This is what I would do. Step up your contributions to the 529 NOW. If he gets into MIT – and that’s a very big if – have him take out and agree to repay the Federal student loans. You take out a home equity line of credit for the rest. Then, starting second semester of his sophomore year, start evaluating whether and when to sell assets to pay off the HELOC. If you don’t sell assets to pay the HELOC, you’ll pay it back when you sell your primary home and move to the retirement condo, which you will still have.
The best place to “shelter” those assets is in a pension plan (which doesn’t count towards the EFC except in extreme circumstances). Definitely contribute to that before the base year (but not during/after it because any pre-tax contributions reduce your income tax which is deducted in calculating your EFC). The second best place is in primary home equity, which doesn’t count for the FAFSA and has some protection at colleges that use the CSS Profile (and full protection at a handful like Princeton/MIT, you need to look that up or experiment with their NPCs - this was an issue for us and we had to carefully select colleges to apply to because they had very different net costs). The 529 doesn’t help as a shelter except through its intrinsic tax benefits (i.e. no capital gains on qualified expenses).
So you could consider selling the condo (and perhaps some of the stock) and paying off the mortgage on your primary home. That would presumably free up some cash flow to help with college payments as well. However you are giving up future price appreciation on the condo/stock (effectively you are reducing your net leverage). And it won’t help everywhere (a list is given here, but I don’t know if it’s still accurate: http://www.thecollegesolution.com/will-your-home-equity-hurt-financial-aid-chances/).
The most aggressive move with the biggest EFC benefit is to convert some or all of your SEP IRA to a post tax Roth basis this year and/or next (assuming it is pre-tax at the moment), using proceeds from either selling your stock or your condo to pay the taxes due on that. You take a big tax hit doing that now, but you remove a significant amount of assets from consideration. The problem with doing this is that you would otherwise be paying the taxes on the IRA money on withdrawal in retirement, likely at a lower rate than today (especially if the conversion pushes you into a higher tax bracket). And you might still not get as much benefit in college costs as you hope (e.g. If the college doesn’t meet full need), without access to those funds to pay for the college expenses because they are now in the IRA. However a post tax (Roth) IRA does have more flexibility in terms of withdrawals in retirement.
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i guess i'm trying to learn something new by reading this thread, but i dont really understand: why your assets valued at 490K would equal $303K if sold/cashed out.Why would you take that much loss? And, if sold and cashed out and their value is $303K; why wouldnt you use that as your value now? sorry; i’m trying to follow this just for the sake of learning something new, but i dont understand why you’d take a big loss on purpose.
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Yes, therein lies the rub. I wouldn’t want to take that loss…not on the condo, anyway, if there’s a 50% chance I’ll retire in it and someday pass away there. On the stock I might be willing to take the hit, as I’ll have to pay those gains someday anyway if I use those funds.
The reason for the 490K (percieved assets) vs 303.5K (assets if actually used to pay tuition) difference is that:
Colleges ask:
Condo value: 470K
Condo principal remaining: 130K
Stock value: 150K
And they see (470-130)+150 in assets, which is 490K
But the stock costs a lot to sell, because it’s highly appreciated and thus has almost no basis, which is not a factor in EFC.
And the condo costs a lot to sell, because the government wants capital gains, and because investment property owners are required by the IRS to claim depreciation every year and pay the tax savings back at 25% on it per year when they sell, and because the IRS wants to subtract the deprecation from the 200K purchase price when calculating capital gains, and because there will be realtor fees and closing costs.
And so, if I sell both, I have:
470 (condo sale) + 150 (stock sale) - 139K (capital gains [and tax increases due to resulting bracket increases] on stock and on a condo which is considered to have a basis of 104K for tax purposes due to the 96K depreciation taken so far being subtracted from the 200K I actually paid) - 24K (depreciation recapture on 96K) - 23.5K (realtor fees and closing costs) - 130K (mortgage remaining)
This is 303.5K.
Am I off here, somehow?
I thought about the roth conversion, twoin, but then I’m using up a non-reportable asset and not lowering EFC as I consume those (retirement!) funds, and thus I think it works better to put the stock proceeds into a 529 than into paying the taxes on a roth conversion.
@Twoin18 there is a dollar limit per year for contributing to retirement accounts…and it’s a LOT less than $300,000.
I’m going to try this one more time.
Stop. Don’t do anything now. Wait and see IF your kid actually gets accepted to places like MIT and Caltech.
Otherwise, you might be selling off assets that you really want…and your kid might just be attending that state public university (which BTW, might be just just fine).
And again i say…
Where are the proceeds from the sale of condo or stocks going to GO.
You need to spend them before you file a financial aid form. Any amount you still have will STILL be an asset if you still have it.
Oh…and it doesn’t matter whether you have those sales proceeds stuffed in your mattress…or buried in your backyard…or in granny’s bank account. They are still yours.
@BelknapPoint am I missing something here?
No you are correct. But you will have to pay this tax eventually unless you hold on to these assets until you die. That sounds like it might be your intention with the condo, if so probably best not to sell it. But for the stock, it’s presumably something you would sell later to fund retirement. So I would consider selling the stock now, putting what you might need for college in a 529 and potentially using the rest to pay taxes on converting some of your SEP IRA to a Roth.
Separately you might refinance the condo with a bigger loan and use that to pay down the mortgage on your main residence: it is surprising to me that you have more equity in the condo than in your main house anyway. Then you get to shelter some of that equity for colleges like MIT that don’t count primary home equity and potentially have more expenses to set against the rental income. Though if you have a great interest rate on your primary mortgage, this might increase your overall interest bill.
