College Planning
One of the most important, most overlooked areas
of family planning is the area of saving and paying for college. It can
be frightening when you wake up one to day to realize that your son or
daughter is a senior in high school and you haven't put nearly enough
money away to pay for the college they choose to attend.
Luckily, all is not lost. If you have time now and
even if time is almost gone I can help you plan to save and I can help
you find ways to help pay for college if you are only months away from
the orientation.
IF YOU HAVE TIME
There are several ways to save for education expenses
if you have time. (I define time as 5 years or longer)
Educational IRA's
The Educational IRA, also know as the Coverdall IRA,
can be used to save for primary, secondary and
post secondary education costs. It is flexible, allowing various
investment options, with contributions growing tax-deferred and
withdrawals being tax-free if used for qualified educational expenses.
You can contribute up to $2,000 per year into your
educational IRA. If you have more than one child you should open an
Educational IRA in each child's name. Be aware that there are some
limitations to an educational IRA.
The account is the legal property of the child once
they reach the age of majority (18-21 depending on the state),
contributions to an educational IRA phase out beginning at $190,000 of
joint income and are not allowed for incomes over $220,000 of joint
income.
If you have very young children that you may send to
private school this is a great way to prepare for the costs involved.
ROTH IRA's
A Roth IRA is a great way to save for retirement with
tax-deferred growth and tax-free withdrawals, but it can also provide
funds to pay for college expenses.
If you have money in an Educational IRA or a Uniform
Gift (Trust) for Minors Account the proceeds legally belong to the child
once they reach the age of majority. Many parents worry that if the
child chooses not to go to college the child may raid their college
funds for something foolish. They may decide to buy the Harley instead
of Harvard.
By saving money in a Roth IRA you are putting money
into your own retirement account (up to $3,000 in 2002 and 2004) and you
are allowed to take money out of a Roth IRA to pay for educational
expenses. If your child decides not to go to college, you have a bigger
retirement fund. If they go to college you can take money out of your
Roth IRA without penalty to pay the bills. You will be taxed on the
growth as regular income.
Like the Educational IRA there is an income cap on
contributions to a Roth IRA. The phase out on contributions begins at
$95,000 for single filers and $150,000 for joint filers.
529 PLANS
If you are looking for the best of all worlds when
saving for college, look no further than the 529 Plan. First, there is
no income limit on who can contribute to a 529 Plan. Second, the child
is the beneficiary of the account, not the owner, so you are sure the
money will be used for its intended purposes. And last, the growth is
tax-deferred and the proceeds are tax-free if used to pay qualified
higher education expenses.
529 Plans are managed by individual states and you are
free to shop for the plan you like best no matter where you live. You
can contribute up to $11,000 into the plan in any one year and you can
make 5 years worth of contributions at one time ($55,000 single or
$110,000 joint) and treat it like 5 individual gifts. This is a great
tool for grandparents who want to move money out of their estates.
Each plan has one owner and one beneficiary. The
beneficiary can be any family member from immediate all the way out to
cousins. If your child decides not to go to college you can just change
the beneficiary to another family member including yourself. You
are allowed to change the beneficiary one time per year and you are
allowed to completely change the investment one time per year, including
moving the plan to another state.
Here is a plan that allows you to maintain control of
your assets while legally moving them out of your estate, save in a
tax-free environment and potentially provide funds for multiple
generations.
If you want more information about 529 Plans, please
give me a call or send me an e-mail at
marc@cramgroup.com.
Equity Indexed Universal
Life Insurance
You may not have heard of this product
yet as it is fairly new (only about 2% of life insurance sold in 2004)
but if you have time and the discipline this could be an excellent way
to save for college. If you need life insurance anyway you can
accumulate fairly large sums in this policy and access it tax-free for
any expenses you like. When you withdraw money from the policy you start
by taking out your contributions which have already been taxed and then
you can start borrowing from the cash value tax-free. The money in your
policy will never be counted for financial aid purposes which may mean
your child will qualify for additional financial aid. If you want to see
what this would look like for your situation, give me a call.
