Case Study Report 4


Funding a 1417Power Program versus saving in a 529 Education Savings Program account

 


Concept

This study will evaluate three programs:

  1. The first analysis will evaluate converting your “equity” from a 529 Education Savings Program as a one-time Lump Sum prepayment in a 1417Power program.
  2. The second analysis will evaluate converting your ongoing 529 Education Savings Program’s monthly deposits to a 1417Power monthly prepayment program.
  3. The third analysis will evaluate converting both your equity and your ongoing 529 Educations Savings Program’s monthly deposits to a 1417Power program.

 

Puropse

The purpose of this report is to summarize the results of an analysis of funding your child in the 1417Power Program versus funding your child’s 529 Education Savings Program account.

SavingforCollege.com reports 2015 average for all 529 plans was 3.09%

Forbes July 18, 2013 issue reported: "Over the past decade the inflation rate for public four-year colleges was 5.2% [annually]". The implication being that 529 program earnings are not keeping up with escalating college costs. Savingforcollege.com reports: "As the custodial parent of a dependent student, your non-retirement investment assets are assessed in determining your child's Expected Family Contribution (EFC). Any 529 accounts under your ownership are counted as parent assets for this purpose.”

The US federal Tax Code allows withdrawal of all amounts paid into a 529 Educational Savings Program (your equity) at any time for any purpose. You are allowed to adjust to zero the amount of your monthly contribution to a 529 Educational Savings Program. Having any savings in a 529 Education Savings account negatively impacts eligibility for need based financial assistance and may have negative impact on some merit based scholarship offerings. By law Roth IRA account value is excluded for assets on the FAFSA application. 529 Educational Savings Accounts are subject to penalty and income tax if they are not used for the specified individual for qualified educational expenses.

A logical interpretation is; a 529 account might not accomplish your objective and could become a tax problem if your child elects a non-college option. It could be a hindrance to receiving financial aid.

 

Background:

Many experts are advising parents to re-evaluate the whole concept of using a 529 program. The table below presents Morningstar, Inc. reported 529 programs' rates of return:

Morningstar Category

529 Average Five-Year Return %

Large Value

-0.87

Large Blend

0.47

Large Growth

1.01

Conservative Allocation

3.71

Moderate Allocation

2.54

Intermediate-Term Bond

4.69

Short-Term Bond

3.44

 

Findings

The table below provides a summary of the cost and total tax exempt Roth IRA account value of the 1417Power program and their 529 Education Savings Account versus the child’s 529 Educational Savings Account value based on not withdrawing any equity or changing their ongoing monthly contribution.

 

Item

Continue the 529 Education Savings account

1417Power Lump Sum Prepayment

1417Power monthly Prepayment

Combining Lump Sum and Monthly Prepayment Programs

Value of Roth IRA account at age 67*

 

$0.00

$924,000 to 1,222,000**

$485,000 to $641,000**

$1,595,000 to $2,110,000**

529 Education Savings Account value at age 18

 

$16,800

 

$8,674.25

 

$11,062.18

 

$2,935.78

* Roth IRA value is based on a mathematical calculation using 11.5% annualized rate of return. 11.5% is the 50-year average S&P500 index annual rate of return it is not a forecast or prediction. Past performance of any investment program is not a predictor of future performance.
** 1417Power offers referral and revenue share credits that increase the participants level and or duration up to a maximum of a 30% increase in participation. This results in approximately a 30% increase in the Roth IRA contribution amount.

Analysis

  1. The family withdraws $5,610 of their equity in the 529 program, leaves the remainder and continues making $50 monthly deposits to the account. The value of the 529 account at age 18 would be $8,674.25 (based on the same 4.69% annual rate of return). By investing the $5,610 as a Lump Sum Prepayment enrollment in 1417Power, the child would be enrolled at the 550 level for 12 months starting after the child turns 14.
  2. The family stops funding the 529 program, and instead, funds a 1417Power Monthly Prepayment Discount Program making $48.75 monthly payments to enroll the child at the 325 level for 12 months starting after the child turns 14.
  3. The family withdraws the $5,610 equity in the 529 program, leaves the remainder and stops funding the 529 program, and instead funds a 1417Power Monthly Prepayment Discount Program making $50.02 monthly payments to enroll the child at the 650 level for 18 months starting after the child turns 14.

 

Conclusion and Recommendation

Converting equity and future monthly payments, or just equity or just future monthly payments from a 529 Educational Savings Program to a 1417Power Program can provide hundreds of thousands of dollars for your child’s retirement versus nothing saved, at no additional “out of pocket” cost to you.

The logical conclusion; it is preferable to have savings in a Roth IRA versus in a 529 Educational Savings Program Account. The analysis strongly recommends moving your 529 Education Saving program account equity and all future payments to a 1417Power Program. In addition to not being counted as an asset for scholarships and financial aid the Roth IRA is exempt from tax forever, even estate tax.