Broker Check

College Daze

March 08, 2017

Ballooning college costs

The average cost of tuition and fees for the 2016–2017 school year is $33,480 at private colleges, and $9,650 for state residents at public colleges. It averages $24,930 for out-of-state residents attending public universities, according to data provided by the College Board.

Of course, that doesn’t include an array of other expenses that push costs higher. The average cost of books can add another $1,200 per year, and room and board can run just over $10,000 (College Board). And we haven’t even discussed what the meal plan will run!

“If you look at the long-term trend, (college tuition) has been rising almost six percent above the rate of inflation,” said Ray Franke, a professor of education at the University of Massachusetts, Boston. “That's brought immense pressure from the media and general public, asking whether college is still worth it” (CNBC).

Many experts still believe a college degree is the ticket to boosting long-term income. While the soaring costs can be discouraging, savings plans have blossomed, enabling disciplined savers to sock away cash for their kids to go off to college.

So let’s look at some of the more well-known savings plans that are available.

Before I get started, let me say that for many of you the proliferation of savings plans has brought about quite a lot of confusion. And that's without not even taking into account the wide array of investments that are available. My goal isn’t to cover the various plans in painstaking detail, but to touch on these in a high-level way.

I really do understand the confusion, as I’ve had numerous conversations on this topic with many of you over the years.

With some time and consultation, I have found that what initially appeared to be an insurmountable burden for many of you has been lifted. Of course, college saving often requires a disciplined approach, but just having a plan is half the battle.

As I always say, my door is open. I’m just a phone call or email away. If you have questions about how to save for college or you want to be sure you are on track, let’s talk.

Custodial accounts

That said, let’s jump in and start with the custodial account, more formally known as the Uniform Gift to Minors Act (UGMA) or Uniform Transfer to Minors Act (UTMA).

Anyone can make a deposit into a custodial account, but it is managed by an adult, usually a parent or guardian. Any deposits are irrevocable gifts to the child and must be used for his or her benefit.

Generally speaking, the first $1,050 in earnings is considered tax-free and the next $1,050 is taxed at the child’s rate. Unearned income over $2,100 is taxed at the child’s parents’ tax rate.  The kiddie tax rule now applies to children under age 19 and full-time college students under the age of 24 (Forbes, T. Rowe Price).

Please be aware, however, that various states require the funds to be turned over to the child when he or she reaches the age of majority, usually 18 – 21. However, there is no guarantee the child will want to spend any “windfall” on college. The siren song of Europe or a new car might be more attractive.

Also, for the purposes of financial aid, custodial accounts are considered assets of the student and could impact financial aid eligibility.

Coverdell Education Savings Account

Next, let’s look at the Coverdell Education Savings Account (ESA–IRS Pub 970). It’s available to you if your modified adjusted gross income is less than $110,000 ($220,000 if filing a joint return).

These plans offer tax-free investment growth and tax-free withdrawals when the funds are spent on qualified education expenses. In addition to college expenses, certain K-12 purchases are also considered qualified when using a Coverdell ESA.

Contributions, however, are limited to $2,000 annually.

529 college savings plans

This brings us to 529 college savings plans, a plan the Washington Post called the best way to save for college. But one many don’t use.

The plan allows for various investments in stocks and bonds and is usually operated by the state or a college. As with a Roth IRA account, earnings are not subject to federal taxes when withdrawn, though you must use the cash for “qualified education” expenses, such as tuition, room and board, or books.

Contributions cannot exceed the amount necessary to provide for the qualified education expenses of the beneficiary (IRS 529 Q&A), which puts the limit at a much higher level than an ESA. Anyone can contribute, not just the beneficiary’s parents. But anything in excess of $14,000 will be subject to the gift tax.

Moreover, 34 states and the District of Columbia give the account owner a full or partial state income tax deduction for their contributions to the state's 529 plan ( 

While a 529 can impact financial aid, it is not as onerous as funds in a custodial account. But be careful when it comes to fees.

Maybe it’s the confusing nature of the 529 that causes folks to bypass this savings vehicle. If that's the case for you, I can’t this enough –please feel free to reach out with your questions. That is what I’m here for.

Prepaid tuition plans

Prepaid tuition plans may be an alternative to the 529 plan. These plans, administered by individual states and typically used for in-state school tuition, allow parents to pay for tuition credits in advance at a predetermined price. These plans retain the same tax benefits as 529 plans, but they are not subject to swings in the stock market.

