The Smart Way to Save for College

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There is no more precious gift you can give a child than a college education. But while the cost of living is steadily increasing, college costs are rising at a faster rate – approximately twice the rate of general inflation, according to Edvisors.com.

UTMA

The Uniform Transfer to Minors account is a custodial account allowing for securities to be owned by a minor. Gift s can be made into this account by anyone, subject to the annual exclusion. This money becomes the property of the minor upon reaching the age of majority, age 21, in Florida. The nature of this account does not require the student to use the money for education and in some cases, this can become a problem with young adults.

Student Loans

Discussion of student loans is outside the scope of this article; however, we believe this should be the student’s last resort. Student loans must be paid after the student’s education. Frequently, the student does not make sufficient income after graduation to support both the student loan repayment and to establish and run a household. We encourage students and their families to evaluate the realistic ability to repay based on the degrees pursued and other factors intrinsic to the student and their family. These loans remain “on the books” for the student’s lifetime. If they are not repaid, they cannot be discharged by bankruptcy and there is even a current strategy by the U.S. government in some cases to collect unpaid student loans from Social Security payments made in retirement.

529 Plan

A favorite way by most advisers is a 529 college savings plan. It can offer numerous advantages over other college savings vehicles:

• Tax-deferred growth and tax-exempt withdrawals for approved educational expenses.

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• Gifting by parents, grandparents or any interested party can be made into the fund, subject to the annual exclusion of $14,000 per person; therefore, parents can contribute $28,000 per year. Further, you can forward gift up to five years per person totaling $70,000 to qualify for the annual gift tax exclusion.

• The donor can stay in control of the account; the beneficiary has no legal right to the funds. The earnings portion of non-qualified withdrawals will incur income tax and an additional 10% penalty if not used for specified educational expenses.

• 529 plans are low maintenance and easy to set up and fund. They do not have to be reported on your federal tax return and you will not receive a Form 1099 to report taxable or nontaxable earnings until the year withdrawals are made.

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• Plan investment options can change twice per year and funds can be rolled over into another 529 plan every 12 months if needed. There is no federal limit on the frequency of these changes if the account beneficiary is moved to another qualifying family member at the same time; there are no age limits, income limits, or annual contributions limits; however, there are lifetime contribution limits which vary by plan, ranging from $235,000 to $500,000.

Prepaid State Tuition Plans

Florida has a prepaid saving plan that allows a selection of options with specific costs, payment schedules and benefits. The amount covered by the plan can also be applied to other schools nationwide. You can have both a Florida Prepaid Plan and a 529 college savings plan.

Roth IRA

Like a 529 plan, parents can contribute after-tax money and any investment gains can be withdrawn after age 59 1/2 tax-free. Roth IRAs also allow you to withdraw funds tax and penalty free to pay for qualifying educational expenses after five years. This can be appealing to parents who want the ability to decide whether to use the Roth for their own retirement or for their children’s education. Unlike the 529, however, there are income and contribution limits. Single taxpayers earning over $129,000 a year or $191,000 for married couples are not eligible and only $5,000 per year (or $6,500 if you are over age 50).

Coverdell Education Savings Account

This account has tax advantages when the money is used to pay for educational expenses. It also belongs to the parent, not the child so it has less impact on your child’s chance of getting federal aid. This account can be used for any level of educational costs. It only allows $2,000 per year per child and eligibility phases out for couples earning more than $190,000 a year. Funds not used by the time your child is age 30 may be subject to tax.

Parents Funding Educational Costs While the Student is in College

This option has many disadvantages to it. Many parents today are still paying their student loans while they are trying to fund their own children’s college. Further, parents should be saving for their own retirement during this time and college funding severely limits the parent’s ability to accomplish this goal. It causes parents to postpone retirement or to retire before it is financially feasible if there are health problems or extenuating circumstances.

There are many ways to save for and fund college; it is important to review your circumstances to determine which combination work best for you and your family. The wrong decisions can cause problems many years down the road! Julie Clairmont-Shide

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