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College Planning

 

When should I start saving for college?

  • Start saving for your child’s college AFTER you have a solid retirement plan that you are financially comfortable contributing to on a regular basis.
  • While it is very loving to want to pay for your child’s college now; show your love FIRST by making sure you are taking steps towards being able to retire so you will not become a burden to your children.
  • TIME is your most valuable asset – start saving early!

 

What are some helpful tips for saving money?

 

  1. Start saving early and save consistently.  If you start saving the day your baby is born, you take advantage of compounding interest.  If you save regularly, it becomes a habit.  Saving at certain intervals – like every month or every time you’re paid – will help you remember to save.

  2. Save the most you can.  Even starting with a small amount will grow your savings.  Once you commit to an amount to save, you will naturally adjust your spending and your savings will begin to grow.

  3. Save automatically.  Set up an automatic withdrawal from your checking account on the same day every month or see if you can contribute through payroll deduction.  If the money’s not in your checking account, you can’t spend it.

  4. Establish a savings goal and be encouraged when you can track your progress.

  5. Invest refunds and bonuses.  If you come into extra money through a large tax refund or a bonus at work, put a large part of that toward your college savings.

  6. Save more every year.  Plan on increasing the amount you save by a minimum of 5% to keep up with the college tuition inflation rate.  Increase your college savings in line with any raises you receive.

  7. Enlist the help of extended family.  Let your family in on your savings goal and you might find that they would like to give gifts to help fund your child’s education.

  8. Stop paying for something and start saving.  If you pay off a vehicle, start contributing your old car payment towards college savings.

  9. Involve your children.  Talk with your children and educate them about your family savings plan.  Let them know how much you value higher education.  You may want to encourage them to contribute some of their own money and then watch it grow together.  If your children know your savings goals it will be harder for YOU to stop contributing!

 

 

The Coverdell Education Savings Account

What is the Coverdell Education Savings Account (Coverdell ESA)?

 

  • The Coverdell ESA is an education savings vehicle created by The Taxpayer Relief Act of 1997 which allows for after-tax contributions (not tax deductible) for student beneficiaries attending any qualified academic institution.

Are there age requirements for contributions?

 

  • Yes, the designated beneficiary must be under the age of 18.

 

How much can I contribute per year?

  • The maximum contribution per beneficiary is $2,000 per year regardless of how many donors contribute to the plan (parents, grandparents and/or other adults may contribute to the plan).

 

Are there contribution limits for taxpayers based on the taxpayer’s Modified Adjusted Gross Income?

 

  • Yes, speak with a tax specialist or an Envoy Financial LifeStage Specialist for complete details. 

 

Do I pay taxes on earnings in the account?

 

  • No, earnings grow tax-deferred.

 

Do I pay taxes on withdrawals used for education expenses?

 

  • No, qualified educational withdrawals are tax free.  Educational expenses for the beneficiary include the following:
    • Tuition
    • Books
    • Room and board

 

Do I pay taxes on withdrawals not used for education expenses?

 

  • Yes, nonqualified withdrawals or funds that are not used by the beneficiary’s 30th birthday are taxed and are subject to 10% penalty.

 

If my child is a special needs student, are there additional considerations?

 

  • Yes, contributions are permitted for beneficiaries over 18 years of age with special needs.

 

 

What is the time frame to make a contribution?

 

  • Contributions for any year into a Coverdell can be made up to April 15 of the following year.

 

Who controls the assets in the account? 

  • The custodian controls the assets in the account until the named beneficiary reaches the age of majority, usually age 18.

 

 

529 Plans 

What is a 529 Plan?

 

  • A 529 Plan is a state-operated education investment plan for college expenses only that consists of two types:
    • Prepaid tuition plans – locks in current tuition rates
    • College savings plans – saves for future college expenses
  • It allows for after-tax contributions (not tax deductible) for student beneficiaries.

 

Are there age requirements for contributions?

 

  • No.

 

How much can I contribute per year?

 

  • The maximum contribution per donor is $12,000 per year (annual gift tax exclusion).  A donor may contribute up to $60,000 in one year.  In this case, the amount is considered a 5-year advance of the annual gift tax exclusion (for 2006).  Please note that in the case of a married couple (two parents for example) this amount goes up to $120,000 for both of them.

 

Are there contribution limits for taxpayers based on the taxpayer’s Modified Adjusted Gross Income?

 

  • No.

 

Do I pay taxes on earnings in the account?

 

  • No, earnings grow tax deferred.

 

Do I pay taxes on withdrawals used for education expenses?

 

  • Qualified educational withdrawals have been federally tax free since January 2002.  Some states waive taxes for residents if the plan is sponsored by that state.  529 Plans can only be used to fund educational expenses for the beneficiary’s college expenses.  Qualified expenses including the following:
    • Tuition
    • Books
    • Room and board

 

Do I pay taxes on withdrawals not used for education expenses?

 

  • Yes, nonqualified education expenses are taxed and are subject to 10% penalty.

 

Who controls the assets in the account?

 

  • Assets remain in control of the donor at all times and are generally excluded from the donor’s gross estate

 

Here is a chart comparing 529 and Coverdell plans:

 

YEAR 2006 RULES

529 Plan

Coverdell Education Savings Accounts

Federal Income Tax

Non-deductible contributions; withdrawn earnings excluded from income to extent of qualified higher education expenses

Same as 529 plan except earnings withdrawn for qualified K-12 expenses also excluded

Federal Gift Tax Treatment

Contributions treated as completed gifts; apply $12,000 annual exclusion, or up to $60,000 with 5-year election

Same as 529 plan but 5-year election only available under special circumstances

Federal Estate Tax Treatment

Value removed from donor's gross estate; partial inclusion for death during a 5-year election period

Value removed from donor's gross estate

Maximum Investment

Established by the program; many in excess of $250,000 per beneficiary

$2,000 per beneficiary per year combined from all sources

Qualified Expenses

Tuition, fees, books, supplies, equipment, and special needs; room and board for minimum half-time students

Same as 529 plan plus additional categories of K-12 expenses

Able to Change Beneficiary

Yes, to another member of the beneficiary's family

Yes, to another member of the beneficiary's family

Time/Age Restrictions

None unless imposed by the program

Contributions before beneficiary reaches age 18; use of account by age 30

Income Restrictions

None

Ability to contribute phases out for incomes between $190,000 and $220,000 (joint filers)

Federal Financial Aid

Counted as asset of parent or other account owner; not counted as a student asset

Counted as asset of parent or other account owner; not counted as a student asset

Investments

Menu of investment strategies as developed by the program

Broad range of securities and certain other investments

Use for Non-qualifying Expenses

Withdrawn earnings subject to federal tax and 10% penalty

Withdrawn earnings subject to federal tax and 10% penalty

 

 

How will my college savings affect my FAFSA? (Free Application for Federal Student Aid)

 

The laws and requirements are continually changing.  For your convenience, we have provided the Link to the FAFSA Information: www.fafsa.ed.gov

 


For more information on College Planning, set an appointment with a LifeStage Specialist by contacting Envoy Financial at (888) 879-1376, ext. 1 or by email.

 

Envoy Financial

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