This Mistake Could Cost You

Sgt. Joe Friday’s insistence upon facts still makes a lot of sense.*

Benjamin Franklin Uh Oh: Financial Mistakes

What follows might appear to be about college planning, but it isn’t.

Your children likely have already graduated from college. If not, you (like most readers of this publication) can probably afford to send them — which is why I rarely devote much space to college planning issues here.

However, T. Rowe Price’s recent survey on how parents are saving for college is worth talking about, for a reason that should concern you.

Of those parents who are saving for college, according to the survey, only 30% are doing so through 529 plans. Another 40% are using regular bank savings accounts!

That makes no sense at all, because 529 plans let the money grow completely tax-free. Why invest in bank accounts or in stocks, bonds, mutual funds or ETFs — or any other vehicle — when the profits you earn in a 529 plan are tax-free?

Turns out there’s a simple reason why so many parents aren’t using 529 plans. According to the survey, 28% don’t know what a 529 plan is.

You can’t take advantage of something that you don’t know exists.

And it gets worse. Another 40% refrain from investing in 529 plans because of mistaken information. One in four believe that if they invest in a 529 plan, they can’t get the money back. And 15% are afraid that having money in a 529 will reduce their ability to qualify for financial aid.

These folks don’t have their facts straight. Both of those beliefs are wrong.

Money invested in a 529 plan remains available to you at any time, subject to current market values. Profits that are withdrawn but not used for college or other qualified postsecondary education are subject to taxes and a 10% penalty.

And having money in a 529 plan doesn’t impact your ability to qualify for financial aid any more than having money in other accounts does. It’s no worse — and certainly no reason to avoid investing in a 529 plan.

But, remember, I said at the outset that this isn’t about college planning.

Here’s what it’s really about: How certain are you that all the “facts” upon which you base your financial decisions are accurate?

You choose investments. You buy insurance. You have a certain amount of cash in an emergency fund. You contribute a particular amount regularly to your retirement plan at work. Your will makes certain stipulations.

You’ve made all these decisions and taken all these actions based on “facts” — at least on facts as you know them.

But are you sure that your information is accurate?

If it isn’t, then you could unknowingly, inadvertently cost yourself hundreds of thousands of dollars in lost value at retirement or in tax liabilities that you maybe could have avoided — despite your good intentions and best efforts.

Sometimes your “facts” are misleading you simply because they’re out of date.

The last time you looked at an issue, maybe you made the right decision. But have you reviewed that decision lately? Things change — not least of which is tax law.

A client recently told me she was giving $10,000 to her children. When I asked how she chose that amount, she replied, “Because that’s the most I can give due to gift taxes.” Well, that was true from 1997 through 2001, but since then the annual exclusion amount has increased. This year, the limit is $14,000. Thus, she was going to give her children less than she really wanted to because of an out-of-date fact.

She was also unaware of another aspect of the law pertaining to gift taxes: The $14,000 per-person, per-year limit is actually one of two limits. The other limit says you can give $5.43 million over your lifetime (twice that if you’re married) without incurring any gift tax. On this basis, my client (who’s not a multimillionaire) need not be concerned with gift taxes at all.

Looks like 40% of parents are making similar mistakes with their college planning: They’re acting on false assumptions or outdated information — and they could pay dearly for their mistakes.

Please don’t allow this to happen to you. Take the time to verify the facts upon which your financial decisions are based — or hire a financial advisor who can do it for you.

*If you’re not old enough to remember Sgt. Friday, ask your parents. Yeah, you could Google him instead, but you should call your mother.

Originally published in Inside Personal Finance September 2015

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