Transcript Saving for your Children`s Education and Missions

Personal Finance: Another Perspective
Saving for your Children’s
Education and Missions:
What you can do Now to Prepare
August 20, 2015
Bryan Sudweeks, Ph.D., CFA
From the BYU Marriott School of Management website
at http://personalfinance.byu.edu
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Abstract
The choice to help financially with children’s
education and missions is an individual/family
decision. For those who want to help, many are
unsure of ways to best save for these expenses.
This presentation will help with ideas on these
topics, including the why of personal finance,
how education relates to our goals, principles,
the process of selecting investment vehicles,
and how we can motivate ourselves to save for
these goals. These are things we can do now to
help prepare for the goal of helping save for our2
children’s education and missions.
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Objectives
Understand:
• A. Understand the “whys” of personal finance
• B. Understand how education relates to goals
• C. Understand the principles of financing
education/missions
• D. The process of selecting investment vehicles
for education and missions
• E. Techniques to motivate yourself to really do
this!
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A. Understand the “Whys” of Personal Finance
• We all have lists of what we could and should do in
our [ priesthood ] responsibilities. The what is
important in our work, and we need to attend to it. But
it is in the why of [priesthood service] that we discover
the fire, passion, and power. The what of [priesthood
service] teaches us what to do. The why inspires our
souls. The what informs, but the why transforms.
(italics, color and brackets added, Dieter Uchtdorf,
“The Why of Priesthood Service”, Ensign, May 2012).
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A. Understand the “Whys” of Personal Finance
• We all have lists of what we could and should do in
our [personal finance] responsibilities. The what is
important in our work, and we need to attend to it. But
it is in the why of [ personal finance ] that we discover
the fire, passion, and power. The what of [personal
finance] teaches us what to do. The why inspires our
souls. The what informs, but the why transforms.
(italics, color and brackets added, Dieter Uchtdorf,
“The Why of Priesthood Service”, Ensign, May 2012).
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The “Whys” (continued)
• What are the doctrines or “Whys” of personal
finance that inspire and transform our souls?
• If perspective is important, we can ask the “whys”
in terms of our different perspectives:
• Spiritual
• Temporal
• Family
• Individual
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The “Whys” (continued)
• 1. Spiritual: To bring us to Christ
• Whatever the problem may be in a person’s life—
failure to pay tithing, breaking the Word of
Wisdom, casual church attendance, [or I add - poor
financial habits, the]—real issue is faith in Jesus
Christ. If we can help people obtain the gift of faith
in Christ, good works will follow. The end purpose
of any law of God is to bring us to Christ. And how
well will the law work? It depends on what we
think of the Author of the law (C. Max Caldwell,
“What Think Ye of Christ?,” Ensign, Feb 1984).
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The “Whys” (continued)
• 2. Temporal: To become wiser stewards
• Our resources are a stewardship, not our
possessions. I am confident that we will literally be
called upon to make an accounting before God
concerning how we have used them to bless lives
and build the kingdom (Joe J. Christensen, “Greed,
Selfishness, and Overindulgence,” Ensign, May
1999).
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The “Whys” (continued)
• 3. Family: To return with our families back to
Heavenly Father’s presence
• It helps us keep our priorities in order
• Harold B. Lee said, “The most important work
you will do will be within the walls of your own
home” (Teachings of Presidents of the Church:
Harold B. Lee [2000], 134).
• David O. McKay stated: “No other success can
compensate for failure in the home” (quoted
from J. E. McCulloch, Home: The Savior of
Civilization (1924), 42; in Conference Report,
Apr. 1935, 116).
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The “Whys” (continued)
• 4. Individual: To prepare for and accomplish
our divine missions
• I bear testimony of the fact that if you keep the
commandments, He nourishes you, strengthens
you, and provides you means for accomplishing all
things necessary to faithfully finish your divine
mission here on earth. May the Lord bless you in
your decisions at this important time in your lives
(Gene R. Cook, “Trust in the Lord”, Ensign, Mar.
1986).
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B. Understand How Education
Relates to Other Goals
Median
Level of Education
Annual Earnings* Lifetime Earnings
Not a HS graduate
$24,325
$973,000
High school Diploma
32,600
1,304,000
Some College, no degree
38,675
1,547,000
Associate's Degree
43,175
1,727,000
Bachelor’s Degree
56,700
2,268,000
Master’s Degree
66,775
2,671,000
Doctoral Degree
81,300
3,252,000
Professional Degree
91,200
3,648,000
*Annual earnings is lifetime earnings divided by 40 years.
Source: Anthony P. Carnevale, Stephen J. Rose, and Ban Cheah, “The
College Payoff: Education, Occupations, Lifetime Earnings,” Georgetown
University Center for Education and the Workforce, 2012.
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How Education Relates (continued)
• Is education a good investment?
• President Gordon B. Hinckley said:
• Now is the season to train your minds and
your hands for the work you wish to do.
Education can prove to be the wisest and
most profitable investment you will ever
make (italics added, Tambuli, Sept. 1989,
49).
