Financial “Cents”

Saving For Your Child’s College Education

By Walter Woodgett

Saving enough for your child's college education can be a very difficult task. That's why many folks are using Educational IRAs, better known as Coverdell Educational Saving Accounts. Unfortunately, this type of college savings plan does not have any tax advantages. The problem with an Educational IRA is that you can only save $2,000 per year. That's not a lot of money, considering that tuition and room and board can cost thousands of dollars per year.

Educational IRA accounts are opened in the name of the child, so the child is considered the owner of the assets or money in the account. The ownership of these assets can cause the reduction or even elimination of the financial aid that your child might otherwise receive. This same problem also applies to custodial accounts, known as "Uniform Gift to Minors" accounts.

If you invest stocks or mutual funds in your Educational IRA, you might be in for a very unpleasant surprise. Most investment firms charge an annual fee to maintain these accounts. That fee could be as much as $50.00 per year. If you invest $2,000, a $50.00 administration fee is equivalent to a 2.5% charge. Ouch! That means that you'll have to make at least a 2.5% return on your contribution every year before you break even. 

Depressed yet? Don't be. There's a new way of saving for college: The 529 Plan. 

What is it? A 529 plan (called 529 because it is found in Section 529 of the Internal Revenue Code) allows you to either prepay tuition for qualified universities or save funds in a tax-free account to be used to pay higher education costs. That's right: tax-free. Under the old laws, 529 earnings were only tax deferred. But for any distributions from a 529 plan used to pay for qualified higher education expenses in 2002 and later (until at least 2010), you will not have to pay taxes on the earnings.

Some states go so far as to allow a tax deduction for contributions to a 529 plan. The nice thing about a 529 plan is you can do this for any child in your life -- your own child, your grandchild or the child next door who mows your lawn. The real kicker is that you do not necessarily have to live in the state of the plan that you choose!

529 plans allow you to put away large sums of money -- as much as $200,000 in some cases. These plans have no age or income limitations. If you're thinking of going back to school, you can even set up a 529 plan for yourself. Another big advantage is that the person who establishes the account decides when distributions may be made. That differs greatly from a custodial account that could allow your child to use his or her education money on a brand-new, shiny sports car if they so chose. Additionally, unlike a custodial account, the assets in a 529 plan remain under your control.

For more information on 529 plans, e-mail me at comments@afampointofview.com and stayed tuned for the next issue of Point of View when I talk about how to invest in the stock market without losing your money. n