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Saving for College
How do You Plan to Save for College?
By James Fogal
Financial Planner, Fogal Financial Group
If the sounds of high school Pomp and Circumstance seem far away for members of your family, hold onto your mortarboards. The cost of a college education is rising and showing no signs of decreasing. According to the College Board, the average public university tuition and expenses grew 14.1% to $4,964 annually for the 2003-04 school year. If you have future college students in your family, saving for college now can help make paying for college easier.
Two popular ways to save for college are 529 plans and Coverdell Education Savings Accounts (Coverdell ESA). Both options have benefits for future students and contributors. However, which plan will work best for you?
The Coverdell ESA, known before 2001 as the Education IRA, allows an annual non-deductible contribution to grow free of federal taxes. With the tax law changes of 2002, contributions increased from $500 to $2,000. However, there is a maximum contribution amount of $2,000 per child annually. And contributions cannot be made if the parents' adjusted gross income is over $190,000-$220,000 for married filing jointly and $95,000-$110,000 for single. For some parents, this saving plan is even more attractive because you can use funds from a Coverdell ESA for elementary and post-secondary education expenses. In all cases, the funds have to be withdrawn by the time the student reaches age 30. However, the Coverdell ESA may not be the only college funding solution as maintenance fees can chip away at the account's value since contributions are relatively small.
One of the most popular college savings vehicles is the 529 plan. Every state has at least one type of 529 plan. When considering a 529, you have two types to choose from: a prepaid tuition plan and a savings plan. Prepaid tuition plans lock in today's prices for future students. However, these 529s are typically restricted to state residents only. Before choosing this type, consider the student's goals. A savings plan can be fully used at any accredited university in the United States.
Unlike a Coverdell ESA, there are generally no age restrictions or income limitations. The money can be used for undergraduate and postgraduate education. So, if you want to pursue a master's degree later on, you could use the funds in a 529 for those expenses. If you establish a 529, you can control the account and even regain control of those funds. The beneficiary has no control over this plan. Contributions are unlimited, but remember that you contribute up to $11,000 annually without paying the gift tax. Best of all, this money grows tax-deferred, so taxes will be paid when a distribution is taken.*
When choosing how to save for college, consider your student's needs and their current financial situation. An investment professional can help you navigate the waters of college funding and tailor a plan to help meet your needs.
*Pursuant to the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA"), qualified distributions are federal income tax free. The provisions of EGTRRA will expire on December 31, 2010. Unless the law is extended by Congress and the President, the federal tax treatment of 529 plans will revert to its status prior to January 1, 2002. If you are not a resident of the state of the plan for which you are offered, you may want to investigate whether your state offers a plan for its residents with alternate tax advantages. Units of the options are municipal securities and may be subject to market volatility and fluctuation.
Securities offered through H.D. Vest Investment ServicesSM, a non-bank subsidiary of Wells Fargo & Company, Member SIPC.
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