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How Education Relates (continued)
• Cost Facts:
• Average NR U.S. medical school tuition/fees in 20132014 was $55,294 (public) and $52,093 (private)
• 2014 average top 20 MBA programs tuition and fees:
>$100,000 (varies by school)
• Average cost in tuition, fees and lost salary: $150,000
• Annual budget for students of BYU in 2015-2016
• Undergraduate $17,778 (LDS), $22,928 (non-LDS)
• Graduate
$25,808 (LDS), $32,308 (non-LDS)
• MSM/Law
$32,250 (LDS), $44,220 (non-LDS)
• Education isn’t cheap, but the cost of ignorance is higher!
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How Education Relates (continued)
• You young people, the little decisions that you
make can so affect your lives. Shall I go to school
or not? Shall I continue on with my education?
That is a big decision for some of you. Our
doctrine suggests, although there may be some
circumstances that would affect that decision, that
the more education you receive the greater will be
your opportunity to serve. That is why this Church
encourages its young people to get the schooling
that will qualify them to take their places in the
society in which they will become a part. Make
the right decisions. Take a long look (italics
added, Gordon B. Hinckley, Regional Conference,
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Idaho State University, 4 June 1995).
How Education Relates (continued)
President Hinckley further commented:
It is so important that you young men and you
young women get all of the education that you
can. Education is the key which will unlock the
door of opportunity for you. . . My dear young
brothers and sisters, take advantage of every
educational opportunity that you can possibly
afford, and you fathers and mothers, encourage
your sons and daughters to gain an education
which will bless their lives (“Inspirational
Thoughts,” Liahona, June 1999, 3).
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C. Understand the Principles
• Principles of financing education and missions:
• 1. Teach your children to be financially responsible
• 2. Help your children to contribute to their own and
other family member’s missions and education
• 3. If you choose to help, develop an education and
mission plan that is consistent with your personal
goals and budget, share it with your children early,
and follow it
• 4. Start early in saving for your children’s
education and missions
• 5. Invest funds wisely and tax-efficiently consistent
with your tolerance for risk
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Principles (continued)
• 1. Teach your children to be financially
responsible
• Teach them to work and to earn (not shirk and
yearn), consistent with their age and abilities
• Teach them to be accountable for their spending,
just as they are for their words and thoughts
• Teach them to share the things they have—none of
our “stuff” belongs to us
• Teach them that they earn and receive money based
on their working—not their whining
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Principles (continued)
• 2. Help your children to save for their own
(and other family member’s) education and
missions consistent with their abilities to earn
• Encourage children to set savings goals and save for
their own missions and education
• Set up investment or savings accounts for your
children, and help them contribute to these accounts
• Give your children opportunities to earn money that
is earmarked, after paying the Lord, specifically for
their missions and education
• Consider matching children’s funds to encourage
their contributions
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Principles (continued)
• 3. If you choose to help, develop education
and mission plans for your children
• Develop education and mission plans, consistent
with your personal goals and budget, and share
them with your children
• Determine how much you will help, what you will
pay for, and what children must do to receive funds
• Encourage your children to contribute. Plans which
require work and contributions by children have a
better chance of teaching desired principles
• Set up investment accounts for your children and
set aside funds each month to fund these accounts
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wisely
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Principles (continued)
• 4. Start NOW (and early) to save for your
children’s education and missions
• Begin now and early if you choose to help
• The best time to begin saving for your children’s
education and missions was 20 years ago. The
second best time is today. The Law of the Harvest
takes time and is still in effect
• Make saving a key part of your family budget—be
an example to your children
• Have your children begin now to help save for their
own missions as you save for yours as well
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Principles (continued)
• 5. Invest funds wisely and tax-efficiently
consistent with your own tolerance for risk
• Use wisdom in your investments
• Invest at a risk level you are comfortable with
• Understand your available financial investment
vehicles for education and missions
• Use the investment vehicles which allow you to
save the most on an after-tax basis (utilize tax
benefits in your educational and mission savings
plan)
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E. Understand the Process of Selecting Investment
Vehicles for Education and Missions
• Is there process for selecting investment
vehicles for financing education and missions?
• Your priority should be:
• 1. Free Money
• 2. Family Money
• 3. Employment
• 4. Loans
• 5. Credit Cards (No!)
• 6. Retirement Accounts (No!)
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1. Free Money
• Get free money first--scholarships and grants
◦This is free money which is not paid back
• If you have to pay money to get a scholarship or
grant, it is generally a scam!
◦ Grants are need-based--complete the FAFSA
• Pell Grant: approximately $626-$5,775/year
• SEOG Grants – not available at BYU
◦ Scholarships from schools and private sources
• You may need a supplemental application
• Find out which ones you are eligible for on a
scholarship search engine and apply for each
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◦ Armed Forces Scholarships: See recruiting offices
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2. Family Money
• Use personal savings and help from parents
• If children pay for their education and missions,
they will likely use their resources more wisely, as
it is their money they are spending
• Start the process of financial self-reliance as
soon as you can
• Let your children do as much as they can, then
help if you are able--but don’t do it all
• If parents and grandparents can help, that is
wonderful
• Express appreciation to anyone who helps!
