Planning on Sending a Child to College?
You probably started thinking about financial planning for college when your child was very young. You may even have thought about it before your child was born, perhaps while you were shopping for a bassinet and a teddy bear. After all, it’s one of the major responsibilities you face as a parent: your child’s college education.
You’ll need a good estimate of the cost of your child’s education, based on the year in which you expect he or she will enter college. To come up with an estimate for specific years and/or specific colleges, you can contact your Financial Planner.
What are 529 Plans?
529 plans were authorized by Congress in 1996. They are administered by the states and provide families with tax incentives to encourage saving for college. States implement their own 529 plans in various ways, with each having its own conditions, but all 529 plans are exempt from federal income tax. Continue below to learn more about 529 Prepaid Tuition and Investment Plans.
Lock in the Price of College Today
These plans lock in the price of tuition at today’s rates, no matter what the rate actually is when your child enters college. Prepaid tuition plans are operated by state governments.
Prepaid tuition plans are not for everyone. Using this option may jeopardize your chances for state financial aid if you would otherwise qualify. If you’re interested, and a plan is offered in your state:
- Offered by 19 states, check with your state’s commission on higher education to see if a plan is available.
- Make payments to the state in a lump sum or monthly installments.
- Anyone can contribute to a prepaid tuition plan.
- Whether the plan covers only the cost of tuition, or room and board, as well;
- If you can apply the proceeds to another state school within your state; and
- How your original deposit will be returned if your child does not attend college or attends a private or out-of-state college.
Save for College Over Time
An alternative to prepaid tuition plans are investment plans. Investment plans can offer more flexibility and control to the owner and their beneficiaries.
Investment plans are not for everyone. Using this option may jeopardize your chances for state financial aid if you would otherwise qualify:
If your state does not have a savings plan, many other states have opened their plans to non-residents. You should consider the potential tax benefits (if any) that your own state’s plan offers to residents prior to considering another state’s plan. To determine specific laws and regulations that affect your situation, consult your financial professional.
- Plans offer a variety of investment options.
- Plans are available in 49 States and Washington D.C.
- Anyone can contribute to an investment plan.
- Owner controls investment options and withdrawals.
- Investments grow tax deferred, if used for a qualified institution of higher learning within the United States withdrawals can be tax free.
- If your child does not go to college, the money can be used for another family member’s qualified education expenses.
- In 2009, $13,000 per donor for each beneficiary is eligible for the gift-tax exclusion.
- Savings may not be enough to cover all college expenses.
- Some plans have a dollar amount limit – usually $300,000.
- If the funds aren’t used for a qualified expense, a 10% penalty applies with applicable income taxes.
- The value of investments in these plans will fluctuate based on the investment vehicles you choose and market conditions.
- Unlike prepaid tuition plans, these plans do not lock in tuition rates and make no guarantees.
Coverdell ESA/Education IRA
Coverdell Education savings accounts can be used to pay for your child’s qualified expenses from kindergarten through high school in addition to higher education costs.
Coverdell ESA plans are not for everyone. Using this option may jeopardize your chances for state financial aid if you would otherwise qualify:
Uniform Gift to Minors Act/Uniform Transfer to Minors Act
UGMA/UTMA custodial accounts let you take advantage of your child’s lower tax rate while saving for your child’s education. Withdrawals can be used for more than education costs, but always must be used for the benefit of the minor.
Custodial accounts are not for everyone. Using this option may jeopardize your chances for state financial aid if you would otherwise qualify: