Investments & Retirement Planning
COLLEGE SAVINGS
As college costs continue to climb, it is important to start a college
fund as soon as possible. Next to buying a home, a college education might
be the biggest purchase you ever make. According to the College Board,
for the 2006-2007 school year, the average cost of one year at a four-year
public college is $16,357, while the average cost for one year at a
four-year private college is $33,301. Though no one can predict
exactly what college might cost in 5, 10, or 15 years, annual price
increases in the range of 5 to 8 percent would certainly be in keeping with
historical trends.
Saving for College
Many families rely on some form of financial aid to pay for college. Loans and work-study jobs must be repaid, while grants and scholarships do not. Do not rely too heavily on financial aid. Although it can certainly help, student loans make up the largest percentage of the typical aid package. The more you focus on saving now, the less you may need to worry about later.
You are ready to start saving, but where should you start? There are several college savings options, but in order to save in the most efficient way possible, you should opt for tax-advantaged strategies.
529 Plans TOP
529 Plans are one of the most popular tax-advantaged college savings options. They include both college savings plans and prepaid tuition plans. With either type of plan, your contributions grow tax deferred and earnings are tax free at the federal level if the money is used for qualified college expenses. Participation is not restricted by income, and the lifetime contribution limits are high, especially for college savings plans.
Coverdell Education Savings Accounts TOP
A Coverdell account is a tax-advantaged education savings vehicle that allows you to contribute up to $2,000 per year. Your contributions grow tax deferred and earnings are tax free at the federal level (and most states follow the federal tax treatment) if the money is used for the beneficiary's qualified elementary, secondary, or college expenses. You have complete control over the investments you hold in the account, but there are some income restrictions on who can participate.
UGMA/UTMA Custodial Accounts TOP
A custodial account is a way for your child to hold assets in his or her own name with you (or another individual) acting as custodian. Assets in the account can then be used to pay for college. Because the assets are taxed at your child's rate, you may reap some tax benefit. However, when your child is under age 18, the kiddie tax rules apply, which means that all investment income over a certain amount will be taxed at your tax rate. All contributions to the account are irrevocable.
