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Need a reason to prepare the FAFSA? Here are 4.

Many have asked whether, given their family’s level of assets and / or income, they should go to the trouble of filling out the Free Application for Federal Student Aid (FAFSA). If you are a high school or college student (or the parent of one) that plans to attend college in the fall of 2021, the short answer is an unqualified “YES, do it now.” I believe that every student’s family should complete the FAFSA. Completing the FAFSA is a family affair–it involves the collection of data on the student as well as the parents or guardian.

Colleges and universities are run like businesses these days. They are competing for certain students and the admissions departments are busy evaluating students to see who gets in and who doesn’t. They use terms like “holistic” or “comprehensive” to describe the selection process. That means that a certain GPA or involvement in extracurricular activities are not the sole minimum requirements. They consider the whole package, including the family’s ability to pay for the education. The FAFSA shows the college your ability to pay.

Even if you think student loans are the work of the devil and you would not, at this moment, ever think of borrowing for college, submit the FAFSA anyway. FAFSA is also used for other forms of financial aid. The U.S. Department of Education awards $120 billion a year in grants, work-study programs and loans.

Here are some other reasons why you should complete the FAFSA:

When the FAFSA is completed, the Expected Family Contribution (EFC) is generated. Colleges determine financial need by subtracting your EFC from the Cost of Attendance (COA) at their school. Bear in mind, that the EFC is an estimate of your family’s ability to pay. Your ability to pay may actually increase or decrease before the child enters school next year. Life sometimes throws curve balls at the best laid plans. Schools can use professional judgement in their awards. When that happens, the first thing a school is likely to ask for is the FAFSA.

The chief reason for completing the FAFSA is to become eligible for Direct Federal Loans. High-income families will not likely qualify for Direct Federal Subsidized Loans, but by completing the FAFSA, they will become eligible for Direct Unsubsidized Federal Loans. The interest rate for undergrads is low enough to consider this source of capital.

Completing the FAFSA, along with the college application, puts the ball in the court of the admissions office. They don’t have to wait until after the FAFSA deadline (which can vary by state and school) to provide a financial aid award letter. The sooner you get the award letter, the sooner you know the net cost of college, and the sooner you can begin the award letter appeal process if the letter is unfavorable. We will deal with appealing award letters in a later blog post.

Because the Direct Federal Loan has an annual and a lifetime limit, it has become very important to project the entire cost of college from matriculation to graduation. Cash flow planning and debt structuring become crucial parts of a family’s financial plan when their student is headed off to college. Direct Federal Loans for undergrads are usually cheaper than the Federal Grad Plus loans. Therefore, sometimes it makes sense to borrow for undergrad education and save resources for graduate or professional school. A plan for repayment should also be developed before the money is borrowed. Because paying for college is likely to be the second largest expense for a family a complete college financial planning package should include a plan to reduce the cost of college, college cost comparisons, debt analysis, student loan repayment, and public loan forgiveness planning.

Federal funds are limited, and many states award their grants on a first-come, first-serve basis. So do it NOW.

Here is what you will need:

  • Social Security numbers for student and parents if student is a dependent
  • Driver’s license number if you have one
  • Tax returns including forms W2 for student and parents if student is dependent
  • Any records of untaxed income.
  • Asset records for cash, checking accounts, investments, real estate, business and farm interests.

Let us show you how to reduce the cost of college. For a free resource called 4 Keys to Cutting College Costs, click here.

Updated October 1, 2020

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Is this a new normal?

Do you call the time BC (before Covid-19) normal? Do you join me in hoping that life can get back to normal soon, but have serious doubts about that? What if this is normal? I believe we need to talk about what we have learned and how we might think about going forward.

