Today’s show is brimming with information. In the first half of the show, I share a research study done by Consumer Reports in their Consumer Reports Money Adviser. In the report, they compare some of the best and the worst 529 college savings plans around the nation. I then go on to discuss the 2009 stimulus package, ‘The American Recovery and Reinvestment Act of 2009’, and the tax implications it could have on you. I try not to get too far into the government spending portion of it, but I do believe it is important to understand the ‘who and what’ of the tax portion, and how it could potentially affect our nation both now and in the long-term.
In 2008, college costs rose by about 5.7%. The average cost of a public state university was $14,000 per year while the cost of private institutions was a whopping $34,000 per year. With the cost of providing Junior with a solid post-secondary education, it comes as no surprise that it is absolutely necessary to begin planning for these expenses early. One great way, maybe even the best way, to do so is by funding a state sponsored 529 college savings plan. 529 plans offer potentially tax-free growth on funds used for qualified educational expenses. The Consumer Reports piece explains what you should look for in a 529 plan and also lists the 5 best and 5 worst plans across the country. I explain the difference in risk tolerance and risk capacity and why this is a very important consideration that should be made when planning for college expenses. I also explain why prepaid tuition 529s may not be as good as they sound. Below are Consumer Report’s 5 best and 5 worst plans and the ranges of possible expenses association with each of them: (in no particular order)
- Path2College 529 Plan Georgia – .08% – .33%
- College Savings Iowa – .03% – .06%
- Bright Start College Savings Program Illinois – .04% – .59%
- Mississippi Affordable College Savings Program – .14% – .41%
- Direct Portfolio College Savings Plan Colorado – .02% – .07%
- Tomorrow’s Scholar Wisconsin – .75% – 1.23%
- John Hancock Freedom 529 Alaska – .06% – 1.35%
- Franklin Templeton 529 College Saving New Jersey – .63% – 1.80%
- Columbia New York Advisor 529 Plan New York – .25% – 1.32%
- Columbia 529 Plan Nevada – .48% – 1.24%
For more great information check out www.savingforcollege.com, a 529 site owned by Bankrate.com that contains information on all state programs. Also try www.collgesavings.org for information and links to your home state’s program.
As you know, last week President Obama signed into law the American Recovery and Reinvestment Act of 2009. I just want to be completely honest and say that I am unsure about this stimulus package. The main fundamental problem with this package that I see is this: Excessive leverage and spending is what got us into this financial meltdown in the first place. Therefore, our government has decided that the best way for us to resolve this over leveraged and overwhelming debt is to spend our way out. This does not pass the Brian Preston common sense test.
I do believe it is important to understand the tax implications of this stimulus package. As you listen to the show, I will walk through each of the tax incentives including:
- ‘Making Work Pay’ Credit – The $13 /week provision
- Economic Recovery Payment – A one-time $250 payment to retirees
- Refundable Credit For Certain Federal and State Pensioners – A $250 credit to certain government retirees who are not eligible for Social Security
- Unemployment Compensation Exclusion – A temporary suspension of taxability on the first $2,400 of unemployment benefits
- Expanded Earned Income Tax Credit – provides relief to certain families with three or more children
- Expanded Child Tax Credit – Lowers the threshold for the refundable child tax credit to $3,000
- Expanded and Revised Higher Education Credit – A $2,500 credit for higher education expenses for the first four years of college
- Computers and Education Expense – Allows 529 funds to pay for computers and computer technology tax free
- Expanded First-Time Credit for First-Time Home Buyers – Offers a credit up to $8,000 for taxpayers that purchase a home from January to November of 2009.
- Tax Break for New Car Purchasers – Allows for the deduction of state and local sales tax on the purchase of a new automobile
Being a Certified Public Accountant, I feel like I have a special insight into the tax system in this country as well as a unique understanding of how the system should work and what the ultimate goals of the system are. As you think about this stimulus, the economy, and taxes as a whole, I would like for you ponder how taxes impact our economic behavior. Behaviors that the government wants to encourage (i.e. home ownership, investing, saving, business creation, business expansion, etc.) should be given special incentives (i.e. tax cuts or special tax treatment). Behaviors that the government wants to discourage should be taxed. If the government offers special tax incentives for things like unemployment compensation, what is it they are trying to encourage? On the flip side, if the government increases taxes on those who have the ability to create jobs, and excludes real estate investors from tax credits on home purchases, then what is the government’s ultimate goal?
Just as we were getting ready to publish this podcast, we ran across this video from CNBC. I feel like it ties in perfectly with what we talk about in this weeks podcast.
I also want to let you guys know that we here at the Money-Guy show are super excited about what the future holds for us. We are currently working on creating a premium membership section that we feel is going to be an incredible tool during these trying times. Not only will we have our current market research, but we will also have personal risk questionnaires, model asset allocations, special podcasts with handouts, and other very useful tools. Keep your eyes and ears open in the coming weeks for more details.