Servion Financial Advisors Newsletter - September 2021

SEPTEMBER 2021

In This Issue Saving for College Has Never Been More Important September is National College Savings Month Preparing for Student Loan Sticker Shock How 529 Plans can Help Families Prepare for College Costs

Saving for College Has Never Been More Important The cost of attending college has risen dramatically over the past two decades.1 Wage growth is not keeping up with college costs. In fact, since 1989, the cost to attend a university has increased about 8 times more than wages.2 That means it is more important than ever to start saving and investing money so it can grow by the time a child goes off to college.

In this edition of our newsletter, we’re providing articles on college savings. Feel free to discuss the information with your members, many of whom may be thinking about sending their own kids to college one day.

n and Fees (20 o i t i 01Tu e 20 g a 20 r e ) Av PRIVATE SCHOOLS

2001

$16,987

2020

$41,411

+144%

OUT-OF-STATE PUBLIC SCHOOLS 2001

$10,101

2020

$26,809

+165%

IN-STATE PUBLIC SCHOOLS 2001

$3,583

2020

$11,171

+212%

1. US News: 20 Years of Tuition Growth at National Universities, available at https://www.usnews.com/education/ best-colleges/paying-for-college/articles/2017-09-20/see-20-years-of-tuition-growth-at-national-universities 2. Forbes: Price of College Increasing Almost 8 Times Faster than Wages, available at https://www.forbes. com/sites/camilomaldonado/2018/07/24/price-of-college-increasing-almost-8-times-faster-than-wages/?sh=7992a20066c1

529 Plans Pros

September is National College Savings Month When it comes to saving for college, it’s important to know all your options. Most people are familiar with a 529 plan, which is an account that allows you to save and invest money for college tuition, or other qualifying reasons. However, 529 plans aren’t necessarily the only game in town. There are a handful of other options, all of which have their pros and cons. In this article, we’ll do a quick compare and contrast of some of these savings methods.

529 plans are specifically designed to help families save for college: they have do not have contribution limits, they are low maintenance, and parent-owned 529 plans get favorable financial aid treatment. Another benefit is that the funds in a 529 plan are tax-exempt if they are used for educational expenses. They also give you an opportunity to earn a higher return because you can invest in ways that may yield a higher return than a traditional savings account.

The IRS doesn’t specify annual contribution limits for 529 plans.

Here are two great articles explaining what this means: Do 529 plans have contribution limits? and How much can you contribute to a 529 plan?

Cons To reap the 529 plan’s tax benefits, you must use the money for college expenses, which is a restriction you’ll need to keep in mind. Secondary education (i.e. anything pre-college) expenses aren’t covered. Also, distributions from a 529 owned by anyone other than the student or parent count as income to the student, which can impact their ability to qualify for financial aid. Another downside is that without professional guidance, it may be difficult to choose the right places to invest. Without this help, it could cost you dearly.

Education Savings Account (ESAs) Pros Perhaps the biggest difference between an ESA and a 529 is that an ESA is not limited to college. In other words, an ESA can be used to pay for the cost of education not just for college but for secondary schooling as well. Plus, ESAs allow more freedom than a 529 plan in terms of investments; an ESA allows you to choose almost any kind of stocks, bonds, or even mutual funds, which you can’t do in a 529. You can also change investments anytime you want, whereas a 529 only allows you do change twice a year.

Cons ESAs have relatively low contribution limits, allowing you to contribute just $2,000 per year per child, substantially lower than the $6,000 limit that a 529 plan allows. Also, there is a certain gross income that can regulate who can create one of these accounts. If your modified adjusted gross income is higher than $110,000, you are not able to open an account. Finally, the money is an ESA must be used by the time the student turns 30; if funds aren’t used by age 30, the remaining amount will be paid out and taxed.

Roth IRAs Pros In most circumstances, you incur a withdrawal penalty if you take funds out of your Roth IRA before age 59 ½. However, withdrawals are exempt from the penalty if the funds are used specifically for qualified educational expenses, like tuition, fees, books and room and board. you may withdraw funds early without penalty for college expenses or tuition. And, unlike a 529, a Roth IRA allows people who have funds leftover after withdrawing for college expenses to convert those dollars to retirement income – with no tax consequences or penalties. That means if you don’t use up all the Roth IRA funds to pay for your child’s education, you can use it to supplement your own retirement income.

Cons Roth IRAs do have some drawbacks. If you are under the age of 50, you cannot contribute more than $6,000 each year. If you are older, you may add up to $7,000 to the account. Second, you need to have earnings in order to have a Roth IRA, making it difficult for retirees to open an account. Finally, those with high incomes cannot use this tool – for the 2021 tax year, your income must be under $140,000 (single) or $208,000 (married) in order to be able to contribute.

Brokerage Accounts Pros Brokerage accounts give you access to any investment type, whether stock, bond or mutual fund. Like a standard savings account, you can deposit and withdraw funds whenever you’d like without penalty (but you will pay taxes). Second, there are no contribution limits for a brokerage account; you can invest as much as you want. Third, you can withdraw the money any time for any reason, it doesn’t have to be education-related.