7 Things to think about now

  • Ordinarily we financial planners are demonstrating the value of working longer, i.e. postponing retirement. But this month, we have been more engaged with evaluating those clients who are thinking of retiring earlier than originally planned. If you are eligible and have the assets or guaranteed income to retire now, this could be an attractive scenario. Of course, an early retirement nearly always results in less to spend for the rest of one’s life. I know that it might feel scary to even think about, but now would be a great time to determine the true cost of retiring now. Social security benefits factor into that and a Social Security Timing Analysis would be great place to start.
  • Do you find one of the benefits of being quarantined is that you are spending less and saving more? If you are like many we have talked with, your expenses have dropped a lot over the past three months. (I have bought one tank of gas since February and I still have a fair amount of it left.) Perhaps you have some pent up demand to get back out to restaurants or to travel, but several people tell me that they have been surprised to learn what they can do without. That doesn’t bode well for our consumption and debt-based economy, but it could truly be our new normal. Could these past couple of months be a good representation of what retirement spending looks like? You should add in some fun however, just to be safe.
  • Do you need a vacation? Like many of you, I still don’t feel safe getting on an airplane or cruise ship. The opening up of various countries is going to likely be pretty chaotic. Leaving the U.S. might be easy, but getting back in from some of the hot spots around the world could be harder in the coming months. We’ve heard more than one person plot their vacation with a plan to stay within a comfortable drive from home. Popular U.S. destinations could even get to be crowded, so if this is in the cards for you, plan early.
  • Of course, it’s never fun to think about updating your estate plan, but we are in the middle of a life-threatening pandemic. If not now, when? We can help you review your existing plan by mapping the current estate structure into a flowchart. We would then make suggestions for you to discuss with your lawyer if you don’t like the results. That’s all I will say about that.
  • I think you will agree that insurance of various types represents protection. It would be a good idea to review your current policies and to determine if you have the right type and the right amount. I was able to get my auto insurance premium reduced considerably with a revised estimate of how much I think I will drive in the next twelve months. It took about 15 minutes to save 15% and I didn’t have to switch to that popular company to do so.
  • Is it time to re-finance? Consider how much debt is appropriate for your current circumstance. And while you are at it, consider the kind of debt and the interest rate on any debt that you carry. We heard about sub-3% interest rates on home mortgages this week. Prime is 3.25%. Refinancing current debt loads should probably be high on your list. You are going to hear a lot about personal de-leveraging (paying down debt) as we move into the new normal. We see a lot of people switching from 30 year mortgages to 15 year.
  • Tax laws have changed a lot this year as a result of stimulus measures. Required minimum distributions from retirement plans have been waived entirely. If you have already taken your RMD, you can roll it back into the IRA and avoid paying the tax. You should likely consider a ROTH conversion this year. The first two estimated payments for 2020 have been delayed until July 15th, along with the filing deadline of 2019 returns. Student loan payments and interest have been deferred. The treatment of charitable contributions has changed. If any of these provisions could benefit you, a revised tax projection for 2020 and 2021 is in order.

It is so easy to let inertia set in and avoid any consideration of money issues. But as I’ve often said, “Better decisions today yield better outcomes tomorrow.” Your financial plan is your road map and it should be dynamic enough to handle multiple scenarios for casting a best-case, worst-case, and somewhere in the middle. If nothing else, these last three months should have been instructive in thinking about risk tolerance. We are here to help you with any of these things. Reach out with any questions. We are a phone call or ZOOM meeting away.

June 29, 2020

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CARES Act impacts YOU

As most of you know the CARES Act was signed into law on Friday, March 27.  I attended an extensive Continuing Education session led by one of the nation’s experts and I spent time on Saturday learning more about how this new benefits package might help our clients.

Four provisions for individuals stand out:

Filing deadlines were clarified

  • Tax filing and, perhaps more importantly payments for returns originally due on April 15th and the tax estimates due on April 15th and June 15th have been postponed to July 15th. You do not have to be sick or quarantined for this to apply. It applies to everybody. Furthermore, if you owe taxes, the period between April 15th and July 15th will be disregarded for calculating interest and penalties.  Those will begin to accrue on July 16th if you owe money and haven’t paid by then. You can still extend filing your tax return to October 15th by filing an appropriate extension on or before July 15th.  Contributions to IRAs for 2019 can also be made up until July 15th .

No decision or action is needed on your part in order to take advantage of this postponement.

Checks in the mail

  • It seems the most widely publicized provision of CARES is the “2020 Recovery Rebate for individuals.”  The intent of Congress is to drop money into bank accounts as soon as possible. They will do it electronically if you have had direct deposit of government benefits such as Social Security or a bank link for payment of taxes.  Obviously, the hope is that it will be a relief to families that are hurting from the effects of the virus and that it will flow back into the economy.

