10-9 9010 StrategyLegendary investor Warren Buffett invented the “90/10" investing strategy for the investment of retirement savings. The method involves deploying 90% of one's investment capital into interest-bearing instruments which present a lower degree of investment risk while allocating the remaining 10% of money towards higher-risk investments. This system is a relatively conservative investment strategy which aims to generate higher yields on the overall portfolio. Following this method, proponents profess the potential losses will typically be limited to the 10% invested in the high-risk investments. However, much depends on the quality of the interest-bearing bonds purchased. A typical application of the 90/10 strategy involves the use of short-term Treasury Bills for the 90%, fixed-income component of the portfolio. Investment of the remaining 10% is in higher risk securities such as equity, index options or warrants. For example, an investor with a US$100,000 portfolio electing to employ a 90/10 strategy, might invest $90,000 in one-year Treasury Bills which yield 4% per annum. The remaining $10,000 goes either towards equities or stocks listed in the S&P 500 or to an index fund. Of course, the “90/10” rule is merely a suggested benchmark, which may be easily modified to reflect a given investor’s tolerance to investment risk. Investors with higher risk tolerance levels can adjust greater equity portions to the equation. For instance, an investor who sits at the upper end of the risk spectrum may adopt a 70/30 or even 60/40 split model. The only requirement is that the investor earmarks the more substantial portion of the portfolio funds for safer investments, such as shorter-term bonds which have an A- or better rating. To calculate the returns on such a portfolio, the investor must multiply the allocation by the return and then add those results. Using the example above, if the S&P 500 returns 10% at the end of one year, the calculation is (0.90 x 4% + 0.10 x 10%) resulting in a 4.6% return. However, if the S&P 500 declines by 10%, the overall return on the portfolio after one year would be 2.6% using the calculation (0.90 x 4% + 0.10 x -10%). Buffet not only advocates for the 90/10 plan in theory, but he actively puts this principle into practice as reported by Fortune Magazine. Most notably, as a trust and estate planning directive for his wife, as laid out in his will. He once explained,
20-9 90-Day Letter90-Day Letter is an IRS notice stating that there was a discrepancy or error within an individual's taxes and they will be assessed unless petitioned. The taxpayer has 90 days to respond, otherwise the audit deficiencies will result in reassessment. Also known as a Notice of Deficiency. Once you receive your notice, you have 90 days (150 days if the notice is addressed to a person who is outside the country) from the date of the notice to file a petition with the Tax Court, if you want to challenge the tax the IRS proposed, according to the agency. These notices are usually sent after or audit, in the case of people who fail to file a tax return or who have unreported income. If you don't dispute the accuracy of the assessment the Internal Revenue Service has made you won’t need to amend your tax return unless you have additional income, expenses, or credits that you want to report. In that case, all you need to do is sign Form 5564, Notice of Deficiency – Waver and return it to the IRS, with a check attached to avoid additional interest and or penalties. If you agree with the findings but have additional income, expenses, or credits to claim, it will be necessary to amend your original tax return with Form 1040-X. You can do this through your online tax prep service or your tax professional or fill out the form yourself. It gets more complicated if you disagree with the IRS findings. If you think the IRS notice is incorrect, incomplete or otherwise mistaken, you can contact them with additional information that will shed light on the case. You have 90 days from the date of the notice to dispute the claim. You can ask the Tax Court to reassess or correct or eliminate the liability proposed by the deficiency notice. During the 90 days and any period the case is being reconsidered the IRS by law can't assess or put your account into collection. Many taxpayers use a tax professional or attorney to handle the dispute process if the amount in question is significant. If you lose the appeal and don't or can't pay, the government can file a federal tax lien against your wages, personal property, or your bank account. This is a claim against the assets, not the seizure of them. That happens when a federal tax levy occurs and the IRS actually seizes your property. Payment plans can also be worked out to avoid liens and seizure.
30-9 83(b) ElectionThe 83(b) election is a provision under the Internal Revenue Code (IRC) which gives an employee, or startup founder, the option to pay taxes on the total fair market value of restricted stock at the time of granting. The 83(b) election applies to equity that is subject to vesting, and it alerts the Internal Revenue Service (IRS) to tax the elector for the ownership at the time it of granting, rather than at the time of stock vesting. In effect, an 83(b) election means that you pre-pay your tax liability on a low valuation, assuming the equity value increases in the following years. However, if the value of the company instead declines consistently and continuously, this tax strategy would ultimately mean that you overpaid in taxes by pre-paying on higher equity valuation. Typically, when a founder or employee receives compensation of equity in a company, the stake is subject to income tax according to its value. The fair market value of the equity at the time of granting or transfer is the basis for assessment of tax liability. The tax due must be paid in the actual year of stock is issuing or transfer. However, in many cases, the individual receives equity vesting over several years. Employees may earn company shares as they remain employed over time. In which case, the tax on the equity value is due at the time of vesting. If the company’s value grows over the vesting period, the tax paid during each vested year will also rise in accordance. For example, a co-founder of a company is granted 1 million shares subject to vesting and valued at $0.001 at the time the shares are granted him. At this time, the shares are worth the par value of $0.001 x number of shares = $1,000, which the co-founder pays. The shares represent a 10% ownership of the firm for the co-founder and will be vested over a period of five years, which means that he will receive 200,000 shares every year for five years. In each of the five vested years, he will have to pay tax on the fair market value of the 200,000 shares vested. If the total value of the company’s equity increases to $100,000, then the co-founder’s 10% value increases to $10,000 from $1,000. His tax liability for year 1 will be deduced from ($10,000 - $1,000) x 20% i.e. in effect, ($100,000 - $10,000) x 10% x 20% = $1,800. If in year 2, the stock value increases further to $500,000, he will pay taxes on ($500,000 - $10,000) x 10% x 20% = $9,800. By year 3, the value goes up to $1 million and his tax liability will be assessed from ($1 million - $10,000) x 10% x 20% = $19,800. Of course, if the total value of equity keeps climbing in Year 4 and Year 5, the co-founder’s additional taxable income will also increase for each of the years. If at a later time, all the shares sell for a profit, the co-founder will be subject to a capital gains tax on his gain from the proceeds of the sale. The 83(b) election gives the co-founder the option to pay taxes on the equity upfront before the vesting period starts. If he elects this tax strategy, he will only need to pay tax on the book value of $1,000. The 83(b) election notifies the IRS that the elector has opted to report the difference between the amount paid for the stock and the fair market value of the stock as taxable income. The worth of his shares during the 5-year vesting period will not matter as he won’t pay any additional tax and he gets to retain his vested shares. However, if he sells the shares for a profit, a capital gains tax will be applied. Following our example above, if he makes an 83(b) election to pay tax on the value of the stock upon issuance to him, his tax assessment will be made on $1,000 only. If he sells his stock after, say, ten years for $250,000, his taxable capital gain will be on $249,000 ($250,000 - $1,000 = $249,000). The 83(b) election makes the most sense when the elector is sure that the value of the shares is going to increase over the coming years. Also, if the amount of income reported is small at the time of granting, an 83(b) election might be beneficial. In a reverse scenario where the 83(b) election was triggered, and the equity value falls or the company files for bankruptcy, then the taxpayer overpaid in taxes for shares with a lesser or worthless amount. Unfortunately, the IRS does not allow an overpayment claim of taxes under the 83(b) election. For example, consider an employee whose total tax liability upfront after filing for an 83(b) election is $50,000. Since the vested stock proceeds to decline over a 4-year vesting period, they would have been better off without the 83(b) election, paying an annual tax on the reduced value of the vested equity for each of the four years, assuming the decline is significant. Another instance where an 83(b) election would turn out to be a disadvantage will be if the employee leaves the firm before the vesting period is over. In this case, they would have paid taxes on shares that would never be received. Also, if the amount of reported income is substantial at the time a stock granting, filing for an 83(b) election will not make much sense. The 83(b) election documents must be sent to the IRS within 30 days after the issuing of restricted shares. In addition to notifying the IRS of the election, the recipient of the equity must also submit a copy of the completed election form to their employer and include a copy with their annual tax return.
