College Education Planning For Today
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Posted On :
Mar-23-2010
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Article Word Count :
2034
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Paying for a college education is an expensive proposition—but not an impossible one. Expenses at private universities currently average more than $22,000 a year.1 The annual cost for state colleges averages about $10,000.1 With the right strategies, however, you can go a long way to meeting this challenge, whether your child is still in preschool or already in high school.
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Paying for a college education is an expensive proposition—but not an impossible one. Expenses at private universities currently average more than $22,000 a year.1 The annual cost for state colleges averages about $10,000.1 With the right strategies, however, you can go a long way to meeting this challenge, whether your child is still in preschool or already in high school.
An Early Start
If your child is young, establishing a savings plan now can put time on your side. Consequently, you may want to consider the following alternatives to the traditional savings account:
Uniform Gifts/Transfers to Minors Act (UGMA/UTMA) Custodial Accounts
Setting up a UGMA or UTMA custodial account in your child’s name with a mutual fund company and making regular contributions to that account can help you reach your college finance goals and possibly minimize income taxes as well. When deciding on what mutual funds to invest in, choose investments with a potential for high long-term returns, such as growth stock funds. Because these investments pay little or no current income, you may be able to avoid the “kiddie tax,” which taxes the investment income of children under age 14, above the $1,500 level, at the parent’s or the child’s top federal income-tax rate. Once the child is age 14, all account income will be taxed at the child’s tax rate.
As of 2002, an individual can transfer up to $11,000 per year ($22,000 for a married couple) to a trust or custodial account for each child, free from gift tax. It should be noted that once the child reaches the age of majority (age 21 for an UTMA account and age 18 for an UGMA account), all principal must be distributed to the child and the parent/custodian relinquishes principal and control forever.
Education IRAs
If your income is not too high, you may make a non-deductible contribution of up to $2,000 a year to an Education IRA for each of your children or grandchildren under age 18 (or older, in the case of a special needs beneficiary). Please note that this $2,000 contribution is limited to all sources, meaning that grandparents, parents, aunts, uncles, etc. can all only contribute to one Education IRA per beneficiary. All withdrawals—including investment earnings—that are used to pay the child’s qualified education expenses are income-tax free. The $2,000 contribution limit is phased out with income between $95,000 and $110,000 (individuals) or between $190,000 and $220,000 (married couples filing jointly). Prior to the Economic Growth and Tax Relief Reconciliation Act of 2001, the definition for qualified education expenses only included those expenses that pertained to post-secondary higher education. However, with this new tax law, qualified education expenses now include expenses associated with elementary and secondary tuition or expenses. This means that a parent can use funds established in an Education IRA to pay for tuition or expenses for a private elementary or high school.
Qualified Tuition Programs (Section 529 Plans)
Section 529 of the Internal Revenue Code authorizes two types of tax-favored qualified tuition programs:
Prepaid Tuition Plans
Many states and individual colleges offer tuition prepayment plans. With these plans, you make a series of payments or pay a lump sum now for your child’s education. In return, the plan guarantees that your investment will cover the child’s expenses when he or she is ready to attend college. Some plans will even lock in the cost of future education at today’s prices. Currently, state-sponsored plans enjoy certain tax advantages. Beginning in 2002, private educational institutions can also create tax-favored plans. Before choosing this route, though, be sure to find out what will happen to your investment if your child does not attend the sponsoring college.
Education Savings Accounts
This is the more commonly used type of qualified tuition plan. Unlike prepaid tuition accounts, only states may sponsor education savings accounts. State-sponsored accounts provide you with a potential tax-free way to invest for a child’s college education. The designated beneficiary must be a member of your family. A change in beneficiary is not treated as a distribution from the plan and is not subject to income tax if the new beneficiary is a member of the family of the old beneficiary. In addition, a change in beneficiary will not result in a taxable gift if the new beneficiary is a member of the family of the old beneficiary and is assigned to the same generation as the old beneficiary. If the new beneficiary is assigned to a lower generation, (e.g., beneficiary changes from your child to your grandchild) the change will be treated as a gift from the old beneficiary (your child) to the new beneficiary (your grandchild).
Beginning in 2002, funds withdrawn and used to pay qualified higher education expenses from state-sponsored plans will be exempt from federal income tax. Qualified distributions from plans sponsored by private institutions will be tax-exempt beginning in 2004. Unlike pre-paid tuition plans, funds in these plans generally can be used for expenses at any qualified school nationwide or, in some cases, outside the U.S. Furthermore, funds do not have to be used solely for college or university expenses. If your son or daughter decides not to go to college, funds from these plans can be used to pay for expenses associated with a qualified trade or technical school as well. In addition, it should be noted that your choice of 529 plans is not limited to the state you live in or the state in which your child wants to go to college.
If a contribution to a beneficiary’s account, in one year, exceeds the $11,000 annual gift tax exclusion, you may elect to take the aggregate contribution into account ratably over five years beginning with the year of the contribution. Therefore, a maximum of $55,000 per person may be contributed free of gift tax under this election ($110,000 for married couples). Maximum contribution limits are dependent upon the annual cost of attending the most expensive school in the sponsoring state (including tuition, fees, room and board) multiplied by seven. Depending upon the sponsoring state, this amount can range from $100,000 to upwards of $250,000. If the combined balance of all accounts for a single beneficiary is below the maximum contribution limit, the beneficiary is eligible to receive further contributions up to this limit. If you die before the end of this five-year period, the contributions allocable to periods after death are included in your estate. Other than this exception, an education savings account should not be included in your estate.
