Saving for School- how the heck do you do it?

May 16, 2010

Saving for your children’s education by Dana Skallman

With the cost of education rising faster than inflation and government support dwindling, savings for your children’s education is crucial in order to prevent high debt. In the past grants and scholarships have been more available and were based on need. These options are much fewer and far between, which means college students rely on student loans, their parent’s support or savings.

To help ease the burden on families our government has established a couple of education savings programs. The more well known one is the 529 Plan. But what does it consist of and what is it for? The 529 is exclusively for higher education. To help you better understand what a 529 plan consists of, these are some things you should know:

Contribution limit Depends on plan — varies from $100,000 to $305,000
Tax treatment of withdrawals Tax-free if used for qualified expenses until 2010 (distributions will count as income to the student in 2011 and beyond unless Congress extends the current law)
Qualified expenses Tuition, fees, room, and board at qualified higher-education institutions
Effect on financial aid Assets are considered to be property of the account owner, which — unless the owner is also the beneficiary — means only a small portion of the assets will be considered in the financial aid calculation
Control of the account In most states, control of account will always remain with contributor.
Must use funds by Varies by plan
Assignability to other relatives Immediate family, including cousins, step-relatives, and in-laws
Penalty for non-qualified withdrawals Earnings are taxed as ordinary income to account owner, plus a 10% penalty
Contribution deadline Depends on the plan

Source: http://www.fool.com/college/compare.htm

It is important to note that anyone can contribute to the 529 plan, grandparents and other relatives as well. It could be used as part of the estate planning as a gift to grandchildren. You can open an account at any time with as little as $250 & systematically invest from your bank account. One last note: the 529 can be set up for adults too. If you’re planning on a higher education yourself, this is a great savings vehicle.

Another education savings program is the Coverdell. The most important difference is that this plan is not for higher education savings alone. You can use the Coverdell while your children are in elementary and secondary school, in some cases it could cover extra curricular activities. Things you need to know about the Coverdell are:

Contribution limit $2,000 per student per year
Tax treatment of withdrawals Tax-free if used for qualified expenses
Qualified expenses Tuition, room, board, fees, supplies, and special needs related to the attendance of a qualified elementary, secondary, or post-secondary institution
Effect on financial aid Considered to be an asset of the student, which means a large portion of the assets will be considered in the financial aid calculation
Control of the account In most states, account assets become property of the student at age 18.
Must use funds by Age 30
Assignability to other relatives Immediate family, including cousins, step-relatives, and in-laws
Penalty for non-qualified withdrawals Earnings are taxed as ordinary income to contributor, plus a 10% penalty
Contribution deadline Tax-filing deadline for the year of the contribution

Source: http://www.fool.com/college/compare.htm

On final note the Coverdell are for minors only.

In addition to the 529 and Coverdell plans, there is also a minor account, which allows you to save for your children as a gift. This would be something you may want to do in order to give them a little more cash. There are no real tax benefits and full control goes to the minor as soon as they are of age.

There are minimums to set up these accounts, however saving a small amount on a monthly basis can really add up. For example $100 per month at a 6 percent rate of return over a 15 year period grows to $29,472.69.

***********
Dana Skallman is a District Leader with Primerica Financial Services.  She is passionate about helping people understand how money works and how to make money work for them. Families in the Tri-State Area have come to depend on Dana’s support to guide them through their financial challenges and building a strong financial house. Dana’s educational background includes: a Bachelor’s degree in Marketing from St. Cloud State University, MN; an MBA from Instituto Tecnológico y de Estudios Superiores de Monterrey in Mexico and an MA in Critical Global Studies from the University of Exeter in the United Kingdom.
www.primerica.com/dskallman dskallman@primerica.com 800-680-0174 ext. 2

banner ad - 620x135
Banner 620x135