Author: Blakely Financial

Presented by Emily Promise, AIF®, APMA®, CRPC®

Being a woman who is in her 20s, I personally have been introduced to the realities of adulthood and I am sure you can relate if you are around that 20-30 year old mark. While you’re excited by all the opportunities life has to offer, you are also aware of your emerging financial responsibility. In the financial realm, the millennial generation (young adults born between 1981 and 1997) faces a unique set of challenges, including a competitive job market and significant student loan debt that can make it difficult to obtain financial stability.

At Blakely Financial, we have seen poor money management lead to debt, stress, and dependency on others. Fortunately, good money management skills can make it easier for you to accomplish your personal goals. Become familiar with the basics of planning now, and your future self will thank you for being responsible.

Figure out your financial goals

I have found that setting goals is an important part of life, particularly when it comes to your finances. Over time, your goals will probably change, which will likely require you to make some adjustments. Start by asking yourself the following questions:

• What are my short-term goals (e.g., new car, vacation)?
• What are my intermediate-term goals (e.g., buying a home)?
• What are my long-term goals (e.g., saving for your child’s college education, retirement)?
• How important is it for me to achieve each goal?
• How much will I need to save for each goal?

Once you have a clear picture of your goals, you can establish a budget that will help you target them.

Build a budget

A budget helps you stay on track with your finances. There are several steps you’ll need to take to establish a budget. Start by identifying your current monthly income and expenses. This is easier than it sounds: Simply add up all of your sources of income. Do the same thing with your expenses, making sure to include discretionary expenses (e.g., entertainment, travel, hobbies) as well as fixed expenses (e.g., housing, food, utilities, transportation).

Compare the totals. Are you spending more than you earn? This means you’ll need to make some adjustments to get back on track. Look at your discretionary expenses to identify where you can scale back your spending. It might take some time and self-discipline to get your budget where it needs to be, but you’ll develop healthy financial habits along the way.

On the other hand, you may discover that you have extra money that you can put toward savings. Pay yourself first by adding to your retirement account or emergency fund. Building up your savings using extra income can help ensure that you accomplish your financial goals over the long term.

Establish an emergency fund

In my work with Blakely Financial, one of the biggest mistakes is not having an emergency fund. It’s an unpleasant thought, but a financial crisis could strike when you least expect it, so you’ll want to be prepared. Protect yourself by setting up a cash reserve so you have funds available in the event you’re confronted with an unexpected expense. Otherwise you may need to use money that you have earmarked for another purpose–such as a down payment on a home–or go into debt.

You may be familiar with advice that you should have three to six months’ worth of living expenses in your cash reserve. In reality, though, the amount you should save depends on your particular circumstances. Consider factors like job security, health, income, and debts owed when deciding how much money should be in your cash reserve.

A good way to accumulate emergency funds is to earmark a percentage of your paycheck each pay period. When you reach your goal, don’t stop adding money–the more you have saved, the better off you’ll be.

Review your cash reserve either annually or when your financial situation changes. Major milestones like a new baby or homeownership will likely require some adjustments.

Be careful with credit cards

Getting my first credit card was so exciting! Credit cards can be useful in helping you monitor how much you spend, but they can also lead you to spend more than you can afford. Before accepting a credit card offer, evaluate it carefully by doing the following:

• Read the terms and conditions closely
• Know what the interest rate is and how it is calculated
• Understand hidden fees such as late-payment charges and over-limit fees
• Look for rewards and/or incentive programs that will be most beneficial to you

Contact the credit card issuer if you have questions about the language used in an offer. And if you are trying to decide between two or more credit card offers, be sure to evaluate them to determine which will work best for you.

Bear in mind that your credit card use affects your credit score. Avoid overspending by setting a balance that you’re able to pay off fully each month. That way, you can safely build credit while being financially responsible. Take into account that missed payments of any sort can cause your credit score to suffer. In turn, this could make it more difficult and expensive to borrow money later.

Deal with your existing debt

At this stage in your life, you might be dealing with student loan debt and wondering how you can pay it off. Fortunately, there are many repayment plans that make it easier to pay off student loans. Check to see whether you qualify for income-sensitive repayment options or Income-Based Repayment. Even if you’re not eligible, you may be able to refinance or consolidate your loans to make the repayment schedule easier on your budget. Explore all your options to find out what works best for you.

