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Why You Should Enroll In A 529 Plan For Your MBA

03.09.2019 by admin // 2 Comments

529 plan for MBA, 529 for MBA, 529 plan for yourself for grad school

I knew about 529 college savings plans but always thought it was a way to save money in order to send your children to college in the future. It wasn’t until I was in grad school when I learned that 529 plans can be used to help pay for your MBA. I learned how 529 plan contributions grow tax free as gains aren’t taxed and that there are tax benefits for 529 plan contributions. At the time, the tax benefits for 529 plan contributions were almost $500/ year in state income taxes in Illinois through the 529 plan contribution tax deduction. Enrolling in a 529 plan for your MBA will help you save money to pay for your MBA degree and avoid student loans.

What Is A 529 Plan for MBA?

A 529 plan for MBA is the same exact plan as a 529 college savings plan. It is a tax-advantaged savings plan to encourage savings for future education investments. They are legally known as “qualified tuition plans” and are sponsored by states, state agencies and educational institutions. All 50 states sponsor at least one 529 plan. There are two types of 529 plans: education savings plans and prepaid tuition plans. Education savings plans let a saver open up an account to save for a beneficiary’s future qualified higher education expenses. That beneficiary can be yourself or someone else. Prepaid tuition plans let you pre-pay all or parts of the costs of an in-state public college education that can also be converted for use at private and out-of-state colleges.

529 Plan Investment Options

Each 529 plan offers multiple investment options. It’s up to you to decide which option or options are best for you based on your risk tolerance and your time horizon for using the money. As part of this selection process, it’s also important to look at the fees for each investment option. Fees do differ by investment.

529 Plan Qualified Expenses

Typically, the first thought that comes to mind is tuition, but the qualified expenses are actually broader than that. You can use the funds in your 529 account to cover a variety of education expenses including tuition, fees, books and a computer. The funds in your 529 account can be used at any accredited institution.

529 Tax Benefits

529 plans are funded with after tax dollars but money earned on the investments in a 529 plan grow tax free and you do not pay any taxes when you take money out to pay for qualified expenses, similar to a Roth IRA. Additionally, many states offer tax deductions or other benefits on the contributions you make to a 529 plan. Over 30 states offer tax benefits for contributing to 529 plans which are outlined here. Benefits vary by state so be sure to research what your state offers.

529 Plan for MBA Personal Experience

I live in Illinois and got my MBA at a college in Illinois. I enrolled in the Illinois 529 plan (education savings plan) through Bright Start. Illinois in 2019 has a flat state income tax of 4.95%. Single filers can deduct up to $10,000 a year. This means they expect to save up to $495 / year in state taxes. Joint filers can deduct up to $20,000 / year. This means that they can expect to save up to $990 / year in state taxes. My part time MBA spanned 4 calendar years. I made the full contribution I was allowed to deduct for 3 years. Each time used it to help fund tuition the following calendar year.

I usually aligned my 529 contributions to getting my bonus or selling my ESPP shares. Since I could deduct up to $10,000 a year I would contribute that amount. I made my 529 contribution all at once. You can also set up automatic investments from your bank and possibly with your payroll so you have smaller, continuous contributions throughout the year. By contributing $10,000 / year I saved almost $1,500 in state taxes. When I received my tax refund check I put it directly toward my next tuition bill. I also made some money on the investments and I wasn’t taxed on the gains. I found the whole process very easy with the ability to do everything online. It only taking a few days for the funds to clear when I needed to use the funds for my tuition bill.

529 Plan For MBA Additional Resources

Each state has certain restrictions about this deduction. Be sure to learn about what your state offers and what the restrictions are. By pure chance, in hindsight I learned I picked one of the best 529s offered but it is best to do your research first! I found a blog post by Smart Money Mamas very helpful which goes into great detail how to choose the best 529 plan for yourself or your family.

Are you enrolled in a 529 plan for your MBA or a 529 plan for yourself for grad school? How did you decide which plan to enroll in?

529 for MBA, 529 plan for yourself for grad school

The Ultimate Guide To Employee Stock Purchase Plan (ESPP)

01.27.2019 by admin // Leave a Comment

Why You Should Enroll in an employee stock purchase plan

Why do you care about Employee Stock Purchase Plans (ESPP)? If you enroll in the employee stock purchase plan offered by your company you can make more money! ESPP is a benefit offered by some publicly traded companies to their employees. ESPP is the ability to purchase company stock through payroll deductions at a discounted rate.

The effort required is minimal and requires enrolling in ESPP and selling the shares to realize gains (or losses). You have a guaranteed return if you sell the day you receive the shares. If you decide to hold the shares for longer, and the shares increase in value, it will help you accumulate wealth. Companies can offer a maximum discount of 15% on company shares. With current savings accounts interest rates at best at 1.5% APY, and average stock returns at 5-7% a year, but not guaranteed, this is a great deal.