40-9 80-20 RuleThe 80-20 rule is a business rule of thumb that states that 80% of outcomes can be attributed to 20% of all causes for a given event. In business, the 80-20 rule is often used to point out that 80% of a company's revenue is generated by 20% of its total customers. Therefore, the rule is used to help managers identify and determine which operating factors are most important and should receive the most attention based on an efficient use of resources. The 80-20 rule is also known as the Pareto principle, the principle of factor sparsity and the law of the vital few. At its core, the 80-20 rule is a statistical distribution of data that says that 80% of a specific event can be explained by 20% of the total observations. The 80-20 rule is frequently used in business, but it has been applied to a wide variety of subjects, such as wealth distribution, personal finance, spending habits, and even infidelity in personal relationships. The 80-20 rule was first used in macroeconomics to describe the distribution of wealth in Italy in the early 20th century. It was introduced in 1906 by Italian economist Vilfredo Pareto, best known for the concepts of Pareto efficiency or Pareto optimality. Pareto noticed that 20% of the pea pods in his garden were responsible for 80% of the peas. Pareto then expanded this principle to macroeconomics by showing that 80% of the wealth in Italy was owned by 20% of the population. Joseph Juran, a prominent figure in the study of management techniques and principles, expanded the 80-20 rule to apply to business production methods. In the 1940s, Juran applied the 80-20 rule specifically to quality control for business production by showing that 20% of defects in production were responsible for 80% of problems. He coined this phenomenon "the vital few and the trivial many." Because 80% of the consequences stemmed from 20% of the causes, focusing on the critical 20% of causes allowed for more effective quality control and a better use of resources. Juran set forth these principles in his "Quality Control Handbook." The first edition was published in 1951, and the publication is now considered a classic in management theory. After World War II, Juran was invited to Japan to give a series of lectures on quality control, which are cited as having had a major impact on Japan's post-war economy. That 80-20 rule has since been expanded to more general uses in business. For example, a company may find that 80% of its sales come from 20% of its customers. A company can increase its sales by focusing on the 20% of customers who bring in the majority of the revenue. Also, 20% of a company’s employees may be responsible for 80% of the output. The company can then focus on rewarding the most productive employees. The 80-20 rule is meant to express a philosophy about identifying inputs. It is not a hard-and-fast mathematical law, even though it is often interpreted that way. It's just coincidence that 80% and 20% happen to equal 100% in the 80-20 rule. Inputs and outputs represent different units, so the percentage of inputs and outputs does not have to equal 100%. One might observe that, for a given phenomenon, 74% of the output comes from 35% of the inputs. This is entirely plausible and valid, even though 35% plus 74% equals 109%. The underlying principle suggests that certain inputs should be focused on more than others. There are many misinterpretations of the 80-20 rule. Some result from the coincidental 100% sum. Some result from a logical fallacy, namely that if 20% of inputs are most important, then the other 80% must be unimportant. The actual implied application of the 80-20 rule is to focus on identifying the inputs with the most potential productivity and pursuing those causes first. For example, a student should try to identify which parts of a textbook are going to create the most benefit for an upcoming exam and focus on those first. That doesn't imply that the student should ignore the other parts of the textbook. As it applies to business management, the 80-20 rule holds that 20% of the time spent in a certain area of a business creates 80% of that business's results. This ratio can help businesses become more efficient. By identifying and focusing more time on the most important areas, businesses can achieve higher growth and better results. If a company can identify its highest-spending customers, for instance, it can effectively market to them to retain existing customers and acquire similar consumers. Therefore, companies should dissect their revenues and understand who makes up their top 20% of customers. From there, it's been found that the top 4% of a customer base accounts for 64% of total sales, meaning that the more granular a company can get in its analysis, the more accurate the understanding of its customers becomes. This allows companies to launch targeted marketing campaigns aimed at resonating with the most impactful consumers. Managers must make decisions about how to allocate scarce resources – time, finances, labor and capital equipment, among others. The 80-20 rule suggests that it's important for managers to understand which inputs produce the greatest results. As mentioned, the 80-20 rule doesn't mean the exact 80% and 20% proportions are necessarily constant in every case. If the manager of a financial advisory firm knows that 70% of the firm's revenue comes from 10% of its clients, then the firm should focus its efforts on those clients first and foremost. That is the most efficient use of resources. It's a matter of opportunity cost, in other words. The studied causes and effects don't have to be revenue producers. For instance, a manager might know that 80% of his department's computer crashes come from just a handful of bugs; so, he should focus the IT department on fixing those bugs first. However, the 80-20 rule is like the proverbial half full or half empty glass. That is, the rule works both ways, depending