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Funding college education
Survey the scene to understand your options
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College costs are rising
Four years of tuition, room, and board
2030
2012
Public college (in state)
Private college
$71,440
$158,072
$171,928
$380,419
Figures include tuition, fees, room, and board. Estimated growth rate of 5.0%.
Sources: The College Board, Trends in College Pricing, 2012.
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College debt is also rising
57% of full-time undergraduates use loans
to help finance their college costs.
Among graduates from private universities
who borrow money, the average debt is
$29,900.
The median starting salary for a graduate
with a bachelor’s degree is $55,700.
Sources: Trends in Student Aid, 2012; Education Pays, 2010 (The College Board),
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A 529 college savings plan
has many benefits
• Tax advantages: Account grows tax
free, and there are no taxes on funds
withdrawn for qualified higher
education expenses
• Control: Investor controls account
assets after the beneficiary reaches
legal age
• Flexibility: Anyone can contribute —
parents, grandparents, other family
members, friends
Do you have
existing custodial
(UGMA/UTMA)
accounts?
Converting a custodial
account to a 529
can help you benefit
from tax advantages
while increasing a
child’s eligibility for
financial aid.
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Estate planning
Grandparent uses Putnam 529 for AmericaSM to lower estate tax
Contribution to 529 plans*
Grandparents
$700,000
$140,000
$140,000
$140,000
$140,000
$140,000
Ω
Ω
Ω
Ω
Ω
Ω
* Married couples filing jointly may contribute up to $140,000 per beneficiary. Individuals may contribute up to $70,000. Contributions are generally treated
as gifts to the beneficiary for federal gift tax purposes and are subject to annual federal gift tax exclusion amount ($14,000 for 2013). Contributor may
elect to treat contribution in excess of that amount (up to $70,000 for 2013) as pro-rated over 5 years. Election is made by filing a federal gift tax return.
While contributions are generally excludable from contributor’s gross estate, if electing contributor dies during 5-year period, amounts allocable to years
after death are includible in contributor’s gross estate. Consult your tax advisor for more information.
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Minimizing taxes
Consider how to best allocate your resources
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Taxes increased in 2013
Tax item
2012
2013
Ordinary income
35%
43.4%
Dividends
15%
23.8%
Capital gains
15%
23.8%
Payroll tax
4.2%
6.2%
No
Yes
Income phaseouts of itemized
deductions and personal exemptions?
Tax rates reflect highest marginal rate and incorporate additional taxes related to the health-care reform law. Health-care-related taxes include
a surtax of 3.8% on net investment income and an additional 0.9% payroll tax affecting single filers with income in excess of $200,000, and joint
filers with income in excess of $250,000. Highest marginal tax rate on income, capital gains, and dividends apply to tax payers with taxable
income above $400,000 ($450,000 for couples).
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Will taxes increase even more?
Annual U.S. Federal budget surplus/deficit, 2000–2012 ($B)
$500
$0
-$500
-$1,000
20
12
20
11
20
10
9
20
0
8
20
0
20
0
7
6
20
0
5
20
0
4
20
0
3
20
0
2
20
0
1
20
0
20
0
0
-$1,500
Source: Congressional Budget Office, Monthly Budget Review, September 2012.
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The aging of America will
further strain the system
Total U.S. population age 65+
40.3 million
Today
88.5 million
2050
Source: U.S. Census Bureau, Facts for Features, May 2012.
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New health-care taxes
take effect in 2013
• Increase in the individual portion of the Medicare
payroll tax on wages from 1.45% to 2.35%
• New Medicare investment income tax of 3.8%
– Will affect interest, dividends, capital gains,
rental income
– Distributions from retirement accounts are excluded
– Interest from municipal bonds are not affected
• Targeted at individuals with more than $200K
income (couples with $250K income)
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Be aware of the AMT
Will you owe the AMT?
Your income
Chance you will
owe AMT
$100K – $200K
2%
$200K – $500K
48%
$500K – $1M
78%
You may owe the
AMT if you
• Claim children as
exemptions
• Live in an area with high
income or property taxes
• Claim miscellaneous
itemized deductions
Source: Urban-Brookings Tax Policy Center, September 2012 estimates.