Beware of new borrowing

You’re doing your best to pay off your existing debt, but you might find that you need to borrow more (for example, for graduate school or a car). Think carefully before you borrow.

Ask yourself the following questions before you do:

• Is this purchase necessary?
• Have you comparison-shopped to make sure you’re getting the best possible deal?
• How much will this loan or line of credit cost over time?
• Can you afford to add another monthly payment to your budget?
• Will the interest rate change if you miss a payment?
• Are your personal finances in good shape at this time, or should you wait to borrow until you’ve paid off pre-existing debt?

Weigh your pre-existing debt against your need to borrow more and determine whether this is a wise decision at this particular point in your life.

Take advantage of technology

If you are in your 20s or 30s like me, you have had access to technology at a young age and this is one major advantage that benefits millennials, compared with our parents and grandparents when they were starting out. These days, there’s virtually an app or a program for everything, and that includes financial basics. Do your homework and find out which ones could be the most helpful to you. Do you need alerts to remind you to pay bills on time? Do you need help organizing your finances? Are you looking for a program that allows you to examine your bank, credit card, investment, and loan account activities all at once?

Researching different programs can also help with number crunching. Many financial apps offer built-in calculators that simplify tasks that may seem overwhelming, such as breaking down a monthly budget or figuring out a loan repayment plan. Experiment with what you find, and you’ll most likely develop skills and insight that you can use as a starting point for future planning.

Although apps are one way to get started, consider working with a financial professional for a more personalized strategy that can help you analyze your current situation and plan for the future. Be honest with yourself about your goals and your ability to make smart decisions and revisit those goals frequently and continue to increase investments in yourself. You will be so happy you did!

Engage with the entire Blakely Financial team at WWW.BLAKELYFINANCIAL.COM to see what other expert advice we can provide towards your financial well-being.

EMILY PROMISE is a financial advisor with BLAKELY FINANCIAL, INC. located at 1022 Hutton Ln., Suite 109, High Point, NC 27262 and can be reached at (336) 885-2530.

Blakely Financial, Inc. is an independent financial planning and investment management firm that provides clarity, insight, and guidance to help our clients attain their financial goals.

Securities and advisory services offered through Commonwealth Financial Network, Member FINRA/SIPC, a Registered Investment Adviser.

*Prepared by Broadridge Advisor Solutions

Authored by Brad McMillan, CFA, CAIA, MAI
Presented by Robert Blakely, CFP®, AIF®, CHFC®

It is now clear that the coronavirus has escaped the attempted containment by Chinese authorities and has spread around the world. According to the World Health Organization, there are 79,331 confirmed cases, of which 77,262 are in China and 2,069 are outside of China (as of February 24, 2020). The two largest country clusters are in South Korea (with 232) and Italy (with 64). And many of those numbers seem to be on the rise, with the Washington Post reporting on February 24 that there were 833 confirmed cases in South Korea and 53 confirmed cases in the U.S.

Market reaction

On Monday and Tuesday, global financial markets are down by 4 percent or more. Here in the U.S., they were down by almost 5 percent from their peaks. This drop is one of the largest in recent months, and it reflects the sudden apparent surge in cases over the weekend. Investors are clearly expecting more bad news—and rather than wait for it, they are selling.

Is selling the right thing to do? Probably not. Indeed, the virus could continue to spread and even get worse. But we do know a couple of things.

What we know

First, new cases in China seem to be leveling off, having peaked between January 23 and February 2. We can expect things to get worse in countries with new outbreaks, but steps can be taken to help control the virus—as has been shown in the origin country.

Second, countries have been applying the lessons learned from China to their own outbreaks, which should help contain their outbreaks. For example, the Centers for Disease Control and Prevention (CDC) reports 14 cases diagnosed in the U.S., as well as 39 cases in people repatriated here from China or the Diamond Princess cruise ship. Cases here appear well contained and under surveillance, which should help limit any spread. The same holds true in most of the developed countries.

For all the hype, then, in many countries and certainly in the U.S., the coronavirus remains a very minor risk. Another way to put that risk in context is that during the current influenza season, there have been 15 million cases, 140,000 hospitalizations, and 8,200 deaths. Compared with the average flu season, then, the coronavirus does not even register. With 53 current coronavirus cases, it could certainly get worse. At least in the U.S., however, the overall damage is not likely to come close to what we already accept as “normal.”

