My Personal Finance Blog

If you’re like most parents, saving for your children’s college education is a priority and a big challenge. Tuition and related costs at both public and private universities have been rising at 5% per year or more, far exceeding the rate of inflation. To put that into perspective, a child born in 2006 should plan on $110,000 in total expenses for four years at the average in-state public college; $300,000 for four years at a private university.

Financing these costs for one or more children is going to take planning and, most importantly, disciplined savings. Tax-advantaged “529″ College Savings plans are the savings vehicle of choice and offer important advantages over other options. A $3,000 annual contribution, beginning at birth, to a growth-oriented 529 plan should pay for one child’s in-state public education, and a $7,500 annual contribution for a four-year private education. A later start means higher annual contribution amounts.

529 Plan Advantages

- Large Tax-Free Contributions: Parents, grandparents, other relatives and even friends can contribute up to $12,000 per year per child, tax-free, to a 529 plan.

- Tax-Free Earnings and Distributions: All earnings in a 529 plan are tax-free. Distributions are free from all federal income and most state income taxes when used for tuition or other qualified college expenses. This makes 529 plans as powerful as Roth IRAs for long-term savings.

- Donors (parents, grandparents, etc.) “own” the 529 assets: Unlike a custodial account that typically becomes the minor’s property at age 18, 529 plan assets are always under the control of the donor.

- 529 plan assets are more advantageous for financial aid considerations: Plan assets are counted at a 5.5% rate by college financial aid offices, compared to the 35% rate used for custodial account assets.

- Unused funds in a 529 can be rolled over to another child’s benefit.

Have I caught your attention? Now the question is which 529 Plan is best for you and your children?

Choosing a 529 Plan

All plans are sponsored by individual states, but are typically available to residents of other states. Some states offer residents a state income tax deduction for contributions to their own plan. So, for residents of these states, that is the way to go. For those without that tax incentive or residents of states without an income tax, you can choose from just about any of the available plans.

Be aware that many 529 plans are heavily promoted by brokerages and other financial institutions and can carry large and completely unnecessary sales charges. Go with a plan with no sales or other load charges. Typical annual fees for asset and account management combined should be 1% or less.

Recommended 529 Plans

There are at least a dozen excellent options to choose from. Among these, we like the TIAA CREF-managed plans (California and others) and the Vanguard-managed plans in Iowa, Nevada, New York and Utah. The Vanguard plans, with their index investment strategies, have operating costs of less than 0.75%. A new entry is the Alaska plan managed by T Rowe Price. It offers a choice of first-rate actively-managed funds and at relatively low cost.

No matter which plan you choose, we strongly recommend an “age-based” investment strategy. These strategies range from Conservative to Aggressive. Age-based programs are dynamic asset allocation programs, similar to Target Retirement date funds. They are heavily invested in stocks when your child is young, gradually converting to more fixed-income and cash as college age approaches. This approach protects against the risk of a major stock market downturn just as the funds are needed.

With over 31 years of investment experience, Martin Weil, Registered Investment Advisor and Principal of MW Investment Strategy Group, helps busy professionals and their families achieve their long-term financial goals. For a free special report filled with recommendations on saving for your child’s college education, go to http://www.mwinvest.com/site/contact_us.html. Martin can also be reached at (877) 442-8777 or contact@mwinvest.com

 

February 25, 2008

Besides the purchase of your home, sending a child to college is one of the biggest expenditures you’ll ever have. According to savingforcollege.com the price of a college degree for a child born today will be $312,166. That’s a significant investment for any family, so it is important to start saving now.

One way to save is by investing in a tax-deferred 529 plan (also called a Qualified Tuition Plan). With a 529 plan, all funds grow free of federal and state income tax. With tax-free growth, money saved for college accumulates faster. When it’s time for college, withdrawals are exempt from federal taxes when used for qualified educational expenses.

There are two types of 529 plans: prepaid and savings plans. With a prepaid plan, you enter a contract to save a specified amount to lock costs at a specified college at today’s prices (the Illinois plan covers tuition and mandatory fees). Prepaid accounts may transfer to out-of-state schools under certain conditions.

You can purchase as little as one semester’s coverage and pay for it with a lump sum or on an installment basis. Most state plans require either the owner or beneficiary of the plan to be a state resident.

With the savings plan you can start small and save at your own pace. Because your contributions are not part of a contract, however, they don’t lock in today’s college prices. Savings accounts can, however, cover any qualified higher education expenses including books, supplies, and room and board. Money can be used at accredited colleges throughout the country. There are also many different investment options available that you can choose from.

While many states offer 529 programs, the Illinois College savings program has additional benefits for Illinois residents. Under some conditions, qualified 529 contributions can be deducted in computing Illinois taxable income, up to a maximum of $10,000 per year for an individual taxpayer. Furthermore, unlike other college savings programs, 529 plans do not impose income limitations on those who wish to contribute. Also, grandparents can contribute to a 529 plan as well.

