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Planning for your children college education
College Planning!

Every year you hear that college costs are raising more than inflation and that, 18 years from now, it will cost a lot more to send your child to public or private school. Your kid is almost two, and the cost of college is already on your mind. If you’re like most Americans with school-age children or grandchildren, you may be wondering how you can ever save enough money to send them to college.

Average college cost breaks $30,000

Average for 4-year private school passes key mark; total costs for both public and private schools up well above inflation.
NEW YORK (CNNMoney.com) October 27 2006 -- The average cost of a four-year private college jumped to $30,367 this school year, the first time the average has broken the $30,000 mark. As they have for the past 11 years, average college costs rose faster than inflation, according the latest report from the College Board, a non-profit the good news is that the rate of increase at four-year public colleges slowed slightly for the third year in a row - to 6.3 percent from a 7.1 percent jump last year. The average tuition at four-year public colleges and universities is $5,836 for the 2006-07 school years.

The average cost of college education in the year 2025 will be $63,000 per a year.

Even if you can’t save a lot, you can still take advantage of a college savings plan. With this in mind, I thought it would be helpful to take a look at some popular ways to save for college. Take a look below, I condensed the information into 10 questions people frequently ask me about college savings. Please feel free to call me for any additional question you may have.

1. How can I estimate future college costs?
The FinAid.org cost calculator can help you figure out how much a particular college will cost at the time your children or grandchildren will attend. It’s a little more generic in nature, but it can give you a good sense of what the basic costs might be. In working with clients, I also have a software program that I use that has a list of most colleges throughout and you can get a real sense of what the estimated cost for an actual college might be.

2. Why start a college savings plan early?
The longer you wait the more money you’ll need to save to meet your goal. By the time today’s newborns are set to enroll in college, four years at a public university will cost more than $200,000. While getting an early start is key, it’s never too late to begin saving for the educational objectives of those you care about. Doing so can make a meaningful difference — by potentially reducing the amount you or the account beneficiary may need to borrow to pay for school.

3. What are some tax-advantaged ways to save for college?
Section 529 savings plans and Coverdell- Education-Savings Accounts are the two most popular ways to save for college. Many investors also use custodial accounts such as those authorized under a state-sponsored Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA). There are pros and cons to which would be best. Most notably, is if the child does not go to school. Typically, what I see is for parents that what to save some money for the child, but don’t want to force them to go to school, the custodian account works best. Reversing the situation and you’ll see the other two being used, most commonly the 529 savings plans and Coverdell- Education-Savings Accounts

529 College Savings Plan vs. Coverdell ESA
Similarities. These college savings plans both work similar to Roth IRAs contributions are non-deductible and grow tax free. Withdrawals are also tax free for qualified higher education expenses. 529 Plans and Coverdell ESAs are viewed the same for financial aid purposes. They are considered the assets of the custodian (the person who opened the account), and withdrawals by the beneficiary are not considered taxable income when used for college expenses. Both plans can be transferred to another beneficiary without penalties or fees.

Differences. The major differences between the 529 Plans and Coverdell ESAs are listed below.

Types of accounts:
529 Plan: Two –Prepaid college tuition

ESA: Only one

Control of account:
529 Plan: Account holder controls when withdrawals will be made and for what purpose, and can change beneficiaries at will. There are no restrictions regarding when funds must be used.
ESA: Account holder can change beneficiary at will. If money is not transferred to a new beneficiary or used for higher education costs, then the beneficiary receives the assets when they turn 30 and the account will be assessed taxes and penalties.

Age limit for contributions and withdrawals:
529 Plans: None.
ESA: Must be fewer than 18 to receive contributions, must use assets before age 30.

Contribution limits:
529 Plan: Between $100,000 and $350,000 depending on state
ESA: $2,000 per year from all sources

Income limits for contributors:
529 Plan: No income limit.
ESA: To qualify for the max $2,000 contribution, your AGI must be less than $95,000 for single filers and $190,000 for married couples. Contributions will drop to $500 per year in 2010 if Congress does not extend the current limits. More about ESA contribution limits.

State tax deductions or credits for contributions:
529 Plan: Yes, depending on state plan and residency.
ESA: No.

Uses for plan assets:
529 Plan: Higher education only.
ESA: Through 2010 assets can be used for K-12 and higher education.

