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College
Funding
Your
Greatest Ally When Planning
Your Children's
Education Is Time.
Contact
Us Today!
For
anyone planning for a
child’s education
the costs can seem
overwhelming. That’s
why it’s good to
start early. There are
several options
available. A Coverdell
Education Savings
Account (formerly
Education IRA) or
state-sponsored
tuition programs (529
plans) are just two
options. Our aim is to
help you develop a
savings strategy that
puts the power of time
– and tax-deferred
compounding to work
for you.
In
addition, you can find
ways to pay that
don’t involve your
checkbook, like
federal tax credits,
scholarships, and
student loans.
Sure,
tuition costs can be
overwhelming. But the
worst thing to do is
nothing at all.
You
don't have to win the
lottery to send your
child to college.
Putting
Time On Your Side
The
earlier you start to
save for college, the
greater your
accumulated funds can
be. If you begin a
college savings
account for a child at
birth, you’ll have
up to 18 years to take
advantage of long-term
growth potential.
That’s why investing
regularly can be so
rewarding; even if you
invest just a small
amount every month,
your money can grow
into a considerable
sum over time.
In
general, the number of
years before college
is your best indicator
of the types of
investments to make.
When your children are
young, you might
consider investing in
stocks or stock mutual
funds because you’ll
have many years to
ride out possible
market volatility. As
your children grow
older, you can
gradually shift to
more stable
investments such as
bonds, bond mutual
funds, certificates of
deposit (CDs), and
money market accounts.
You should plan your
investments in bonds
and CDs to mature as
your first tuition
bills come due.
How
Do The New 529 Plans
Work?
In
past years, certain
states introduced
prepaid tuition plans
that, although
attractive in their
own right, locked you
in to attending a
state school. Today,
most states have
introduced the next
generation of college
savings plans: 529
plans, also called qualified
tuition programs.
There are two types of
529 plans: prepaid
tuition plans and
education savings
plans. Prepaid tuition
plans permit a donor
to purchase tuition
credits whereas
education savings
account plans permit a
donor to make
contributions to an
account held for the
benefit of a
designated
beneficiary. If a
state offers an
education saving
account plan, the
state selects a
financial institution
that will manage the
accounts. Your
investment choices are
therefore limited to
those selected by the
state. However, you
may transfer credits
or amounts from one
529 plan to another
529 plan or from
portfolio to portfolio
once a year with no
tax consequences as
long as the
beneficiary remains
the same. You may also
change beneficiaries
as long as the new
beneficiary is a
member of the first
beneficiary’s
family. Under the 2001
tax legislation,
private educational
institutions will also
be able to offer
prepaid tuition plans
but not the education
savings account plans.
Although
each 529 plan is
different, they offer
generous tax
advantages plus high
contribution limits.
Any individual
(parent, grandparent,
aunt, uncle, generous
neighbor) may
contribute up to
$10,000 ($20,000 for
married couples) in a
single year to a 529
plan without paying
gift taxes at all.
Each contributor may
contribute up to
$50,000 ($100,000 for
married couples) in a
single year without
paying federal gift
tax, as long as no
additional
contributions are made
for five years. The
IRS considers
contributions to a 529
plan “completed
gifts”. So the money
is excluded from the
contributor’s
estate. This is true
even if you or another
individual retains
control of the plan.
Generally,
you can open a 529
plan for any person
regardless of the
beneficiary’s age or
your income level. The
assets remain under
your control, and you
can usually contribute
as little as $25 a
month or as much as
you like, up to the
plan’s contribution
limits. A 529 plan is
considered an asset of
the account owner for
purposes of financial
aid eligibility. Since
most colleges expect
parent to contribute
only a small
percentage (currently
about 6%)* of their
assets each year for
education funding, the
529 plan will fall
into the 6% bracket,
which means your child
may be more eligible
for financial aid. If
the 529 plan is held
in a name other than a
parent or the child
(remember those
relatives and generous
neighbors mentioned
earlier?), it will
stay out of the
financial aid formula
altogether.
*As of October 2001.
Beginning
in 2002, withdrawals
from 529 plans are
tax-free if they are
used for qualified
educational expenses,
which include tuition,
books, fees, room and
board, and equipment
required for
enrollment at an
eligible educational
institution. Certain
states allow their
residents to make
either tax-deductible
contributions or take
tax-exempt
withdrawals.
As
with most investment,
there is no guarantee
of specific returns.
Participation alone
does not ensure that
your contributions and
earnings will be
adequate to cover your
child’s college
expenses. If you
decide to withdraw
funds for any other
reason than education
expenses, you will pay
federal and state
income taxes and a 10%
federal penalty on all
gains. Exceptions
include if the
beneficiary receives a
scholarship, becomes
disabled, or dies.
However, because of
their flexibility and
favorable tax
treatment, 529 plans
can be an excellent
choice for educational
savings.
