Back to school: Start saving now
The parents of children heading off to school may be breathing a sigh of relief. Meanwhile, the parents of young adults heading off to college are reaching into their wallets. Adjust todays college costs for inflation and multiply by four years and by the number of children in your family, and the total outlay can be staggering.For many people, paying these costs requires saving in advance, combined with using cash flow during the years of college attendance — and, in many cases, using loans to create an extended payment period. Grants and scholarships are also available through schools, the government, and many independent sources. Eligibility varies by program and state. Whatever your strategy, the sooner you start saving, the better.Custodial accounts Uniform Gifts to Minors or Uniform Transfers to Minors accounts are popular education savings options and offer certain tax advantages. Once a child is 14 or older, the income that these account earn is taxed to the child in his/her bracket which is usually considerably lower than the parents.However, a gift to one of these accounts is irrevocable: the money belongs to the child, and control goes to the child at the age of majority (which varies by state). A custodian cannot change his/her mind and take the money back. And because the custodial account belongs to the child, the balance in the account can reduce the ability to qualify for financial aid, loans or certain scholarships.As a result of the Economic Growth and Tax Relief Reconciliation Act of 2001, two other tax-advantaged savings vehicles Coverdell Education Savings Accounts (formerly known as Education IRAs) and Qualified State Tuition Programs have become more attractive.Coverdell Savings AccountsThe Coverdell Savings Account has a maximum annual contribution limit of $2,000. In addition, qualified distributions will include withdrawals made to cover elementary and secondary school expenses, as well as tuition for private and religious schools.Qualified state tuition plansThese plans are state-sponsored investment programs that have special tax status under Section 529 of the Internal Revenue Code. These plans usually include both a prepaid tuition program and a savings-account plan. 529 plans offer investors professionally managed tax-advantaged portfolios to help meet rising college expenses. Currently contributions in these plans grow tax-deferred and withdrawals are tax-free to the student when made for the payment of qualified education expenses. Proceeds can be used at any accredited post-secondary school in the United States.Anyone may contribute on behalf of a child including parents, grandparents, other relatives and family friends – regardless of income or state residency. Maximum contributions vary from state to state, but typically exceed $125,000. With the high contribution maximums and no income restrictions for participation, these plans have become a very popular tax-advantaged savings vehicle. And qualified withdrawals from 529 plans are free of federal income tax, although state income taxes may still apply.By contrast with custodial accounts, the account owner retains control over distributions from the account and the asset is considered a parental asset for financial-aid purposes. If the child decides not to attend college, the account owner still controls withdrawals and is free to change beneficiaries (any new beneficiary must be related to the original beneficiary), leave the assets in the plan for later use, or withdraw the assets. The earnings portion of any nonqualified withdrawals is generally taxed at the owners tax rate and is subject to a 10 percent penalty. If the child wins a scholarship, the owner will be refunded the scholarship amount without penalty.To further encourage savings for this important goal, the law now permits contributions to be made to both a Coverdell Education Savings Account and a 529 plan during the same year for the same beneficiary.For most people, saving for college requires systematic discipline. Start early, be consistent, and you should be able to meet the challenge of college costs. Your financial adviser can analyze your college funding needs, determine how much you need to save, and recommend appropriate investments to get you there. Many education saving strategies have tax and/or legal implications, so be sure to discuss your situation with your tax and legal advisors before taking action.The accuracy and completeness of this material are not guaranteed. The opinions expressed are those of Fraser M. Horn and Dudley M. Irwin and are not necessarily those of Berthel Fisher or its affiliates. The material is distributed solely for information purposes and is not a solicitation of an offer to buy any security or instrument or to participate in any trading strategy. Provided courtesy of Fraser M. Horn and Dudley M. Irwin, Investment Adviser Representatives with Berthel Fisher in Edwards.Registered Representative of and securities offered through Berthel Fisher & Company Financial Services, Inc. (BFCFS). Member NASD/SIPC. 1st & Main Investment Advisors is independent of BFCFS.