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2017 Finances and Money Issues

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Welcome to 2017!

Relax. Take a deep breath.

There. Feel better? Good. Then let’s jump in.

Finances Updated in 2017

With a new year, come some new numbers. There will be updates to the maximum 401k contributions, income limits for Roth IRAs, and others. Plus, there will be adjustments to the 2017 income tax brackets, the 2017 standard tax deduction, and more. And, of course, there is a new IRS mileage rate for 2017 as well.

What about 529 plans? There aren’t a lot of updates to those numbers each year, primarily because most facets of 529 college savings plans are administered through the states, who aren’t always as keen on changing and updating everything.

You’ll want to re-evaluate your financial plan for the new year, and you’ll want to review how your financial plan did in 2016. Plus, you’ll want to rebalance your portfolio, if you didn’t do it at the end of 2016.

Retirement Plans 2017

A big part of most retirement plans are tax-advantaged savings accounts like your 401k plan, IRA accounts, and, for some of you, 457 plans, 403(b) plans, and various differed compensation plans. All of those need adjusted and reviewed for 2017 as well.

2017 Income Taxes

A big focus for many people’s finances at the start of 2017 is the looming prospect of income taxes. Start collecting and saving your W2 forms, 1099 forms, and all those other tax forms you get in the mail. However, keep in mind that an increasing number of financial institutions, and even employers are distributing tax forms electronically. Be sure to log into all of your accounts and see if your tax forms are there to download, especially if you have signed up for paperless accounts with anyone.

Set a box, or file folder where you go through your mail so that you can put tax documents in it right away and not lose any. For electronic ones, print and download them so you have them to enter into TurboTax, or give your accountant or tax preparer.

Remember most tax forms are due to be mailed by January 31st.

Also, start thinking about whether you need (or want) to make any retirement plan contributions for 2016 still. You get until April 15th to make the contributions and still count them as a 2016 tax deduction.

Don’t Panic About Money in 2017

Does that sound like a lot?

We haven’t even scratched the surface of making smart money decisions in 2017, but don’t worry. Finance Gourmet will be bigger and better than ever in 2017 to help guide you through with financial recipes for success, and more.

It’s going to be a great 2017.

529 Contribution Limits 2016

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The 529 plan is a tax-advantaged college savings plan. Of course, like all plans that offer IRS sanctioned tax savings, there are rules and regulations regarding just how and when a 529 plan may be used. One of these limitations involves how much money you can contribute to a 529 plan in 2015.

Head over here if you are looking for how a 529 plan works. If you want to know how to open a 529 plan account then head here.

2016 529 Contribution Limits

Unlike IRA plans, where there are new 2016 IRA contribution limits, or other child tax credits, there are no income limits for 529 plans. That means that you can contribute to a 529 plan regardless of whether you are a high-income taxpayer or not.

There are, however, still a few kinds of contribution limitations for 529 savings accounts that you want to be aware of.

The first 529 plan contribution limit comes from the 529 plan rules established by each individual plan. Since 529 plans are administered by each of the 50 states, there can be 50 different plan rules. For each plan, there may be both an annual contribution limit and a lifetime contribution limit. In addition, for states that offer a state income tax deduction for 529 plan contributions, there may be a limitation on how much of each year’s contribution may be deducted.

For example, the State of Colorado has no annual contribution limit, but restricts contributions to a Colorado 529 plan once the account balance hits $350,000. On the other hand, California 529 plans allow contributions until the account balance is $371,000. (Many 529 college savings plan limits are indexed to inflation, or otherwise increase on a regular basis.)

For some taxpayers, the most important 529 plan contribution limitation isn’t actually a 529 plan limit at all. IRS rules state that contributions to a 529 plan are a gift. Therefore, to avoid triggering potential gift tax implications, contributions must be limited to under $14,000 each year, which is the 2016 gift tax limit (unchanged from last year). A married filing joint couple can contribute up to $28,000 per year, which is considered one $14,000 gift from each person.

Special Gift Tax Rule for 529 Plans

There is a special rule for 529 plans regarding gift taxes. Up to five years of gifts can be made in advance to a 529 plan without triggering any estate tax or gift tax implications. In other words, a single person can contribute up to $70,000 in a single year to an individual’s 529 plan. However, such a contribution is considered an advance on future year’s gifts. Therefore, if one contributes the full $70,000 into a 529 plan, then no additional gifts may be made for five years.

