Alpine Bank's Financial News · Vol.3 · No.12 · December 2016
College Savings Alternatives
With the cost of college on an endless upward trajectory, the prospect of saving enough by the time your child reaches college can feel overwhelming—particularly if college is still a decade or more away.
For the 2015/2016 school year, the annual cost of tuition for in-state, public four-year schools averaged $19,548, per the College Board. Meanwhile, the annual cost of most private schools is more than double the cost of state schools, with the average cost rising to $43,921 for the 2015/2016 year. Considering that the 10-year historical rate of increase for college tuition is about 5 percent—higher than the rate of inflation—the cost of a four-year college degree in a decade is astonishing. Given this reality, it is important to start saving as early as possible and to do so with the best rate of return and in the most tax-efficient way.
529 college savings plans allow the earnings generated by money invested to grow on a tax-free basis, and allow that money to be withdrawn tax-free, as long as it is used for qualifying college expenses. While 529 plans are the most common college savings vehicle, there are other options to be aware of as well, particularly if saving for a private school education.
Beyond 529 plans, the Uniform Gift to Minors Act (UGMA) allows assets, such as securities, to be placed into a custodial account. Unlike 529 plans, assets placed into these accounts do not have to be used solely for education, these assets can be used for the benefit of the minor, and withdrawn at any time. Like 529 plans, there is a tax benefit to these accounts. If the beneficiary of a UGMA account is under the age of 19—or 23 if a student—the first $1,000 of earnings generated through these accounts is tax-free, the second $1,000 is subject to tax at the minor’s tax rate and any amount generated over $2,000 is subject to the tax rate of their parents.
The benefit of setting up a UGMA account is that there is no need to hire an attorney to do so. However, as soon as the beneficiary of these accounts reaches the age of maturity, the assets in the account become the property of the child and the donor cannot control how they are used.
Please contact Alpine Bank Wealth Management to learn how we can help you meet your financial goals and invest for the future.
Products of Alpine Bank's Wealth Management service are not FDIC insured, may lose value, and are not bank guaranteed.
Gena Cooper joined Alpine Bank in 2000 as a client relationship officer with the Wealth Management group in Glenwood Springs. Her experience includes business development and client management, employee benefit organization and administration, and management of the administrative staff of the department. She now manages individual client relationships throughout western Colorado and beyond, and oversees Alpine Bank’s employee stock ownership plan and the company 401(k) plan. Gena earned a Bachelor of Science at the University of Colorado, Boulder and an MBA from San Diego State University. Her career history also includes experience in the insurance and business supply industries. She shares office time between the Wealth Management location in Grand Junction and the Alpine Bank Delta location.
Financial Literacy for Teens and Beyond
Earned vs. Unearned Income
There are two types of income: earned or unearned. Understanding earned income is easier than understanding unearned income. Earned income is what you earn through work. It comes in the form of salaries, wages, commissions and tips from your place of employment. Another source of earned income comes from a business you own, which is self-employment.
Unearned income is earnings from sources other than employment such as gifts, interest earned from savings accounts, money made on investing in stocks and bonds, checks from government programs such as Social Security, and even gambling winnings.
Sometimes people earn income by receiving money from others. Landlords may rent their space or land to others. The money landlords collect is called rent, and rent is considered unearned income.
Your bank pays you for depositing your money in an account. These payments the bank makes is called interest. Interest income is considered unearned income.
Sometimes people purchase investments such as stocks. Some stocks pay dividends. A dividend is a sum of money paid to shareholders of a stock from its earnings. The dividends paid are considered unearned income.
Capital gains are considered unearned income. Capital gains is income that results when the selling price of an asset is greater than the original purchase price. An example is the amount by which the selling price of a stock exceeds its cost.
Social Security retirement benefits, Medicare and Medicaid are all examples of government transfer payments. Government transfer payments are money that the government transfers to citizens for reasons other than employment or providing the government with goods and services. These are also examples of unearned income.
The difference between earned income and unearned income can have more to do with how the income is taxed by the government than how hard you work to earn that money. People pay different rates (percentages) of income tax, depending on their overall income level, on earned income compared to unearned income.
(Source: Kirsten Petre McDaniel, I am Financial Knowledge. www.youthentity.org)
Building a Better Budget
Whether you’re shopping for the holidays, saving for a vacation or a house, the most important thing about staying within your budget is to have a budget. Creating a budget is something everyone should do. Here are a few simple steps to set a budget.
The first step is to track spending: determine your monthly bills and routine expenses. This will help you decide how much money you can realistically save each month. Documenting your regular bills on a spreadsheet is also a good way to see if there are unnecessary expenses that can be eliminated to save more. Remember, though, it’s important not to cut back too aggressively on small luxuries, such as occasionally eating out and entertainment.
The simplest way to determine your monthly spending is to use one of the many apps available to help track spending. These apps keep track of purchases and expenses; they also can be used to warn you when your account drops to a certain balance. Many apps will even analyze spending patterns to make it easier to determine where you could cut back. Once you know your monthly spending, consider setting up an automatic transfer to your savings account, as you are less likely to overspend if money isn’t readily accessible.
Similarly, you may also want to consider shifting spending away from using credit cards and, instead, use cash since credit cards can make it easy to exceed your budget, especially if you don’t check your balances. Relying on cash for non-budgeted expenses will help you think twice about overspending. As you spend your budgeted cash, you’ll see the actual dollars decrease, unlike credit cards, where it’s easy to overlook how quickly multiple small purchases add up in a big way—until you receive a jaw-dropping statement at the end of the month.
Traveling? Avoid ATM Fees
Traveling this holiday season? Avoid ATM fees coast to coast! As an Alpine Bank customer, you have access to over 43,000 surcharge-free Allpoint Network® ATMs, you can find one nearby at alpinebank.com or on the Allpoint app.
Green Your Resolutions
As the holiday season winds down, we focus on our ambitions for the new year. If you’re thinking of going green, below are some New Year’s resolution ideas to get you started:
- Drive less
- Bring your own water bottle
- Use reusable shopping bags
- Take shorter showers
- Cut your paper usage
- Recycle Compost
Even if you chose just one thing to focus on this year, you can make a huge impact on the environment. Here’s to a green New Year!
Holiday Bank Closures
Our branches will be closed Monday, December 26 and Monday, January 2 in observance of Christmas and New Year’s Day. The last business day of 2016 will be Friday, December 30. Any items that need to be processed in the 2016 tax year should be transacted on or before December 30, 2016.