Start a college fund: 8 strategies
1.
Section 529 Plans.
A Section 529 Plan is a tax-advantaged
investment plan, issued and operated by a state or educational institution
which helps families save for college. Section 529 Plans1 are named after the tax code that governs them. Almost all 50
states offer these plans, and rules vary by state. In many cases, you don’t
have to be a state resident to take advantage of them; in fact, you can invest
in multiple 529 Plans in multiple states, if desired.
Please contact your
Registered Representative for more information on 529 Plans and/or obtain the
appropriate Plan Disclosure Statement and the applicable prospectuses for the
underlying investments of the 529 Plans we have available. Investors are asked
to consider the investment objectives, risks, charges and expenses of a
portfolio carefully before investing or sending money. The Plan Disclosure
Statement and prospectuses contain this and other information about the plans
and their underlying investments. Please read this material carefully before
investing or sending money.
There are two types of 529 Plans:
College savings plans.
o Generally, college savings plans offer
tax-deferred earnings; distributions from qualified state tuition plans are tax
free if they are used to pay for qualified higher education expenses (some
states offer tax exemptions and deductions, so check around). However, the
earnings portion of any non-qualified withdrawal are subject to federal income
taxes, applicable state income taxes, and an additional 10% federal tax.
Maximum contribution amounts range from state to state. Please keep in mind
that the underlying investment options are subject to market risk and will
fluctuate in value. Check the IRS website and contact your tax professional for
the current contribution amounts, and more details regarding income
limitations. If an investor or a beneficiary of a 529 Plan is not a resident of
the state which issues the 529 Plan he or she is considering, he or she should
consider before investing whether his or her home-state 529 Plan provides state
tax and other benefits only available to in-state taxpayers investing in the
plan.
Other 529 Plan details include:
o You can name yourself the account owner and
beneficiary in planning for your own educational expenses. (You can also
withdraw funds for non-educational expenses, but the earnings may be subject to
ordinary income taxes, and a 10% federal tax penalty.)
o You can also rename beneficiaries. Some states
allow the account owner to be a friend as well as a relative.
Potential investors of 529 Plans may get more
favorable tax benefits from Plans sponsored by their own state. Consult your
tax professional for how 529 tax treatments would apply to your particular
situation.
Keep in mind that there are fees, expenses,
and tax ramifications associated with 529 Plans that you should take into
account before choosing one. State tax treatment varies.
Pre-paid tuition plans.
o Some universities have set up programs where
college expenses may be paid in installments over many years, or in a lump sum
prior to attending the school. Based on age, age of beneficiary, and number of
years of college tuition purchased, the advantage is that you can lock in the
current price. Any earnings are tax-deferred, and distributions are excludable
from gross income if used to pay for qualified higher education expenses.
2.
Coverdell Education Savings Accounts.
With
a Coverdell Education Savings Account (formerly known as Educational IRAs), you
can make contributions for each child, until he or she is 18.
There
are contribution limitations and income eligibility requirements. Money
contributed to a Coverdell Education Savings Account may grow, tax-deferred,
and may be withdrawn—free from federal income tax—for any qualified higher
educational expense incurred by the child before age 30. After that time, the
balance remaining must be distributed to the beneficiary. Any gains will be
taxed as ordinary income and will incur a 10% penalty tax. State taxes may also
apply. The account owner can retain control of the money in the account, if
desired. The beneficiary can even be renamed in some cases. Check the IRS
website for current contribution limits.
3.
Uniform Transfers to Minors Act(UTMA) and the Uniform Gift to
Minors Act(UGMA).
These
custodial accounts allow you to set up an account in the child’s name. You can
make transfers to an UTMA/UGMA account on a per-child, per-year basis. Check
the IRS website for current contribution limits. Check with your tax advisor,
prior to making any decisions.
Setting
up an UTMA/UGMA account in a child’s name is easy. The account will involve a
custodian; your registered representative can guide you in completing the
application. Separate accounts are required for transfers to each child. Be
sure to provide the child’s Social Security number (not that of the person
making the gift or of the custodian). The custodian will have full authority to
make decisions, including control over the assets. Since transfers must be
permanent, parents can’t gain access to the money for their own use. Also, all
assets in the UTMA account will belong to the child when he or she reaches the
age of majority. You may also want to consider the possibility that assets held
in your children’s name(s) may affect the level of financial aid they’ll be
eligible to receive when they apply to schools.
4.
Loans.
