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The
2006-2007 school year has begun. If you
are a parent of a college student, you
have probably made arrangements to meet
those hefty tuition payments – and some
of these arrangements can involve
considerable sacrifice.
But if your children are a
few years away from heading off to
school, you can still take advantage of
some attractive college savings
vehicles.
How important is it to save
early and often for college? Just ponder
these figures from the 2005-2006 school
year: For students attending four-year
public colleges and universities, the
average total cost was $15,566; at
four-year private colleges and
universities students paid, on average,
$31,916, according to the College Board.
These numbers will surely
rise for this school year, and, in all
likelihood, for the next few years, too.
In fact, for the past decade, inflation
has been much higher on the college
campus than in the world outside.
What can you do? What is the
best way to save and invest for college?
As is the case when you save for
retirement, it is a good idea to find
vehicles that offer both growth
potential and tax advantages. Here are a
couple to consider:
Coverdell Education
Savings Account Depending on your
income level, you can contribute up to
$2,000 annually to a Coverdell Education
Savings Account (ESA). Your Coverdell
earnings and withdrawals will be
tax-free, provided you use the money for
qualified education expenses. (Any
non-education withdrawals from a
Coverdell ESA may be subject to a 10
percent penalty.) You can place your
contributions to a Coverdell ESA into
virtually any investment you choose:
stocks, bonds, certificates of deposit,
etc.
Section 529 savings plan
In a Section 529 savings plan, you put
money in specific investments. All
withdrawals will be free from federal
income taxes as long as the money is
used for a qualified college or graduate
school expense of the beneficiary you
have named, which is typically your
child or grandchild. (However, 529
distributions will appear as income on
the child's tax return, which could
affect financial aid calculations.)
Withdrawals for expenses other than
qualified education expenditures may be
subject to federal, state and penalty
taxes.
Aside from the tax benefits,
a Section 529 savings plan offers other
advantages. First, account limits are
quite high. You can accumulate more than
$200,000 per beneficiary in many state
plans, although special gifting
provisions may apply.
Just as importantly, you can
get significant estate-planning benefits
from a Section 529 savings plan. Because
you can contribute large amounts of
money to the plan, you may be able to
reduce the size of your taxable estate.
Plus, even though the assets are out of
your estate, you retain control of them.
You decide who will get the money and
when he or she will get it. You can even
change the beneficiary to another family
member.
Before investing in either a
Coverdell ESA or a Section 529 plan, see
your tax advisor. Contributions for
Section 529 plans are tax-deductible in
certain states for residents who
participate in their own state's plan.
But don't wait too long. While college
may look a long way off for your
children or grandchildren now, time has
a way of sneaking up on you. |