Beginning in 2002, money can be transferred tax-free from one qualified tuition program to another qualified tuition program for the same beneficiary. If the beneficiary decides not to attend college or trade school or receives a full scholarship, the donor has the option of changing the account beneficiary to another family member. Family members include the beneficiary’s parents, spouse, siblings, first cousins, children, nieces, nephews and their spouses. If you have no other beneficiary to give the money to, you are allowed to get that money back. However, all nonqualified distributions, such as refunds back to the donor, are subject not only to income tax at the donor’s rate but also to a penalty tax equal to 10% of the earnings in the account.
Since most states sponsor a qualified tuition plan, there are many different plans out there to choose from. Some are fairly rigid with respect to the way in which the contributed money has to be invested, while others are much more flexible in the investment choices you can make. In order for you to determine the best 529 plan for you and your family, please check out one of these websites: collegesavings.org/state-table.htm or savingforcollege.com.
Never Too Late
If your child will be starting college within the next couple of years or has already started, there are still financing methods available for you to consider:
Financial Aid
Most schools have a limited pool of funds, so you should file financial aid forms as soon as possible. Generally, the school will calculate how much aid your child will receive based on your financial situation. Also, your child should apply for all available governmental or private grants and scholarships.
Loans
Your child’s aid package may include loans from the federal or state government, the college or a commercial lender. The loan offers may vary considerably, depending on the program, so be sure to carefully check the interest rates and terms of each. Home equity loans, retirement plan withdrawals, and the cash value of your life insurance are other possible loan sources you might consider.
Tax Incentives
If you do take out a qualified higher education loan, up to $2,500 of the interest paid is tax deductible this year. Beginning in 2002, the 60-month time period for qualified higher education loans has been repealed allowing taxpayers to deduct interest on loans that have been outstanding for more than 60 months. You also may be eligible for the Hope Scholarship Credit and the Lifetime Learning Credit. The Hope Scholarship Credit is currently worth up to $1,500 a year for each student’s first two years of eligible post-secondary education expenses. The Lifetime Learning Credit is available for up to $1,000 of qualifying expenses paid for each additional year of education (20% of a maximum of $5,000 in expenses). The Lifetime Learning Credit will increase to $2,000 beginning in 2003 (20% of a maximum of $10,000 in expenses). The Lifetime Learning Credit and the Hope Scholarship Credit cannot be used for the same person in the same taxable year. However, the taxpayer may use the Hope Scholarship Credit for one student and the Lifetime Learning Credit for other students in the same taxable year. Both of these credits are phased out with modified adjusted gross income levels between $40,000 and $50,000 for individuals and between $80,000 and $100,000 for married couples filing jointly.
New Above-the-Line Deduction for Higher Education Expenses
For tax years beginning after 2001 and before 2006, eligible taxpayers will be able to claim an above-the-line deduction for qualified higher education expenses. The maximum allowable deduction will be $3,000 in 2002 and 2003 and $4,000 in 2004 and 2005. The deduction is, however, subject to certain income limitations—$65,000 adjusted gross income (AGI) for individuals and $130,000 AGI for married couples. During 2004 and 2005, the deduction is $5,000 for those above the AGI limitations noted, but below $80,000 AGI for individuals and $160,000 AGI for married couples. The deduction may also be unavailable or limited if other education tax benefits are utilized for the tax year, like the Lifetime Learning Credit or Hope Scholarship Credit. Furthermore, this provision is not available after 2005.
Conclusion
While it’s best to get an early start, it is never too late to plan for the cost of your child’s education. Many people feel that since they did not start saving for their children’s education when they were first born, they cannot start an adequate savings program now. It should be evident that no matter when you start saving for college, there is some form of assistance available to you to aid you in the gargantuan task of paying for the cost of your child’s education. For assistance in finding out which alternatives are best for you, contact your professional financial advisor. He or she can help you plan today for your child’s education tomorrow.
John J. Chichester, Jr., CFP®, CPA, PFS, is a CERTIFIED FINANCIAL PLANNER™ Practitioner, Registered Representative offering securities through First Allied Securities, Inc., a Registered Broker/Dealer and Member FINRA finra.org /SIPC sipc.org, and an Investment Advisor Representative offering services through Hermening Advisory Services LLC and First Allied Advisory Services, Inc. John was Senior Financial Analyst with Lehman Brothers of New York; Vice President – Financial Controller/Head of Operations with GTF Asset Management (USA), Inc., New York; and Senior Analyst for MeesPierson Fund Services, Curaçao, Netherlands Antilles. John is noted for his commitment to the financial industry and for his ongoing efforts to keep abreast of the evolving complexities relating to the financial marketplace.
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Article Source :
http://www.articleseen.com/Article_College Education Planning For Today_14263.aspx
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Author Resource :
For more information contact John Chichester at Chichester Financial Group, LLC 3420 E. Shea Boulevard, Suite 164 Phoenix, AZ 85028 602-283-2793 john@chichesterfinancial.com or visit www.chichesterwold.com.
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Keywords :
financial business strtegist, marketing, financial professionals, Financial Planning firms, financial advisor marketing strat,
Category :
Reference and Education
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Reference and Education
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