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Retirement Savings

Retirement Savings

 - Introduction
 - Types of Tax Incentives
 - Maximize Company
    Savings Plans
 - Automatic Savings
 - Contribution Limits
 - Types of Retirement
 - Small Business &
    Self-Employed Plans
 - Asset Allocation
 - Educational Savings




Educational Savings Accounts

Coverdell Education Savings Accounts (Educational IRAs) are trust/custodial accounts set up specifically to pay for educational expenses for a designated beneficiary under the age of 18, or for a special needs person. There are strict limits on income; 2006 contributions are capped at $2,000 per beneficiary. These accounts are allowed to grow tax-free. Withdrawals are also tax-free when used to pay qualifying education expenses, such as tuition, fees, books and supplies, as well as room and board. Unused amounts are treated as non-qualifying distributions and taxable to the beneficiary. The taxable amount represents that portion of the account that accumulated from the tax-free earnings; it’s treated as ordinary income and subject to a 10% penalty. There are, however, tax-free rollover provisions for the beneficiary’s family members under 30 years old. Unused account balances must be distributed within 30 days after the beneficiary’s 30th birthday or death.

If the beneficiary (student) is eligible for financial aid, then balances in this or other custodial accounts will most likely reduce his/her chances of getting financial aid. If a parent owns the account, up to 5.6% of its value will be used in the federal financial aid formula.  

529 Plans are state-operated prepaid tuition programs and college saving accounts. This is the rich men’s piggy bank, used to fund their children’s education. There are many benefits; here are just a few. 1) Parents maintain control of the assets. 2) Contribution limits are usually $250,000 and up. 3) There are no income or net worth limits. 4) Plan contributions are not considered part of your estate for federal tax purposes. 5) Future tuition costs at some schools are paid at today’s prices. 6) Contributions are made with after-tax dollars. 7) Earnings are exempt from federal (and certain state) taxes, as are withdrawals that are used to pay qualified education expenses. 8) Under the federal financial aid formula, 529 savings accounts are treated assets of the parents; as such, only 5.6% (or less) of its value would be available for college costs. Private universities, however, may have different rules.  

Student assets, assessed in the financial aid formula in 2006 at 35%, will be reduced to 20% in the 2007-2008 school year.

Taxed deferred retirement and savings accounts are a benefit that every citizen should take advantage of.


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