How will I Save for my Child’s Education?
Your child was born, you now have a million things on your mind and college seems so far away. But in reality, time goes by quick and before you know it your child is living in a dorm and making life-long memories. With the ever increasing tuition rates, planning for your child’s education should be at the top of the parents priority list.
If you blinked and your child is now in high school, don’t panic. You can still plan and save to pay for at least a portion of college costs.
Saving doesn’t always have to fall on the shoulders of parents. Cassandra Financial has many opportunities that allow family members such as grandparents, aunts and uncles, and others to contribute to the child’s education if they are able.
Which Plan is Right for You?
With many new college savings alternatives available, it is critical to choose the one that’s appropriate for you. Selecting the wrong plan – or not investing properly within the right one – can prohibit you from maximizing your savings. However, with the help of our experienced guidance, choosing the right alternative can be easy.
What to Consider Before Selecting A Plan:
- What are the tax benefits?
- Who controls the funds?
- How much risk is involved?
- Are there contribution limits that may hinder your ability to meet savings goals?
- Are large contributions subject to gift taxes?
- What investment options are available?
The following alternatives address these issues with a variety of different savings features.
529 Savings Plans
These state-sponsored plans offer flexible, tax-deferred ways to save.
Benefits
529 savings plans offer several advantages over other savings plans.
- States may allow contribution deductions from state income taxes.
- Earnings are free from federal taxes if used for qualified higher education expenses.
- In most states, earnings are free from state taxes if used for qualified higher education expenses
- The owner of the plan controls the funds regardless of who the beneficiary may be.
- Generous contribution limits exist, regardless of income level.
- You choose the investment strategy that is right for you and your student.
- You can contribute to a 529 savings plan and a Coverdell Education Savings Account during the same year.
- Your child may choose any accredited college, university or vocational school.
- The account may be transferred to another family member.
- Contributions are typically excluded from your taxable estate and may not be subject to gift taxes.
- Some states may provide creditor protection. It is important to review each plan and state laws to determine if they allow creditor protection.
Considerations
While 529 savings plans offer many benefits, there are potential drawbacks.
- Earnings are taxed and subject to a 10% penalty when withdrawn for uses other than qualified higher education expenses.
- The portfolio allocations may only be changed once per year or upon a change in beneficiary.
- As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover education costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. The tax implications can vary significantly from state to state.
529 Prepaid Plans
These plans allow you to purchase a certain percentage of tuition over time that is guaranteed to be equivalent to the same percentage of tuition in the future. Cassandra Financial does not offer 529 prepaid plans. However, we can assist you in determining if a 529 prepaid plan is available in your state.
Benefits
With tuition rates rising, these plans may be appropriate for some families.
- States may allow contribution deductions from state income taxes.
- Value of contract is free from federal taxes if used for qualified higher education expenses.
- Locks in tuition at a known rate.
- Funds are not subject to market volatility.
Considerations
Consider these plans carefully since there are limitations.
- Earnings are taxed and typically penalties will apply if the funds are not used for higher education.
- Your child may have limited school choices.
- Refunds may be limited to original contribution only, less fees.
UGMA/UTMA Custodial Accounts (Uniform Gifts/Transfers to Minors Act)
This act allows you to transfer ownership of assets to your child without needing to establish a more costly trust.
Benefits
While not specifically designed for educational funding, these accounts can be advantageous as they allow you to accumulate funds in your child’s name.
- Earnings from these investments may be taxed at your child’s lower rate (certain limits apply).
- There are no annual contribution limits, but keep in mind that gifts into the account are subject to annual gifting rules.
- Transferring assets may lower the value of your portfolio, thus allowing you to avoid higher taxes.
- You may invest the funds on behalf of your child. We can provide you investment advice that suits your goals for your child.
- As a custodian, you have many investment choices to choose from, including stocks, bonds and other investments.
Considerations
These accounts are not specific college savings plans, and there are several noteworthy issues to think about.
- You lose control of the funds when the child reaches the age of majority.
- Contributions to the account are irrevocable.
- Your child may use the funds for any purpose.
Coverdell Education Savings Accounts
Formerly known as the “Education IRA,” this savings alternative is a trust or custodial account used for education expenses. Our team does not offer Coverdell Education Savings Accounts as a custodian. However, we are contracted to offer these accounts through certain mutual fund companies.
Benefits
Coverdell Education Savings Accounts (ESAs) offer several advantages.
- Earnings are free from federal taxes when withdrawn for qualified education expenses.
- Funds can be used for primary and secondary education in addition to higher education.
- You can contribute to a Coverdell Education Savings Account and a 529 savings plan during the same year.
- You have full investment control.
- Unused portions of the account may be transferred to another family member.
Considerations
Before investing in a Coverdell Education Savings Account, consider these points.
- Total contributions are limited to $2,000 per year.
- Earnings are taxed and subject to a 10% penalty if not used for qualified primary, secondary or higher education purposes.
- Income limitations may prohibit some individuals from contributing.
- When the beneficiary turns 18, contributions can no longer be made, and at age 30 the account needs to be closed.
Other Ways to Save
While 529 plans and Coverdells are specifically designed for higher education planning, other strategies also exist. While not intended specifically for this purpose, these alternatives can help you pay for expenses. Talk to us before implementing any of these strategies to find out how they may affect your overall investment plan.
IRAs
You can withdraw funds from your IRA to pay qualified higher education expenses. While this may seem like a viable savings option, remember that you will be spending your retirement savings. In addition, amounts withdrawn may count as income and affect eligibility for need-based financial aid.
The 10% penalty tax for withdrawals is waived when funds are used for higher education purposes, but the money may still be subject to income taxes.
Typically, if you own a traditional IRA, the full amount will be taxed, while Roth IRAs allow tax-free withdrawals in certain circumstances. Discuss this issue with us to determine if your withdrawal will be subject to taxation.
Putting your Child’s Future First…
The time to plan for your child’s future is today. Contact us at Cassandra Financial Group for a no-obligation analysis of your college planning alternatives.