching age 30, the remaining assets must generally be distributed within 30 days after the date of death. If you create a CESA to put someone other than yourself through school, that student has no control over the funds and is not responsible for any of the tax consequences. 11

12 REAL CASE STUDY #2: PURCHASING A RENTAL PROPERTY WITH YOUR CSA This is exactly how I paid for my kid s college. I found a Seller willing to finance a rental house to me in a neighborhood that had potential for growth. The price was $40,000 with $4,000 cash down at closing and the seller finance 6% for 15 years. The $4,000 cash down was exactly the amount in the CSA. So I made the CSA the buyer and I hired a Property Manager who collected the rent, kept up repairs and even made the mortgage payment to my Seller. I instructed the Property Manager to keep and ever-increasing reserve fund. When it got big enough, I contacted the seller and paid the mortgage off early. The seller even gave the CSA a discount for cash at payoff time. Now there are certain rules about borrowing money with your CSA. The best thing to do is to call for the details. When junior went off to college as a freshman, I arranged for the house to be sold to another Landlord for $60,000 cash. The $60,000 was returned to the CSA and then sent off to pay for tuition, books, computers and dorm costs. Want to take action on this concept? Find a We Buy Houses guy in your market. They are easy to find in the newspaper or yard signs or local investors club. Then, find and interview a property manager who meets your performance standards. Get busy negotiating for favorable Seller Financing Terms. Do Qualified Expenses include Prom Night? No I don t think so. But here is the break down of what does... Qualified Higher Education Expenses are expenses related to enrollment or attendance at an eligible post-secondary institution. As shown in the following list, to be qualified, some of the expenses must be required by the school and some must be incurred by students. Students Must Be Enrolled at least half-time which is defined as at least half the full-time academic work load as determined by The Educational Institution. For a more detailed explanation, go to The following expenses must be required for enrollment or attendance of a designated beneficiary at an eligible postsecondary school. 1. Tuition and fees. The Educational Institution should be able to tell you if it is an eligible Educational Institution. 2. Books, supplies, and equipment. 12

13 Expenses for Special Needs Services needed by a Special Needs Beneficiary must be incurred in connection with enrollment or attendance at an eligible pre or post Secondary School. Expenses for room and board must be incurred by students who are enrolled at least Half Time. The expense for room and board qualifies only to the extent that it is not more than the greater of the following two amounts: 1. The allowance for room and board, as determined by the school, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student. 2. The actual amount charged if the student is residing in housing owned or operated by the school. Qualified Elementary and Secondary Education Expenses are expenses related to enrollment or attendance at an eligible elementary or secondary school. As shown in the following list, to be qualified, some of the expenses must be required or provided by the school. There are special rules for computer-related expenses. The following expenses must be incurred by a designated Beneficiary in connection with enrollment or attendance at an eligible elementary or secondary school. 1. Tuition and fees. 2. Books, supplies, and equipment. 3. Academic tutoring. 4. Transportation & Uniforms. Will An IPAD Fit in My Granddaughter Hattie s Christmas Stocking? The purchase of Computer Technology, Equipment, or Internet Access and Related Services is a Qualified Elementary and Secondary Education Expense if it is to be used by the Beneficiary and/or the Beneficiary's family during any of the years the Beneficiary is in Elementary or Secondary School. (This does not include expenses for computer software designed for sports, games, or hobbies unless the software is predominantly educational in nature.) 13

14 REAL CASE STUDY #3: LENDING MONEY WITH YOUR CSA FUNDS This technique will supercharge your growth with above market rates of return. You will become a local, personal and private bank for lending to others to buy cars, boats, houses and equipment. This is do-able and repeatable in your local market. Let s say you find someone (Landlord) who needs to borrow $20,000 on some collateral you would loan money on... like a rental house. Your CSA only has $6,000 but you know some family member who has cash that is not earning anything at the bank. So you offer Uncle Mark 6% interest on his money. You agree to loan the money to the Landlord at 10% interest, interest only, for 12 months. Uncle Mark receives a 6% return but your CSA is charging 10% plus a $500 fee to arrange the loan. Utilizing a Wrap Around Mortgage, you get your CSA working at 10% on the $6,000 as well as making the spread on the difference between what you pay Uncle Mark (6%) and what you charge the Landlord (10%). In fact you are making 4% or Uncle Mark s 6% plus a $500 arrangement fee. Not bad. This is EXACTLY what your local bank does. Want to take action on this concept? Let the Uncle Marks of the world know you can help get their Lazy Money back working with higher than market rates. ONE IMPORTANT THING TO KNOW. There are 8 different types of accounts that can all be self directed into non traditional investing. They are the Traditional IRA, Roth IRA, SEP and SIMPLE, 401Ks and the Solo 401Ks plus the 2 specialty Health Savings accounts and Coverdells (CSA). If you had one of each, you could combine them all into on investment like buying a $400,000 house at a discount of $250,000. It is done ever day! Hold till the market is ripe. Special Needs Kids ARE Special! Special Needs Services for a Special Needs Beneficiary: The following expenses must be required or provided by an eligible Elementary or Secondary school in connection with attendance or enrollment at the school. 1. Room and board. 2. Uniforms. 3. Transportation. 4. Supplementary items and services (including extended day programs). Exception for Transfer to Surviving Spouse or Family Member: If a Coverdell ESA is transferred to a surviving spouse or other family member as the result of the death of the designated beneficiary, the Coverdell ESA retains its status. ( Family member was defined earlier). This means the spouse or other family member can treat the Coverdell ESA as his or her own and does not need to withdraw the assets until he or she reaches age 30. This age limitation does not apply if the new beneficiary is a Special Needs Beneficiary. There are no tax consequences as a result of the transfer. 14

