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There is good news for veterans and active duty servicemembers concerned about future education expenses. Both military and civilian programs exist to help. Here’s a brief introduction to four potential opportunities.

Post-9/11 GI Bill

The Post-9/11 GI Bill is an education benefit program available to those who served on active duty after September 10, 2001. It typically covers up to 36 months of tuition and fees. Allowances are also available for housing, books, and supplies.

The benefit pays 100 percent of tuition and fees for in-state students at public schools. It can be used at domestic and some overseas institutions. The cap for private and foreign schools is approximately $26,000 per academic year.

Benefits may be transferred to a spouse or child. But the transfer application must be made while still on active duty. The servicemember must agree to additional service to make the transfer.

Yellow Ribbon Program

The Yellow Ribbon Program can pay expenses above what the Post-9/11 GI Bill can cover. It has additional eligibility requirements. In addition to qualifying for the Post-9/11 GI Bill, one of the following must apply to the applicant:

1) Have served at least 36 months on active duty and were honorably discharged, or

2) Received a Purple Heart on or after September 11, 2001, and were honorably discharged after any length of service, or

3) Served at least 30 continuous days on or after September 11, 2001, and were discharged or released from active duty because of a service-connected disability, or

4) Are a dependent child using transferred benefits, or

5) Are a Fry Scholarship recipient

Program Limitations

The Yellow Ribbon Program’s benefits can be used only at schools approved by the VA.

Both programs have set annual benefit limits. Once they are exhausted, they are gone forever. And transferred benefits must be used within a limited amount of time.

The good news is that there are civilian education savings plans that can complement the Post-9/11 GI Bill and the Yellow Ribbon Program.

Coverdell Education Savings Account

Investment earnings in a Coverdell Educations Savings Account (ESA) are not taxed by the federal government.^[i]  And there is no federal income tax liability when funds are withdrawn to pay qualified education expenses.

An ESA can never receive more than $2,000 in annual contributions, which are not tax deductible. Allowable contributions get reduced (ultimately to zero) based on the income of the person making them.

Anyone can contribute to an ESA as long as the beneficiary is 18 or younger.^[ii]  Funds remaining in an ESA after age 18 belong to the beneficiary. But if they aren’t used for qualified education expenses, withdrawals become taxable income and subject to a penalty.

529 Plan Account

Like an ESA, earnings in a 529 plan account aren’t subject to federal income tax. Also, withdrawals used to pay qualified education expenses don’t create federal taxable income. And contributions aren’t deductible. ^[iii]

A 529 plan account can be opened by anyone for anyone. The beneficiary’s age doesn’t matter. A 529 plan account can be opened for adult children, a spouse, or oneself. Beneficiaries can change. So, an account could fund more than one person’s education. ^[iv]

Unlike an ESA, there is no federal restriction on annual contributions.^[v]  Some states impose limits. But they are typically tens of thousands of dollars. Lifetime contribution limits are over $500,000 in some states. And the person who establishes a 529 plan account controls it.

Funds can be used to pay K through 12 tuition and fees, any expense required by a college or trade school to enroll or attend, some room and board, or up to $10,000 in student loan debt.

There are two types of 529 plan accounts. One lets you prepay tuition at specific institutions in a given state. The other lets you save money that can be used at almost any type of school (e.g., public, private, in-state, out-of-state, international, professional, vocational). 

Choosing the Right Education Funding Program

These are just a few of the programs available to help servicemembers and veterans pay for education. Each has its own eligibility requirements, funding features, and payment benefits.

It should be noted that only active duty servicemembers and veterans can take advantage of the military opportunities (Post-9/11 GI Bill, Yellow Ribbon Program). But that doesn’t mean they are excluded from using the civilian programs (ESA, 529).

That’s why planning is so important. Planning can help fit all the pieces together so that the combination of military and civilian programs is personalized and optimized for a given situation.

Click here to see how these programs compare to one another.

