The possibility that our children will turn out to be as entrepreneurially brilliant as Bill Gates is over 6 Billion to 1. So, for the rest of us, we had better start planning on how we can help our child achieve success in whatever endeavor they choose to pursue. A good start is universally recognized as having them graduate from College. College graduates generally make more, and have more opportunities available to them than those who just finish high school. But, the cost of sending you child to college has been growing rapidly! If parents want to assist their children with this goal they must start planning for it today, or risk limiting the opportunities for their children.
Paying for a child’s education will be a considerable burden for most families. Luckily, the government has recognized the importance of this goal, and has provided us with several tools to assist in that effort. You can now put up to $2000 away, every year, in a Coverdell Educational Savings Account. While not tax deductible, the earnings accumulate tax free when used for educational expenses, including grade school and high school, as well as College. Their eligibility is phased out for single taxpayers making between $95,000 to $110,000, and married taxpayers (filing jointly) from $190,000 to $220,000. Contributions must be made before April 15th of 2008, for the 2007 contribution.
In addition, an even more attractive savings vehicle is the 529 College Savings Plan (named after the IRS section in the code that establishes it). There are two types of 529 Plans available in many states, including California:
1) Prepaid tuition plans – allow an individual to prepay a student’s future tuition and fees at today’s rates, and
2) College savings plans – allow individuals to contribute to an account established to pay a student’s qualified higher education expenses at any eligible educational institution. Mutual Funds are the most commonly used investment vehicle for these plans
529 Plans have several key features that you should be aware of:
First, while contributions to 529 plans are not tax deductible in California, some states do allow tax deductions. However, in every state, the earnings from 529 plans accumulate, and can be used, tax-free at the federal level, to pay for qualified higher education expenses and programs of any eligible higher education institution.
Second, anyone can contribute to your child’s 529 Plan. So, Grandparents or any well off family member can contribute. This can be very helpful as they have more disposable income! They can take advantage of up to $12,000 in annual gifting limits without any tax consequences to them.
Third, you can put away up to $320,000 per child here in California, which is good considering that some colleges/universities are charging close to that today for a four year ride, and those born today will face even higher costs for their College education.
And fourth, the Donor maintains control over how the funds are spent. If for some reason the child ends up not going to college, the funds can be spent on someone else’s education, or even withdrawn by the Donor themselves (subject to income tax and a 10% penalty fee on earnings)
Additional considerations in whether to take advantage of a 529 Plan include the possibility that they also may not be the best use of your resources at this moment in time. While everyone is eligible to invest in a 529 Plan, an argument can be made that you should save for retirement first. You do not want to support your children through college only to become a burden to them in your later years. Your children may be able to get loans, grants or some other kind of student aid to assist them, whereas your retirement will not have that luxury when it comes time. If your child applies for financial aid, the 529 Plan can be used to calculate eligibility, but you can also use Roth, and Traditional IRA’s, to fund college education (income taxes may apply). And finally, there is a school of thought that some children will not appreciate the money spent on an education unless they are required to contribute to it also, by working their way through college.
But, all that being said, if your retirement plan is in place, this could be an important and efficient use of your investment capital in meeting this goal for your children. And remember, generally, something is better than nothing. Some plans can be started with as little as $50 a month. Planning for this expense, will benefit your children, and subsequently your grandchildren
For more information contact us on our website: http://www.farmersagent.com/ctrowbridge, or call me at 650-FARMERS!