To calculate the amount, the IRS will be looking at your 2019 tax return (2018 if you haven’t yet filed 2019).  If you didn’t file a return in either year, but had Social Security income, they will look to your SSA-1099 and determine eligibility from that.  Based on their determination, they will send you $1,200 if you are single or $2,400 if you are married filing jointly, plus $500 for each child under the age of 17.  The rebate is not considered taxable income for 2020 but there are limits to amount of rebate. 

The rebate phases out at certain levels of adjusted gross income. If AGI exceeds $75,000 ($150,000 for joint filers and $112,500 for heads of household), your rebate is reduced by 5% of the amounts over those thresholds. 

It’s important to know that any payment you receive is an advance payment of a credit that will be calculated by your tax preparer and will appear on your 2020 tax return. In other words, the actual credit is based on 2020 income, not 2019 or 2018.  Plan accordingly. We anticipate that we will need to update any previously prepared tax projects as soon as the software catches up with these new laws and certainly before year-end.

Decision needed: No decision or action is needed to receive the money. But remember that there are five things, and only five things, to do with every dollar that comes to you, including this one.  Decide now, even before you get it, whether you are going to use it pay taxes, pay on debt, give it away, save it, or spend it.

Changes to retirement plans

  • Required Minimum Distributions (RMDs) from retirement plans have been waived for 2020, including those who have a required beginning date in 2020.  Additional notices from the IRS have clarified the rules relating to the waiver. For example, you are now able to rollover any RMDs taken this year as long as you do it before August 31. Ordinarily you are only allowed to do one such rollover per year and it must be done within 60 days of the distribution. Both those requirements are waived. If you have a question about that, call us.  
  • Early distributions from retirement plans (typically those made before age 59½) have previously been met with a 10% penalty in addition to the income taxes on the distribution.  Now, individuals can take up to $100,000 coronavirus-related early distribution (typically under 59½) from retirement plans without paying the 10% penalty.  These are available for those diagnosed or whose spouse is diagnosed with COVID-19, or those who experience adverse financial consequences as a result of COVID-19. The distribution will still be treated as income but will be recognized and taxed over 3 years rather than all at once in 2020. The amount distributed can be re-contributed over a three-year period as well. There are exemptions from the withholding rules. Before taking the distribution, consult your tax advisor. We can also assist you with this decision.
  • Loans from retirement plans may become necessary for many people if cash gets really tight due to lack of work. In the past, loans have been limited to 50% of the account balance or $50,000. This has been increased to $100,000 limit and 100% of the account balance. This applies to loans made within 180 days of enactment.

Decision or Action: Strongly consider the impact of taking money out of your retirement account either by loan or distribution.  It is possible that you will miss the recovery of your 401k balance if you take the money out while the market is down.  Have your advisor run new retirement projections to determine the impact.  Weigh all the alternatives.

Charitable contributions deduction for non-itemizers

Charitable organizations need our help now more than ever.  CARES modified the charitable contribution deduction.  First, it provides non-itemizers the ability to deduct up to $300 of contributions from AGI.

For those who do itemize, percentage limitations are eliminated for this year.  The prior limit for contributions was 60% of Adjusted Gross Income (AGI), now it’s up to 100% of AGI; excess contributions can still be carried forward and used in future years. This means that your taxable income can be reduced to zero for 2020 by carefully planning your major contributions to match your AGI. This technique is not available for contributions made to donor-advised funds.

Decision or action: Make a contribution to your favorite charities now for at least $300. They likely need it now more than ever.  Remember to take the deduction next year, even if you don’t itemize.     

Watch for a complete post on the ability to deduct 100% of AGI this year.  It is also a way to make a tax-free conversion of IRA to a ROTH-IRA.   Coming up soon.         

Student loans

As a result of the pandemic, Congress has halted all federal student loan interest accumulation and payment requirements through September 30. Borrowers may continue to make payments during this time, but no financial penalties will apply if no payments are made. If you are in a loan-forgiveness plan (e.g. those working in a not-for-profit organization), these months will count toward loan forgiveness plan as if the payments had been made.

Decision or action: If you have a loan that is not a federal loan, you should reach out to your lender.

As I said at the beginning of this, each member of our firm is hard at work serving clients during this crisis. But we are here for you.   All of us are likely to face challenging decisions in the days and weeks ahead. Reach out via email, call, text or ZOOM.

This post was updated for new information on June 27, 2020.