^[i] NOTE: Not all states follow federal tax rules. So, earnings could be taxed at the state level.

^[ii] Contributions are not allowed after age 18 unless the beneficiary is a special needs beneficiary.

^[iii] Residents in some states may be able to deduct contributions on a state tax return.

^[iv] By naming successive beneficiaries.

^[v] Contributions over the Federal Gift Tax Exclusion are subject to tax.

^[vi] Must be part of the federal student aid program.

Contributions to 529 education savings plan accounts are excluded from gift taxes up to a set annual limit. Any contributions above that “annual exclusion” become taxable to the person making the “gift.” That is unless they take advantage of an opportunity reserved for 529 plan accounts which excludes some 529 contributions over the annual limit from the gift tax liability. 

What is a Gift tax?

The transfer of anything from one person to another without receiving something of equal value in return is a gift. The general rule is that any gift is taxable.^[i] As the table below illustrates, the tax rate on gifts starts at 18 percent.

But there are exceptions.

One of the exceptions is that gifts of $16,000 or less made to a person in any one year aren’t subject to the gift tax. This is referred to as the “annual gift tax exclusion.”

It applies on a per-gift basis. So, in any given year, an individual may give up to $16,000 to more than one person. And a person may receive separate $16,000 gifts from more than one person. In none of these cases would any of the gifts be taxable.

For example, a married couple with four children could each give away $64,000 a year (for a combined total of $128,000) by transferring $16,000 to each child.

The math would be the same if the couple had 10 children. Only the magnitude of the numbers would change. It would be $320,000 in this case. And it’s important to note that gifts can be made to anyone, not just the couple’s children.

There is no annual ceiling on how much money someone can give away. There is a “lifetime gift and estate tax exemption.” But that limit is more than $11 million per person. It’s important to discuss issues like this with a qualified tax professional.

Funding Limits and the Gift tax Exclusion

Still, the annual gift tax exclusion can present a challenge for people looking to endow a loved one’s education. Funding an education savings plan with just $16,000 a year may not be sufficient to finance a loved one’s entire education expenses.

For example, if 529 contributions begin when a child is between ages eight and 15, funds would likely start being withdrawn in as few as three years. Another challenge might be to fund a child’s K-12 education. Contributions starting at birth could likely be withdrawn as soon as a child is five years old.

In either case, there might not be sufficient time for investments to reach their full potential.

A 529 education savings plan account may be an appropriate solution for both situations because the annual gift tax exclusion doesn’t need to be a funding barrier.

The Gift Tax Exclusion Opportunity with a 529

There is a provision in the tax code that allows otherwise taxable gifts made to 529 plan accounts to be treated as if they had been made over time. It allows a large contribution to be averaged over five years.

As long as that average is at or below the annual gift tax exclusion, then the initial contribution will not be considered a taxable gift.

For example, the parents of two children could separately contribute $80,000 to both of their children’s 529 plan accounts. The contributions are not taxable if no further contributions go into the accounts over the next four years.

The benefit of this front-end loading may not be apparent upon first glance. After all, the total noted in the illustration above is exactly that of the illustration below.

But front-end loading allows a larger pool of money to be invested up front. It creates an opportunity for the entire investment to earn a return over time. It provides a head start, as demonstrated in the table below.

The above illustration assumes two hypothetical 529 plan accounts that own the exact same investment and earn an identical rate of return over five years. In this illustration, the account funded by accelerated gifting earns nearly $23,000 more than the account that is funded gradually over five years.^[ii]

Other Benefits of Accelerated Gifting

The opportunity to have a larger pool of money earn potential investment returns may be outweighed by the fact that accelerating contributions to 529 plan accounts means there is more money available to meet expenses earlier in a loved one’s education. This may create more options or more flexibility for a student.

Accelerated gifting can also be used as an estate planning technique.

Use our education savings calculator to see if your plan is on track.

