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YOUR GREATEST ALLY WHEN PLANNING YOUR
CHILDREN'S EDUCATION IS TIME . . .
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.
Santos Associates, FEDERALLY AUTHORIZED TAX
PRACTITIONERS, can help you with your accounting, tax
and financial planning needs. Call today for an appointment &
consultation. We are not attorneys, we can refer competent council
upon request.