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3. Employment
• Have children work when possible to offset
educational expenses
• Most colleges offer federal College Work Study. Others,
including BYU, provide thousands of student
employment opportunities from their own funds.
• Undergraduate students enrolled in 12+ semester hours
should work no more than 20 work hours per week.
• BYU students who work full-time at $10/hr while living
free at home for 4 months will earn tuition for two
semesters.
• High school students should work no more than 0-10
hours per week while in school as working more hours
reduces GPA and likelihood of attending college.
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• Working summers to save is desirable.
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4. Loans
• Use (all) loans wisely. They must be paid
back. Understand the 5 critical areas of a loan:
• a. Who pays the interest during school?
• The borrower or the government?
• b. When must you start paying back the loan?
• Immediately or after graduation?
• c. Who takes out the loan (and pays it back)?
• The student or the parents?
• d. What is the interest rate cap?
• What is the highest rate you may pay?
• e. What are the amounts available and costs?
• What are all the costs: amounts, fees, etc.?
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Loans (continued)
• Subsidized Federal Loans (2015-2016)
• Direct Subsidized Loans (undergraduates only)
• a. Government pays interest while in school
• b. Repayment begins 6 months after student
drops below half-time enrollment or graduates
• c. Loan is in the student’s name
• d. For 2014-15, the interest rate is fixed at 4.29%
APR. No interest accrues (or grows) while
enrolled in school
• e. The origination fee is 1.073%. Subsidized
loan amounts range from $100 to $5,500 for
undergraduates
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Loans (continued)
• Unsubsidized Federal Loans
• Direct Unsubsidized Loans (2015-2016)
• a. Student is responsible for interest during school
• b. Repayment begins after student graduates or
stays below half-time for a continuous 6 months
• c. Loan is in student’s name
• d. Fixed interest rate 4.29% for undergraduates
and 5.84% for graduates
• e. The origination fee is 1.073%. Loan amounts
vary up to $12,500 for undergraduates and up to
$20,500 for graduates
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Loans (continued)
• Unsubsidized Loans
◦Unsubsidized Federal Loans
• Direct PLUS Loan: Available for parents of
undergraduate, dependent students to help with
school-related expenses.
a. Parent is responsible for interest during school
b. Repayment begins six months after student
graduates, discontinues, or drops below half time
c. Parent is the borrower
d. Interest rate is 6.84% fixed APR charged from
first disbursement
e. There is an origination fee 4.292%, a credit
check for approval, and a FAFSA is required.
Parents can borrow up to cost of education less
financial aid the student receives
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Loans (continued)
• Unsubsidized Loans
◦ Direct Unsubsidized Federal Loans
• Grad PLUS Loan: Available for graduate
students to help with school-related expenses
a. Student responsible for interest during school
b. Repayment begins six months after student
graduates, discontinues or drops below half time
c. Graduate student is the borrower
d. Interest rate is 6.84% fixed APR charged from
first disbursement
e. Requires a credit check for approval, FAFSA,
and a 4.292% origination fee. Student can borrow
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up to cost of education less financial aid the
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Loans (continued)
• Unsubsidized Loans
• Private Alternative Loans
Caution -- these unsubsidized loans are much more
expensive than federal unsubsidized loans
• a. Interest starts immediately and accrues
• b. Must begin paying the loan back immediately
• c. Student is the borrower
• d. Interest rates are higher than Federal loans and
there is no interest rate cap. A 14.5% variable
interest rate means loan amount can double in five
years (Rule of 72)
• e. These have higher up-front fees and may require a
cosigner. Read the fine print VERY CAREFULLY 31
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Loan Comparison
Federal Direct Loans
Private – Alternative
•Subsidized 4.29% fixed *
•Unsubsidized 4.29%* or
5.84%** fixed
◦ Like a credit card
•Principle:
◦ Federal Stafford,
PLUS, Grad PLUS =
Less Costly
•14.5% variable
•Double in 5 years
•Unsubsidized only
◦ Like a credit card
•Principle:
◦ Private =
More Costly
•APR limit = 25% to
Infinity
Note:
*=undergraduate
** = graduate
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Loans (continued)
• Final Thoughts on Loans and Borrowing:
• Use subsidized Federal loans first. Federal loans are
generally less expensive than private, non-federal
loans. They subsidize the interest during school, and
are a better choice if borrowing is necessary
• Let the child borrow. Parents should not put their
retirement at risk for their children’s education
• Let the child work a semester. This may not only help
the child save money, but teach the importance of
earning and spending wisely
• Avoid private-alternative loans. Beware of aggressive
marketing campaigns by these companies. These 33 3333
loans are very expensive
5. Credit Cards (No!)
• Credit Cards and Payday Loans
• Among the most expensive way to borrow
• They require you to pay it back immediately
• There is no help in the payment of interest
• The interest rates are extremely high (> 500%)
and you are in school
• These are not not not advisable ways to finance
schooling and are usually the result of poor
planning!!!