Assessing the investment risk

While the risk to your health may be small, that may not be the case for your investments. The epidemic has already caused real economic damage in China, and it is likely to keep doing so for at least the first half of the year. The same case seems likely for South Korea. These two countries are key manufacturing hubs. Any slowdown there could easily migrate to other countries through component shortages, crippling supply chains around the world. Again, there are signs in the electronics and auto industries that the slowdown is already happening, which will be a drag on growth. This risk is largely behind the recent pullback in global markets.

Here, the key will be whether the virus is contained—which would still be a shock to the system but would be normalized fairly quickly—or whether it continues to spread. Right now, based on Chinese data, the first scenario looks more likely. If so, Chinese production should recover in the next six months, with the economic effects passing even more quickly. It might help to think of this situation like a hurricane, where there is significant damage that passes quickly. Stock markets, which typically react quickly on the downside, can bounce back equally quickly. Should the virus be contained, it would be a mistake to react to the current headlines. We have seen this situation before—the drop and bounce back—with other recent geopolitical events.

What if the virus continues to spread?

Even if the virus continues to spread around the world, those in the U.S. should take a deep breath. The U.S. economy and stock markets are among the least exposed to the rest of the world, and they are the best positioned to ride out any storm. Further, the U.S. health care system is among the best in the world, and the CDC is the top health protection agency in the world. As such, we are and should be relatively well protected. Finally, given that the U.S. economy and markets depend primarily on U.S. workers and their spending, we are less vulnerable to an epidemic. We should do relatively well, as has happened in the past.

The proper course

The headlines are scary and Monday’s market declines even more so. But the economic foundation remains reasonably solid around the world. The epidemic is a shock, but it is not likely to derail the recovery. The World Health Organization, while recognizing the risks, has not declared a pandemic, indicating that the risks remain contained. The U.S. is well positioned, both for the virus and for the economic effects.

We certainly need to pay attention. But as of now, watchful waiting continues to be the proper course. Once again, remain calm and carry on.

Engage with the entire Blakely Financial team at WWW.BLAKELYFINANCIAL.COM to see what other expert advice we can provide towards your financial well-being.

ROBERT BLAKELY, CFP® is a financial advisor with BLAKELY FINANCIAL, INC. located at 1022 Hutton Ln., Suite 109, High Point, NC 27262. He is the founder and president of Blakely Financial, Inc. celebrating 25 years in business.

Blakely Financial, Inc. is an independent financial planning and investment management firm that provides clarity, insight, and guidance to help our clients attain their financial goals.

Securities and advisory services offered through Commonwealth Financial Network, Member FINRA/SIPC, a Registered Investment Adviser.

Authored by Robert Blakely, CFP®, AIF®, ChFC®

It is that time of year again. A time of year when you would rather be doing something, anything other than filing your taxes. This is a great time, however, as you are gathering and organizing your tax documents to also set up a financial organization system. Here are some things that may be helpful when organizing not only your tax documents but your financial planning documents.

Have a Proper Filing System

One of the most overwhelming things about filing taxes is dealing with the huge amounts of paperwork. Though emails and online documents are making it easier, you still need to ensure that you have all the important documents organized and easily accessible. Keep your files close to where you do all your work to ensure easy access and avoid the possibility of misplaced files and documents.

Creating Your Files

The simpler you keep your documents, the easier they will be to file and retrieve at any time. Write down each category and label documents accordingly. Color coordinate to make it easier to find the category you are looking for.

Organizational Checklist

Now that you have your filing system in place, you can easily categorize your papers.

1. Income and Investment Information

• • • W-2 – showing your earnings and what was withheld for taxes
    • Taxable alimony, jury duty records, hobby income and expenses
    • Bank or financial institution statements
      • Did you make contributions to an IRA? (Form 5498)
      • Are you paying down student load debt? (Form 1098-E)
      • Did you take out a home mortgage? (Form 1098 Mortgage Interest Statement)
    • Last year’s state refund amount – If you itemize your deductions, then your state refund is considered income for tax purposes.
    • Other miscellaneous income – This could include award money, gambling winnings, lottery payouts, etc.
    • Any and all Form 1099s

