Saving for Your Child's College
More and more college students are relying on student loans to help them
through school. In fact, according to a recent study, 43% of full-time
undergraduates used loans to help pay for college costs in 2000, which
is a 13% increase from 1993 (1).
By 2018, four years at a state university is a projected to cost more than $80,000, while four years at a private university could cost more than $200,000. (2)
Learning to budget and save for college as soon as possible to avoid the burden of student loans might be something to consider. There are many attractive options that parents can utilize when it comes to savings. Here are a few of these options:
529 College Savings Plan
Tax Advantages:
Account earnings grow free from federal income taxes while in the account.
Qualified withdrawals made are exempt from federal tax. Please note that
the federal tax exemption is due to expire on December 31, 2010, unless
the law providing for the federal exemption is extended.
Estate Planning Benefits:
Invest as much as $55,000 ($110,000 for married couples) per student in
one year without incurring gift taxes. Contributions between $11,000 and
$55,000 made in one year can be prorated over a five-year period without
incurring gift taxes.
Control
Unlike a UGMA/UTMA account, the account owner always maintains control
over the account assets.
Flexible Options
Any U.S. resident can open an account, regardless of income level, and
anyone can be a student, regardless of age.
Proceeds from a 529 plan can be used to pay for tuition, fees, room and board, books and required supplies and equipment at qualified schools nationwide.
The student can be changed to another family member at any time without penalty. Note there maybe some tax consequences that may apply with a change in beneficiary.
Funding Options
There are no funding limits on a 529 plan. Grandparents and relatives
my also add money to your child's college plan. You have a choice of Age-Based
Portfolios that follow an investment strategy that varies based on the
age of the student. As the student grows older, assets are moved to increasingly
more conservative portfolios. Other ways to allocate your funds include
Year to Enrollment Portfolios, Balanced Portfolio, All Equity Portfolio,
and Fixed Income Portfolio. See your Financial Advisor for more details
on what would most appropriate for you.
Please consult your tax advisor for specific advice related to your plan.
Roth IRA
Consider a traditional or Roth IRA to fund your child's college. A Roth
IRA differs from the traditional IRA in that contributions (up to $3000
per year in 2003 and 2004) are not deductible. Contributions do, however,
grow tax-deferred and funds can be withdrawn tax-free after five years
if the individual is at least 59 ½ . In addition, unlike the deductible
IRA, the Roth IRA does not require a mandatory distribution at 70 ½,
which potentially can allow for further accumulation of assets. The benefits
to consider for college includes:
Flexibility of Fund Options
Unlike other college plans, you have a very wide choice of investment
options to choose from. See your Financial Advisor for help.
Penalty Free Withdrawals for Higher Education Expenses
Assuming the account is open for at least five years, the Roth IRA 10%
penalty is waived for funds withdrawn to pay for higher education expenses;
however, ordinary income tax rates will apply minus your after tax contributions.
Qualifying for Scholarships
Having your money in your name might help your child qualify to receive
more scholarship money. Here is an example; you have two children both
trying to qualify for the same academic scholarship. One has a lot of
money in his name the other does not. Who do you think might get the scholarship?
Don't get me wrong; they do look at the parent's incom,e but the child's
savings has a lot of influence on the outcome. If the child decides not
to attend college or drops out early, it is still apart of your retirement
income.
UGMA/UTMA Accounts
UGMA/UTMA are custodial accounts that were created under the Uniform Gifts/
Transfer to Minors Act. As an extension of the UGMA, the UTMA allows real
estate and art to be included as transferable assets.
Benefits
A UGMA/UTMA custodial account allows you to transfer or gift assets to
a minor without setting up a trust.
Withdrawals from the account can be used for any purpose, and the minor
is not limited in using the funds.
Features
Other adults, such as family members, may also add to the account. You
may contribute up to $11,000 per person per year free of gift tax. While
the minor is below the legal adult age, a custodian must be appointed
to the account.
Child has control
At age 18 or, with most states, age 21, the child has full control over
his account. Some parents might not like to have a teenager have access
to that account. In other words, instead of the college degree the child
might get a new car.
Coverdell Education Savings Account
In July 2001, President Bush signed into law the Economic Growth and Tax
Relief Reconciliation Act of 2001. Which reconfigures Education IRAs as
" Coverdell Education Savings Accounts." (ESA). ESAs qualify
for special tax advantages and can be used for qualified expenses associated
with elementary, secondary, or higher education.
Benefits
Assets in an ESA grow tax deferred and may be distributed federal income
tax and penalty free when used for qualified education expenses. Qualified
withdrawals may be used for tuition, fees, books, supplies, computers,
and in some circumstances, room and board. Assets can be rolled over from
the account of the beneficiary to a qualified family member.
Features
Qualified investors, (Single tax filers with AGI less than 95,000 and
joint filers with AGI less than 190,000) can
make full contributions up to $2,000 annually on behalf of qualified beneficiaries.
Contributions will start to phase out
between $95,000 to $110,000 for single filers and $190,000 to $220,000
for joint filers. Corporations and other entities are permitted to make
contributions to an ESA. The beneficiary must be a child under the age
of 18 unless the child has "special needs," as defined in IRS
regulations. The entire account must be distributed before age 30. Any
withdrawals after age 30 or for unqualified expenses will be subject to
income taxes and a 10% penalty.
Life Insurance
Life insurance for many years has been recommended as a good savings vehicle
for college. It will pay for college if the parents should die; however,
the touted rates of return on the savings are trimmed by fees and agent
commissions. Life insurance tends to pay more for the agent's children's
college than yours. There are better alternatives.
Investing for your children takes time and discipline. Account values will fluctuate with the market. There is a variety of choices when it comes to saving for college,e but you must have a plan. "Most people don't plan to fail they just fail to plan" - the key is to start saving now.
(1) USA Today, October 31, 2002
(2) Forbes, April 16, 2001