Options
Parents have several different saving and investment plans to
choose from to help save for their children's future education.
Choosing the right plan depends largely on your income and your
ability to save. Below is a review of some of your options.
Uniform Gifts to Minors Act is a
custodial account placed in your child's name and Social Security
number, with a parent named as custodian. While this plan offers
financial benefits, there are some drawbacks in terms of ownership
and qualifying for financial aid.
The Education IRA has been given
a new title: the Coverdell Education Savings Accounts. The
Coverdell ESA allows for a maximum annual contribution of $2,000
per student. The earnings in the account grow tax-free as long as
distributions are used for eligible expenses, which are not
limited to college costs.
Roth IRA Accounts could be a good
investment strategy that works for parents who will be at least 59
½ years old when their kids are in college. You can invest up to
$3,000 a year, 4 times the amount of an education IRA allowing for
accumulation potential.
529 College Savings Plans have
numerous advantages to the 529 Qualified Tuition Savings Plan,
including the fact that the federal tax advantages can save you
thousands. They are currently offered by various states, through
the help of a professional money manager or a State Treasurer's
Office. The plans can be extremely different, and so it pays to
ask questions.
Investing for
College
Once you've surpassed
contribution limits to these special savings programs, there are
other investing strategies that help pay for college.
While these separate investments
may not have special tax-advantaged status, there are ways to
minimize the effect of capital gains taxes. For example, if you
have made long-term investments in the stock market, you can give
your child enough stock to pay for their tuition bill. When your
child sells the stock, they pay the long-term capital gains taxes
at their lower tax rate.
What kind of investments should you make? There are a number of
things to keep in mind when designing a portfolio to pay for a
future college education:
Education Tax Credits
Once your child is grown and
attending college, there are currently 2 options that offer a
measure of relief:
With the Hope Scholarship,
families can receive a tax credit of up to $1,500 a year for the
first 2 years of college. This credit applies against college
costs like tuition and fees, books and room and board do not
qualify. There are income restrictions on using this tax credit:
single filers can earn up to $40,000 and joint filers can earn up
to $80,000.
The Lifetime Learning Credit
offers a $1,000 tax credit taken for the third school year and
beyond. In the year 2003, it will increase to $2,000. The credit
can be used by both college students and adults to offset the cost
of professional seminars and adult-education courses. The income
limits are the same as those for the Hope Scholarship: $40,000 for
single filers and $80,000 for joint filers.
You can only claim one of these
credits on any given tax year, but during years in which you make
withdrawals from an Education IRA, neither of these credits may be
claimed.
Their College vs.
Your Retirement
Trying to save for your
children's college education and your own retirement at the same
time seems like a recipe to shortchange both. What to do? Pay
yourself first. Financially, it usually makes more sense to fully
fund your 401(k) or other tax-deferred retirement plans and grow
that money tax-free. Why? These plans reduce your taxes, grow
tax--deferred, and if your employer offers matching funds, you get
a substantial return right away.
When you have college bills to
pay, you may be able to borrow against your retirement plan to pay
for some of your kid's education. Many 401(k)s and profit-sharing
plans let you borrow up to half of the funds in your account, to a
maximum of $50,000. But the requirements for these plans vary
widely; make sure to investigate the particulars surrounding your
retirement plan.
The key is to start now...