^[i] Source: Department of the Treasury, Internal Revenue Service, Publication 559, Cat. No. 15107U, Survivors, Executors, and Administrators, for use in preparing 2021 Returns.

^[ii] This is a hypothetical illustration intended only to demonstrate the potential opportunity that accelerated gifting might provide to an investor. All investing involves risk, including the potential loss of principal. Actual result will vary and different market environments could yield different outcomes.

Estate planning isn't just for the super wealthy. While it's true that most Americans don’t need to be concerned about estate taxes due to the high exemption limit, that doesn't mean estate planning should be skipped altogether. For example, a well-considered gifting strategy could benefit some estates regardless of net worth. And a 529 Education Savings Plan account could be an important part of that strategy.

First, determine what is included in your taxable estate

Congress makes the federal tax policy, which defines the value of a taxable estate. But this value isn’t fixed, it fluctuates as tax laws change.

Adding together the components of an estate – a home, vacation or investment property, cars, boats, other toys, savings, investments and retirement accounts – shows that it may be possible that more Americans could be subject to the estate tax than they think.

In addition, while some states follow federal rules and exclude 529 Plan account contributions from a donor's taxable estate, some may have different thresholds and regulations. It's important to check the specific rules of the state where the donor resides to understand how 529 Plan account contributions are treated in the context of state estate taxes.

This is why a little estate planning might be a good idea – even for investors who don’t consider themselves wealthy.

Using a 529 Plan account as an estate planning tool

A 529 Education Savings Plan account is a tax-advantaged vehicle to save money for qualified education expenses incurred from kindergarten on. Earnings in a 529 Plan account are not subject to federal income tax and withdrawals to pay for qualified education expenses are also exempt from federal income tax. Below are several examples of how a 529 Plan account could be used as an estate planning tool.

• Contributions to a 529 Plan account are immediately removed from a donor’s estate for federal estate tax purposes, reducing the potential for federal estate tax liability. And don’t forget, the account owner maintains control over those assets, including the ability to change beneficiaries.
• 529 Plan account contributions may also be excluded from the donor’s assets in the state where the donor resides and some beneficiaries (depending on their relationship to the donor) have the potential to exclude 529 Plan accounts from their state inheritance taxes.
• Naming a successor or contingent account owner may help 529 Plan accounts avoid the probate process, which, in the absence of a detailed estate plan, trust, or last will and testament, could delay transferring an estate.
• Contributions to 529 Plan accounts enjoy special gift tax treatment. Amounts above the annual gift tax exclusion can be averaged over five years to avoid gift taxes on the initial investment.
• In addition to Estate Planning, you can find information on other benefits of a 529 Plan account here.

Many investors see the value of using a 529 Plan account to help loved ones pay education expenses, but some miss the estate planning opportunities the accounts also provide. As with many financial planning issues, such ancillary benefits may not be obvious on the surface.

That’s why investors should consult with qualified legal, tax and investment experts before making any long-term planning moves.

If you have any questions, call one of our live U.S.-based investment specialists.

The original purpose of 529 Plan accounts was to pay for college. And some people might assume that’s all they can be used for today; however, changes in the federal tax code have expanded how 529 Plan accounts can be used, exposing opportunities to use them more broadly than one might think.

Absolute Funding Limits

To take full advantage of a 529 Plan account, one might consider fully funding the account. Each state determines the lifetime contribution threshold for the 529 Plan they sponsor, but those limits are high – more than $200,000 in every state.¹

Maximizing contributions to a 529 Plan account could serve several purposes. For many, the primary purpose is to ensure that the beneficiary has enough money available to cover future education expenses that come up between kindergarten and college, but a secondary purpose would be to ensure there are ample funds to use beyond college. 

Read more about 529 Plan contribution limits here.

Using a 529 Plan Account Beyond College

As we’ve established, there are ways funds in a 529 Plan account can be used after the beneficiary graduates from college. Here are some scenarios you might consider when planning how much to contribute to your loved one’s 529 Education Savings Plan.