These
days, most people borrow at least a portion of the money needed to cover
college expenses. You may want your children to look for student loans with
special rates and repayment terms. For details on all these options, check out
the U.S. Department of Education’s site at www.ed.gov or www.college.gov.
o The federal government offers Parent Loans to
Undergraduate Students (PLUS loans), where eligible parents can borrow the full
amount of the undergraduate tuition education, including room and board and any
other eligible school expenses minus any aid their dependent child receives
from the federal government. The interest rates do not exceed 7.9% (as of July
1, 2010).
o Stafford Loans, named for Vermont Senator
Robert Stafford, are low-interest loans for eligible students. You can apply at
any financial institution or the U.S. government, depending if they are Direct
or FFEL (the Federal Family Education Loan) Stafford loans.
o Named after former Kentucky representative
Carl Perkins, a Federal Perkins Loan is a low-interest (5%) loan for both
undergraduate and graduate students. With this campus-based loan program, the
school acts as the lender using a limited pool of funds provided by the federal
government.
Interests
on student loans may be deductible as well. To read more about student loans
from a tax standpoint, go to the "Forms and Publications" section of
the IRS website.
Helpful hint…
You
may want to take a look at your permanent life insurance policies, such as
whole life, universal life, and variable universal life, which offer cash value
accumulation in addition to their essential financial protection. Over the long
term, the cash value accumulation may be significant enough to be borrowed
against to help fund a portion of college expenses if it is determined that the
full death benefit is no longer needed. And the interest rates may be a lot
lower than a bank loan. In addition to accruing interest, policy loans against
the cash value reduce the available death benefit and cash value by the amount
of the outstanding loan and interest.
Please note: Loans from life
insurance policies that are treated as modified endowment contracts for federal
tax purposes are taxable to the extent of the gain in the policy and, if the
owner has not attained the age 591/2 may also be subject to
a 10% penalty tax.
The
guarantees and protection of a life insurance policy are based on the
claims-paying ability of the issuer.
5.
Investments
You
can invest money in an account earmarked for your child’s education costs.
Generally, it is better to invest when the child is young (less than 5 years
old).
Many
people buy zero-coupon Treasuries—known as STRIPS (Separate Trading of
Registered Interest and Principal of Securities)—as they are backed by the U.S.
government and are non-callable, which means they can’t be called, or redeemed,
before the maturity date. STRIPS are not issued or sold directly to investors;
they can be purchased and held only through financial institutions and
government securities brokers and dealers. Interest earned on STRIPS is taxable
in the year it is earned.
There
are also savings bonds, including the Series EE Savings Bonds, or education
bonds.
6.
Grants
The
U.S. Department of Education has the following Student Financial Assistance
Programs:
o A Federal Pell Grant, unlike a loan, does not
have to be repaid. Pell Grants are awarded only to undergraduate students who
have not earned a bachelor’s or professional degree.
o There are also Federal Supplemental
Educational Opportunity Grants, or FSEOGs, for $100-$4,000 a year. These grants
are awarded to students in need of financial aid. All U.S. students are
eligible. Priority is given to Pell Grant recipients. These grants do not need
to be paid back.
7.
Tax credits.
Tax
credits are better than tax deductions, as you subtract the credit from your
total taxes due. Check the IRS website for the current credits amounts, and
more details regarding credits.
o The Hope Credit is a tax credit to help with
the first two years of tuition of post-secondary education. It is available to
tax payers and their dependents. The maximum credit is $1,800.
o The Lifetime Learning Credit is for
post-secondary education students. The maximum credit is $2,000 per tax return.
With
both programs, your income must not exceed a certain amount to qualify. Also,
note that these two credits can’t be claimed if you use an IRA to pay expenses
in the same tax year.
8.
Financial aid.
There are billions of dollars available each
year in scholarships, grants, and work-study programs. Financial aid to middle
income families may be tough to come by, but some universities may be more
willing to offer generous financial aid packages.
There are thousands of financial aid programs
available. They fall into three general categories:
o federal, state and campus-based grants (grants
are free money generally offered on a financial-need basis);
o student loan programs (from special rate
guarantees to special repayment schedules); and
o "special situation" scholarships
(given for achievement without regard to income or assets).
It’s certainly worth contacting your child’s
high school and prospective college financial aid office to see if you’re
eligible.
Helpful Hint…
Your role in providing financial support to
pay for your children’s college education is crucial. Life insurance can help
assure that, if you die and, as a result, your income is lost, your children’s
dreams of a college education need not be lost as well.
The information in
this article is for educational purposes only and is not intended to be an
offer for any specific product. Neither Speros Financial nor its affiliates or
financial professionals are in the business of offering tax advice. You should
consult with your professional advisors to examine tax aspects of any topics
presented.
Vasilios "Voss" Speros 602-531-5141
Spence Cassidy and Associates
#LifeInsurancePhoenix #RetirementStrategiesPhoenix
http://www.scaaz.com/
google.com/+SperosfinancialBlogspot
http://sperosfinancial.blogspot.com/
www.linkedin.com/pub/vasilios-"voss"-speros/8b/71/279
vsperos@scaaz.com
85018