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6. Retirement Accounts (No)
• Taking money from retirement accounts is not
not not not not not recommended
• (Do you get the hint?)
• Parent’s first priority is to save for their own
retirement, and then, if resources are available
and if they desire, to help their children
• There is no commandment that says parents
must pay for their children’s college
education
• It is not wise to jeopardize your retirement
for your children’s education
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Key Investment Vehicles for Education
• College Savings Plans
• Six major ways to save for college:
• With Tax benefits
1. Series EE and Series I Government bonds
2. Coverdell Education Savings Account
(Education IRA)
3. 529 Prepaid Tuition Plan
4. 529 Savings Plan
• Without tax-benefits
5. Tax-efficient Investing
6. Custodial Accounts (UGMA/UTMA)
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1. Series EE and Series I Bonds
• Advantages:
• Earnings are tax-free if used for paying tuition and
fees (I bond rates are 0.0% (inflation was negative)
and EE bonds are 0.3% until October 31, 2015)
• Earnings are not taxed until bonds are cashed
• Can be purchased in small denominations
• Disadvantages:
• 3-month penalty on early withdrawal before 5 years,
with minimum holding period of 1 year
• $10,000 per year maximum purchase per year per
SSN (and $5,000 more if use your tax refund)
• For tax-free status, principle and earnings can only 37
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EE/I Savings Bond Phase-out Limits
• If your income is above specified limits in the year
bonds are cashed, you cannot exclude the interest
income from your income taxes. The limits are:
Year
2011
2012
2013
2014
2015
Filing Single
$71,100-86,100
$72,850-87,850
$74,700-89,700
$76,000-91,000
$77,200-92,199
Married Filing Jointly
$106,500-136,500
$109,250-139,250
$112,050-142,050
$113,950-143,950
$115,751-145,749
• Your modified Adjusted Gross Income is your adjusted gross
income adding back certain items such as foreign income, foreignhousing deductions, student-loan deductions, IRA-contribution 38
deductions and deductions for higher-education costs.
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U.S. Series EE Bonds/I over Time
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2. Coverdell Education Savings Account
• Advantages:
• Distributions are tax-free (even beyond 2015).
• You choose your investments.
• Can be used for eligible elementary, secondary and
post-secondary education expenses.
• Disadvantages
• Contribution limits of $2,000 per year in 2015,
which may phase out as your income (MAGI)
increases beyond specific limits
• Funds must be used by age 30 (but can be
transferred to other students). Earnings not used for
educational expenses are taxed with a 10% penalty
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Education IRA Deductibility Limits
Education IRA
MAGI Phase Out Range (in 000’s)
Year
Amount
Single Range Married FJ Range
2011
$2,000
$95-$110
$190-$220
2012
$2,000
$95-$110
$190-$220
2013
$2,000
$95-$110
$190-$220
2014
$2,000
$95-$110
$190-$220
2015
$2,000
$95-$110
$190-$220
• Your Modified Adjusted Gross Income is your adjusted gross income
and adding back certain items such as foreign income, foreignhousing deductions, student-loan deductions, IRA-contribution
deductions and deductions for higher-education costs. Earnings
beyond these limits ($95k single and $190k jointly) result in a phase
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out of allowable interest deductions, which totally phase out at $110k
and $220k).
3. 529 Prepaid Tuition Plan
Advantages:
• You know tuition will be covered, regardless of
raises in costs of tuition
• May be useful if you think your children will not be
eligible for financial aid. Can save up to a
maximum of $416,000 per child in 2015
Disadvantages:
• May not be offered in the state you/your child wants
• Does not allow you to choose your investments
• Your children are young, so you could be more
aggressive with your investing for higher returns
• Assets reduce financial aid dollar for dollar
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4. 529 Savings Plan
Advantages:
• Control of the funds resides with the contributor, who
chooses the assets within options provided
• 529 Savings Plan assets are not considered student
assets, increasing aid
• States may offer tax deductions for contributions to
your local 529 funds (check by state)
• Distributions are tax-free if used for qualified
educational expenses ($416,000 maximum in 2015)
Disadvantages:
• May not cover all college expenses
• If not used for educational expenses, earnings subject 43
to tax and 10% penalty
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Different States Savings Plans
• When determining which 529 Plan to use, start
with a review of your state’s 529 plan (Utah’s
Plan is at www.uesp.org)
• Check the fees (at the Plan and at the fund level)
• Check for any tax benefits (Utah has a 5% tax
credit against your Utah State tax to $3,800 MFJ)
• Check for investment assets and options
• Check for the maximum amount you can invest per
child
• Once you have reviewed your state’s plan, read about
other state’s plans and select the best plan to meet your
needs and goals. You can invest in any state’s plan 44
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College Savings Plans Comparison Chart Coverdell
and 529 information From Robert Brokamp, the Motley Fool.com, May 1, 2002
College Savings Plans Comparison Chart
C ustodi al Account
Highlight s
Can be open by anyone
Offered by…
Brokerages, mut ual
fund companies, banks
Cont ribut ion limit
Se ri e s EE/I
C ove rde l l ESA
529: Pre pai d Tui ti on
529: Savi ngs Pl an
An invest ment account
Cont ribut ions t oday are
available t o cont ribut ors guarant eed t o cover
who earn less t han $110K t uit ion cost s in t he fut ure.