2. Insurance
   • This file will include all types of insurance: car, life, health, home and other insurance policies.
3. Paid taxes and tax returns
   • When you properly document all the taxes you have paid, it can prevent overpaying. Include all real estate taxes, state and local income taxes and personal property taxes.
4. Vehicles
   • Keep a copy of state taxes for your vehicles.
   • Claim the actual expenses of your vehicles if allowed. You should keep all gas receipts, maintenance and washing. Tolls and parking receipts are needed as well.
   • You must provide the record for mileage when using your vehicle for business purposes. Record the beginning mileage on January 1^st and store it in the file so you know where to go at the end of the year with your ending mileage.
5. Children
   • Keep your childcare expenses in this file. If you utilize a childcare provider, keep their tax ID number or SS number.
6. Charities
   • Keep receipts for any physical or monetary donations you have made. In the case of itemizing, you need to document what you have given with the date of donation and the name and address of the organization.
7. Health, Dental and Other Medical Expenses
   • Keep all health insurance costs and receipts for all unreimbursed medical expenses. These could include exams, surgeries and preventative care. It could also include braces, glasses, hearing aids, prescriptions and transportation to and from treatment.
   • Form 1095 – Health Insurance Coverage Forms
8. Personal Information
   • Store your social security cards, birth, death, marriage, divorce certificates, prenuptial agreements, etc. for all family members.
9. Social Security Information
   • If you receive Social Security, you will receive an SSA-1099 in January showing the total amount of benefits you received for the year.
10. Self-Employment and Business Records (where applicable)
    • Business Expense Records
    • Quarterly Estimated Tax Payment Receipts
    • Mileage Records
11. Estate Documents
    • Wills, Power of Attorneys, Health Care Power of Attorneys, Living Wills, Trusts
    • Keep all these for all family members in one place for easy access
12. Logins & Passwords
    • Best practice is to write down your passwords and keep them in a safe place
    • Using a password manager to keep track of your logins and passwords can be helpful
    • Avoid using obvious personal information as a password

By following these tips, becoming well organized and keeping everything in one place you won’t dread tax time as much.

Check with your tax professional for guidance on your specific tax situation and for policies and regulations that may pertain to you.

Engage with the entire Blakely Financial team at WWW.BLAKELYFINANCIAL.COM to see what other expert advice we can provide towards your financial well-being.

ROBERT BLAKELY, CFP® is a financial advisor with BLAKELY FINANCIAL, INC. located at 1022 Hutton Ln., Suite 109, High Point, NC 27262. He is the founder and president of Blakely Financial, Inc. celebrating 25 years in business.

Blakely Financial, Inc. is an independent financial planning and investment management firm that provides clarity, insight, and guidance to help our clients attain their financial goals.

Securities and advisory services offered through Commonwealth Financial Network, Member FINRA/SIPC, a Registered Investment Adviser.

Presented by Robert Blakely, CFP®, AIF®, ChFC
Authored by James Gard, Morningstar Investment Editor

Public health outbreaks and epidemics like the recent coronavirus can quickly scare investors and, eventually, affect economies and businesses. World stock markets have tumbled since the first death was announced on January 11, with Chinese equities more than 10% lower since then.

The recent coronavirus outbreak has shut down airports, halted trade, and led to the rapid construction of new hospitals in China. The effects of the outbreak may push China’s economy into a period of slower growth, with stocks trading lower as investors seek protection.

So, what does that mean for investors?

Key takeaways 

• Looking at nine major outbreaks since 1998, there is little evidence linking global epidemics with long-term investment fundamentals.
• The Chinese economy may slow, perhaps even meaningfully, but that is not a reason to invest or divest. Long-term investing is often best disconnected from short-term economic reactions, so investors should maintain their focus on what matters.
• Across the portfolios run by Morningstar Investment Management, we do have a relatively small exposure to Chinese assets (both directly and indirectly) but remain confident these holdings will deliver positive outcomes for long-term investors.

Epidemics and investing

To understand the potential impacts of an outbreak, we must make a forecast. But it’s important to acknowledge that we’re trying to peer into the future, which is wrought with intellectual danger. No one can predict the future, but plenty of research suggest ways that forecasts can be improved.

One way to improve the accuracy of a forecast is to start with base rates. How often do outbreaks become epidemics? What effect do epidemics have on economies or markets? For this latter question, we look to Exhibit 1 to provide a sense of base rates—market returns following major epidemics in recent history.

