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The two winners of our February drawing will win The ABCs of Making Money for Teens by Alan Lysaght & Dr. Denis Cauvier.

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February 24th, 2006

Saving for College: What Are My Options?

It’s no wonder the thought of sending a child to college gives most parents heart failure. According to College Board estimates, by 2020, the cost of higher education could rise to as much as $287,000 at a private institution and $133,000 at a public one. As saving the change found in your couch cushions isn’t likely to cover the rising cost of tuition, investing for your child’s college education is a smart decision.

“We wanted to get a jump start on saving for Joshua’s college,” says Jennifer D., mother of a precocious 2 year old, “Fortunately for us, my employer offers a 529 program using pre-tax dollars, so we started contributing right when I went back to work.”

College savings plans, commonly referred to as 529s, are just one of the three main college savings options available. Each program has its own benefits and tax advantages. Most programs can be started at any time, so even if you have school aged children, it’s not too late to begin saving.

1. Custodial Accounts

What is it?: A savings account that will ultimately be controlled by your child

Best for: Modest yearly contributions

Details:

• Ownership of the account belongs to the minor, thought a custodian controls the assets until the child reaches the age of 18
• Gift is irrevocable and the assets cannot be transferred
• Withdrawals are allowed only for the child’s benefit

Tax implications:

• First $800 of earnings is free from federal name taxes
• Earnings above $800 are taxed at the child’s rate
• Earnings above $1,600 are taxed at the parents marginal rate
• If the beneficiary is 14 or older, first $800 of earnings is free from federal name taxes; earnings above $800 are taxed at the child’s rate.

2. Coverdell Education Savings Account

What is it?: Kind of like a 401K for you child’s college education

Best for: Moderate yearly contributions

Details:

• $2,000 contribution limit per year per minor
• All withdrawals used to pay for qualified higher education expenses (primary and secondary) are tax-free

Tax implications:

• Earnings grow tax-deferred
• Contribution can be added up to April 15th for the prior tax year

3. College Savings Plans (529 Plans)

What is it?: An investment plan for your child’s college education

Best for: Lump sum or significant yearly contributions

Details:

• Accounts can be opened at any time and anyone can be a beneficiary, regardless of age
• Proceeds from the account can be used at eligible schools nationwide – including public and private colleges, universities, graduate schools, community colleges and certain vocational schools
• Proceeds can be used for qualified expenses such as tuition, fees, room and board, books and required supplies.
• The account beneficiary can be changed to another “member of the family” of the current beneficiary at any time without penalty.

Tax implications:

• Earnings grow federally tax-free
• Qualified withdrawals are free from federal income taxes.
• Invest as much as $55,000 ($110,000 for married couples) per student in one year without incurring gift taxes.

3B. Virginia Prepaid Education Program

What is it?: A specific 529 plan offered by the Virginia College Savings Plan that locks in tuition fees

Best for: Contributing a single lump sum payment in the plan

Details:

• Locks in future costs of in-state undergraduate tuition and mandatory fees
• Can be used at any accredited college in the country eligible to accept federal financial aid
• Maximum use is 5 years at university and 3 years at community college
• Enrollment is limited each year
• Enrollment can begin at birth; children must be enrolled before 9 th grade
• Benefits can be transferred to a sibling or family member

Tax implications:

• Earnings are tax-free
• Qualified distributions are tax-free
• Federal estate and gift tax provisions
• Virginia income tax deduction for account owner

“It’s such a relief to know that we’re preparing for our son’s future,” says Jennifer, “And there are plenty of tax advantages to help us along the way.”

Whatever your child’s age or your income level, there’s an option that’s right for you.

Consult your tax advisor to find out which college savings plan best fits your situation.

To attend a free seminar on college savings plans or to get a free individual financial review, please contact Anthony Jardine by phone at 334-6684 or by email at awjardin@yahoo.com.

Please contact your program provider for full disclosures and details and consult your tax advisor regarding your specific situation.