(for single filers) and
$220K (for joint filers)
A st at e-sponsored
invest ment account for
t he benefit of anyone -your child, your cousin,
your neighbor, yourself
US Government
Brokerages, mut ual fund
companies, banks
St at es
None
$30,000 per year for
EE and I bonds
$2,000 per st udent per
year
Depends on plan and age
of st udent
T ax t reat ment of
wit hdrawals
No favorable t ax
t reat ment
T ax-free if used for
qualified expenses and
if your income is
wit hin t he government
set limit s. T axes may
be eit her paid annually
or when redeemed.
T ax-free if used for
qualified expenses
T ax-free if used for
qualified expenses
St at es (usually wit h help
from a financial services
companies)
Depends on plan -- varies
from $100,000 t o
$305,000
T ax-free if used for
qualified expenses unt il
2010 (dist ribut ions will
count as income t o t he
st udent in 2011 and
beyond unless Congress
ext ends t he current law)
Qualified expenses
None
T uit ion, fees, supplies
and special needs.
Room and board are
not qualified expenses.
T he amount of
qualified expenses are
reduced by scholarships
and ot her aid.
T uit ion, room, board,
fees, supplies, and special
needs relat ed t o t he
at t endance of a qualified
element ary, secondary, or
post -secondary
inst it ut ion
T uit ion at a college
wit hin t he plan (some
plans will also cover
room and board)
T uit ion, fees, room, and
board at qualified highereducat ion inst it ut ions
www.Tre a s urydire c t.go v
Mot leyFool.com
Mot leyFool.com
Mot leyFool.com
Source of Informat ion: Charles Schwab
45
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College Savings Comparison
(continued)
College Savings Plans Comparison Chart
C ustodial Account
Se rie s EE
C ove rde ll ESA
529: Pre paid Tuition
T ax-deductibility
None
None
None
Investment flexibility
Assets can be invested
in stocks, bonds,
mutual funds, and cash
equivalents.
Investments can be
bought and sold as
often as desired.
Bonds must be held at
least 5 years for full
interest. An interest
penalty of 3 months
will be assessed on all
bonds cashed before 5
years.
Assets can be invested in
stocks, bonds, mutual
funds, and cash
equivalents. Investments
can be bought and sold as
often as desired.
Ability to transfer
account
None
None
Account may be
Depends on plan
transferred to other
brokerage or mutual fund,
or to a 529 plan, subject
to fees and penalties.
Interaction with Hope
and Lifetime Learning
Credits
None
None
Credits can be claimed in
the same year as tax-free
withdrawal provided that
the distribution is not
used for the same
expenses for which a
credit is claimed.
MotleyFool.com
Source of Information: Charles Schwab
www.Tre a s urydire c t.go v
Some states allow
contributions to be
partially or completely
deductible.
Plan administrators
invest all assets.
Credits can be claimed in
the same year as tax-free
withdrawal provided that
the distribution is not
used for the same
expenses for which a
credit is claimed.
MotleyFool.com
529: Savings Plan
Some states allow
contributions to be
partially or completely
deductible.
Assets are professionally
managed. Depending on
the plan, participants can
choose from two to
almost 30 mutual fundtype investments.
Investment choice may
be changed once every 12
months.
May transfer to another
529 plan once every 12
months
Credits can be claimed in
the same year as tax-free
withdrawal provided that
the distribution is not
used for the same
expenses for which a
credit is claimed.46
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MotleyFool.com
College Savings Comparison
(continued)
College Savings Plans Comparison Chart
Custodial Account
Cove rde ll ESA
529: Pre paid Tuition
Assets are considered
to be property of the
account owner, which -unless the owner is also
the beneficiary -means only a small
portion of the assets
will be considered in
the finanical aid
calculation
Control of the account In most states, account In most states, control
assets become property of account will always
of the student at age
remain with
18.
contributor.
Must use funds by…
No age limit
No age limit
Considered to be an asset
of the student, which
means a large portion of
the assets will be
considered in the
financial aid calculation
Considered to be the
student's resource and
thus reduces financial aid
dollar-for-dollar
In most states, account
assets become property
of the student at age 18.
In most states, control of In most states, control of
account will always
account will always
remain with contributor. remain with contributor.