Investment options:

529 Plan: Stocks, bonds, mutual funds, CDs. Can only change investment allocation 2 times per year.
ESA: Stocks, bonds, mutual funds, CDs. No limit to changes in investment allocation.
529 College Savings Plan offers more flexibility than a Coverdell ESA
In my opinion, the 529 Plan is a more versatile plan, especially if you will have other people contributing money toward your child’s education – the $2,000 limit for ESA contributions is more difficult to track when there are multiple people contributing.

The Coverdell does have several advantages, including the ability to use the funds for K-12 (through 2011 unless extended), make unlimited changes to asset allocation, and ESAs may have better investment options, depending on the state in which you open your 529 College Savings Plan.

The good news is that you can have both plans for your children and you can roll a Coverdell ESA into a 529 College Savings Plan. These plans have a lot of small print and conditions, so I recommend reading the details for your state 529 plans or reading more about the Coverdell ESA before opening an account and making contributions.

4. What is a 529 savings plan?
Named after Section 529 of the Internal Revenue Code, 529 college savings plans provide a tax-advantaged way to save for qualified higher education expenses. These plans are generally sponsored by individual states, while plan assets are professionally managed by independent investment firms or state government agencies. Anyone can open a 529 savings account regardless of income level and contribute up to $13,000 ($26,000 for married couples) a year without gift-tax consequences.

5. What are some features of Coverdell Education Savings Accounts?
Coverdell Education Savings Accounts have been offering tax-free withdrawals for higher education since 1998. Unlike 529 savings plans, withdrawals can be used for elementary and secondary education and even for academic tutoring and education-related computer expenses.

There are income restrictions though. If you’re modified adjusted gross income (MAGI) is less than $110,000 ($220,000 if filing a joint return), you will be eligible to contribute to a Coverdell account. Annual contributions are also limited to $2,000 a year.

6. Can I invest in both a 529 and Coverdell account?
Yes, investments in a 529 savings account will not affect your ability to invest in a Coverdell Education Savings Account for the same beneficiary. Investing in both can be an especially good idea because the two complement one another. It’s similar to having a retirement plan at work and then also having an IRA, as well.

7. Are UGMA and UTMA accounts still good choices?
For many years, UGMAs/UTMAs were the only substantial education savings vehicles available, so many investors have built up sizable amounts in these accounts. UGMA/UTMA accounts do not have income or contribution limits. And, at least part of your earnings may be exempt from federal income tax. Some or all will be taxed at the child’s lower rate if the child is under age 18.

Contributions to UGMA/UTMA accounts are irrevocable, meaning that once the money or other property has been given, you cannot change your mind and withdraw the gift.

You can withdraw money anytime for the benefit of the child — not just for education. The child assumes control of the account upon reaching the age of majority (18 or 21 in most states).

8. Do gift-tax rules apply to college savings plans?
Contributions to 529 savings plans, Coverdell Education Savings Accounts and UGMA/UTMA accounts are subject to gift-tax rules. Under these rules, you can contribute up to $13,000 a year ($26,000 for married couples) without gift-tax consequences.

Under a special election, you can invest up to $65,000 ($130,000 for married couples) to a 529 account at one time by accelerating five years’ worth of investments with no federal gift-tax consequences. If you make this election, additional contributions or other gifts to the same individual over that five-year period will exceed the annual gift-tax exclusion.

9. What if my child does not go to college?
With a 529 savings plan, you can leave the money in the account in case your child decides to attend college at a later time. Or you can select a new beneficiary, including yourself or anyone who is a member of the current beneficiary’s family. If you take the money out for anything other than education, you will pay ordinary federal income tax plus a 10% penalty on the earnings. Keep in mind that the 10% penalty does not apply to scholarships. This means that if your child were to receive a scholarship, you would be able to withdraw the scholarship amount of the account without getting penalized.

With a Coverdell account, the beneficiary must use the assets by the time he or she reaches age 30, or a new beneficiary must be named.

For UGMA/UTMA accounts, you will owe capital gains tax whenever shares, stocks or bonds are sold.

10. What do you use for your child?
Currently, we are using an out of state 529 plan because I felt it offered better investment options. I will in the near future start an in-state plan as well, just as another level of diversification. While helping our kids through college is on our minds, we do not expect to fund the full tuition. If we have the money we will, but we also want our child to appreciate the gift of education.


Moti Gur is a Registered Representative with and securities offered through Financial Network Investment Corp and Cetera Adviser Networks LLC.
A registered broker/dealer, Investment advisor and member FINRA/ SIPC
3807 Wilshire Blvd, Suite 1040 Los Angeles, CA 90010 213-385-6237

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