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Tips for avoiding or
minimizing the AMT
•
•
•
•
Select municipal bonds wisely
Proceed with caution before exercising stock options
Assess the impact of large capital gains
Defer certain tax deductions like local property taxes
if you are going to owe AMT
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Taxes on traditional
retirement plans
Income
for expenses
Federal
income
taxes
A dollar inside a traditional (pretax)
retirement savings account may only
provide 60¢ of income in retirement
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Consider the benefits
of a Roth IRA
• Tax-free income
in retirement
• Heirs receive assets free from
income taxes
• No required distributions
in retirement
• Remember, beginning in 2010
everyone can convert to a Roth
Few benefits
Some benefits
Consider
Strongly
consider
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Planning for income in retirement
and transferring wealth
The decisions you make today impact the
shape your retirement takes tomorrow
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Longevity comes at a cost
Amount needed to maintain purchasing power:
• 30 years
$287,174
• $50,000 income
$162,169
$90,568
2%
4%
6%
Inflation rate
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The end of Social Security?
Worker-to-beneficiary ratio has fallen dramatically
• If nothing changes
• Potential solutions
– Raise wage base
– Decrease or delay benefits
– Pre-fund benefits through personal,
voluntary savings accounts
6
Workers per beneficiary
– Beginning in 2010, benefits owed
exceeded taxes collected
– The trust fund will be exhausted
in 2033
5.1
5
4
2.8
2.1
3
2
1
0
1960
Current
2030
Sources: SSA 2011 Annual Report.
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Create an income plan
Early in your retirement
Pension
income
Part/full-time
work
Life
insurance
Immediate
annuity
Long-term-care insurance
Later in retirement
Social
Security
IRA
withdrawals
Real estate
401(k)
withdrawals
Investments are subject to market risk, including possible loss of principle.
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Choose the right
withdrawal rate
How long would your money have lasted?
50
Years
40
30
20
10
0
3%
4%
will last
will last
50 years
33 years
5%
will last
years
20
6%
will last
years
16
7%
will last
years
13
8%
will last
years
12
9%
will last
years
11
10%
will last
years
10
Percentage of your portfolio’s original balance withdrawn each year
This example assumes a 95% probability rate. These hypothetical illustrations are based on rolling historical time period analysis and do not account for the
effect of taxes, nor do they represent the performance of any Putnam fund or product, which will fluctuate. These illustrations use the historical rolling periods
from 1926 to 2012 of stocks (as represented by an S&P 500 composite), bonds (as represented by a 20-year long-term government bond (50%) and a 20year corporate bond (50%)), and cash (U.S. 30-day T-bills) to determine how long a portfolio would have lasted given various withdrawal rates. A one-year
rolling average is used to calculate performance of the 20-year bonds. Past performance is not a guarantee of future results. The S&P 500 Index is an
unmanaged index of common stock performance. You cannot invest directly in an index.
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Watch your asset allocation
How long would your money have lasted?
The information below shows how various asset allocations affect a portfolio’s expected longevity.
It assumes that 5% of the original account balance is withdrawn each year and that withdrawals
were increased each year to account for inflation.
PORTFOLIO TYPE
ALLOCATION
20 YEARS
30 YEARS
CONSERVATIVE
20% stocks
50% bonds
30% cash
89%
27%
3%
BALANCED
60% stocks
30% bonds
10% cash
96%
76%
54%
GROWTH
80% stocks
20% bonds
0% cash
96%
79%
69%
80%–100% probability
60%–79% probability
40 YEARS
0–59% probability
This example assumed a 95% probability rate. These hypothetical illustrations are based on rolling historical time period analysis and do not account for the
effect of taxes, nor do they represent the performance of any Putnam fund or product, which will fluctuate. These illustrations use the historical rolling periods
from 1926 to 2012 of stocks (as represented by an S&P 500 composite), bonds (as represented by a 20-year long-term government bond (50%) and a 20year corporate bond (50%)), and cash (U.S. 30-day T-bills) to determine how long a portfolio would have lasted given various withdrawal rates. A one-year
rolling average is used to calculate performance of the 20-year bonds. Past performance is not a guarantee of future results. The S&P 500 Index is an
unmanaged index of common stock performance. You cannot invest directly in an index.
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Pay attention to order
Type of income
Taxability
May be partially taxable as
Social Security
ordinary income
Pension income
Taxed as ordinary income
IRA and 401(k) distributions Ordinary income rates
Dividend income
23.8% rate
Long-term capital gains
23.8% rate
Liquidation of investment
Not subject to taxation
principal
This is not intended as tax advice. Please consult your independent tax advisor regarding tax ramifications.
