COLLEGE SAVINGS 101

Savingforcollege.com

Five questions to ask yourself when choosing a college savings strategy
http://www.savingforcollege.com/articles/five-questions-to-ask-yourself-when-choosing-a-college-savings-strategy

Updated: 2015-06-19

by Kathryn Flynn

College can be one of the largest expenses a family will ever face. There are a number of different options available to help you reach your goal, and here are a few things to consider before choosing the one thatís right for you.

1. What are the accountís limitations?

  • Income

    Depending on your income, you may not be eligible to invest with certain savings vehicles. Coverdell ESAs, for example, are only available to individuals with a gross adjusted annual income (AGI) of less than $110,000 ($220,000 if filing jointly).

    Roth IRAs are another popular way to build a college fund but are completely prohibited to those with an AGI greater than $129,000 ($191,000 if filing jointly). The best bet for high earning families is a 529 college savings account, which has no income limits.

  • Contributions

    Even if you meet the income limit of an IRA, there is a cap on the amount you can save. In 2014 the maximum annual contribution amount is $5,500 ($6,500 if you are 50 or older). Whatís more, this amount is even less if your AGI is between $181,000 and $191,000.

    529 plans typically do not have an annual contribution limit, but there may be a lifetime contribution limit. These limits range from around $235,000 to $400,000. If think your child might attend a private college or university, itís a good idea to shop around for a plan with a higher limit. According to the College Board, in 18 years the total cost of attending a private college is expected to reach a whopping $365,000 (assuming a college cost inflation of 4.0%.

Compare 529 plan features here.

2. Will I be eligible for tax benefits?

  • Federal

    You should have no trouble finding a college savings strategy that offers federal tax benefits. As long as they are spent on qualified educational expenses, distributions from 529 plans, Coverdell ESAs and certain types of U.S. Savings Bonds will be will be federally tax-free. While distributions taken from a Roth IRA before 59 1/2 are still taxable, the additional 10% penalty on early withdrawals is waived if the money is spent toward qualified higher education expenses.

  • State

    Currently, 529 plans are the only savings vehicles that offer up-front state tax deductions. When selecting your plan, keep in mind that not all states offer an incentive and most that do have residency requirements. The types of incentives vary by plan, but most states offer a deduction or credit for 529 contributions.

Compare tax incentives offered by different states here.

3. Do I absolutely need to use the funds toward college?

This is an important question since in most cases you will lose tax benefits or incur a penalty tax if you need to spend the money on something other than college. If you're not fairly certain the beneficiary will attend college, and no other family members will need the money for college, UGMA/UTMA accounts and Roth IRAs might be worth another look since there are no restrictions on how you spend the distributions.

With a 529 account, you will be charged a 10% penalty tax on the earnings portion of your fund that are not spent on qualified educational expenses. There are some exceptions to this rule, including the case of scholarships, U.S. military school attendance, disability or death.

4. How much am I willing to pay in fees?

No matter which investment product you choose for your college fund, you will likely incur some type of fees. Accounts that invest in mutual funds will be charged an expense ratio based on the underlying investments and some providers will also charge a monthly account maintenance fee just for having the account.

You may also have to pay sales charges, commissions or advisory fees depending on the type of account you choose and how it is purchased. If youíre looking for a 529 plan with the lowest fees, opening the account directly through the plan manager will usually be your best bet. Financial advisors often charge an upfront commission anywhere between 1%-5.75% of the amount invested.

Should you use a direct-purchase or advisor-sold 529 plan?

5. What is my time horizon and risk tolerance?

Maybe you just had your first baby and have a full 18 years to save for college. Or perhaps your child is just entering high school and you need to save as much as possible in a few years. The amount of time you have left to save will determine which investments will work best for you.

The shorter your investment time horizon, the less risky your investments should be. If you have young children, consider an age-based 529 education savings plan. This type of plan automatically allocates funds in the account based on the age of the beneficiary. As the child grows, the plan becomes less risky as equity (stock-market based) investments are reduced.