• Graduate School: 529 Funds can be used to pay the beneficiary’s tuition and qualified education expenses to attend graduate school (e.g., business school, medical school, law school).
• Vocational and Trade School: If the beneficiary decides to attend a vocational or trade school after college, a 529 Plan account could also be used. In addition to tuition, the funds may be available to cover some tools and equipment. This is also the case for apprenticeship programs registered with the federal Labor Department. 
• Student Loans: The funds may be used to pay down certain student loan debts of the beneficiary or their siblings. 

Importantly, these opportunities exist even if the beneficiary doesn’t use all the funds. And, because there’s no federal limit on how many times the account’s beneficiary can change, the account owner can simply name another beneficiary to the account.²

Creative Uses of a 529 Plan Account

With no federal limit on how many times a new beneficiary can be named to an account and high contribution limits, as well as the fact that 529 Plan accounts never expire,³ account owners can now explore ways to use funds creatively. Here are some ideas.

A single 529 Plan account could be used to put a loved one through college, graduate school and help pay down student loan debt. Funds can continue to be added to that same account and, along with any funds remaining, could potentially pay for another loved one’s education expenses.

The account could be used to attend cooking classes at a local community college or maybe even a study-abroad program.

There are many education savings expenses that qualify. Learn more here.

What to do Next

To see if your education savings plans are on track, use our Education Savings Calculator or call one of our live U.S.-based investment specialists.

¹ Some states may impose annual contribution limits. Source: Saving for College, LLC website as of November 3, 2023. 

² Transfers to non-family members are treated as non-qualified distributions that may be subject to tax and penalties. Source: Saving for College, LLC website as of December 18, 2023. 

³ Check with a plan’s sponsor to review specific rules, which may differ from state to state.

Investing is the discipline of putting money aside with an expectation that it will earn a positive rate of return, and that over time those funds will grow in value. Investing is not the same as saving. But the terms are often used interchangeably. So, a discussion of the differences between saving and investing may provide a better understanding of just what investing means.

Time as a Component of Saving and Investing

Saving means something not used. Money saved is not spent. From a financial planning perspective, saving means deferring consumption. People put off spending money today so that they can have things in the future. Sometimes that future is right at hand. Other times it is many years away.

So, money reserved for imminent expenses might get exhausted quickly. Funds earmarked to finance long-term goals might be accumulated over several years.

Because various goals occur over time, money set aside to finance them might also consider time. Since funds aren’t required all at once, they don’t need to be available all at once. Savings and investment accounts may be tiered to match the timing of various goals.

The assets used in such accounts might also be similarly synchronized. Accounts intended to be accessed quickly might hold assets that reach their full potential promptly. Accounts meant to finance long-term goals might hold assets that develop over many years.

As such, time may be one of the variables that separates saving from investing.

Saving and Investment Risk

Another variable used to distinguish saving from investing is risk.^[i]  There are many saving and investing opportunities available to finance future consumption goals. Each comes with specific risks.

Some opportunities come with little risk of capital loss.^[ii]  Other opportunities pose a potentially higher risk of losing money. So, risk may also help define an opportunity as savings or investment.

The Expected Return of Savings and Investments

One of the primary differences between savings and investments is expected return.^[iii]  Expected return is what an asset might earn in the future. It describes the historical average return an asset class has generated over time. Some assets deliver high expected returns. Others are lower.

So, expected return is another factor that helps separate savings from investments.

Defining Savings and Investment

Clarifying the differences between savings and investment helps to specifically answer the question about what an investment is. Those differences are the time frame the asset might be owned, how risky it is, and what its expected return might be.

These unique characteristics might also be used to determine what asset class might be appropriate to finance a specific consumption goal. This is especially the case when one considers the timing and importance of the goal.

