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 Post subject: Re: $50,000 bonus for an 18 year old - what to do??
PostPosted: Wed Jan 09, 2013 4:40 pm 

Joined: Mon Jan 07, 2013 2:03 pm
Posts: 2
Three other people died in the accident, and all medical bills have been paid in full. My idea with the Roth was contributing while his tax liability is essentially 0, letting it grow tax free until retirement, and having a nice start to a nest egg.


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 Post subject: Re: $50,000 bonus for an 18 year old - what to do??
PostPosted: Wed Jan 09, 2013 5:50 pm 

Joined: Fri May 04, 2007 8:14 pm
Posts: 1820
aaronsmith1234 wrote:
Three other people died in the accident, and all medical bills have been paid in full. My idea with the Roth was contributing while his tax liability is essentially 0, letting it grow tax free until retirement, and having a nice start to a nest egg.

It's actually a nice idea but as previously mentioned, that money doesn't qualify for a Roth (or any other kind of) IRA. There have been alternative suggestions in this thread that you might want to consider. They're quite sound.


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 Post subject: Re: $50,000 bonus for an 18 year old - what to do??
PostPosted: Wed Jan 09, 2013 6:50 pm 

Joined: Fri Apr 27, 2012 1:08 am
Posts: 35
Question...are funds in a 529 account weighted more heavily when applying for financial aid, than funds in a Roth IRA? If so...I'd put as much in a Roth IRA as I legally could (must have earned income, etc. etc.). Even if you have no intention whatsoever for using those funds for retirement. You can withdraw the PRINCIPAL amount penalty-free. Put in $10,000, you can withdraw $10,000. Hey, if he has earned income from last year and this year...and if the new Roth IRA limits are $5,500...that's a total of $10,500 he could possibly put into a Roth IRA. And while most of us consider a Roth IRA as consisting of stocks, funds, etc., it can be a wide range of things (from real estate to savings accounts). Since he's looking to use the money in the near future, put it in a savings account, or something that has virtually no risk (and likely a very poor interest rate to boot). So that $10,500 turns into $12,000 by the time he's ready to use it, and he pulls out the full $10,500 (the principal amount). He still has $1,500 in a Roth IRA, not great but also better than nothing. And if having the funds in a Roth IRA helped him to better qualify for financial aid, so much the better (seriously though, this is murky territory that I haven't dealt with for many, many years...do your own research on how money in varying accounts affects financial aid).

Oh, to reiterate the Roth IRA eligibility...you certainly CAN use that money to fund a Roth IRA, but only if you had enough earned income (and meet other eligibility). I.e. if you earned $6,000 last year, spent it all on bills...and your grandparents gifted you $5,000 to put in a Roth IRA, that's perfectly legal. The issue is if you had say, $1,000 in earned income last year, and your grandparents gifted you $5,000 to put in a Roth IRA...can't do it; your earned income was only $1,000, and you can't put more in a Roth IRA than you earned...$1,000 is the max that could be put in a Roth IRA for that year.


Last edited by josetann on Thu Jan 10, 2013 12:37 pm, edited 1 time in total.

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 Post subject: Re: $50,000 bonus for an 18 year old - what to do??
PostPosted: Wed Jan 09, 2013 10:56 pm 

Joined: Sun May 29, 2011 4:50 am
Posts: 170
aaronsmith1234 wrote:
Three other people died in the accident, and all medical bills have been paid in full.


Wow that's pretty awful.


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 Post subject: Re: $50,000 bonus for an 18 year old - what to do??
PostPosted: Thu Jan 10, 2013 8:13 am 

Joined: Fri May 04, 2012 2:23 pm
Posts: 810
josetann wrote:
Question...are funds in a 529 account weighted more heavily when applying for financial aid, than funds in a Roth IRA? If so...I'd put as much in a Roth IRA as I legally could (must have earned income, etc. etc.). Even if you have no intention whatsoever for using those funds for retirement. You can withdraw the PRINCIPAL amount penalty-free. Put in $10,000, you can withdraw $10,000. Hey, if he has earned income from last year and this year...and if the new Roth IRA limits are $10,500...that's a total of $21,000 he could possibly put into a Roth IRA. And while most of us consider a Roth IRA as consisting of stocks, funds, etc., it can be a wide range of things (from real estate to savings accounts). Since he's looking to use the money in the near future, put it in a savings account, or something that has virtually no risk (and likely a very poor interest rate to boot). So that $21,000 turns into $23,000 by the time he's ready to use it, and he pulls out the full $21,000 (the principal amount). He still has $2,000 in a Roth IRA, not great but also better than nothing. And if having the funds in a Roth IRA helped him to better qualify for financial aid, so much the better (seriously though, this is murky territory that I haven't dealt with for many, many years...do your own research on how money in varying accounts affects financial aid).

Oh, to reiterate the Roth IRA eligibility...you certainly CAN use that money to fund a Roth IRA, but only if you had enough earned income (and meet other eligibility). I.e. if you earned $12,000 last year, spent it all on bills...and your grandparents gifted you $10,500 to put in a Roth IRA, that's perfectly legal. The issue is if you had say, $1,000 in earned income last year, and your grandparents gifted you $10,500 to put in a Roth IRA...can't do it; your earned income was only $1,000, and you can't put more in a Roth IRA than you earned...$1,000 is the max that could be put in a Roth IRA for that year.