And I’d also add that when valuing the condo you can deduct the closing costs as the value is what you would realize in a sale. Not sure you can make that argument successfully for the capital gains, but you could try. The condo valuation is your estimate, so is inevitably less well defined than the share price on the day you do the FAFSA.
You are both missing the point on the IRA to Roth conversion. You pay the taxes with assets outside the IRA, i.e. the profits on stock sales from the taxable account (or the condo sale). You are not consuming assets in the IRA, in fact this is a way to add much more than the normal income based limit to the after tax value of your retirement account. The taxes on converting $300K would be of order $120K depending on your state and marginal tax rate. That is an asset that simply then disappears from your taxable account when you pay the taxes, because the IRS has your money.
I think this poster needs to see a financial planner. NOT for college purposes…but to find out how all of this affects his retirement planning strategy.
This isn’t the place to get financial advise that is this complicated.
Plus…as noted numerous times…the family contribution is largely based on income. The poster says he has enough income to cover the “income portion” of his family contribution…can pay about $30,000 a year for college. So income is likely in the near $150,000 a year range.
He is trying to make financial projections for college costs a couple of years from now. Plus he wants sell off items he says were really part of his retirement strategy.
Go see a financial planner about your retirement strategy FIRST.
That’s my opinion…but I’m not a financial planning expert. You need to take EVERYTHING to someone in person…who can analyze what your gains and losses REALLY are going to be…and how this will affect your future. My opinion.
Assets are not assessed for financial aid purposes at 100 percent. The percentage will work out to be between 5 and 6 percent. This is part of the reason why massive liquiditation of assets is not great for financial aid purposes: you get rid of a dollar of assets and your EFC only goes down by 6 cents the following year. Or after capital gains show up on your tax return, EFC goes up rather than down (with a time-delay of up to two years down the road).
Moreover, if income or assets get to a certain level (and OP is comfortably off) there is no point in trying to manage your EFC because you won’t qualify for financial aid no matter what you do. At that point, it becomes just “how do I minimize my college expenses” (in-state tuition and/or merit aid hunt) and “how do I minimize my taxes” (there is a new tax law, including a cut in the “kiddie” tax which would apply if OP gifted stock to the kids directly and let them pay their own tuition and capital gains taxes). Selling stock when you are full-pay raises a high EFC even higher, but it doesn’t matter what your EFC is if you do not qualify for any need-based aid.
There are CPAs and financial planners who specialize in FAFSA and Profile. OP seems to be wealthy enough to afford one before making any large transactions.
“if income or assets get to a certain level (and OP is comfortably off) there is no point in trying to manage your EFC because you won’t qualify for financial aid no matter what you do”
This is just not true. For extremely generous schools like MIT, many fairly wealthy (by these standards) self-employed parents can manage their EFC quite successfully. We did that for Princeton and I calculated we would have got about $20K per kid in need based aid, despite being full pay at all lower tier schools. The kids didn’t get in, so we ended up choosing in-state tuition and merit scholarship offers elsewhere.
Definitely speak to a good CPA or attorney specializing in this area. As you have multiple years before the first EFC determination date, there are many strategies that could be employed, including strategic gifting.
If kid 2 is admitted into a $60-70k plus COA college will you be willing to stretch things financially for him/her also? If not, you need to address this with your family now. Not sure if you have additional children which would complicate things further.
@thumper1
Is that dollar limit the limit that is tax deductible? Or the maximum you are permitted to contribute to a retirement account REGARDLESS of whether it is tax deductible? I always wondered about that. I never did contribute more than the stated limits, and the answer to my question is not clear when I google. I’ve been thinking about it because we will be inheriting a fairly large sum, and I thought we’d just dump it all into an IRA all at once. Or a Roth IRA. I don’t care if it’s not all tax deductible.
“Or the maximum you are permitted to contribute to a retirement account REGARDLESS of whether
it is tax deductible?”
the latter.
^^So my plan wont work. Darn.
You cannot dump more than 5.5 or 6.5k/year into an IRA but you may be able to keep maxing out your 401k if your company allows it (usually there is a percentage of your salary limit). Total IRS 401k retirement contribution limit is $55k or 61K/year in 2018.
@brantly As noted above, converting existing pre-tax IRAs to post-tax Roth IRAs does not have any dollar limit. So that’s a good way to feed in excess contributions, usually averaging over a couple of years to avoid bumping yourself to a higher tax bracket. But remember that you pay ordinary income tax on appreciation in a pre-tax IRA and (at least partly) the lower capital gains rate on taxable stock/mutual fund appreciation.
A person under 50, I think, can contribute about $18,000 a year to a pretax IRA or TSA. For over 50, the number is higher.
Self employed folks have a different account, with a higher amount allowed.
Best to check with payroll or human resources or an accountant for your annual limit.
I just re-read the OP. So…you have enough income now…in 2018…but what will your income be in 2020. For the 2022-2023 FAFSA and Profile, you will be using income fro 2020. That means you have TWO more years to even make any decisions about things that will alter your income.
Assets are as of the date of filing the financial aid forms…that 2022-2023 FAFSA won’t be available for filing until October 2022.
Can you, with certainty, know what your income will be in 2020? Do you have any idea what other expenses migh come up that would make a difference in your financial planning.
But most of all, you are talking about some pretty competitive colleges for a kid who hasn’t even stepped into High School yet.
OP, if you have $30k/year to spare on your current income, shove it into a 529. You’ll have saved $120k plus earned interest by 2022. If you continue to have a spare $30k/year during the years your kid is in college, that will be $240k (plus earned interest). Voilà. You’ve paid for college.