Age 30
Varies by plan
Varies by plan
Assignability to other
relatives
Immediate family,
including cousins, steprelatives, and in-laws
Earnings are taxed as
ordinary income to
contributor, plus a 10%
penalty
T ax-filing deadline for
the year of the
contribution
MotleyFool.com
Immediate family,
including cousins, steprelatives, and in-laws
Earnings are taxed as
ordinary income to
account owner, plus a
10% penalty
Depends on the plan
Immediate family,
including cousins, steprelatives, and in-laws
Earnings are taxed as
ordinary income to
account owner, plus a
10% penalty
Depends on the plan
Effect on financial aid
Se rie s EE
Considered to be an
asset of the student,
which means a large
portion of the assets
will be considered in
the financial aid
calculation
Penalty for nonqualified withdrawals
None
Selling before 5 years
results in a 3 month
interest penalty
Contribution deadline
None
None
Source of Information: Charles Schwab
www.Tre a s urydire c t.go v
MotleyFool.com
529: Savings Plan
Assets are considered to
be property of the
account owner, which -unless the owner is also
the beneficiary -- means
only a small portion of
the assets will be
considered in the
finanical aid calculation
47
47
47
MotleyFool.com
5. Tax-efficient Investing
• How do you invest tax-efficiently:
• 1. Know your tax rates. Calculate the after-tax
return on each of your investments
• 2. Invest long-term. Replace interest and shortterm distributions with long-term capital gains and
LTCG distributions
• 3. Invest wisely. Replace interest and short-term
distributions with qualified stock dividends/stock
distributions (consistent with your risk tolerance)
• 4. Receive tax-exempt income. Purchase
muni/Treasury securities when rates are more
attractive than other securities for tax-exempt
48
income
48
48
Tax-efficient Investing (continued)
Advantages:
• Can be invested in all types of financial assets,
stocks, bonds, mutual funds, etc.
• Can be used for any educational, mission, or other
expense
• Parent has control of the assets and can use them
for any purposes
• Investments can be made which minimize taxes
Disadvantages:
• No tax advantages
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49
49
6. Custodial Accounts: UGMA/UTMA
Advantages:
• Can be invested in all types of financial assets,
stocks, bonds, mutual funds, etc. UTMA has fewer
restrictions and may include real estate
• Can be used for any educational or other expenses,
including missions
Disadvantages:
• No tax advantages. Currently taxed at parent’s rate
until child is 18 years old
• Is considered the child’s money as soon as the child
is of age—it cannot be taken back by the parent
50
• I prefer a tax-efficiently invested account
50
50
My Preferred Education Vehicles
• For a majority of families I recommend:
• First, the 529 Savings Plan
• 1. Taxes: Tax free if used for qualified expenses.
Money is put in after-tax and grows tax-free
• 2. Tax Credit: If you are from Utah, you get a
5% tax credit of up to a $3,800 contribution MFJ
($1,900 per beneficiary in 2015 or $190 credit)
• 3. Low costs: Utah’s plan is very inexpensive
and utilizes Vanguard Funds
• 4. Flexibility: Money can be used in any college
in any state
• 5. Investment Options: Multiple, with most low51
cost mutual and index funds
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Preferred Education Vehicles (continued)
• Second, the Education IRA
• 1. Taxes: Tax free if used for qualified expenses.
Money is put in after-tax and grows tax-free,
similar to a Roth IRA
• 2. Low costs: Utah’s plan is very inexpensive and
utilizes Vanguard Funds
• 3. Flexibility: Money can be used in any college in
any state, as well as for postsecondary expenses
• 4. Investment Options: Multiple, with almost all
low-cost mutual and index funds
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52
Preferred Education Vehicles (continued)
• Third, I or EE US Savings Bonds
• 1. Taxes: Tax free if used for qualified expenses
(tuition and fees only)
• 2. Money is put in after-tax and grows tax-free
• 3. Interest rates: Higher interest rates than
traditional cash assets if you can accept a variable
rate
• 4. Tax deferred: Earnings are tax-deferred until
you cash the bonds
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53
Key Investment Vehicles for Missions
• There are fewer ways to save for children’s
missions:
• 1. Tax-efficiently invested assets (with accounts in
each child’s names to remind you of their purpose)
• 2. Custodial accounts: UGMA/UTMA (Not
Recommended)
54
54
54
1. Tax-efficient Investing
Four ways to invest tax-efficiently:
1. Know your tax rates. Calculate the after-tax return
on each of your investments
2. Invest long-term. Replace interest/short-term
distributions with long-term capital gains/LTCG
distributions
3. Receive stock dividends. Replace interest/shortterm distributions with qualified stock
dividends/stock distributions (if you can consistent
with your risk tolerance)
4. Receive tax-exempt income. Purchase
muni/Treasury securities when rates are more
55
attractive than other securities
55
55
Tax-efficient Investing (continued)
Advantages:
• Can be invested in all types of financial assets,
stocks, bonds, mutual funds, etc.
• Can be used for any educational, mission, or other
expense
• Parent has control of the assets and can use them
for any purposes
• Investments can be made which minimize taxes
Disadvantages:
• No tax advantages
56
56
56
2. Custodial Accounts: UGMA/UTMA
Advantages:
• Can be invested in all types of financial assets,
stocks, bonds, mutual funds, etc. UTMA has fewer
restrictions and may include real estate
• Can be used for any educational, mission, or other
expense
Disadvantages:
• No tax advantages. Currently taxed at parents rate
until child is 18 years old
• Is considered the child’s money as soon as the child
is of age (age 21 in Utah)—it cannot be taken back
by the parent
57
• I prefer a tax-efficiently invested account
57
57
H. Understand How to Motivate Yourself to Save
for your Missions and Education
• It is easier to understand what we should do. It
is much harder to do it.
