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Other Articles
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Saving for College
Save Wisely for College
By John Mikhael
Financial Advisor; Portfolio Manager, Smith Barney
Education funding is a hot topic these days. With the average cost of college soaring, families are coming to realize that they had better start saving sooner rather than later.
In the past three decades, public college tuition has increased steadily, while tuition and fees at private schools have skyrocketed nine-fold—to the point where price of a four-year education, plus room and board, at a moderately priced private school can top $100,000. With yearly increases at many schools far outpacing the rate of inflation, it’s no surprise that parents, grandparents and other guardians, are seeking ways to help reach tuition goals. 529 savings plans can help. These 529 plans allow tax-deferred growth and then tax-free withdrawals to pay for qualified higher education expenses.
Save with Flexibility
Put money away now, and on a regular basis, to pay for the college education of your children, grandchildren, siblings, nieces, and nephews—even close friends. It doesn’t matter where you live or where the beneficiary attends college. You can even save for your own college expenses. Initial investments vary, but may be as little as $25.
The funds in College Savings Plans are usually invested in one or more pre-selected portfolio, according to the age of the student or risk tolerance of the owner. Some plans allow the donor to create a customized portfolio using a specific group of mutual funds. The performance of the portfolios depends on market conditions and there is no guarantee that there will be enough money in the account to cover all education expenses.
Save with High Limits
There is no limit for you and no age restriction for the student. Limits on total contributions vary, but most plans allow you to accumulate more than $200,000, in these tax-deferred accounts. Plans adjust their contribution and accumulation limits annually. The money saved helps pay for tuition, room and board on or off campus, books, and other required supplies at any accredited college or vocational schools in the U.S.
The tuition savings account always remains under your control. You can change the beneficiary anytime. Should one child decide not to go to college, the money can help finance the college education of another family member.
Give Your Grandchildren the Gift of Learning
There is no greater tax-free gift for your grandchildren than the money they’ll need for a higher education. Help them, and at the same time effectively lower the taxable value of your estate. An individual may contribute up to $55,00 and married couples may invest up to $110,000 in a single year and have the contributions treated as five gifts of $11,000 or $22,000, spread over five years—with no gift tax. This presumes the same donors make no additional gifts to the same beneficiary during the five-year period. The IRS deems investments completed gifts although a prorated portion of the contribution will be included in the donor’s taxable estate if he or she dies before the end of the five-year period. With you grandchildren as beneficiaries, they will receive more from your estate—and Uncle Sam less.
Supplement Your College Savings
You can supplement your college savings with a Coverdell Education Savings Account, or ESA. Formerly known as an Education IRA, this tax-deferred savings plan now has a contribution limit of $2,000.
The Coverdell ESA may also be suitable for small savers, especially those who want to open many small accounts. Unlike 529 plans, Coverdell assets can be used for K-12 as well as college. They are not mutually exclusive, either. You may contribute to 529 plans and to Coverdell ESAs for the same beneficiaries—another good way to get a jump-start on your savings when freshman orientation is close at hand.
Sunset Provision
It’s important to remember that the law permitting tax-free withdrawals includes a sunset provision. Congress must extend the law or the tax break will go away December 31, 2010. If that should happen, withdrawals free of federal income tax would no longer be allowed. But the accounts would still retain their tax-deferral benefit and withdrawals would be taxed at the beneficiary’s lower tax rate—so it’s still a good deal.
Companies Are Catching On
More and more companies are offering payroll deduction for 529 savings plans. This makes it even more convenient to save systematically for college.
Begin Saving Now
With no end in sight to the soaring cost of college, getting started in a 529 plan is a step in the right direction. A Financial Consultant can provide more information, and help you determine which plan may be suited to your needs.
Smith Barney does not provide tax or legal advice. Please consult your own tax and/or legal advisor for such guidance.
Smith Barney is a division and service mark of Citigroup Global Markets Inc. Member SIPC.
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