Building Bridges with College Funding Beyond 529 Plans: Advanced College Funding Strategies

1. Building Bridges with College Funding Beyond 529 Plans:Advanced College Funding Strategies Rick Darvis, CPA, CCPS 1-800-765-2031 rdarvis@solutionsforcollege.com www.solutionsforcollege.com

2. Agenda • The College Funding Opportunity • College Funding vs. Retirement • Education Tax Strategies

3. Building Bridgeswith College Funding • Bridge to existing and prospective clients • Product has lost its sizzle • Added Value is the key • College funding will provide a niche • College funding is HOT and recession proof • Ultimate door-opener to premium clients

4. College is EXPENSIVE! $45,000 40,000 $48,000 35,000 30,000 $32,000 25,000 20,000 15,000 $16,000 10,000 5,000 Average Public University Elite Private College Average Private College *Source of college costs is from the College Board.

5. If You Haven’t Saved for College… You May Have A Retirement Issue! ? ? How old will you be when your last child graduates from college? How are you going to fund your own retirement after paying for college?

6. College Dollars Spent Equals Retirement Dollars Lost Years Until Retirement Public $80,000 Private $160,000 Elite $240,000 15 20 $166,320 $212,240 $332,640 $424,480 $498,960 $636,720 Assumes 5% investment rate, one child in college, after-tax dollars

7. Solving the Dilemma… Education Funding Retirement Funding How can I determine the most efficient way to fund college and retirement without going broke?

8. Five-Year College After-Tax Cost Tax Brackets Public $80,000 Private $160,000 Elite $240,000 25% 28% 33% 35% $114,286 $119,403 $129,032 $133,333 $228,571 $238,806 $258,065 $266,666 $342,857 $358,209 $387,097 $400,000 College is Paid with After-Tax Dollars *Assumes additional 5% state and local tax and only ONE child’s college expenses

9. Education Tax Strategies Using the IRS to Help Fund College • A new-found tax benefit is the same as a “tax scholarship” • The higher the income tax bracket, the greater the benefit • of any tax strategy • All tax strategies MUST be reviewed with a tax advisor

10. Introduction to Tax Capacity • Opportunities in the child’s tax return • Child’s tax capacity definition • Income shifting to utilize tax capacity Age 0-13 $1,600 Age 14-HS $34,700 College $37,900 + HC/LC The term “Tax Capacity” is from Practitioners Publishing Company

11. Income Shifted Parents’ Tax Rate Parents’ Tax Liability $ 27,000 X 15/35% $ 7,450 Tax Scholarship $ 7,442 Example: College Years Wages IRA Withdrawal Capital Gain Personal Exemption Standard Deduction Taxable Income Tax Rate Tax Hope Tax Credit Child’s Tax Liability $ 5,000 $ 12,000 $ 10,000 (3,100) (4,850) 19,050 X 5/15% $1,508 (1,500) $ 8

12. Case Study #1 — Facts • Income — $145,000 • Assets — $140,000 (outside of retirement) • Medical expense of $9,000 per year • Ineligible for aid at • $35,000/year college • Pay undergraduate • & graduate school

13. Case Study #1 — Strategies • 1) Sole Proprietor • Employ Mother in the business • Establish SIMPLE IRA (Mother & Father) • Employ the two children in the business

14. Case Study #1 — Strategies • 1) Sole Proprietor • Employ Mother in the business • Establish SIMPLE IRA (Mother & Father) • Employ the two children in the business • 2) Tax Strategy • Medical reimbursement plan • First year depreciation election

15. Case Study #1 — Strategies • 1) Sole Proprietor • Employ Mother in the business • Establish SIMPLE IRA (Mother & Father) • Employ the two children in the business • 2) Tax Strategy • Medical reimbursement plan • First year depreciation election • 3) Junior Year • Employer Education Assistance • Gift and leaseback of equipment • Gifts of appreciated securities • Life Insurance or Federal PLUS Loans

16. TOTAL BENEFITS - $165,965 RETIREMENT DOLLARS - $345.041 SIMPLE IRA CONTRIBUTIONS - $140,000 Case Study #1 — Added Value • Eligible for $43,240 of financial aid • Tax Scholarships of $36,125 • IRC 105 & SIMPLE IRA tax benefit of $73,850 • IRC 127 tax benefit of $9,870 • Tuition Deduction tax benefit of $2,880

17. Case Study #2 — Facts • Income - $624,000/year • Assets - $4,017,000 • Newborn child • Save and pay for K-12 private & college • Grandparents have • desire to help

18. Case Study #2 — Strategies • 1) Birth • Grandparents fund Coverdell ESA and 529 Plan • Fund UTMA with municipal bond fund

19. Case Study #2 — Strategies • 1) Birth • Grandparents fund Coverdell ESA and 529 Plan • Fund UTMA with municipal bond fund • 2) Teenager • Employ child and invest wages in IRA (age 10) • Gift and leaseback of equipment (age 14)

20. Case Study #2 — Strategies • 1) Birth • Grandparents fund Coverdell ESA and 529 Plan • Fund UTMA with municipal bond fund • 2) Teenager • Employ child and invest wages in IRA (age 10) • Gift and leaseback of equipment (age 14) • 3) College • Employer Education Assistance (age 21) • Grandparents contribute to CRT • Gifts of appreciated assets as needed

21. Case Study #2 — Added Value • Tax scholarships of $98,601 • IRC 127 tax benefit of $4,515 • Grandparents • Avoid tax on income of $123,005 from the 529 Plan & CESA • Remove $226,000 from estate • Receive a charitable tax deduction of $78,791 • Avoid tax on $80,000 of appreciation

22. Review • The College Funding Opportunity • - Added value is the key • - Network with other professionals • - Attract premium clients, including grandparents • College Funding vs. Retirement • -Paying for college is a retirement problem • - College dollars saved are retirement dollars gained • Education Tax Strategies • - Use “tax capacity” to add value and increase • cash flow for investing • - Unique opportunities for business owners • - Employees also have opportunities

23. The Next Steps Building Bridges with College Funding The College Funding Opportunity - How to maximize financial aid eligibility - How to maximize the education tax incentives - Methods and investments to fund college & retirement - A roadmap to meet financial goals