on the manager’s focus. Applying the rule to a company’s product line tells a manager that 80% of the company’s sales volume is attributable to only 20% of the products in the product line. If those products are stored in a warehouse as inventory, then that superstar 20% of the product line should occupy 80% of the warehouse space. Using the 80-20 rule to evaluate employees, it suggests that 80% of a company’s production is the result of the efforts of only 20% of its employees. But it could also show the manager that 80% of all human resource problems are caused by just 20% of the employees. Regarding a company’s revenue, the rule would indicate that 80% of the revenue comes from 20% of the company's customers. Conversely, the rule could also tell managers that 80% of customer complaints come from 20% of the customers. The rule will not tell managers whether the revenue-generating customers are the same as the complaining customers. But since both are only 20% of the customer list, this narrowed focus makes it easier to target those customers who are truly influential, which is the real lesson of the 80-20 rule. While there is a lack of scientifically stringent statistical analysis either proving or disproving the validity of the 80-20 rule, numerous internal business analyses, and much anecdotal evidence exists to support the rule as being essentially valid, if not numerically accurate. The basic assumption that underlies this rule is that things are typically distributed unevenly in life. As it relates to business performance, the 80-20 rule proposes that 80% of revenues come from 20% of customers. Regarding investing, the rule suggests 80% of all profits come from 20% of investments. In broad economic theory, the rule refers to the fact that a small percentage of the population owns a large percentage of an economy's financial assets. For example, the 80-20 rule in economics refers to the fact that 80% of a country's wealth is usually controlled by 20% of its population, although this can sometimes be explained by the Gini index. In June 2016, Nigeria was found to have roughly this distribution of wealth within its country's borders. The minimum annual income needed to sustain a living in Nigeria was $1,000, yet more than 74% of the population lived below this poverty level. This distribution came after the country's population grew by 12% while its GDP rose by 54% from 2010 to 2014. However, the allocation of the increased wealth was not even, and it exacerbated the income inequality, thus adding to the Pareto principle. Six Sigma and other business management strategies have incorporated the principle into their designs for increased business efficiency. Analysis of performance results of salespeople across a wide spectrum of businesses also supports the 80-20 rule. The principle appears valid simply from a basic logical analysis. Obviously, not all efforts in any endeavor will be equally effective. It is logical to deduce that, from all the different efforts made toward achieving the desired end, less than half of them will eventually be responsible for more than half of the total results.
50-9 80-10-10 MortgageAn 80-10-10 mortgage is a loan where the first and second mortgages happen simultaneously. The first mortgage lien has an 80-percent loan-to-value ratio (LTV ratio), the second mortgage lien has a 10-percent loan-to-value ratio, and the borrower will make a 10-percent down payment. The 8 -10-10 mortgage is also known as a piggyback mortgage. ​​​​​​​The 80-10-10 mortgage, transactions are frequently used by borrowers to avoid paying private mortgage insurance (PMI). PMI is insurance which protects the financial institution against the risk of the borrower defaulting on a loan. In general, 80-10-10 mortgages tend to be popular at times when home prices are accelerating. As homes become less affordable, piggyback mortgages allow buyers to borrow more money than their down payment might suggest. This annual insurance can cost between .25% to 2% of the total loan principal. Six main companies in the U.S. sell PMI. The Doe family wants to purchase a home for $300,000, and they have a down payment of $30,000 or 10% or the total home's value. With a conventional 90-percent mortgage, they will need to purchase and pay PMI on top of the monthly mortgage payments. Also, a 90-percent mortgage will generally carry a higher interest rate. Instead, the Doe family can take out an 80-percent mortgage for $240,000 possibly at a lower interest rate, and avoid the need for PMI. At the same time, they would take out a second 10 percent mortgage of $30,000. This type of loan is typically in the form of a home equity line of credit (HELOC). The down payment will still be 10-percent, but the family will avoid PMI costs and get a better interest rate. The second HELOC mortgage functions like a credit card, but with a lower interest rate since the equity in the home will back it. As such, it only incurs interest when you use it. That means you can pay off the HELOC, in full or in part and eliminate interest payments on those funds. Moreover, once settled, the HELOC credit line remains. These funds can act as an emergency pool for other expenses, such as home renovations or even education. 80-10-10 loans are a good option for people who are trying to buy a home but have not yet sold their existing home. In that scenario, they would use the HELOC to cover a portion of the down payment on the new home. They would pay off the HELOC when the old home sells. HELOC interest rates are higher than those for conventional mortgages, which will somewhat offset the savings gained by having an 80-percent mortgage. If you intend to pay off the HELOC within a few years, this may not be a problem. When home prices are rising, your equity will increase along with your home’s value. But in a housing market downturn, you could be left dangerously underwater, with a home that’s worth less than you owe.