As far as federal rules goes, 529's do boost the EFC, thus lowering the amount of aid one is available for. Of course, the school can then go in and say, "they have a 529 and most of the bills are taken care of, so we will delve this aid out to others."

The Roth IRA or any type of retirement account is not seen as assets that are able to pay for a college education. If you withdraw from an IRA, it will be regarded as income for future years.

Last, the OP's BIL would need at least $5k income for 2012 and $5.5k income for 2013 to do the entire $10.5k for both years. Not other combination will get you there.

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"If you only have 1 year to live, move to Penn...as it will seem like an eternity."


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 Post subject: Re: $50,000 bonus for an 18 year old - what to do??
PostPosted: Thu Jan 10, 2013 9:31 am 

Joined: Fri Sep 12, 2008 12:29 pm
Posts: 1606
Location: Seattle, WA
Bichon Frise wrote:
As far as federal rules goes, 529's do boost the EFC, thus lowering the amount of aid one is available for. Of course, the school can then go in and say, "they have a 529 and most of the bills are taken care of, so we will delve this aid out to others."


529's do count as an asset of the student (or parent or grandparent), however, they are treated no worse than any other asset. So it doesn't hurt vs. just keeping the money in cash or whatnot.

Bichon Frise wrote:
The Roth IRA or any type of retirement account is not seen as assets that are able to pay for a college education. If you withdraw from an IRA, it will be regarded as income for future years.


But removal of contributions from a Roth IRA doesn't count, right?

Bichon Frise wrote:
Last, the OP's BIL would need at least $5k income for 2012 and $5.5k income for 2013 to do the entire $10.5k for both years. Not other combination will get you there.


True - although keep in mind that it's gross income, not net (aka take home).


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 Post subject: Re: $50,000 bonus for an 18 year old - what to do??
PostPosted: Thu Jan 10, 2013 9:48 am 

Joined: Fri May 04, 2012 2:23 pm
Posts: 810
stannius wrote:
529's do count as an asset of the student (or parent or grandparent), however, they are treated no worse than any other asset. So it doesn't hurt vs. just keeping the money in cash or whatnot.


Not quite true. There are 2 things: 1) how the federal gubimint calcs EFC and 2) how the school views it. #1 529's do impact one's EFC. But, it is a small percentage (~5%) opposed to a cash savings account being ~20%. The higher the EFC, the lower your fin aid pkg will be. #2 Just b/c you have a low EFC, doesn't mean the school won't take your 529's into account when deciding how much fin aid to delve out. So, some schools will totally ignore it, or other schools will give you no fin aid if you have saved enough to cover 4 years. Not only does it vary school to school, it can vary student to student within a school.

stannius wrote:
But removal of contributions from a Roth IRA doesn't count, right?


I suspect it could. Since all distributions from all IRA's need be recorded "above the line". You also have 1099's reflecting the distributions. It's a front page issue on the 1040. Whether this is caught, I have no idea. Roth's weren't big back in the day when I worked at the fin aid office.

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Bichon Frise

"If you only have 1 year to live, move to Penn...as it will seem like an eternity."


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 Post subject: Re: $50,000 bonus for an 18 year old - what to do??
PostPosted: Thu Jan 10, 2013 12:42 pm 

Joined: Fri Apr 27, 2012 1:08 am
Posts: 35
Bichon Frise wrote:
The Roth IRA or any type of retirement account is not seen as assets that are able to pay for a college education. If you withdraw from an IRA, it will be regarded as income for future years.


I thought it might be something like that.

Bichon Frise wrote:
Last, the OP's BIL would need at least $5k income for 2012 and $5.5k income for 2013 to do the entire $10.5k for both years. Not other combination will get you there.


Another egg-on-face moment...my numbers originally were off due to me being married (though I should have been quoting $11,000 instead of $10,500...). Fixed my post so the numbers make a bit more sense now. $5,000 past years, $5,500 going forward, per person (a married couple can double that).


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 Post subject: Re: $50,000 bonus for an 18 year old - what to do??
PostPosted: Thu Jan 10, 2013 1:21 pm 

Joined: Fri Sep 12, 2008 12:29 pm
Posts: 1606
Location: Seattle, WA
Bichon Frise wrote:
Not quite true. There are 2 things: 1) how the federal gubimint calcs EFC and 2) how the school views it. #1 529's do impact one's EFC. But, it is a small percentage (~5%) opposed to a cash savings account being ~20%. The higher the EFC, the lower your fin aid pkg will be. #2 Just b/c you have a low EFC, doesn't mean the school won't take your 529's into account when deciding how much fin aid to delve out. So, some schools will totally ignore it, or other schools will give you no fin aid if you have saved enough to cover 4 years. Not only does it vary school to school, it can vary student to student within a school.


