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College Planner
Ways to Save for College
Being able to pay for a child's education is one of most parents' top financial priorities. But putting money into a regular savings account probably won't earn enough interest to fund mounting tuition costs. The good news is that there are more ways to save and invest than ever before for your child's college education. Following is a list of the most popular savings vehicles:
State-Sponsored College Savings Plans
State-sponsored college
savings plans, also known as 529 plans, are a
popular
option for saving and investing for future college expenses.
However, when
using these savings and investment plans, it is still important to
carefully
research your options and closely monitor your investment.
Here's how 529 college
savings plans work: you deposit money in a state-sponsored account
(either the
state you live in or any other state). The account is overseen by
either the
state treasurer's office or a state-appointed program manager, usually
an
investment company. The program manager invests the funds in a variety
of
stocks, bonds, CDs and mutual funds. The fund manager will move your
money,
over time, to gradually more conservative investments so that when it's
time
for your child to enter college, your money is invested in low-risk,
liquid
(meaning most quickly accessible) investments. This strategy is
intended to
give you the greatest return on your money by investing according to
your
investment horizon (how long you have until you need to access your
funds.)
There are significant benefits to
investing in a 529 college plan – most
notably that:
- All earnings on
your investment are federal income tax-free.
- Anyone can
contribute to the plan (parents, grandparents, friends, etc.)
- Each beneficiary
(child that you have an account for) can receive up to $10,000 each
year as a tax-free gift (beneficiaries must be U.S. citizens).
- The money can be
used for almost any college-related expense and can be transferred to
another sibling if your child doesn't attend school or if there is
additional money left in the account after he/she graduates.
- As custodian of the
account, you have complete control of the account.
When
considering a 529 college saving plan, ask your advisor:
- What fees are associated with this plan (enrollment fees,
application fees, maintenance fees, etc.)? Fees vary by state and
there are differences. For example, one state’s plan may charge a
yearly fee as a percentage of money invested. So if a state’s
plan charges an annual fee of five percent of funds invested and you
have $3,000 invested then you are going to pay $150. Compare that
to another state’s plan that charges a 15 percent fee of funds
invested and you will pay $450 for the same services.
- Can you explain to me how the fees with the plans you recommend
compare to potential earnings?
- How long has the state used this investment firm to manage the
plan? What has the plan’s performance been so far? Has the
state changed investment managers since starting the plan?
- Can I get a list of college savings plan offered from all 50
states?
- What penalties are there for early withdrawal or if I choose to
withdraw the money for unqualified purposes (meaning for reasons not
approved under the program guidelines)?
- What are the minimum and maximum contribution requirements?
- Are qualified distributions from your recommended plans exempt
from state, as well as federal, income taxes?
- Is there an age limit or time limit to receiving distributions
from this plan?
After
getting answers to these and any other questions you may have, take
some time
to compare plans carefully before investing. You may also want to
consider
meeting with a financial professional about investing in 529 plans
as part
of your overall strategy to save for college expenses. Once you
choose a plan
and begin investing, be sure to review your plan’s earning statements
on a
regular basis to monitor how your investments are performing. If
you are not
satisfied with the plan’s performance, you can talk with a financial
professional to review your options within 529 plans and other college
savings
vehicles such as those listed below. If you stop investing in the plan
you have
chosen and maintain the balance until you need to access the funds for
college
expenses, you will not incur an early withdrawal penalty. You
could also open
an account and begin investing in another state’s plan. Most
states do not
have a residency requirement to open an account and there is no limit
to the
number of plans you can invest in.
For more
information on 529 plans, consider visiting the College Savings
Plan
Network's site. You can also compare plans at www.Savingforcollege.com.
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Prepaid Tuition Plans
Locking in the cost of your child's college tuition while he/she's still in diapers defines a prepaid tuition plan. You choose a college - or a group of colleges (for example, all public colleges in your home state) - and you stash money away in a fund to cover the cost of tuition when your child is ready to attend. Of course, depending on how young your child is it might be a bit difficult to figure out which school he/she will want to go to. If he/she chooses not to go to school, or chooses to go to a school other than the one you've selected, the amount you'll get back from the plan varies.
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UGMA Accounts
UGMA stands for "Uniform Gifts to Minor Act." UGMA accounts and UTMA ("Uniform Transfers to Minor Act") accounts are also called custodial accounts. That means that until your child reaches age 18 (or 21 in some states), you are the custodian of the account and have full responsibility for how your money is invested and used. After your child reaches the legal age, however, the account becomes his/her property. The money can be used for college or for any other expense for the child while he/she is a minor. Once the account becomes their property, he/she is allowed to use it for any purpose. You cannot transfer the account to another sibling and the beneficiary must be a U.S. citizen. Each parent is allowed to deposit up to $10,000 in the account each year tax-free.
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Coverdell Education Savings Accounts (formerly known as Education IRAs)
Coverdell ESAs won't allow you to sock away a tremendous amount of money for college costs, but they're a good place to park some savings. You, or anyone else (grandparents for example), can deposit up to $2,000 annually in this IRA. All interest earned on the money is tax-free as long as its used for your child's qualified college expenses. And with the recent tax law changes, you can now contribute to both a 529 plan and a Coverdell ESA within the same year. All beneficiaries must be U.S. citizens.
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Series EE Bonds/Savings Bonds
These bonds issued by the federal government are another way to save for your child's college education. You can buy a bond for as little as $50, and you can even buy them online at www.publicdebt.treas.gov. The interest rate on these bonds adjusts twice a year and they can be cashed in after six months of buying/receiving them.
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For more information on financing a college education, check out the following links:
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