Find out more about age-based 529 accounts here.



Let us know if we missed anything! What were the most important factors in choosing your college savings strategy?

2014-04-08

College can be one of the largest expenses a family will ever face. There are a number of different options available to help you reach your goal, and here are a few things to consider before choosing the one thatís right for you.

1. What are the accountís limitations?

  • Income

    Depending on your income, you may not be eligible to invest with certain savings vehicles. Coverdell ESAs, for example, are only available to individuals with a gross adjusted annual income (AGI) of less than $110,000 ($220,000 if filing jointly).

    Roth IRAs are another popular way to build a college fund but are completely prohibited to those with an AGI greater than $129,000 ($191,000 if filing jointly). The best bet for high earning families is a 529 college savings account, which has no income limits.

  • Contributions

    Even if you meet the income limit of an IRA, there is a cap on the amount you can save. In 2014 the maximum annual contribution amount is $5,500 ($6,500 if you are 50 or older). Whatís more, this amount is even less if your AGI is between $181,000 and $191,000.

    529 plans typically do not have an annual contribution limit, but there may be a lifetime contribution limit. These limits range from around $235,000 to $400,000. If think your child might attend a private college or university, itís a good idea to shop around for a plan with a higher limit. According to the College Board, in 18 years the total cost of attending a private college is expected to reach a whopping $365,000 (assuming a college cost inflation of 4.0%.

Compare 529 plan features here.

2. Will I be eligible for tax benefits?

  • Federal

    You should have no trouble finding a college savings strategy that offers federal tax benefits. As long as they are spent on qualified educational expenses, distributions from 529 plans, Coverdell ESAs and certain types of U.S. Savings Bonds will be will be federally tax-free. While distributions taken from a Roth IRA before 59 1/2 are still taxable, the additional 10% penalty on early withdrawals is waived if the money is spent toward qualified higher education expenses.

  • State

    Currently, 529 plans are the only savings vehicles that offer up-front state tax deductions. When selecting your plan, keep in mind that not all states offer an incentive and most that do have residency requirements. The types of incentives vary by plan, but most states offer a deduction or credit for 529 contributions.

Compare tax incentives offered by different states here.

3. Do I absolutely need to use the funds toward college?

This is an important question since in most cases you will lose tax benefits or incur a penalty tax if you need to spend the money on something other than college. If you're not fairly certain the beneficiary will attend college, and no other family members will need the money for college, UGMA/UTMA accounts and Roth IRAs might be worth another look since there are no restrictions on how you spend the distributions.

With a 529 account, you will be charged a 10% penalty tax on the earnings portion of your fund that are not spent on qualified educational expenses. There are some exceptions to this rule, including the case of scholarships, U.S. military school attendance, disability or death.

4. How much am I willing to pay in fees?

No matter which investment product you choose for your college fund, you will likely incur some type of fees. Accounts that invest in mutual funds will be charged an expense ratio based on the underlying investments and some providers will also charge a monthly account maintenance fee just for having the account.

You may also have to pay sales charges, commissions or advisory fees depending on the type of account you choose and how it is purchased. If youíre looking for a 529 plan with the lowest fees, opening the account directly through the plan manager will usually be your best bet. Financial advisors often charge an upfront commission anywhere between 1%-5.75% of the amount invested.

Should you use a direct-purchase or advisor-sold 529 plan?

5. What is my time horizon and risk tolerance?

Maybe you just had your first baby and have a full 18 years to save for college. Or perhaps your child is just entering high school and you need to save as much as possible in a few years. The amount of time you have left to save will determine which investments will work best for you.

The shorter your investment time horizon, the less risky your investments should be. If you have young children, consider an age-based 529 education savings plan. This type of plan automatically allocates funds in the account based on the age of the beneficiary. As the child grows, the plan becomes less risky as equity (stock-market based) investments are reduced.

Find out more about age-based 529 accounts here.



Let us know if we missed anything! What were the most important factors in choosing your college savings strategy?

2014-04-08

 

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