How to Finance Your Child's Education
How to Finance Your Child’s Education
by
Sanjay A. Das CFP®, CLTC
As a Certified Financial Planning-practitioner and the father of two young children, I understand the confusion and stress that is associated with education planning. All we hear is that higher education costs are rising annually at double-digit percentages but we may not hear what the strategies are other than winning the lottery or hoping the student is a sports standout. 529 plans, education IRA’s, GET- what does it all mean? In this article I will try to breakdown the main education funding vehicles.
Two terms to be familiar with for this discussion are: “qualified education expenses” and “eligible education institution”. Qualified education expenses are tuition and certain related expenses required for enrollment or attendance at an eligible education institution (www.irs.gov). An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Education. It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. The educational institution should be able to tell you if it is an eligible educational institution (www.irs.gov).
Here are some of the main education-funding vehicles:
529 Plan
• Can be either an investment in a state’s own higher education savings plan (“prepaid plan”) or in a product sponsor company’s 529 plan (which has to be co-sponsored by a state) known as a “savings plan”
• These plans can be used for higher education in any state
• Considered an asset of the owner, not the beneficiary (the child)
• Funds are withdrawn tax-free as long as they are used for “qualified higher education expenses”
• Plans can be transferred to another beneficiary as long as they are a “member of the family”
529 plans are tax-advantaged investment vehicles designed to help save for future college expenses. Earnings in 529 plans used for qualified higher education are not subject to federal tax, but may be subject to state tax, even if withdrawals are used for qualified higher education. Withdrawals not used for qualified higher education will generally be charged income tax and an additional 10% federal tax penalty. 529 plans are investments and risks follow. Most states offer their own 529 programs which may provide additional benefits for residents and taxpayers. 529 plans come with an Official Statement that should be read before investing in any 529 plan.
Washington State GET Program
• Washington state-sponsored prepaid savings program for higher education
• You purchase units: 100 units guarantees one year of college tuition at a state school in Washington
• The going rate of a unit is $117 per unit (through 4/30/2011- subject to change)
• Washington state will pay the “going rate” of in-state tuition if the beneficiary is going to school out of state or to private school
Coverdell Education Savings Account
• The purpose is to pay “qualified” education expenses for the designated beneficiary of the account
• Can be used for qualified education expenses at any time (K-12, college, graduate school)- more flexibility
• Child must be under the age of 18 when account is established
• Maximum contribution amount is $2,000 per year (non-deductible)
• Distributions are generally tax-free to the extent that they do not exceed the child’s qualified education expenses
• Ability to contribute is subject to Adjusted Gross Income (AGI) limits
UTMA (Custodial) Account
• An account that is in the name of the child (under the minor’s social security number) with an adult as the “custodian” of the asset(s)
• Does not have to be used for higher education- must be used for the minor
• Each state has an Age of Majority that allows the child to take full control of the assets once they reach this age
• It can count against the child when looking at financial aid (asset of the child)
There are some other non-traditional methods for education-funding but as with all of the options listed above, it is best to utilize the services of a qualified tax professional and financial planner to help determine which plan is suitable for your financial goals and time horizon. I hope this article gets you thinking about education planning and financing because before you know it the kids will be at that stage so like all financial decisions- you want to do your homework and find out all of your options.
Securities and advisory services offered through National Planning Corporation (NPC), Member FINRA/SIPC, a Registered Investment Adviser. (DBA) and NPC are separate and unrelated companies.
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If you are interested in learning more, please call Mr. Sanjay Das at (206) 763-4350 or
e-mail: sanjay.das@natplan.com. Sanjay Das is a Certified Financial Planner® and Certified in Long Term Care (CLTC). I am happy to schedule a complimentary, no obligation consultation either in person or over the phone to further discuss these topics. Please visit my website at: www.sri-investing.com.
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