• Following are few ideas to help live the gospel and
save for your children’s education and missions
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Live It (continued)
• 1. Understand doctrines
• Elder Packer said:
• True doctrine, understood, changes attitudes
and behavior. The study of the doctrines of
the gospel will improve behavior quicker
than a study of behavior will improve
behavior (Boyd K. Packer, “Little Children,”
Ensign, Nov. 1986, 16).
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59
Live It (continued)
• The doctrine is that education and missions
are important
• This doesn’t mean we must pay these expenses;
rather, that we should consider it
• Living wisely and preparing are simply part
of the gospel of Jesus Christ
• Obeying is no longer a question of money,
but a question of faith and duty
• These are not temporal commandments
(D&C 29:35)
• There is no separation between the
temporal and spiritual
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Live it (continued)
• 2. Catch the vision
• A. Of who you are
• You are a child of God with great potential (Gal.
3:26).
• “No doctrine is more basic, no doctrine
embraces a greater incentive to personal
righteousness . . . as does the wondrous
concept that man can be as his Maker”
(Bruce R. McConkie, The Promised
Messiah: The First Coming of Christ (Salt
Lake City: Deseret Book, 1978), 133).
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Live it (continued)
• B. Of what you want
• Do you know what you want?
• Have you written down your goals?
• How much do you want to save before your
children go to college?
• How much will you contribute to your
children’s missions?
• How much will you need to save each month
top do these things?
• Are you willing to sacrifice for them?
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Live it (continued)
• C. Of what you can do
• “With increased vision comes increased
motivation” (Ted R. Callister, “The Power in the
Priesthood in the Boy,” Ensign, May 2013).
• “Once a person is determined to help
themselves, there is nothing that can stop them “
(Nelson Mandela).
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Live it (continued)
• 3. Decide to decide
• Make the decisions now and commit to them!
• Decide now what you will and will not do to help
your children, and then be done with decision once
and for all
• Follow a prophet who said to “decide to
decide”
• Seek the Lord’s help in making these decisions
• There is no one who loves you more
• Commit and follow through
• “Commit thy way unto the Lord; trust also in
him; and he shall bring it to pass” (Psalms 64 6464
Live it (continued)
• President Spencer W. Kimball said:
• We hope we can help our young men and young
women to realize, even sooner than they do now,
that they need to make certain decisions only once.
. . . We can push some things away from us once
and have done with them! We can make a single
decision about certain things that we will
incorporate in our lives and then make them ours—
without having to brood and re-decide a hundred
times what it is we will do and what we will not do.
. . . My young brothers [and sisters], if you have not
done so yet, decide to decide! (Spencer W.
Kimball, “Boys Need Heroes Close By,” Ensign, 65
May 1976, 45).
65
Live it (continued)
• 4. Do it willingly (because we have to)
• The prophet Joseph Smith, on his way to Carthage,
knew that he would not return. ”I am going like a
lamb to the slaughter, but I am calm as a summer’s
morning; I have a conscience void of offense
towards God, and towards all men. . . . And it shall
yet be said of me—he was murdered in cold blood
(D&C 135:4).
• He brought his will in subjection to the will
of Heavenly Father
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66
Live It (continued)
• Isn’t that a purpose of life, to bring our wills in
line with the will of the Father?
• We will either “bend the knee” willingly of our
own free will and choice, or we will be compelled
to do it when He comes again (Mosiah 27:31)
• Either way, we will come to recognize Christ
• How much better it is to do these things
willingly because we have faith in Christ and are
seeking to obey His commandments
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Live it (continued)
• 5. Share your goals with your children (and
others)
• Let others know what you are doing
• Embarrassment sometimes is more powerful
than guilt in motivating us to accomplish more
• Share your goals with family and friends
• Let them know of your successes and
failures
• As we let others know what we desire to
accomplish, they can help us to accomplish
our goals
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68
Live it (continued)
• 6. Remember the promised blessings:
• The Lord will stand by you (D&C 68:6)
• None shall stay you (D&C 1:5)
• The Savior will go with you and be in your midst
(D&C 49:27)
• Nothing shall prevail against you (D&C 32:3)
• Power shall rest upon you (D&C 39:21)
• He will uphold you (D&C 93:51)
• You shall have greater treasures than the treasures
of the earth (D&C 19:37-38)
• He will take care of your flocks (D&C 88:72)
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69
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Live it (continued)
Other promises:
• He will send you the Comforter (D&C 79:2)
• He will go before your face. He will be on your
right hand and on your left (D&C 84:88)
• His angels will be round about you (D&C 84:88)
• You shall have great faith (D&C 39:12)
• You will be able to keep God’s laws (D&C 44:5)
• You shall have revelations ((D&C 28:8)
• Your sins will be forgiven 31:5, 36:1, 60:7, 62:3)
• You shall be made truly rich—you will have eternal
life (D&C 11:7)
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F. How Do You Sign up for Aid?