If you’re considering enrolling in ESPP here are the terms you should know, the benefits of ESPP and approximately how much extra income you may be able to make.

Employee Stock Purchase Plan Terms To Know

ESPP Enrollment Period: defined set of dates where you can sign up to participate and select the % election amount. If you miss this enrollment period you will have to wait for the next enrollment period (either 6 months or 1 year later depending on the terms)
ESPP Purchase Period: Timeframe in which company shares are purchased on your behalf through payroll deductions. There may be two purchase periods a year, one beginning Jan 1^st and ending on June 30^th, with the second starting July 1^st and ending Dec 31^st. You do not have access to the money you’ve contributed during this time.
ESPP Purchase Price: Usually, the purchase price is the price of the stock on the last day of the offering period, with the discounted rate applied. In the example above, it would be the ending stock price on June 30^th and December 31^st.
ESPP Holding Period: You can sell your ESPP shares at any time, even the same day you get the shares. However, in order for the sale to be taxed as a capital gain it must be considered a qualifying disposition.
ESPP Qualifying Disposition: A qualifying disposition refers to a sale, transfer or exchange of stock that qualifies for favorable tax treatment. ESPP falls within this definition. To be a qualifying disposition, the employee must sell their position at least one year after exercising the stock or two years after the beginning of the ESPP offering period. As long as you hold your ESPP shares for this time period you are taxed at a capital gains rate. If you sell prior to this period, it is considered a disqualifying disposition. A disqualifying disposition is taxed at the income tax rate.

Employee Stock Purchase Plan IRS Limits

The IRS imposes a limit of a maximum market value of $25,000 per year. However, companies can decide to impose lower limits. That means if your company grants you shares at a 15% discount, the max you can contribute is $21,250. The purchase discount also tops out at 15%, but your company could choose to offer less than that as well. Every plan can vary so be sure to look into the details around what plan your company offers.

Employee Stock Purchase Plan Tax Rules

The stock discount price (up to 15%) is considered additional compensation and taxed as ordinary income. If you sell that day, it is disqualifying and will be taxed as a short term gain / ordinary income. If you hold shares for at least 2 years from the first day of the offering period and at least one year from the purchase date, the additional income is considered a “qualifying dispositioned” and will be taxed as a long-term capital gain (15% tax rate for most taxpayers).

Additional Income Earned with Employee Stock Purchase Plan

The tables below offer a guide to how much additional income you can make after taxes if you sell that day per year. If you decide to hold onto the stock for the time period outlined below, your taxes will be 15% (for most taxpayers) for the discounted amount + any gains you made while holding the stock. Remember, it is always possible for the stock to lose value.

Additional income you can make from participating in an employee stock purchase plan by tax bracket when you sell the same day you get the ESPP shares for single tax filers — *1% assumes average (mean) income of tax bracket
**Assumes all income would have been taxed at the rate of that bracket

It’s hardest to maximize the program when you make less money, but that’s when this is actually the most valuable! When your tax rate is only 22%, you could make almost $2,500 after taxes. If you’re in the highest tax bracket you make only $2,000 after taxes. The first purchase period is always the toughest. You’re used to getting that money in your paychecks every pay period. After the first purchase period is done, if you sell all your shares immediately you have everything you’ve invested from the past 6 months plus the additional income you made as soon as the sale settles!

If you work for a public company, check out your internal benefits page and see if this is one of the benefits your company offers!

Max Out Your 401(k) Contributions in 2021

01.08.2018 by admin // 4 Comments

401k contribution limits 2020 - picture of computer with 401k graphs and contribution amounts

A 401(k) plan is a retirement savings plan sponsored by employers that allows employees to contribute to their retirement savings pre-tax. If you can, you should always max out your 401(k) plan. The 401(k) contribution limit for 2021 is $19,500, unchanged from 2020. 401(k) plans have many benefits including tax benefits, employee company match and accelerating funding your retirement. Maxing out your 401(k) every year, or contributing up to the contribution limit, enables you to take full advantage of all of these benefits. Even if you’re not sure how you’ll be able to afford contributing $19,500 to your 401(k) this year there are steps you can take throughout the year to get closer to this goal.