However, if a child goes to an out-of-state school, you may not realize the full value of the plan.

If the family moves out of state but the child attends a participating school, the family can still use the plan but may be held responsible for the difference between out-of-state and in-state tuition, depending on the plan (

Before enrolling in a prepaid plan, it is important to research a plan’s security and whether it’s backed by a guarantee. Also inquire as to what happens if the plan starts to lose money.

Roth IRA account

Lastly, one more plan you might consider is a Roth IRA account. Yes, that’s right–a Roth IRA.

Like a 529 plan, the Roth IRA also allows for distributions free of federal income tax if the withdrawal is used to pay qualified higher education expenses, and such withdrawals are exempt from the 10% early distribution penalty (

Moreover, the Roth in the parent’s name isn’t counted as an asset against the child for financial aid. However, it may reduce or eliminate aid in future years if the distribution is taken in the child’s first year of college.

At the fear of sounding redundant, let me say it one more time.  I’m always happy to answer any questions or provide a more comprehensive review.

As always, when it comes to tax matters, feel free to consult with your tax advisor.

Table 1: Key Index Returns




3-year* %

Dow Jones Industrial Average




NASDAQ Composite




S&P 500 Index




Russell 2000 Index




MSCI World ex-USA**




MSCI Emerging Markets**




Bloomberg Barclays US Aggregate Bond TR




Source: Wall Street Journal,, CNBC, Morningstar

MTD returns: January 31, 2017—February 28, 2017

YTD returns: December 30, 2016—February 28, 2017


**in US dollars

Awash in a pool of politics 

The market narrative that has dominated the news cycle since November has been the election. Some of you were pleased with the outcome and some were disappointed.

As I’ve said before, it’s not my job to pass judgment over President Trump. It’s my job to discuss and monitor market-moving events, both political and economic, through the bipartisan lens of the market. I’m just monitoring how investors sift through and react to external stimuli. Today, that external stimulus is a President who has been proposing policies generally deemed friendly by markets.

Fed Chief Janet Yellen summed it up well during her semiannual testimony before two Congressional committees when she was asked what she believes is driving stocks higher. “I think market participants likely are anticipating shifts in fiscal policy (tax cuts, infrastructure spending) that will stimulate (economic) growth and perhaps raise earnings,” Yellen opined.

One theme I’ve harped on in recent years has been the fact that earnings and the expectation of where earnings are going are the biggest influence over the long-term direction of stocks. And investors who are pricing in faster economic growth are also pricing in an acceleration in profit growth.

The devil is in the details…or is it?

As the month came to a close, markets were clamoring for specifics on fiscal policy, not just generalities. There were concerns that we might see a selloff if Trump’s February 28th address to Congress didn’t offer details.

Well, it was light on detailed-policy prescriptions, but markets didn’t seem to care because we saw a different Trump, a “Presidential” Trump. It almost reminded me of his conciliatory victory speech in the early morning hours after the election. And shares reacted in a similar fashion, soaring to new highs on March 1.

Trump’s controversial positions and the division we are seeing in the nation just don’t seem to matter as long as the economy continues to expand and earnings come in at a respectable pace. We’ll eventually see volatility return. But forecasters who have been dismissing the rally have been finding themselves on the losing side.

Why? It’s simple. Predicting short-term market moves is next to impossible. It’s why we have always taken a long-term view and recommend investment plans we believe will help you reach your financial goals with the least amount of risk.

The Buffett bet

The difficulty in market timing might best be explained by a $1-million-dollar bet between legendary investor Warren Buffett and Protégé Partners.

Buffett detailed in his latest letter to shareholders how he wagered that between 2007 and 2017 a simple S&P 500 fund could outperform investment gurus who actively hope to time and outperform the index.

Proceeds would go to the winner’s chosen charity.

With one year left, the S&P 500 fund is up 85%, according to Buffett, while the five hedge funds chosen by Protégé are up just 22% on average. Put simply, fund managers who are heavily incented to outperform failed miserably.

For most of you, I would never recommend you put all of your investments in stocks. It’s simply too aggressive, could subject you to unreasonable risk and sleepless nights in a severe downturn, and doesn’t provide the necessary level of income many of you need.

But this is a vivid, real-life lesson that illustrates how even the smartest money managers, employing complex mathematical models, struggle to successfully time the market.

I hope you’ve found this review to be informative and educational.

If you have any questions or would like to discuss any matters, please feel free to give my office a call at 781 236 0802 or email