Again, a spouse may contribute the full gift amount as well. In this case, a married couple that files jointly could contribute $140,000 in a single year to a 529 plan in 2016 as long as they did not make any additional gifts to that same person for the next five years.

Smart to Use Roth IRA For College

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Should I use my Roth IRA for college?

As a former financial planner, I would often get these questions from clients who read something somewhere. Much like patients asking doctors about drugs they heard about on TV, such questions rarely ended up being a good idea. Still, it is possible to use a Roth IRA to pay for college, but it only makes sense in very specific circumstances.

First, you probably know that a Roth IRA is designed for retirement savings, so that is what it is best used for. The corresponding vehicle for parents saving for college is a 529 college savings plan. In general, the best way to save for college is in a 529 plan versus a Roth IRA. That being said, a Roth IRA can be used, and may be clever in certain circumstances.

Can I Use Roth IRA for College

Let’s start with CAN you use a Roth IRA to pay for college. We’ll look at SHOULD you use a Roth IRA for college next.

As you may know, a Roth IRA offers tax-advantaged growth for investments within the account. This creates two kinds of money inside of a Roth IRA. The first kind of money is contributions. Contributions are the monies directly deposited into the account. They do not include any dividends, interest or gains on investments. If you put $5,000 in a Roth IRA for 10 years, then your contributions are $50,000, no matter what the account is actually worth. Any amount above $50,000 is earnings.

There are two features of a Roth IRA that allow for its use to fund college without paying penalties. First, all contributions can be withdrawn without penalty or taxes. In other words, in the case above, the taxpayer could use $50,000 to pay for college (or anything else for that matter) without taxes or penalties.

The second feature is that there is an exception allowing Roth IRA funds to be used to pay for qualified college expenses. Basically, if you are deliberately trying to stretch what “college expenses” means, it probably counts. Tuition, fees, books, supplies and equipment, at an institution with the word university or community college in the name are pretty much all covered. (Typically, non-degree programs like a coding bootcamp, or writers retreat don’t count.) You are allowed to pay such expenses for yourself, your spouse, your children, and their descendants (that means grandkids and great-grandkids are included).

However, this Roth IRA distribution exception only applies to the penalties that would ordinarily be due. The withdrawal does still count as taxable income. This can be a double whammy, because not only do you owe taxes on these funds, but it also increases your income for purposes of financial aid. Since financial aid takes into account your income, artificially inflating it by taking funds from your Roth IRA may not be a good strategy.

Is It Smart To Use Roth IRA for College?

Additionally, you are literally stealing from your retirement in order to pay for a child’s college. Not only is that money not available for your retirement, but that money is not able to grow while you are still working. At 8% growth over 20 years, that $50,000 withdrawal isn’t just $50,000 gone from your retirement, but $234,500 gone from your retirement.

One of the running themes on this blog is that despite what might be “best” mathematically isn’t necessarily what is right for each of us as unique humans with emotions. For parents who really want to help their kids with college, but who don’t have any other money saved up, a Roth IRA offers a tempting, if non-optimal, way to tap into some funds. That being said, keep it as minimal as possible, ideally, no more than the total amount of your contributions to avoid additional taxes.

Remember, as unappealing as student loans sound, there is no such thing as retirement loans. Consider if you are better off helping your child pay back students loans over time, rather than raiding your retirement savings to send them to college.

If you, or your child, is already looking to pay for school, the Roth IRA is an option, if not the best one. If, however, you are thinking of how, or where to save, consider setting up a 529 plan instead and save money specifically for college.

Step by Step Guide to Open 529 Plan Online

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Have you opened that 529 plan account yet?

A while back, while discussing whether or not you need a financial advisor, I talked about how just knowing what to do isn’t always enough. As an example, I pointed out that just knowing you need a 529 plan for your college savings account, doesn’t mean that you are necessarily actually ready to just open a 529 account online or otherwise. There can be a lot of small decisions along the way that end up derailing the most determined person’s individual financial plan. Recently, I revisited this train of thought and figured, I could show step-by-step how to open 529 accounts online for the Colorado 529 plans as an example of exactly what it takes to actually implement those financial decisions you make after doing your online financial planning research.

529 Plan Colorado Example

If you have ever looked for this kind of step by step directions financial planning guide, you know they can be hard to come by. There are several reasons, but one of the main ones is that going through every possible exception can be very time consuming. Even covering the basics can turn into a big project when we are talking about the right things to do with your money.