When to Plan Your 401(k) Contributions

The beginning of the year is the best time to plan 401(k) contributions for the year. This way, you can spread out your contributions evenly throughout the year. The amount taken out per paycheck will be consistent that way. However, if you do hit the maximum amount early you’ll get a nice surprise of extra money in your take home pay at the end of the year as well as extra money taken out for taxes. If you wait until later in the year to plan your 401(k) contributions it may not be financially feasible. You’ll have to contribute more per paycheck to hit the max, or you may not earn enough the rest of the year to hit $19,500 in contributions. Don’t forget to check your 401(k) in the summer to ensure your contributions are on track to max out your 401(k) this year.

Make Sure To Always Get the Company 401(k) Match

Does your company automatically enroll you into their 401(k) plan? If not, make sure you sign up! Most companies that offer a 401(k) plan also offer a company match. At minimum, you should always contribute enough to your 401(k) to get the full company match. This is free money! The 401(k) company match is one of the top benefits of a 401(k) plan.

It’s hard when you first graduate college and starting from scratch- all the fees with the first apartment, first furniture buys, starting those student loan payments, etc. You may also have to save for bigger purchases like a house down payment and a car. It’s easy to feel like there is just no money to save for retirement.

Instead, look at how you are spending your money and find a way to contribute enough so you get the full company 401(k) match. After that, there are strategies to increase your contributions without feeling like you now have less money to spend over time.

Increase Your 401(k) Contributions During Raises and Promotions

Every time you get a raise or promotion you could afford to increase your 401(k) contribution more. Most companies have an annual raise cycle and if you’ve set your 401(k) contributions to a percentage of your salary your contributions will automatically increase when you get your raise. This time of year is also a great time to increase the percentage you contribute. You have already learned to live on your previous salary, do you desperately need that increase to buy more stuff? If you get a $5,000 raise you can increase your contributions by $1,000 a year and still have $4,000 of your raise. You won’t miss that last $1,000 while you’re adjusting to the extra $4,000 you are now earning every year. Using the table below, you can take the annual amount and divide it by the amount of paychecks per year to get the amount withheld out of each paycheck.

Increase Your 401(k) Contributions When You Finish Paying A Big Expense

Whether it’s putting down your first down payment, or paying off your last student loan, you now have one less expense. Reallocate what you would have spend on that expense to your 401(k) contributions. You won’t miss having the “extra” money because you didn’t have it before.

Enroll In The 401(k) Annual Increase Program

Some plans offer an annual increase program where you can establish annual increases. It depends on the plan, but at least some Fidelity plans allow 401(k) contributions to increase 1% or more each year automatically. You have the ability to align it to pay increases as well and then just set it and forget it. Automating 401(k) contribution increases is the easiest way to increase your contributions. If you end up needing more cash every paycheck you can always go online to your 401(k) plan provider website and reduce your contributions.

401(k) Tax Benefits

You know contributions to a 401(k) plan is pre-tax, but have you ever done the math as to how much you’re saving in taxes by contributing to your 401(k)? You may think you can’t contribute anymore but don’t forget you’ll also save money on taxes.

If you contribute $19,500 to your 401(k) in 2020 here are the tax savings you can expect with the current federal tax brackets. If you are single and making $62,825 a year (mean salary in the 22% tax bracket) you’ll avoid $4,290 in taxes. When you’re making $62,825 a year as a single filer for every 1% additional of your salary you contribute to your 401(k) you’ll avoid $138 in taxes.

401k contribution limits in 2020 - How much in taxes you avoid by tax bracket as a single filer by contributing the maximum amount to 401k in 2020 — 2020 Tax Savings for Increased 401(k) Contributions for Single Filers
*Assumes average income of tax bracket
**Assumes all income would have been taxed at the rate of that bracket

401k contribution limits in 2020 - How much in taxes you avoid by tax bracket as a married filing jointly filer by contributing the maximum amount to 401k in 2020 — 2020 Tax Savings for Increased 401(k) Contributions for Married Filing Jointly Filers
*Assumes average income of tax bracket
**Assumes all income would have been taxed at the rate of that bracket

401k Benefits Include Compound Interest

Last, but not least, if you need a little more motivation to max out your 401(k) don’t forget about compound interest. The hardest time to contribute to your 401(k) is when you’re young, as you have a lot of big expenses on the horizon and likely the lowest income you’ll ever have. But, thanks to compounding, the more you save early on the less you’ll need to save later. Take this example from the team at J.P. Morgan Asset Management in their 2014 “Guide to Retirement.” Here, they share how much money you can make from investing $5,000 a year over time depending on when you start.

Compounding interest graph showing how much you will make from investing $50,000 over time. — Example of Compounding from J.P. Morgan Asset Management 2014 Guide to Retirement

Don’t forget, a 401(k) is one of several options to save for retirement. After you’ve hit your employee match in your 401(k) plan, start contributing to your Roth IRA account before maxing out your 401(k) in order to fully optimize the tax benefits in your retirement savings strategy.