15 How to Pass On Your CSA When it is no longer needed OK... My Son Needs Another Football Season at College but he s Turning 30! My son, Damon, called me his senior year at Ole Miss. Dad, I need another season. I didn t blame him. Stay in school as long as someone else pays for the education. For today s student, semesters are measured in seasons. In his case, it was football! When you turn 30 you must take it out and be taxed on the remaining profit dollars or pass it on. Assets can be rolled from one Coverdell ESA to another or the designated Beneficiary can be changed. Any amount transferred from a Coverdell ESA is Not Taxable if it is rolled over to another Coverdell ESA for the benefit of the same Beneficiary or a member of the Beneficiary's family (including the beneficiary's spouse) who is under age 30. This age limitation does not apply if the new beneficiary is a Special Needs Beneficiary. An amount is rolled over if it is paid to another Coverdell ESA within 60 days after the date of the distribution. There are no tax consequences if, at the time of the change, the new Beneficiary is; a) under age 30 or b) is a Special Needs Beneficiary. Do not report qualifying rollovers (those that meet the above criteria) anywhere on Form 1040 or 1040NR. These are Not Taxable distributions. Members of the Beneficiary's family. For these purposes, the Beneficiary's family includes the Beneficiary's spouse and the following other relatives of the beneficiary. - Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them. - Brother, sister, stepbrother, or stepsister. - Father or mother or ancestor of either. - Stepfather or stepmother. - Son or daughter of a brother or sister. - Brother or sister of father or mother. - Son-in-law, daughter-in-law, father-in-law, mother-in-law, brotherin-law, or sister-in-law. - The spouse of any individual listed above. - First cousin. 15

16 Example: When Aaron graduated from college last year he had $5,000 left in his Coverdell ESA. He wanted to give this money to his younger sister, who was still in high school. In order to avoid paying tax on the distribution of the amount remaining in his account, Aaron contributed the same amount to his sister's Coverdell ESA within 60 days of the distribution. Only one rollover per Coverdell ESA is allowed during the 12-month period ending on the date of the payment or distribution. All I Ever Wanted Was To Hear My Daughter Speak French! Certain educational institutions located outside the United States also participate in the U.S. Department of Education's Federal Student Aid (FSA) programs. SHOULD THE THRILL OF MARRIAGE END... The Beneficiary's interest can be transferred to a spouse or former spouse because of divorce. If a spouse or former spouse receives a Coverdell ESA under a divorce or separation instrument, it is not a taxable transfer. After the transfer, the spouse or former spouse treats the Coverdell ESA as his or her own. Example: In their divorce settlement, Peg received her ex-husband's Coverdell ESA. In this process, the account was transferred into her name. Peg now treats the funds in this Coverdell ESA as if she were the original owner. REAL CASE STUDY #4: BUYING AN OPTION WITH YOUR CSA FUNDS This technique allows you to take your skill set or hobby and direct the profit to your CSA. I love Pontoon Boats. I like the way they glide across the water. I like the relaxed manner of visiting watching the sunset with friends and family. And I like the fact that boat owners buy and sell boats all the time... whether or not the purchase or sale of the boat makes any economic sense. When you find a boat owner who is ready to be a landlubber again, option to buy the boat at YOUR right price with your CSA as Buyer. Then call one of your boat buddies and sell the option for a fee. Your CSA takes to profit that avoids the tax as long as the money is spent on education expenses for the Beneficiary of the CSA. This works for airplanes, cars, motor homes, vacation timeshares, condos, wave runners, sailboats and the list goes on. 16