As depicted, market participants tend to react to such unforeseen outbreaks, but markets tend to recover by the six-month mark. This suggests that sentiment drives early losses, but sustained economic impacts are less than perhaps investors feared at the onset.

Another way to improve forecasts is by admitting what you don’t and can’t know. Medical experts might be able to predict mortality rates etc, but no one can predict how unknowable factors might affect the spread of this or any outbreak. That’s not to mention knowing how fear might affect markets.

So how can we make a reasonable assessment of the potential impact of the coronavirus? As long-term, valuation-driven investors, our concern is any potential impact to businesses’ cash flows. For example, will the collective impact of the outbreak (fewer flights, less trade, loss of productivity, etc.) affect a few businesses, a few industries, or entire markets? That’s the question we’re asking.

Our answer is that, at this stage, we have to assume the outbreak will take a similar path to other recent epidemics, and thus we feel there’s no reason for investors to be alarmed. Note that there’s no “safe” approach for investors — for example, exiting stocks in favor of cash has its own risk, namely crystallizing any losses suffered to sentiment while almost surely missing out on a rebound if the virus were to be contained quickly. So, we want to proceed by assuming what we consider to be the most likely scenario, while taking other possible outcomes into account.

Ultimately, we are very watchful but aren’t taking any action. Across our portfolio range, we may hold exposure to Chinese stocks, emerging markets stocks, emerging markets debt, and companies that sell into China to varying degrees depending on the portfolio mandate. Even so, we are still expecting that these holdings will deliver positive outcomes over the long term, and it would require a clear impact to fundamentals for our view to change.

However, once the facts change, we would expect to change our minds. If we were to see a clear and significant potential impact to investment fundamentals, we would carefully study the situation, conduct rigorous scenario analysis, and try to incorporate the new information into our portfolios. Until then, we remain vigilant.

Don’t Panic Yet

With lives at stake, it would be uncaring to call the coronavirus “noise”. Yet, if we focus on the investor’s perspective, we believe it is not time to act. Moreover, we remain confident in our portfolio holdings because they reflect a solid base of research and resemble a well-reasoned way to invest. We certainly won’t be hitting the panic button and we hope you won’t either.

© Copyright 2020 Morningstar. All rights reserved.

Engage with the entire Blakely Financial team at WWW.BLAKELYFINANCIAL.COM to see what other expert advice we can provide towards your financial well-being.

ROBERT BLAKELY, CFP® is a financial advisor with BLAKELY FINANCIAL, INC. located at 1022 Hutton Ln., Suite 109, High Point, NC 27262. He is the founder and president of Blakely Financial, Inc. celebrating 25 years in business.

Blakely Financial, Inc. is an independent financial planning and investment management firm that provides clarity, insight, and guidance to help our clients attain their financial goals.

Securities and advisory services offered through Commonwealth Financial Network, Member FINRA/SIPC, a Registered Investment Adviser.

Authored by Robert Blakely, CFP®, ChFC, AIF®

Have you made your New Year’s resolutions yet? Chances are, your resolutions revolve around getting more sleep, spending more time with loved ones, eating better and going to the gym every day. But have you resolved to get your finances in check? In a recent survey, 87 percent of Americans said nothing makes them happier or more confident than healthy finances. Can you say that you are content with your financial health and well-being?

Achieving money–related balance and financial wellness isn’t necessarily about investing a set dollar amount or your ability to pay for something expensive without flinching. It’s much broader. It is about getting your entire house in order. It can be as simple as chatting about starting your travel fund, saving $20 a month or whether or not your company offers a 401(k) match. Financial independence affords us the opportunity to live the life that we want. It is about developing a healthy relationship with money and feeling a sense of control over short-term obligations while working toward those long-term goals.

One essential first step towards financial wellness is actively talking about your finances. That is not to say you have to divulge personal details about your savings and debt to your whole group of friends, but choosing a mentor or meeting with a financial advisor to put together an action plan can help.

Planning for financial wellness includes the following steps:

Develop goals and set priorities.

What do you want to accomplish? Where do you want to be? When do you want to be there?

Assess current assets and resources.

Document your financial snapshot currently.  Know where you are starting from.

Identify barriers to reaching your goals.

If you are confused about a particular topic, like the different types of retirement funds offered, ask questions. There are plenty of free resources online to help learn the basics of financial literacy. And that financial advisor you contact will be your best resource to guide you down the path of financial wellness.