60-9 8-KAn 8-K is a report of unscheduled material events or corporate changes at a company that could be of importance to the shareholders or the Securities and Exchange Commission (SEC). Also known as a Form 8-K, the report notifies the public of events reported including acquisition, bankruptcy, resignation of directors or a change in the fiscal year. As opposed to the annual reporting of Form 10-K and the quarterly reporting of Form 10-Q, public companies utilize Form 8-K as needed. An 8-K is required to announce major events relevant to shareholders. Businesses have four business days to file an 8-K for most specified items. One exception to this are Regulation Fair Disclosure (FD) requirements in Section 9 in the Investor Bulletin reporting requirements. Regulation FD requirements may be due earlier than four business days. An organization must determine if the information is material and submit the report to the SEC. The SEC makes the reports available through an electronic data gathering, analysis, and retrieval (EDGAR) platform. The SEC outlines the various situations that require the usage of Form 8-K. There are nine sections within the Investor Bulletin. Each of these sections may have anywhere from one to eight subsections. The most previous adjustment to Form 8-K disclosure rules occurred in 2004. The SEC requires disclosure for numerous changes relating to a registrant's business and operations. This includes changes to a material definitive agreement or the bankruptcy of an entity. Financial information disclosure requirements include the completion of an acquisition, changes in the financial condition of an entity, disposal activities, and material impairments. The SEC mandates filing an 8-K for delisting of stock, failure to meet listing standards, unregistered sales of securities, and material modifications to shareholder rights. An 8-K is required when a business changes accounting firms used for certification. Changes in corporate governance such as changes in control of the registrant, amendments to the articles of incorporation or bylaws, changes in the fiscal year and amendments to the registrant's code of ethics are also required to be disclosed. It also requires a report upon the election, appointment or departure of a director or certain officer. The use of Form 8-K is required to report changes related to asset-backed securities. Regulation FD requirements are also required. Form 8-K reports may be issued based on other events up to the company's discretion that the registrant considers to be of importance to security holders.
70-9 8(a) FirmAn 8(a) firm is a small business that is owned and operated by socially or economically disadvantaged individuals. The status is designated by the Small Business Administration (SBA), the United States agency charged with supporting the growth and development of small businesses. The 8(a) status is specially granted to any small business by the SBA, making it eligible for financial assistance, training, mentoring and any other form of assistance. In order to qualify for this special status, businesses must be owned and operated by individuals who are considered socially or economically disadvantaged. The 8(a) status is outlined specifically in Section 8(a) of the Small Business Act, and is designed to help small, disadvantaged businesses compete in the general market. One of the main reasons behind the creation of the 8(a) status was to increase business involvement by a broader portion of society. The SBA identifies several groups that are eligible for 8(a) status including: Black Americans, Hispanic Americans, Native Americans, Asian Pacific Americans, and Subcontinent Asian Americans. Through the 8(a) Business Development Program, owners can compete for special contracts that help level the playing field for their small businesses. These small businesses can use the program to form joint ventures with already-established businesses to form mentor-protégé relationships, as well as for management and technical assistance. In order to qualify for 8(a) status under SBA guidelines, a business must meet the following criteria: It must be a small business. It must not have participated in the program before. At least 51 percent of the business must be owned and operated by U.S. citizens who are considered economically and socially disadvantaged. It must be owned by someone with $4 million or less in assets. The owner must manage day-to-day operations and must make long-term decisions. The owner must be of good character. Owners interested in taking part in the program must first register their businesses on the SBA's website. The administration will then send a letter to the owner explaining whether the business was accepted into the program. The certification lasts for nine years — the first four years are considered to be developmental, while the remaining five are deemed to be a transition phase. In order to keep its status and good standing in the program, the business is subject to annual reviews. During these, the owner will have to draw up business plans and will have to undergo systematic evaluations.
80-9 60-Plus Delinquencies60-plus delinquency rates are home loans that are more than 60 days past due on their monthly mortgage payments. 60-plus delinquency rates are typically expressed as a percentage of a group of loans written within a specified time period, such as a given calendar year. Another common grouping method are the interest rates for the pool of loans that make up a mortgage-backed security (MBS) or other securitized mortgage product. 60-plus delinquencies are less than 90 days past due, and have not yet entered the foreclosure process — loans in the latter status are expressed separately. The 60-plus rate may be split into one for prime loans and subprime loans. The 60-plus rate on subprime loans can be expected to be higher than for prime. Also, 60-plus rates are often published separately for fixed-rate versus adjustable-rate loans. The 60-plus delinquency rate is often added to another negative event measure, the foreclosure rate for the same group of loans. The two added together give a cumulative measure of the individual mortgages that are either not being paid at all, or being paid behind schedule. If the rate on past-due and/or foreclosed mortgages rises beyond a certain level, the mortgage-backed security may have a shortfall of cash to pay out to investors. This can cause massive re-pricing of assets, resulting in some investors losing the majority of their invested capital. A survey of national mortgage delinquencies prepared by global property information firm CoreLogic found that nationally, 4.9 percent of mortgages were in some stage of delinquency (30 days or more past due, including those in foreclosure) in January 2018. This represents a 0.2 percentage point decline in the overall delinquency rate, compared to a year earlier when it was 5.1 percent. The share of mortgages that were 60-89 days past due in January 2018 was 0.8 percent, unchanged from December 2017 and up from 0.7 percent in January 2017. CoreLogic's CEO stated that so far in 2018 delinquency and foreclosure rates are lower than in 2017 in most of the country; the only exceptions were metropolitan areas affected by natural disasters such as Houston and Puerto Rico.
