Starting a College Fund
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Starting a College Fund |
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Saving for your children’s college education is a bigger challenge than ever
before. But, like any challenge, the best way to tackle it is to start with a
plan and start now. The big money needed for a college education can be
daunting, but don’t let the numbers dissuade you from trying to save. A little
money can go a long way when you start early and contribute regularly. Plus,
you’ll be investing in both your child’s academic and financial future.
According to U.S. Census Bureau statistics, college graduates can expect to earn
roughly double the salary of those with only a high school education. This alone
should be enough incentive to get planning.
529 Accounts The 529 qualified tuition programs are perhaps the most popular savings mechanisms. They allow qualified persons to grow funds free of federal tax, and depending on the plan, with state tax deductions. Money withdrawn from these accounts for post-secondary education is also not taxed. There are similar education savings accounts that offer similar tax breaks, or other tax incentives. Pre-Paid Tuition Plans Some state universities have set up innovative programs where college expenses may be paid in installments over many years, or in a lump sum prior to attending the school. The advantage is that you can lock in the current price. Again, any earnings are tax-deferred, and distributions are excludable from gross income if used to pay for qualified higher education expenses. This may be a convenient way to meet expenses, but it takes the choice of school away from your child. If your child chooses not to attend the state university, it may pose a problem. Coverdell Education Savings Accounts With a Coverdell Education Savings Account (formerly known as Educational IRAs), you can make contributions for each child, until he or she is 18. There are contribution limitations. Money contributed to a Coverdell Education Savings Account may grow, tax-deferred, and may be withdrawn federal tax-free for any qualified higher educational expense incurred by the child before age 30. After that time, the account owner will incur a 10% tax penalty with the required withdrawal, and any earnings are taxed as ordinary income. There are still state taxes. The account owner can retain control of the money in the account, if desired. The beneficiary can even be renamed in some cases. Check the IRS website for current contribution limits. Note that unless Congress acts, certain benefits offered by a C-ESA will expire after 2010, the annual contribution will be reduced to $500 and K-12 expenses will no longer qualify. Uniform Transfers to Minors Act(UTMA) and the Uniform Gift to Minors Act(UGMA) These custodial accounts allow you to set up an account in the child's name. You can make transfer amounts to UTMA/UGMA account on a per child, per year basis, without affecting your lifetime estate or gift tax exemption. And your spouse can do the same. Check the IRS website for current contribution limits. Taxation of accounts can be confusing, check with your tax advisor, prior to making any decisions. Setting up an UTMA/UGMA account in a child's name is easy. The account will involve a custodian; your registered representative can guide you in completing the application. Separate accounts are required for transfers to each child. Be sure to provide the child's Social Security number (not that of the person making the gift or of the custodian). The custodian will have full authority to make decisions, including control over the assets. Since transfers must be permanent, parents can't gain access to the money for their own use. Also, all assets in the UTMA account will belong to the child when he or she reaches the age of majority. You may also want to consider the possibility that assets held in your children's name(s) may affect the level of financial aid they'll be eligible to receive when they apply to schools. Loans These days, most people borrow at least a portion of the money needed to cover college expenses. You may want your children to look for student loans with special lower rates and repayment terms for college. For details on all these options, check out the U.S. Department of Education's site at www.ed.gov or www.college.gov. Student Loans qualify as financial assistance; however, federal loans are a form of low-interest debt that must eventually be repaid. There are limits to how much financial assistance students can receive in the form of federal student loans, ones frequently determined by a student’s financial need. For the students who do not qualify for a need-based Pell Grant but do not have enough cash to pay for tuition, student loans are a good option. An added benefit is that interest on certain federal loans does not begin to accumulate until 6 to 12 months after graduation and monthly payments on many federal and private student loans are likewise delayed until that time. |
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