How to Financially Plan for College
The Real Scoop on College Planning
By Cindy Diccianni, Financial Advisor
You have probably heard all about the "new" 529 college plans. Well the plans are not all that new but they have gained a lot of momentum in the last couple of years. In this article I will review the different types of college plans and how they can work for your investment needs.
Prepaid tuition plans fall under the 529-tax code, however they are a first generation type plan. The idea is that you pay the tuition at today's rate for future use. The money is invested by the state, thereby guaranteeing the tuition at a participating college. Something to look out for in this plan is that the tuition must be used at a school within the state that you invested in and it must be used exclusively for tuition or you can pay a penalty. Also there is no professional money management in these plans that are run by the state governments. The major benefit of this plan is the guarantee of the tuition money when redeemed.
The Section 529 college plans, (so named by the IRS code they represent) got a big boost from the recent tax law changes. In a nutshell, the money inside these plans grows completely tax-free and is tax exempt upon withdrawal if used for college related costs. These college costs are tuition, books, room and board, or any other college related expense. The 529 plans are very flexible:
- There are no income limits on the plan
- Anyone can open one and make low monthly contributions
- Monies can be moved from one beneficiary to another
- Excellent estate planning tool
- The money can be used for public or private schools, also 2 year technical schools
- They can be used in any state and some foreign institutions
- Monies in a 529 plan will not affect financial aid as much as educational savings account.
Thoughts to keep in mind:
- The Federal law governing the withdrawals from these plans will expire in 2011, so there may or may not be some changes involved here
- Unqualified expenses will have a 10% IRS penalty and some states also charge a penalty.
- Education Savings Accounts, which were the Educational IRA's of the past, have been positively affected by the new tax law changes.
- Currently the yearly contribution is $2000 per year.
- You can contribute and establish an account on behalf of any beneficiary under the age of 18.
- The funds can be withdrawn tax-free to pay for all qualified educational expenses at primary and secondary schools, colleges and universities.
- In an ESA you have complete control over the investments in the account. Any funds remaining in the account when the beneficiary reaches the age of 30 are redeemable by the beneficiary minus taxes and penalties unless they are rolled over to the account of an eligible family member.
- These accounts are off limits to investors whose single income is more than $110,000 or married couples earning more than $220,000.
UGMA/UTMA Accounts offer fewer tax benefits than the newer savings plans. When the beneficiary reaches the age of majority they have full access to the money, whether it is used to pay for college or a hot new sports car with all the extras! These accounts allow you to invest as much as you like, how and where you elect to invest but without gift-tax incentives. For a child under the age of 14, the first $750 of annual investment is at the child's tax rate, income above $1,500 is taxed at the parents' tax rate. All income for a child 14 or older is taxed at the child's rate. There are many options available to parents today for college savings. The most important one is to begin as early as possible and to continue to invest for as long as necessary. The one thing we all know as parents is that the fastest 18 years of your life happens from the day your child is born to the day they start college. A person who sets aside $2000 per year in an ESA or 529 plan, and earns 10% per year on that money, will have:
- 13,341 at the end of 5 years
- $35,062 at the end of 10 years
- $69,899 at the end of 15 years
- $100,318 at the end of 18 years.
The sooner you can get started, the easier it will be to make the dream of college a reality.
Cindy Diccianni is a nurse, a certified senior advisor (CSA), a registered investment advisor and a registered representative with Leigh Baldwin & Company member NASD and SPIC. She is affiliated with Ortner, O'Brien & Ortner Advisory Group, Inc. Contact Cindy at email@example.com.
Copyright 2002 by Cindy Diccianni.