90-9 529 Savings PlanA tax-advantaged method of saving for future college expenses, authorized by Section 529 of the Internal Revenue Code. Legally known as “qualified tuition plans,” 529 Savings Plans are sponsored by states, state agencies or educational institutions, and may be used to cover a recipient’s tuition, room, board, books, computers and other expenses. The money contributed to the account may be invested in equity or fixed income mutual funds, as well as money market funds, exchange-traded funds (ETFs) and a principal-protected bank products. In most cases, the earnings are not subject to federal or state taxes, provided the money is used only for qualified college expenses. The plans are open to both adults and children beneficiaries. Each U.S. state has its own 529 savings plans, replete with a unique set of features. Individuals living in all states may open a 529 Plan, but the plan does not have to be in the account holder's or the designated beneficiary's state of residence. There are two different kinds of 529 plans: Prepaid Tuition Plans and College Savings Plans. All fifty states and the District of Columbia sponsor at least one type of 529 plan, however a group of private universities participate in Prepaid Tuition Plans. With Prepaid Tuition Plans, the account holder buys credits at participating colleges and universities, covering future tuition costs, but locking them in current prices. Typically offered by in-state, public academic institutions, Prepaid Tuition Plans usually may not be used for future room and board and other ancillary expenses. The federal government does not guarantee prepaid plans and while only certain state governments guarantee the money paid into plans they sponsor, which account holders may lose, if the underlying investments experience a drop in value. College Savings Plans let account holders open an investment account to save for the beneficiary’s future qualified higher education, that includes room and board, as well as the tuition fees. College savings plan accounts generally apply to any university, including non-U.S. institutions of higher learning. It’s important to recognize that fees associated with 529 plans may lower returns, and that fees may vary depending on whether the type of 529 plan in question is a College Savings Plan or Prepaid Tuition Plan. Therefore, it is incumbent on account holders to investigate the fee structure before setting up either plan, in order to fully understand the terms of each investment option. Both plans may charge application fees and ongoing administrative fees.
100-9 529 Prepaid Tuition PlanA 529 prepaid tuition plan is a way to pay the cost of tomorrow’s college-inflated tuition prices at current costs. Unlike using a 529 as a savings plan where you invest money in different asset classes (stocks, bonds, mutual funds), prepaid tuition plans allow you to pay for a certain number of semesters (or contracts) that can be redeemed in the future. These program administrators then pool the money and make long-range investments so that the earnings meet or exceed college tuition increases. When a child is ready to go to college, the plan transfers funds to cover the tuition directly to the institution. Parents, relatives and friends are all allowed to contribute to the child's 529 prepaid tuition plan, which can be especially helpful to grandparents who want to give money to their grandchildren in a tax friendly way. With tuition increasing at faster paces than expected, many of these plans discovered that they couldn’t invest successfully enough to keep up with rising costs. That put both sides of the equation in binds. Upon realizing the plan would be underfunded, the administrators usually refunded their money back with nominal interest, and parents were left trying to figure out how to pay for tuition. Keep in mind only tuition is covered in prepaid plans, unlike 529 savings plans that can be used for some room and board, books, equipment and fees. Another disadvantage is that these plans require that students attend an in-state public school, so if they want to venture far from home you’ll be hit with out-of-state tuition rates. If the child who is the account beneficiary dies, decides not to attend college, decides to attend college in a state other than the one in which the plan was established or decides to attend a private college, prepaid tuition plans do offer options. Credits may be transferred to another child, contributions may be withdrawn, or the in-state value of the prepaid credits may be transferred to an out-of-state or private institution.