I don't think that's true? Of course I am sure you know more about it than I do. But my understanding is,
  • 529 owned by the student is treated the same as any account owned by the student, and gets counted 20% towards the EFC.
  • 529 owned by a parent is treated the same as any account owned by the parent, and gets counted about 6% towards the EFC.
  • 529 owned by a grandparent is treated the same as any account owned by the grandparent, and gets counted 0% towards the EFC.
It doesn't matter if the student is the beneficiary of the 529, it's still owned by the parent or grandparent, respectively.

This is for federal calculations only; of course the school can do almost anything it wants. But still, are you really saying that a 529 could get treated *worse* than a normal savings account? (For purposes of EFC. Of course there are ways in which it is worse/restricted, i.e. it has to be used for college expenses or you pay a penalty taking it out)

It doesn't matter that much for OPBIL, since either way (529 or normal savings account) the money is in OPBIL's name and counts 20%.


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 Post subject: Re: $50,000 bonus for an 18 year old - what to do??
PostPosted: Thu Jan 10, 2013 1:28 pm 

Joined: Fri May 04, 2012 2:23 pm
Posts: 810
josetann wrote:

Another egg-on-face moment...my numbers originally were off due to me being married (though I should have been quoting $11,000 instead of $10,500...). Fixed my post so the numbers make a bit more sense now. $5,000 past years, $5,500 going forward, per person (a married couple can double that).


Just to be accurate (and nit picky at the same time) - the "I" in IRA stands for Individual. While married couples may look at the individual contribution amount "times 2," they are still individual accounts in one person's name. Also, depending on filing status, a married couple may or may not be able to each contribute the full amount available to the other filing options. Those married, filing separately come to mind.

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Bichon Frise

"If you only have 1 year to live, move to Penn...as it will seem like an eternity."


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 Post subject: Re: $50,000 bonus for an 18 year old - what to do??
PostPosted: Thu Jan 10, 2013 2:25 pm 

Joined: Mon Feb 04, 2008 7:35 am
Posts: 1148
Location: Maryland
What is EFC?

blah blah blah


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 Post subject: Re: $50,000 bonus for an 18 year old - what to do??
PostPosted: Thu Jan 10, 2013 3:53 pm 

Joined: Fri May 04, 2012 2:23 pm
Posts: 810
stannius wrote:
  • 529 owned by the student is treated the same as any account owned by the student, and gets counted 20% towards the EFC.
  • 529 owned by a parent is treated the same as any account owned by the parent, and gets counted about 6% towards the EFC.
  • 529 owned by a grandparent is treated the same as any account owned by the grandparent, and gets counted 0% towards the EFC.
It doesn't matter if the student is the beneficiary of the 529, it's still owned by the parent or grandparent, respectively.


I think this is somewhat accurate compared to what I stated. I do believe, any 529 for a dependent student, whether owned by the parent or student, is tallied up at the lower percentage.

stannius wrote:
This is for federal calculations only; of course the school can do almost anything it wants. But still, are you really saying that a 529 could get treated *worse* than a normal savings account? (For purposes of EFC. Of course there are ways in which it is worse/restricted, i.e. it has to be used for college expenses or you pay a penalty taking it out)

It doesn't matter that much for OPBIL, since either way (529 or normal savings account) the money is in OPBIL's name and counts 20%.


I don't think I was saying that all. I was trying to say it gets favorable treatment over other assets in the EFC calculation (lower EFC than if it was cash). Which is sort of true, depending on who has the cash (student or parents)

peachy wrote:
What is EFC?

blah blah blah


http://lmgtfy.com/?q=efc

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Bichon Frise

"If you only have 1 year to live, move to Penn...as it will seem like an eternity."


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 Post subject: Re: $50,000 bonus for an 18 year old - what to do??
PostPosted: Thu Jan 10, 2013 5:02 pm 

Joined: Fri Sep 12, 2008 12:29 pm
Posts: 1606
Location: Seattle, WA
Bichon Frise wrote:
I don't think I was saying that all. I was trying to say it gets favorable treatment over other assets in the EFC calculation (lower EFC than if it was cash). Which is sort of true, depending on who has the cash (student or parents)


I didn't think you would be saying that, which is why I was confused.

However, I am about 82% sure that there is such a thing as a 529 that is both owned by and benefits the student. And that such a 529 would could as a student asset and get counted at the 20$ level. I have read more than one article on 529's that warned against that mistake.


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 Post subject: Re: $50,000 bonus for an 18 year old - what to do??
PostPosted: Fri Jan 11, 2013 9:00 am 

Joined: Fri May 04, 2012 2:23 pm
Posts: 810
stannius wrote:
Bichon Frise wrote:
I don't think I was saying that all. I was trying to say it gets favorable treatment over other assets in the EFC calculation (lower EFC than if it was cash). Which is sort of true, depending on who has the cash (student or parents)


I didn't think you would be saying that, which is why I was confused.

However, I am about 82% sure that there is such a thing as a 529 that is both owned by and benefits the student. And that such a 529 would could as a student asset and get counted at the 20$ level. I have read more than one article on 529's that warned against that mistake.


I think it depends what EFC calculation is being used.

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"If you only have 1 year to live, move to Penn...as it will seem like an eternity."


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