Incorporate strategies into your plan.

Commit to small steps to improve your current financial situation. Bring your lunch to work a few days a week; set up an automatic transfer each month to your savings account; forego that expensive cup of coffee each day –small changes each day can make a big difference and build confidence and discipline over time.

Put the plan into action.

Be sure to celebrate the milestones along the way. Those small accomplishments will continue to push you towards success as you gain that financial well-being you so deserve.

Monitor your progress, evaluate where you are and adjust the plan as necessary.

Be flexible and respond to change. When necessary, reset the course which will bring you back to Step 1, and the process continues.  Financial planning is not a one-time event. It is an ever-changing, ongoing journey, providing the framework for achieving short and long-term goals on your quest for financial wellness.

 

Engage with the entire Blakely Financial team at www.blakelyfinancial.com to see what other expert advice we can provide towards your financial well-being.

Robert Blakely, CFP® is a financial advisor with Blakely Financial, Inc. located at 1022 Hutton Ln., Suite 109, High Point, NC 27262. He is the founder and president of Blakely Financial, Inc. celebrating 25 years in business.

Blakely Financial, Inc. is an independent financial planning and investment management firm that provides clarity, insight, and guidance to help our clients attain their financial goals.

Securities and advisory services offered through Commonwealth Financial Network, Member FINRA/SIPC, a Registered Investment Adviser.

Presented by Emily Promise, AIF®, APMA®, CRPC®

There’s no denying the benefits of a college education: the ability to compete in today’s job market, increased earning power, and expanded horizons. But these advantages come at a price. And yet, year after year, thousands of students graduate from college. So, how do they do it?

Many families finance a college education with help from student loans and other types of financial aid such as grants and work-study, private loans, current income, gifts from grandparents, and other creative cost-cutting measures. But savings are the cornerstone of any successful college financing plan.

College costs keep climbing

It’s important to start a college fund as soon as possible, because next to buying a home, a college education might be the biggest purchase you ever make. According to the College Board, for the 2019-2020 school year, the average cost of one year at a four-year public college for in-state students is $26,590, while the average cost for one year at a four-year private college is $53,980. Many private colleges cost substantially more.

Though no one can predict exactly what college might cost in 5, 10, or 15 years, annual price increases in the range of 3% to 5% would certainly be in keeping with historical trends.

This chart can give you an idea of what future costs might be, based on the most recent cost data and an average annual college inflation rate of 5%. (Source: College Board, Trends in College Pricing 2019)

Year                   4-yr public         4-yr private

2019-2020        $26,590            $53,980

2020-2021        $27,920            $56,679

2020-2022        $29,315            $59,513

2022-2023        $30,781            $62,489

2023-2024        $32,320            $65,613

2024-2025        $33,936            $68,894

2025-2026        $35,633            $72,338

2026-2027        $37,414            $75,955

2027-2028        $39,286            $79,753

2028-2029        $41,250            $83,740

Tip:  Even though college costs are high, don’t worry about saving 100% of the total. Many families save only a portion of the projected costs — a good rule of thumb is 50% — and then use this as a “down payment” on the college tab, similar to the down payment on a home.

Focus on your savings

The more you save now, the better off you’ll likely be later. Start with whatever amount you can afford, and add to it over the years with raises, tax refunds, unexpected windfalls, and the like. If you invest regularly over time, you may be surprised at how much you can accumulate in your child’s college fund.

Monthly Investment  5 years       10 years          15 years

$100                            $6,977         $16,388            $29,082

$300                            $20,931       $49,164            $87,246

$500                           $34,885        $81,940            $145,409

Note:  Table assumes an average after-tax return of 6%. This is a hypothetical example of mathematical principals, is used for illustrative purposes only, and does not reflect the actual performance of any investment. Fees, expenses, and taxes are not considered and would reduce the performance shown if they were included. Actual results will vary. All investing involves risk, including the possible loss of principal, and there can be no guarantee that any investing strategy will be successful.

College savings options

You’re ready to start saving, but where should you put your money? It’s smart to consider tax-advantaged strategies whenever possible. Here are some options.

