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Preparing for the Increasing Costs of Higher Education
By Matthew B. Gournay, CFP
The cost of higher Education is currently outpacing inflation. The College Board estimates
college costs grew at a rate of 9.8 percent at four-year public colleges and universities and at an average of 5.7 percent at private four-year colleges and universities for the 2004-2005 school year. At the current rate of college inflation, parents of newborns can expect average 4-year college expenses ranging from $115,396 for (on-campus) public colleges to $221,562 for (on-campus) private colleges.
With the escalating cost of higher education, it becomes critical to plan ahead in order to
send your children to the college of their choice. There are several options available to help
fund your child's college expenses. Three options include 529 Plans, Educational IRAs and
Custodial Accounts, which can be established to help prepare families for the increasing cost
of higher education.
529 Plans (technically known as qualified state tuition plans) allow parents; grandparents and
anyone else interested in saving for college to contribute money into a tax-deferred account
for higher education. Regardless of income levels, a donor may contribute $11,000 per year
per beneficiary or $55,000 in a single five-year period ($110,000 for married couples) without
triggering gift taxes. The earnings in college savings plans grow tax-deferred from Federal
taxes. When funds are withdrawn they are received Federal income tax-free if used for
qualified expenses (tuition, books, room and board). If a child decides not to attend college,
you can defer use of the account, change beneficiaries or withdraw the assets. If the assets are
withdrawn and not used for higher education, regular taxes and a 10 percent penalty may be
imposed on the earnings.
Coverdell Education Savings Accounts (formally Educational IRAs) allow parents,
grandparents and others to contribute cumulatively up to $2,000 a year for qualified
elementary, secondary school and higher education expenses of a child. Withdrawals from a
Coverdell Education Savings Accounts are Federal income tax-free if used for qualified
expenses such as tuition, room and board. Beneficiaries of the Coverdell can be transferred to
another family member to pay for educational expenses. If the account is not used by age 30
or the funds are not used for higher education, regular income taxes and a 10 percent penalty
may be imposed on the earnings.
Custodial Accounts (UGMA/UTMA) are created for a minor usually at a mutual fund
company or brokerage firm. This account provides a simple way to transfer property to a
minor without the complications of a formal trust. When the child reaches age of majority
(age 18 or 21 depending on the state), the child then has full discretion over the account. Any
earnings on the account up to $750 are tax free if the child is under age 14. Earnings from
$750 to $1500 will be taxed at the child's tax rate. Earnings over $1,500 are taxed at the
parent's highest marginal tax rate (for children under 14 years of age). For children over 14,
the earnings are taxed at the child's tax rate.
Determining which approach is best can be a difficult task. A financial professional can help
you develop a disciplined approach to saving for college costs. Together, you can determine
which college-funding vehicle will work best for your family.
Jefferson Pilot
Securities Corporation
One Granite Place Concord, NH 03301
800-258-3648
The author is a CFP, and representative of Jefferson Pilot Securities Corporation, member NASD, SIPC, Branch
office: location of 119 W Virginia St #200 McKinney, TX 75069
He is a Partner of Legacy Planning Group
located at 119 W. Virginia St #200 McKinney, TX 75069
www.legacypg.com
About the Author
The Author is a CFP and Registered Representative of Jefferson Pilot Securities Corp. member NAIC, SPIC. Branch office: 119 W. Virginia St #200 McKinney, TX 75069. He is a Partner of Legacy Planning Group
Article Source: http://www.simplysearch4it.com/article/35202.html
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