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College Funding Options

Posted August 08, 2012 in Advice Column, Johnston

As the dog days of summer pass by, our kids eagerly await the start of a new school year.

For many parents and grandparents, it’s a realization that college is also another grade level closer. And with the rising costs of post secondary education, it’s never too soon for families to save for these costs. The following is a shortlist of saving vehicles to consider.

 529 Plans. State-sponsored plans that grow federal tax-free as long as the funds are used to pay for qualified college expenses. While the donor may invest in any state’s 529 plans, they may receive further favorable tax treatment by staying in their home state. Investments are limited to the plan’s aged based allocation strategys, most of which shift to a more conservative strategy as college approaches. While donors may currently gift $13,000 ($26,000 for married couples) per beneficiary annually, the 529’s provisions may allow acceleration for five years without incurring a gift tax in the current year. If a child does not go to college, the beneficiary of the account may be changed to another child in the family without negative ramifications.

    Coverdale ESA’s. Previously known as Education IRA’s, these vehicles allow for a maximum of $2,000 per year from all sources through the age of 18. Contributions are not tax deductible but will grow tax-free if used for qualified college expenses by the age of 30. Investment direction is very flexible, and the Coverdale may be transferred to another family member if the beneficiary does not use it. Certain provisions of these plans may change if the 2001 Bush cuts expire.

    UGMA/UTMA Custodial Accounts. These are irrevocable transfers to a trust set up for a child. Since minors do not have the right to contract, a custodian (usually a parent) is designated to control the assets in the trust until the age of trust termination (18 – 21 depending on the state.) These accounts have a wide range of savings options, are taxed at the child’s income tax rate, and are not transferable to another beneficiary. Control of the funds comes under complete control of the child once he or she is of age.

   Retirement Plans. It is possible to take withdrawals from an IRA account for the use of qualified college expenses before you are 59½ and not be assessed the 10 percent penalty for early withdrawal. Taxes are still due on the withdrawal. For Roth IRA’s, the portion of the withdrawal that comes from the original contribution is tax-free.

Whether it’s tax advantageous or estate friendly, maximizing return or minimizing risk, the key is to put a plan in motion. Speak to a professional who understands a variety of planning tools, how they work and fit into what your family needs are.

Information provided by Nathan Reeder, Midwest Retirement Services, 6500 University Ave., Suite 202, Windsor Heights, 279-1649.
Information should not be construed as tax advice. Consult with a tax qualified specialist before making a decision.

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