529 plans

529 plans are one of the most popular tax-advantaged college savings options. Contributions accumulate tax deferred and withdrawals are tax free at the federal level if the money is used for qualified education expenses. States may also offer their own tax advantages. (For withdrawals not used for qualified expenses, earnings are subject to income tax and a 10% federal penalty.) 529 plans are open to anyone and lifetime contribution limits are high, typically $350,000 and up (limits vary by state). In 2020, lump sum gifting up to $75,000 is allowed ($150,000 for joint gifts) with no gift tax implications if certain requirements are met.

There are two types of 529 plans: savings plans and prepaid tuition plans. A 529 savings plan is an individual investment account similar to a 401(k) plan where you direct your contributions to one or more of the plan’s investment portfolios. Funds in the account can be used to pay tuition, fees, room and board, books, and supplies at any accredited college in the United States or abroad. Funds can also be used to pay K-12 tuition expenses, up to $10,000 per year. By contrast, the less common 529 prepaid tuition plan allows you to purchase college tuition credits at today’s prices for use in the future at a limited group of colleges that participate in the plan, typically in-state public colleges.

Coverdell ESA

A Coverdell education savings account (ESA) is a tax-advantaged education savings vehicle that lets you contribute up to $2,000 per year for a beneficiary’s K-12 or college expenses. Your contributions grow tax deferred and earnings are tax free at the federal level if the money is used for qualified education expenses. You have complete control over the investments you hold in the account, but there are income restrictions on who can participate, and the $2,000 annual contribution limit isn’t likely to put much of a dent in college expenses.

Custodial account (UTMA/UGMA)

A custodial account allows a minor to hold investment assets in his or her own name with an adult as custodian. All contributions to the account are irrevocable gifts to your child, and assets in the account can be used to pay for college. When your child turns 18 or 21 (depending on state law), he or she will gain control of the account. Earnings and capital gains generated by the account are taxed to your child each year under the “kiddie tax” rules. Under the kiddie tax rules, a child’s unearned income over a certain threshold ($2,200 in 2020) is taxed using the trust and estate tax rates.

Roth IRA

Though technically not a college savings option, some parents use Roth IRAs to save and pay for college. Contributions to a Roth IRA can be withdrawn at any time and are always tax free. For parents age 59½ and older, a withdrawal of earnings is also tax free if the account has been open for at least five years. For parents younger than 59½, a withdrawal of earnings — typically subject to income tax and a 10% premature distribution penalty — is spared the 10% penalty if the withdrawal is used to pay for a child’s college expenses.

A final word on financial aid

Many families rely on some form of financial aid to pay for college, which may include loans, grants, scholarships, and work-study. Financial aid can be based on financial need or on merit. To determine financial need, the federal government and colleges look primarily at your family’s income, but other factors come into play, including your assets and how many children you’ll have in college at the same time.

To get an idea of how much aid your child might be eligible for at a particular college, you can use a net price calculator, which is available on every college website. The bottom line, though, is to beware of too much borrowing. Excessive student loan debt — and parent debt — can negatively affect borrowers for years. The lesson? The more you save now, the less you and your child will need to fund later.

The fees, expenses, and features of 529 plans can vary from state to state. 529 plans involve investment risk, including the possible loss of funds. There is no guarantee that an education-funding goal will be met. In order to be federally tax-free, earnings must be used to pay for qualified education expenses. By investing in a plan outside your state of residence, you may lose any state tax benefits. 529 plans are subject to enrollment, maintenance, and administration/management fees and expenses.

Emily Promise is a financial advisor located at Blakely Financial, Inc., 1022 Hutton Ln., Suite 109, High Point, NC 27262. She offers securities and advisory services as a Registered Representative and Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. She can be reached at (336) 885-2530 or at emily@blakelyfinancial.com.

Commonwealth Financial Network is not responsible for their content and does not guarantee their accuracy or completeness, and they should not be relied upon as such. These materials are general in nature and do not address your specific situation. For your specific investment needs, please discuss your individual circumstances with your representative. Commonwealth does not provide tax or legal advice, and nothing in the accompanying pages should be construed as specific tax or legal advice.

This communication is strictly intended for individuals residing in the state(s) of AK, AZ, AR, CA, CO, FL, GA, IL, IA, MD, MI, MS, NJ, NY, NC, OK, PA, SC, SD, TX, VA, WV and WI. No offers may be made or accepted from any resident outside the specific states referenced.

Prepared by Broadridge Advisor Solutions Copyright 2019