17 Coverdell ESA s, 529 s and Federal Financial Aid A 529 Plan is an education savings plan operated by a state or educational institution designed to help families set aside funds for future college costs. It is named after Section 529 of the Internal Revenue Code that created these types of savings plans in A Coverdell ESA and 529 plans operate in a similar fashion and provide the same type of tax savings. Essentially, these are accounts that are set aside to pay the school expenses of the beneficiary. The plans have some key differences in what educational expenses they cover but their tax treatment is essentially the same: you invest money on behalf of a student (which can be yourself), the investment profits are tax-free and distributions that go to pay qualifying educational expenses are not subject to income tax. 529 Plans can be used to meet costs of qualified colleges nationwide. In most plans, your choice of school is not affected by the state your 529 savings plan is from. You can be a CA resident, invest in a VT plan and send your student to college in NC. Check to see if your institution is eligible 529 rules. Coverdell ESA s may affect financial aid significantly, or not at all depending on who is the owner of the account. By definition, the owner is usually the person who sets up the account, and usually not the person who is will use it or eventually going to college (the designated Beneficiary ). 1. If the Child is both the Owner and the designated Beneficiary, and is still considered a Dependent of the Parents, none of the assets are counted against financial aid. (Note: this is a legislative loophole that Congress may close in the near future, making the Coverdell ESA assets of the parents). 2. If the Child is both the Owner and the designated Beneficiary and is considered Independent of the Parents, 20% of the assets are counted against financial aid. 3. If the Owner is a Parent, then some percentage of the assets is counted against financial aid. If the Owner is a Grandparent, Member of Extended Family, Unrelated Individual, Corporation or Trust, it is argued (but hasn t been tested by a court), that the assets do not count against financial aid at all. This is due to the fact that there is no place to report assets owned by people other than a parent or student on the FAFSA form. 17

18 1099-Q If you contribute money to a qualified tuition program, such as a 529 plan or a Coverdell ESA, you will likely receive an IRS Form 1099-Q in each year you make withdrawals to pay school expenses of the Beneficiary. The 1099-Q reports the total of all withdrawals you make during the year; however, some of this amount may be taxable depending on how you spend the money. Form 1099-Q comes from the administrator or bank that manages your 529 plan or Custodian of the Coverdell ESA. If you set up the account and make contributions to it, then you are the owner and are the recipient of the 1099-Q. The 1099-Q provides three key pieces of information. Box 1 reports your annual distributions or withdrawals from the account. Box 2 reports the portion of the distribution that represents the income or earnings of your initial investment. Finally, box 3 reports your basis in the distribution. Essentially, this is the amount of your distribution that relates to original contributions you make to the account. The form also includes information on the type of account you own and amounts, if any, that you transfer between two qualified tuition plans. The administrator of your qualified tuition plans must send you the Form 1099-Q in any year you take a distribution or transfer funds between accounts. You should receive the 1099-Q no later than early February following the close of the tax year since the administrator must send it by January 31. Administrators must also provide a copy of each form to the IRS no later than March 31 if sent electronically, or Feb. 28 if using a paper copy. For more information, look at IRS Publication 970, Tax Benefits for Higher Education (at IRS.gov). IRS direct number is 800-TAX-FORM ( ). 18

19 Part 2: Investment Strategies Many people question why a Coverdell ESA is so beneficial when so little can be contributed to it. For one thing, the gift of education is a major improvement over typical gifts given by relatives to children. Over a long period of time, investing a Coverdell ESA in mutual funds or similar investments will certainly help towards paying for the beneficiary s education. However, clearly the best way to pay for your child s education is through a Self-Directed Coverdell ESA. With a Self-Directed Coverdell ESA, you choose your ESA s investments. Common investment choices for self-directed accounts of all types include real estate, both domestic and foreign, options, secured and unsecured notes, including first and second liens against real estate, C corporation stock, limited liability companies, limited partnerships, trusts and much more. DO NOT BE CONFUSED ABOUT A TRULY SELF DIRECTEDD ACCOUNT Do Not Be Confused by what some will call Self Directed Accounts. Some stock brokers may claim they have Self Directed Accounts where you may select from only A, B or C (on which they earn a commission) and you are not permitted to invest in anything outside of A, B or C (because they earn no commission). A truly Self Directed account is one where YOU select an allowable investment even though non traditional. How To Take the Next Step in Setting Up Your Self-Directed Coverdell ESA Contact Walter Wofford to set an appointment to go through the process. He can be reached at or at WalterWofford@gmail.com. What others have said... - These Strategies have saved my family over $50,000 in taxes. David Fenoglio - The Coverdell Tax Free Strategy enabled my daughter, with no scholarship to graduate DEBT FREE unlike most of her 2012 class mates. XXX XXX - My 10 year old grandson whose Coverdell has been opened only 3 years. With only a total $6000 investment contribution, he already has a college fund of $41,000. I m confident he will be able to select and afford any college he chooses. - KKK KKK - Unfortunatelly, I never learned of this great educational funding vehicle till both my daughters had graduated UVA and Virginia Tech respectively. The taxes saved could have given over a $30,000 funding boost and cut into the college debt they still carry. Bob B. For a Free No Obligation Coverdell Consultation Contact: David Metropolitan Financial Services, LLC or Dave@MetropolitanFinancialServices.net 19