Homework Answers
a. Whether or not you can save for your children's college and your retirement will depend on your pay. If you can only afford one of these options which do you choose?
Ans.
Saving for retirement or saving for college is tough, but when you try to save for both at the same time, it can be a real challenge. Both require purposeful attention, not to mention a significant investment over time, explains John Schmoll, financial industry veteran and founder of Frugal Rules. What happens when you need to do both…at the same time? Balancing the two can make most feel like they’re walking a tightrope.
There are alarming numbers on both sides of the fence. The Federal Reserve reports nearly a third of non-retirees have no retirement savings. The Wall Street Journal reports the average student in the class of 2016 has over $37,000 in student loan debt. While these statistics are alarming, you shouldn’t lose hope; it is possible to juggle both with relative success.
The debate over saving for retirement versus saving for college is an emotional one. It’s important to remember that. It’s also important to remember that you can’t allow emotion to drive financial decisions.
b. What are 529 plans and why are they so great (from WSJ saving for Education readings)?
Ans. A 529 plan is a college savings plan that offers tax and financial aid benefits. 529 plans may also be used to save and invest for K-12 tuition in addition to college costs. There are two types of 529 plans: college savings plans and prepaid tuition plans. Almost every state has at least one 529 plan. There is also a 529 plan operated by a group of private colleges and universities.
c. There are two main kinds of 529 plans. Explain each type of plan, which option provides the greatest flexibility and why?
Ans.
There are two types of 529 plans: prepaid plans and savings plans.
- Prepaid plans
- Prepaid plans allow one to purchase tuition credits at today's rates to be used in the future. Therefore, performance is based upon tuition inflation.
- Prepaid plans may be administered by states or higher education institutions.
- Currently, 10 states provide a prepaid tuition plan that is accepting new applicants. Those states include Florida, Illinois, Maryland, Massachusetts, Michigan, Nevada, Pennsylvania, Texas, Virginia, and Washington.
- Savings plans
- Savings plans are different in that all growth is based upon market performance of the underlying investments, which typically consist of mutual funds.
- Most 529 savings plans offer a variety of age-based asset allocation options where the underlying investments become more conservative as the beneficiary gets closer to college age.
- Savings plans may be administered by states only.
- Although states administer savings plans, record-keeping and administrative services for many savings plans are usually delegated to a mutual fund company or other financial services company.
- Savings plans option provides greatest flexibility because of Investment choices and can reallocate the portfolio as often as desired
d. Who are the potential users/beneficiaries of the funds invested in a 529 plan?
Ans. The potential users/beneficiaries of the funds in a 529 plan are, parents, students, colleges, companies and society at large...
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