Saving for Your Child's Education
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By 2020, the cost of four years at a private college may exceed $265,000 and the cost of a public college may exceed 106,000. (1) Save now, or you'll pay later!
Saving for college takes many years of planning and preparation, and the more children you are sending to college, the more difficult it becomes. No one method of saving is ideal for everyone.
A brief summary of the options available for saving follows. The accompanying table also provides a quick comparison of these savings.
Section 529 Plans
Most experts agree that Section 529 savings plans are some of the most
attractive college-savings vehicles ever made available.(2)
The tax law signed by President Bush in 2001 made Section 529 plans more attractive by allowing tax-free withdrawal of funds, after January 1, 2002, for qualified education expenses. Qualified education expenses include tuition, fees, room and board, required books, supplies, and equipment.
In addition, funds may be used at virtually any U.S. accredited college, university, trade school, or at any eligible foreign university. Generous contribution limits vary by state and often exceed $250,000 per child.
One of the most flexible benefits of the Section 529 plan is the ability to modify the beneficiary, or the individual for whom the plan is designed to benefit. Unlike other college savings plans, you don't have to stick to the original beneficiary. You can move the account from child to child, or even to other relatives, if needed, by simply changing the beneficiary. This is a nice feature if your child decides not to go to college. If, for some reason, you choose not to use the funds for the education of a child, you may name yourself the beneficiary. Funds not used for qualified expenses will be assessed a 10% penalty plus applicable income tax, but unused funds can remain in the plan account for use by other family members.
Additionally, there are no income limits, so you can contribute to a Section 529 plan no matter how much you earn. And don't forget grandparents or other relatives. Contributions from grandparents make great holiday or birthday gifts and can be deposited directly into many plans.
What happens with my money? In many Section 529 plans sponsored by states and managed by investment firms, you have a choice of Age Based Portfolios that invest contributions more conservatively as the beneficiary approaches college age, eliminating the need to worry about reallocating funds every year. Several plans offer static portfolios that maintain allocations regardless of age changes of the beneficiary. With the help of your Financial Advisor, you can select which investment options are most appropriate for your needs.
There are, however, a few things to note about Section 529 plans:
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Under current tax law, the ability to withdraw money free of federal tax from a Section 529 plan ends in the year 2010, unless extended by Congress;
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Some states give taxpayers a deduc- tion on their state tax bills for contri- butions to Section 529 plans sponsored by their state;
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Investment mixes in many plans can be changed only once per year;
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Although many plans do have fees associated with them, it is usually worth the small price for profes- sional guidance. You only get one chance to do it right!
Please consult your tax advisor for specific advice related to your situation.
Life Insurance, A Self Completing Plan
Life insurance has a unique advantage over many savings options. If you
die before your child enters college, tuition can be paid from the policy
death benefit. During your lifetime, you can also use policy cash values
to pay for some or all of your child's tuition. Cash values accumulate
and can be used through withdrawals or policy loans. Several types of
life insurance policies exist and should be discussed with your Financial
Advisor prior to implementation to ensure appropriateness.
UGMA/UTMA Accounts
UGMA/UTMA accounts are custodial accounts created under the Uniform Gifts/Transfer
to Minors Act. These accounts give the parents an opportunity to gift
funds to their children and to have earnings on the funds taxed at the
children's tax rate.
The biggest disadvantage to these types of accounts is that gifts contributed are irrevocable. When the child reaches the age when the account terminates - 18 or 21 in most states - the child has control over the funds and is not required to use them to pay for college. In other words, you may see a new sports car in your driveway instead of a college diploma on the office wall.
Education IRAS
Education IRAs, like Section 529 plans, provide an opportunity for tax-free
distributions of earnings if the funds are used to pay for qualified education
expenses. However, the amount that individuals are allowed to contribute
phases out as income increases.
Investing for college for younger children should be viewed as a marathon,
not a sprint! Expect account values to fluctuate with the market. We don't
recalculate the value of our home every time we cut the lawn because we
view our homes as long term investments. College plans should be viewed
the same way.
Successful financial management enables you to balance your life, make decisions about your time, and build security for yourself and your family.
(1) The College Board, Trends in College Planning 2001
(2) 2002 American Funds Distributors, Inc.