To stretch your education dollars further, investigate the potential income and gift tax advantages of a 529 plan. Your financial adviser can provide additional details and help you choose a plan designed to fit your needs and investment strategy.

 

Tom McGee is the managing director of Harris Private Bank in Naperville. He may be reached at tom.mcgee@harrisbank.com

 

Tom McGee is the managing director of Harris Private Bank in Naperville. He may be reached at tom.mcgee@harrisbank.com

College is expensive and the options available to save for it are many. How do we know if as a parent, grandparent, or legal guardian of a child that we are investing in our child’s future in the most effective way with the least amount of tax burden? Unlike money in a parent, grandparent, or legal guardian’s name, money invested in a child’s college savings account such as a 529 Qualified Tuition Plan, a 529 Prepaid Tuition plan, or an Education Savings Account (ESA) like a

Coverdell can be allowed to gain interest federal tax-free.

In addition to offering a tax break by avoiding capital gains taxes, a college savings account allow some states to allow prepaid tuition plans, with or without limits on how much of the investment will receive a tax break. Additionally, withdrawals made for qualified higher education expenses do not incur any taxes or penalties through the Internal Revenue Services. Non-qualifying expenditures may avoid penalties under special circumstances such as receiving a scholarship, or in circumstances of disability or death.

529 Qualified Tuition Plans or 529 Prepaid Tuition Plans are not the only options for future-conscious investors to save for their child’s education. Other options include the Coverdell Education Savings Account which not only can it be used on college expenses but also on qualifying elementary and secondary school expenses without penalty. Like the other plans, the Coverdell Education Savings Account does penalize for non-qualifying expenditures.

Most 529 College Savings Accounts as well as the 529 Prepaid Tuition Plan do not have residency restrictions. However, in some states, either the student beneficiary or the account contributor must live in the same state the college savings account, prepaid tuition plan, or educational savings account was established.

The significant disadvantage to using a 529 plan or other ESA is the total contributions limit compared to a lack of the same on a traditional or non-educational savings account. Depending on the state from which the 529 or ESA account was purchased, maximum contributions must be under $300,000 in total for a 529 college savings account or $2,000 annually for a Coverdell ESA per beneficiary. Additionally, select plans may also have limits on how much of an annual gift to an educational account can be considered for a deduction in taxes.

Whenever you research something, try to get to the essence of what you are studying. I learned that as a philosophy major. It is true of mundane areas as well. As you search for college savings accounts try and reach the best value, definitions and clarity. Read what we have on our site on savings accounts and if you need more material on this you can always go to the world wide web again to finish up on your studies. In this information age, there is a lot of options for increasing your knowledge base.

For more information on College Savings Accounts or visit http://www.easysavingsaccounts.com/, a popular website that offers information on Savings Accounts. Please leave the links intact if you wish to reprint this article. Thanks

A kids college savings plan is very important for you to do as a parent. You will want to start saving early! The sooner you start saving for college the better! You can start by saving a certain amount of money each month for your child’s education and increase the amount you save over time.

You would probably agree, that your kids college savings plan is important. Should I invest the money I have saved for my child’s education in stocks, bonds or annuity? Well, based on the amount of time you have to invest this money will determine what financial vehicle is best for you.

For instance, if your child is younger, the more risk you are able to take which may allow you to invest in stocks.

However, if you have less time to invest the money you have saved for college, a money market or certificate of deposit may be where you should consider placing those funds.

As part of my kids college savings, what is a 529 College Savings Plan? This type of plan allows you to save for your child’s college education on a tax deferred basis.

The contributions made to the plan grow until your child takes money from the plan when he or she begins college.

As your child takes money from the plan to pay tuition, you pay taxes on the contributions made to the college plan based on your child’s tax rate which is usually lower. For my kids college savings plan, are there any tax credits available to help pay for my child’s education? Yes. The Hope and Lifetime Learning Credits. These tax credits provide a dollar for dollar reduction in the amount of federal income taxes you may owe.

The Hope Credit can be used for college expenses incurred for the first two years of college, and up to a certain amount per year.

The Lifetime Learning Credit applies to tuition costs for undergraduates and graduate students. This credit can be used for a certain amount of your child’s college expenses each year.

How can I pay for my child’s college education if I do not have enough money saved? You or your child can complete a Free Application for Federal Student Aid(FAFSA).

The FAFSA application will determine whether or not your child, will be eligible to receive financial aid from the following programs: grants, work study, subsidized and unsubsidized loans. Your child can also apply for various scholarships for college.

Nocita Carter creates websites with tips on various subjects including personal finance tips for you
http://www.personal-finance-tips-for-you.com