Timely Topics - April 22, 2011

Timely Topics - April 22, 2011

1. Tips for Withdrawing Money from Section 529 Plans for College Expenses

Withdrawing funds from a 529 plan to pay for a student's qualified college expenses may seem simple. However, the timing of withdrawals and tax-planning issues can impact the optimal use of funds. Before withdrawing 529 funds, you should consider how much to withdraw, who the check is paid to, the timing of withdraws, and college-age investment options.

The appropriate amount to withdraw may be less than the total amount of qualifying tuition, fees, supplies, and equipment.

If your student receives a scholarship, reduce any withdrawal by the amount of the scholarship.

If you can claim the $2,500 American Opportunity credit, which is based on the first $4,000 in tuition, the amount withdrawn from the 529 should be reduced by up to $4,000, because the earnings portion of any withdrawal above that amount would be subject to taxes.

Understand how your student's college treats 529 funds in the financial aid application process to determine whether the account owner, student, or school should receive the check from the plan.

Some schools treat 529 funds as a scholarship when determining need-based awards; therefore, a check written to the school could reduce financial aid.

For a parent-owned account, consider having the check paid to the student. If any portion of the distribution is subject to taxes, it will be on the student's return, and probably subject to a lower tax bracket. In either case, be prepared to provide the IRS documentation for applicable higher-education expenses.

If a grandparent owns the 529 account, the withdrawn funds are treated as student income on financial aid applications, and may be treated like a scholarship by the school. If your family qualifies for need-based aid, it may make sense to transfer account ownership to the parent.

Time 529 withdrawals to minimize taxes and maximize savings.

Withdraw 529 funds and pay tuition in the same tax year. A December withdrawal and January tuition payment could lead to the withdrawal being subject to taxes.

If checks from the account are payable to the school, allow extra time for the school to process the check because some schools take longer to process checks that come directly from a 529 account.

Maximize savings when 529 accounts provide less than the full amount of expenses. A grandparent-owned 529 account used for freshman tuition results in student income that must be reported in the sophomore and junior year financial aid applications. Reserve those funds for the senior year. Any amounts remaining can be transferred to another relative or used for graduate school or other higher education.

Invest funds more conservatively as students near college age. Age-based investment options in many plans, including California's, generally handle this but still leave a portion allocated to equities. Some plans now offer FDIC-insured options for students paying tuition bills.

2. Total and Renewable Energy Sources in the U.S.

Japan's nuclear power plant disaster and continuing Middle East unrest have rekindled interest in renewable energy sources as a means to reduce our reliance on atomic power and foreign oil. Renewable energy includes solar, wind, hydropower, biofuels, biomass waste, and wood.

It is useful to know how we currently power our country. Breakdowns of total 2009 U.S. energy consumption by source and the detail of renewable energy sources are shown in the pie charts below.

Dept of Energy

Although renewable energy accounts for a growing portion of U.S. power, it is quite small in the overall picture. The largest and oldest renewable energy source, hydropower, accounted for less than 3% of total U.S. energy consumed. Fossil fuels accounted for well over 80% in 2009.

Although technologies have improved and costs have fallen, renewable energy remains too expensive compared to fossil fuels and remains dependent on government subsidies. Another problem is its intermittent delivery. Neither wind nor solar can deliver electricity on demand. Therefore, additional technology breakthroughs are needed to store electricity for future use from these promising sources.

Finally, it is clear from these pie charts that energy policy must emphasize dramatically increased conservation efforts if we really want significant progress toward energy independence.

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		Timely Topics - April 22, 2011

		1. Tips for Withdrawing Money from Section 529 Plans for College Expenses Withdrawing funds from a 529 plan to pay for a student's qualified college expenses may seem simple. However, the timing of withdrawals and tax-planning issues can impact the optimal use of funds. Before withdrawing 529 funds, you should consider how much to withdraw, who the check is paid to, the timing of withdraws, and college-age investment options. The appropriate amount to withdraw may be less than the total amount of qualifying tuition, fees, supplies, and equipment. If your student receives a scholarship, reduce any withdrawal by the amount of the scholarship. If you can claim the $2,500 American Opportunity credit, which is based on the first $4,000 in tuition, the amount withdrawn from the 529 should be reduced by up to $4,000, because the earnings portion of any withdrawal above that amount would be subject to taxes. Understand how your student's college treats 529 funds in the financial aid application process to determine whether the account owner, student, or school should receive the check from the plan. Some schools treat 529 funds as a scholarship when determining need-based awards; therefore, a check written to the school could reduce financial aid. For a parent-owned account, consider having the check paid to the student. If any portion of the distribution is subject to taxes, it will be on the student's return, and probably subject to a lower tax bracket. In either case, be prepared to provide the IRS documentation for applicable higher-education expenses. If a grandparent owns the 529 account, the withdrawn funds are treated as student income on financial aid applications, and may be treated like a scholarship by the school. If your family qualifies for need-based aid, it may make sense to transfer account ownership to the parent. Time 529 withdrawals to minimize taxes and maximize savings. Withdraw 529 funds and pay tuition in the same tax year. A December withdrawal and January tuition payment could lead to the withdrawal being subject to taxes. If checks from the account are payable to the school, allow extra time for the school to process the check because some schools take longer to process checks that come directly from a 529 account. Maximize savings when 529 accounts provide less than the full amount of expenses. A grandparent-owned 529 account used for freshman tuition results in student income that must be reported in the sophomore and junior year financial aid applications. Reserve those funds for the senior year. Any amounts remaining can be transferred to another relative or used for graduate school or other higher education. Invest funds more conservatively as students near college age. Age-based investment options in many plans, including California's, generally handle this but still leave a portion allocated to equities. Some plans now offer FDIC-insured options for students paying tuition bills. 2. Total and Renewable Energy Sources in the U.S. Japan's nuclear power plant disaster and continuing Middle East unrest have rekindled interest in renewable energy sources as a means to reduce our reliance on atomic power and foreign oil. Renewable energy includes solar, wind, hydropower, biofuels, biomass waste, and wood. It is useful to know how we currently power our country. Breakdowns of total 2009 U.S. energy consumption by source and the detail of renewable energy sources are shown in the pie charts below. Although renewable energy accounts for a growing portion of U.S. power, it is quite small in the overall picture. The largest and oldest renewable energy source, hydropower, accounted for less than 3% of total U.S. energy consumed. Fossil fuels accounted for well over 80% in 2009. Although technologies have improved and costs have fallen, renewable energy remains too expensive compared to fossil fuels and remains dependent on government subsidies. Another problem is its intermittent delivery. Neither wind nor solar can deliver electricity on demand. Therefore, additional technology breakthroughs are needed to store electricity for future use from these promising sources. Finally, it is clear from these pie charts that energy policy must emphasize dramatically increased conservation efforts if we really want significant progress toward energy independence.

		Back to Market Reviews