Every one of the 50 states has at least one 529 plan offering. Many states offer multiple 529 plans. There are no 529 plan rules that require you to use your own state’s 529 plan. In fact, depending upon where you live, it might be better to use another state’s 529 plan accounts. Just these three little facts mean that creating a 529 plan guide for everyone would be a daunting task.

To make things usable, I’ve narrowed things down a bit. I’ll have links to other articles and personal finance blog posts that explain when certain decisions have been made. Read those to ensure that this guide is right for you, or to make adjustments to this 529 setup guide. The example here will be opening Colorado 529 plans. That may or may not be right for you, but you should be able to take the information in these directions and apply them to your best 529 plan.

In Colorado, the 529 program is called College Invest.

Open 529 Plan Online in Colorado

In order to open a 529 account online, you have to know where to go. A Google search can be a good start, but verify the information you find. Do not just go with the first search result you see, or you may be duped into paying for something you don’t want to be paying for, like the people who fall for the FAFSA online scam do. To open a Colorado 529 account online, you go to collegeinvest.org (Pay particular attention to the .org and not .com)

At the College Invest homepage there is a picture of a baby and a bunch of buttons for grandparents, parents, and so on. We mean business, so just skip right through and click the purple Enroll button up near the top of the screen.

colorado 529 plan online — Click Enroll at www.collegeinvest.org

Once you’ve clicked Enroll, we’re ready for Step 2 to open a Colorado 529 online. As you can see, the good folks at College Invest are making my point for me. Three simple steps, only they aren’t so simple. And, then there is all of that ominous looking fine print and disclosure at the bottom. It might as well say, “Abandon All Hope, Ye Who Enter Here,” if you haven’t done this before.

Fortunately, we are going to make the assumption that you want to open the kind of 529 plan that you open and manage by yourself without a financial professional, and that you want the kind where you invest your money in mutual funds. This is the “regular” 529 plan that everyone is talking about when you read a finance article telling you that you should open a 529 plan. In Colorado, that’s the Direct Portfolio College Savings Plan.

So, click Direct Portfolio on the side, or there in Step 3. Both links go to the same place.

On the next screen, you choose whether to enroll online or by mail. If you ask to be mailed a kit, you’ll get a big, colorful brochure. You won’t ever read it, or fill it out. Trust me, when I tell you that as a former financial advisor I know that the odds of anyone acting on something that they receive in the mail in a timely manner is slim to none. If you are the kind of person who always takes care of things like this right away, you might be different, but if you aren’t that person, don’t fool yourself into thinking that this time will be different. Click the button to enroll 529 online.

Enroll 529 College Savings Plan Online Colorado College Invest

On the enrollment screen you’ll see a list of stuff you are going to need. Don’t worry about this, we’ll cover it later. Just put in your name, address, email and phone number and click Continue. Don’t worry about the email address. I’ve had a Colorado 529 plan oepn before child was born, and I’ve never gotten any sort of spam. If you sign up for electronic statements or disclosures, this is the email address where they’ll send them. Otherwise, I just get confirmations of things I do online.

On the next screen, you’ll see your information pre-filled in. You are filling in your information here, not your child or future student. Unlike many other accounts, the 529 plan rules allow you to own and completely control the account, even if the account is for someone else. So, even though this is your son or daughter’s 529 college savings account, this is your information because you are the owner of this account, and you are the decision maker.

Near the bottom, you’ll notice a section called successor owner. To be blunt, this is who will be the new owner of the account if you die. This unlike an IRA beneficiary designation. This person doesn’t get the money, if you die, they get control of the account. If you are married with children, then your spouse’s name goes here. If not, then you probably want to put whoever will be the guardian of your children if you die. If you don’t have that set up, then a trusted friend or family member goes here.

Click Next.

Now, we get to who this account is for, the beneficiary. You may know beneficiary from other finance accounts as who gets the money if you die. In this case, beneficiary means who is the account for the benefit of. In other words, the kid who you are helping send to college goes here.

If you want to open a 529 before a child is born, you just put your name here. The owner of a 529 account (that’s you) can change the beneficiary of the account at any time, for any reason. So if you want to open a 529 plan for your unborn child, good for you. Just put your name there, and then change it to your newborn child’s name when you’re ready. There is no rush. You can literally change it the day before the student needs the money. (Well, probably not literally, there is likely some processing time involved.) You’ll just come back and do a Colorado 529 login to your account.

Next, click here to find out how to choose 529 plan investments for your college savings account.

Then after that, you’ll need to actually get money in the 529 account.