Near-term, high-priority goals might be financed with low risk assets. For example, those that are readily accessible (i.e., liquid), or have short-term maturities and have little risk of capital loss…even though they might offer a low expected return.

Goals expected to be attained in the long term might be financed with assets that offer higher expected returns and lower liquidity, even though they might put capital at risk.

So, savings might be defined as assets or accounts that are very short-term in nature, offer a high degree of predictability that capital deployed will be preserved, are very liquid, and that may offer a lower expected return than other opportunities.

Investing may mean owning assets or accounts that require a long holding period or limited short-term liquidity. Investing may come with a higher risk of loss than an asset used for savings. But investing may also provide higher expected rates of return than other opportunities.

In terms of one’s objectives, savings might be used for short-term, high-priority consumption goals. And long-term consumption goals might appropriately be financed with investments.

For help answering questions about various types of savings and investment vehicles, call us at (800) 235-8396. 

^[i] For purposes of this article, risk refers to the risk of a loss of capital invested. All saving and investing involves some type of risk, including the potential loss of capital. Investors should obtain relevant and specific professional advice before making any investment or other decision.

^[ii] For example, the Federal Deposit Insurance Corporation (FDIC) offers limited protection against capital loss on some types of accounts held at some types of institutions. The FDIC does not insure any form of investment security.

^[iii] Source: Consumer Financial Protection Bureau

Inflation is a pretty straightforward concept. Still, it is one of those economic variables that can be concerning to some investors. However, a basic understanding of inflation may help ease some of those concerns.

What is Inflation?

Inflation is simply an increase in prices. It can affect a single good or service. Or it can impact all goods and services in the whole economy. Inflation is generally considered to be negative, but it isn’t all bad. There are pros and cons.

The downside is that when goods and services cost more, the dollar doesn’t go as far as it used to. Inflation diminishes the value of money, forcing consumers to make choices about what and how much to buy. It forces them to budget.

The upside is that inflation is typically the result of a robust economy. Moderate inflation is a sign that businesses and consumers are spending. And aggregate spending is what keeps an economy healthy.

What Causes Inflation?

There is an old expression that price is a matter of supply and demand. And for the most part that statement goes a long way to explain inflation.

When an economy is booming and there’s plenty of money available, people are willing to spend it. The more people are out there spending money, the higher demand and the more likely prices are to rise. Economists call this a shift in demand. 

Now, sometimes inflation can occur without a shift in demand. Changing supply can also affect prices. 

A shift in supply can happen for a lot of reasons. Some are straightforward. For example, a slowdown in production can decrease the number of finished goods coming out of a factory. A shortage of raw materials can do the same thing. 

Then there are factors that are less intuitive. For example, if there aren’t enough people coming in to work, it can decrease a company’s ability to fill customer orders. A backup in the supply chain – getting goods from one place to another – can reduce the supply of goods available to consumers. Both can affect inflation.

A real-life example of these phenomenon was created by the COVID-19 pandemic. Many people missed work, factories were not producing at capacity and there was an overall slowing of the global supply chain.

Should you be Concerned About Inflation?

Americans have gotten used to very low inflation for a very long time. It has averaged right around three percent since 1980. That may be why recent increases in inflation have concerned some investors.

But the correlation between inflation and long-term investment performance is not perfect. Still, inflation has had an impact on other economic indicators. For example, inflation can affect interest rates, which then impacts stock and bond prices.

So, the degree to which investors should be concerned about inflation may depend on the type of investments they own, their age and their circumstances.

Reach out to one of our Representatives for ways to factor inflation into your long-term investment plans. They are available at (800) 235-8396.

Contribution limits on various activities and accounts change in 2024.
 

Sources:

https://www.irs.gov/pub/irs-drop/n-23-75.pdf

https://www.irs.gov/pub/irs-drop/rp-23-23.pdf

https://www.irs.gov/pub/irs-drop/rp-23-34.pdf

https://www.ssa.gov/news/press/factsheets/colafacts2024.pdf