Cons When it comes to brokerage accounts, the biggest disadvantage is the lack of tax benefits; 529 plans can be a better choice for some simply for this reason. It also is possible that there could be brokerage account fees or commission fees when making purchases or sales within your brokerage account.

There’s No One-Size Fits All Answer to College Savings It’s possible that a combination of these methods could be the best for you and your family. Your financial position, your beneficiaries, and your long-term goals all play a crucial role in how you save for education.

At the end of the day, paying for education requires forethought and careful planning. It is important that whichever method you choose, try to get started early in the child’s life, and make sure you fully understand your options.

Consider meeting with a financial advisor to discuss your specific situation. Please see important disclosures at the end of this newsletter.

Preparing for Student Loan Sticker Shock September is College Savings Month, an appropriate time to think about education costs and how the average person can prepare to send their kid(s) off to the university of their choice without burying themselves in mountains of debt.

Various savings vehicles are available to help families deal with the expenses – 529 plans, Coverdell Education Savings Accounts, and IRAs, for example – but before you start thinking about those accounts, it helps to understand what exactly the student loan issue is all about.

That’s what this article is designed to do: impress upon you the importance of saving early so you’ll be ready to handle the costs.

General student loan statistics as of 2021

Class of 2019 (most recent data available)

According to the U.S. Federal Reserve and the Federal Reserve Bank of New York:

• 69 percent of them took out student loans

• As of mid-2021, Americans are carrying $1.73 trillion in total student loan debt (that’s nearly double the $900 billion in credit card debt Americans are carrying) • 43.2 million Americans have college debt

• 14 percent of their parents took out loans at an average of $37,200

Among those who graduated in 2019: • Their average debt was $29,900

• Average college debt at graduation is $39,351 • The average monthly student loan payment is $393 • 11 percent of new graduates default in the first 12 months of repayment

Sources: Student Loan Hero; Savingforcollege.com; U.S. Federal Reserve; WalletHub; EducationData.org

How 529 Plans can help families prepare for college costs College Savings Month is a great time for parents to get familiar with a 529 College Savings Plan. This commonly used savings plan offers parents and their college-bound kid(s) tax-free withdrawals to pay for school.

Here are some important things to know about 529 College Savings Plans • There are technically no contribution limits put in place by the IRS, but contributions can have gift tax consequences (see this article for details).

• Sometimes called “qualified tuition programs,” 529 Plans are vehicles that allow you to save for the higher education costs of someone else.

• Family members, friends or anyone else can establish a 529 Plan to benefit a future student.

• 529 Plans are provided by a state, agencies of the state or by educational institutions themselves.

• Money invested in the plan accumulates on a tax-deferred basis and distributions used for higher education expenses are tax and penalty-free, as long as the funds are used for approved education expenses.

That last point is the key. The tax benefits of 529 Plans are only applicable if the funds are used to pay for approved education expenses. There are nuances to these plans in different states, so talk to your financial advisor before opening an account.

What are qualified expenses for a 529 Plan?

529 Plans have to be used cover qualified expenses. There are actually many applications for the funds in these plans.

You can use them to pay for undergraduate or graduate tuition, trade or tech schools, cooking schools, and some accredited schools abroad. Funds can also be used for room and board, books and other fees.

What about using a trust instead?

Some parents consider creating a trust for college expenses. But be aware that trust funds may not be an effective way to shelter money from the financial aid process, which is concern if your student will apply for such aid. Trust funds can be counted as assets during the financial aid process, affecting your child’s eligibility for aid. A potential work around could be established if the trust was restricted to withdrawing just the principal for the beneficiary.

Talk to an advisor about 529 Plans There’s no question that saving for college in today’s environment of ever-increasing costs is challenging. The sooner you get started the better, and you don’t have to figure it all out on your own. A financial advisor can help you understand 529 plans as well as various other options to help you and your family save for college.

Visit servionfa.com or call 651631-3111 to schedule a meeting with Servion Financial Advisors.

651-631-3111 • servionfa.com

Registered Representatives offering securities and advisory services through Cetera Advisor Networks LLC, member FINRA/ SIPC, a broker-dealer and a Registered Investment Advisor. Investments are: • Not FDIC/NCUSIF insured • May lose value • Not financial institution guaranteed • Not a deposit • Not insured by any federal government agency. Cetera is under separate ownership from any other named entity. For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice. All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful. Investors should consider the investment objectives, risks, charges and expenses associated with municipal fund securities before investing. This information is found in the issuer’s official statement and should be read carefully before investing.

Investors should also consider whether the investor’s or beneficiary’s home state offers any state tax or other benefits available only form that state’s 529 Plan. Any state-based benefit should be one of many appropriately weighted factors in making an investment decision. The investor should consult their financial or tax advisor before investing in any state’s 529 Plan.

Converting from a traditional IRA to a Roth IRA is a taxable event. A Roth IRA offers tax free withdrawals on taxable contributions.

To qualify for the tax-free and penalty-free withdrawal or earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59 ½ or due to death, disability, or a first time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes.

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