• 1. Encourage parents to begin planning early
• 2. Fill out the FAFSA (Free Application For Federal
Student Aid) on the net at www.FAFSA.ed.gov
(remember your PIN number)
• Follow the instructions and do it early (usually after
your tax forms are completed)
• You may submit the FAFSA as early as January 1
for the Fall term
• The amount of your award is based on the FAFSA
results and credit hours, not when you apply
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71
Signing Up for Aid (continued)
3. Talk with your personal OneStop counselor at
BYU (D-148 ASB)
• Call their direct line for an appointment at 801-4227075
• They will guide you in the process and help you in
determining your eligibility for aid
4. Look for other available aid on the web.
• View the following sources and utilize them:
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72
Helpful Websites Containing Information
about Financing School
• Helpful Websites
• Onestop.byu.edu
• FinancialAid.byu.edu
• Scholarships.byu.edu • nsfp.byu.edu
• BYU resources
• BYU Counseling Center: Admissions, Financial
Aid, Scholarships (801-422-4104 or 801-422-7025)
• To have your federal aid in place by fall semester, it is
wise to submit the FAFSA by June 1 the same year, unless
you are planning to get married soon
• Make an appointment with a counselor if you have
questions
73
73
73
Resources for Financing School (continued)
• www.fafsa.ed.gov - Free Application for Federal
Student Aid. This form must be filled out for any
federal financial aid
• www.pin.ed.gov – request a Personal Identification
Number (PIN) needed for FAFSA
• nslds.ed.gov – provides student a centralized,
integrated view of their Title IV loans and grants
• www.fastweb.monster.com – matches student profiles
to a database of scholarships
• www.collegeboard.com– connects student profiles to a
database of scholarships, internships, and loans.
74
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74
Resources for Financing School (continued)
• www.srnexpress.com – contains resources on
scholarships, fellowships, internships, and loan
forgiveness programs.
• www.wiredscholar.com – a good website for college
preparation and information.
• www.finAid.org – a comprehensive site that has
information on loans, scholarships and savings plans.
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75
Summary
• A. We discussed the “whys” of personal
finance?
• We learn and apply personal finance in our lives to:
• 1. Learn the lessons that personal finance can
teach us to bring us to Christ
• 2. Become wiser stewards over what God has
blessed us with
• 3. Help us return with our families back home
to our Savior and Heavenly Fathers’ presence
• 4. Accomplish our personal missions for which
we were sent here to earth
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76
Summary (continued)
• B. We shared how education relates to our
financial goals?
• Education can prove to be the wisest and more
profitable investment your children will ever make
• The more education your children have, the greater
will be their opportunity to serve
77
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77
Summary (continued)
• C. The principles of financing education and
missions
• 1. Teach your children to be financially responsible
• 2. Help your children to contribute to their own
and other family member’s missions and education
• 3. Develop an education and mission plan that is
consistent with your personal goals and budget and
then follow it
• 4. Start early in saving for your children’s
education and missions
• 5. Invest wisely and tax-efficiently
78
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78
Summary (continued)
• D. The process for selecting investment
vehicles for financing school and missions:
• The priority is:
• 1. Free Money
• 2. Family Money
• 3. Employment
• 4. Loans
• 5. Credit Cards (No!)
• 6. Retirement Accounts (No!)
79
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79
Summary (continued)
• Key investment vehicles to help save for your
children’s education:
•
•
•
•
•
•
1. Series EE and Series I Government bonds
2. Education Savings Account (Education IRA)
3. 529 Prepaid Tuition Plan
4. 529 Savings Plan
5. Tax-efficient and wise investing
6. UGMA/UTMA custodial accounts
80
80
80
Summary (continued)
• Key investment vehicles to help save for your
children’s missions
• 1. Tax-Efficient Investing
• 2. Custodial Accounts (UGMA/UTMA)
81
81
81
Summary (continued)
• F. Support for how to reduce the cost of
education and sign up for aid
• See the PowerPoint on the website
82
82
82
Summary (continued)
• E. Suggestions on how to live it were:
• 1. Understand doctrines
• 2. Catch the vision
• A. Of who you are
• B. Of what you want
• C. Of what you can do
• 3. Decide to decide
• 4. Do it willingly (because we want to)
• 5. Share your goals with your children and others
• 6. Remember the promised blessings
83
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83
Summary (continued)
• Saving for education and missions for our children
can be done if we want it bad enough and are willing
to work for it with the Lord’s help.
• I testify to you that our promised blessings are beyond
measure. Though the storm clouds may gather, though the
rains may pour down upon us, our knowledge of the gospel
and our love of our Heavenly Father and of our Savior will
comfort and sustain us and bring joy to our hearts as we
walk uprightly and keep the commandments. There will be
nothing in this world that can defeat us. My beloved
brothers and sisters, fear not. Be of good cheer. The future
is as bright as your faith (italics added, Thomas S.
Monson, “Be of Good Cheer,” Ensign, May 2009, 92).
84
84 84
Summary (continued)
• Thank you
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85 85