Dividend and capital gains rates reflect highest marginal tax rate (20%) plus the 3.8% net investment income surtax.
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Stretching an IRA to create
generations of wealth
IRA owner’s wife dies at age 70, ten years
after the IRA was created and before taking
RMDs. Their 46-year old son begins
receiving annual payments based on his life
expectancy. He names his wife as his
beneficiary. Value of IRA: $200,000.
29 years later, the son dies. His
wife continues the established
distribution schedule. She may
not treat the IRA as her own
and no rollover is available.
The IRA is depleted,
having generated over
$3 million in income.
First year
Year 10
Year 20
Year 30
Year 39
$12,019
$24,506
$54,566
$124,329
$270,526
Annual Required Minimum Distributions in selected years
Income is based upon an initial investment of $200,000 and cumulative annual distributions for 39 years. This hypothetical illustration assumes an 8%
annualized return (8.30% effective return) and that distributions are kept to the required minimum. It does not represent the performance of any Putnam fund
or investment or take into account the effect of any fees or taxes. Investors should consider various factors that can affect their decision, such as possible
changes to tax laws and the impact of inflation and other risks, including periods of market volatility when investment return and principal value may fluctuate
with market conditions. The Stretch IRA feature is designed for investors who will not need the money in the account for their own retirement needs.
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Consider a bucket approach
Short-term income
bucket
Meet immediate cash flow
needs, emergency fund, etc.
•
•
•
•
•
Cash
CDs/money market
Short-term bonds
Immediate annuities
Social Security/pension income
• Wages
Mid-term income
bucket
Mix of growth and income,
replenish short-term, guard
against market volatility
•
•
•
•
Bonds
Deferred annuities
Absolute return funds
Asset allocation funds,
balanced funds
Long-term income
bucket
Inflation hedge, longevity
• Growth stocks/funds
• Real estate
• Commodities
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Do you need an estate plan?
• Do you have children who are minors?
• Are all of your assets owned jointly with your spouse?
• Are most of your assets in real estate,
a business, or a retirement plan?
• Do you have a durable power of attorney?
• Do you have a living will/health-care proxy?
• Do you own property in another state?
• Do you have children from a prior marriage?
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Stick to your plan: Important
documents for staying in control
•
•
•
•
Durable power of attorney
Health-care proxy
Will
Revocable and irrevocable trusts
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What are the next steps?
•
•
•
•
Consider transferring existing custodial accounts to a 529
Fund a 529 to remove assets from your estate
Talk to your tax professional on how to minimize AMT
Use a Roth IRA to create tax-free income in retirement
and avoid required distributions
• Consolidate retirement assets and develop an income plan
• Review legal documents like wills and trusts
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Putnam 529 for America is sponsored by the State of Nevada, acting through the Trustees of the
College Savings Plans of Nevada and the Nevada College Savings Trust Fund. Anyone may invest in
the plan and use the proceeds to attend school in any state. Before investing, consider whether
your state’s plan or that of your beneficiary offers state tax and other benefits not
available through Putnam 529 for America. If you withdraw money for something other than
qualified higher education expenses, you will owe federal income tax and may face a 10% federal tax
penalty on earnings. Consult your tax advisor.
You should carefully consider the investment objectives, risks, charges, and expenses
of the plan before investing. Ask your financial representative or call Putnam at
1-877-PUTNAM529 for an offering statement containing this and other information
for Putnam 529 for America, and read it carefully before investing.
Putnam Retail Management, principal underwriter and distributor Putnam Investment
Management, investment manager.
Investors should carefully consider the investment objectives, risks, charges, and expenses of a fund
before investing. For a prospectus containing this and other information for any Putnam fund or
product, call your financial representative or call Putnam at 1-800-225-1581. Please read the
prospectus carefully before investing.
This information is not meant as tax or legal advice. Please consult your legal or tax advisor before
making any decisions. Shares of mutual funds are not deposits or obligations of, or guaranteed or
endorsed by, any financial institution; are not insured by the Federal Deposit Insurance Corporation
(FDIC), the Federal Reserve Board, or any other agency; and involve risk, including the possible loss
of the principal amount invested.
Putnam Retail Management
putnam.com
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