Planning For Your Child’s Future

Putting your plan together

You probably already realize that there are too many pieces in the college savings puzzle for us to offer a plan that fits every family. Your particular circumstances determine what’s best for you. However, we can offer some general advice that may help you.

Establish a savings budget.
One of the first steps you should take in planning for your child’s future college expenses is to establish a savings goal. There are many very useful college cost calculators on the Internet and we encourage you to utilize them. But you can also get a rough idea of how much you should be saving every month just by referring to the chart below. It shows the monthly savings goal from now through college graduation for a family with one child expected to enroll in the average four-year public university, the average four-year private college, or the average Ivy League college/university.

You can easily adjust these targets based on (1) the current four-year cost of the college or university your child expects to enroll in, and (2) the amount of savings you already have set aside for college. Simply compute the difference between those two figures (your “savings


Minimized taxes
Take advantage of the fact that your child can receive up to $950 in investment income without paying federal income tax (and at low tax rates above that amount as long as the “Kiddie Tax” doesn’t apply). By gifting income-generating assets into a UTMA account now, or gifting appreciated assets later, you can effectively shift income and capital gains out of your higher tax bracket. The opportunities for tax savings may be even better if you can employ your child in the family business. Remember that any assets gifted to your children are theirs to control when they reach a certain age under state law, and that a student’s assets and income are counted more heavily under financial aid formulas. Be sure to speak with your tax adviser before making any tax-related decisions.

Consider 529 savings programs and education savings accounts even for older children.
 Just because your child is already in high school doesn’t mean you can’t benefit from tax-advantaged college plans. If your most recent Form 1040 shows income tax on interest, dividends, or capital gains distributions, you have the chance to save taxes with a 529 plan or ESA even if only for a few years. If your state offers a tax deduction for contributions to its 529 plan, you might even benefit by opening an account and soon thereafter start taking distributions to pay college bills.

Invest tax-free whenever possible.
If your child will be attending a private or religious elementary or secondary school, consider opening an ESA and contributing up to $2,000 per year. But note: the K-12 exclusion ends after 2010. If your child still has money in the ESA after high school it can then be used tax-free for college.

Create the right asset mix between your taxable and tax-free investments.
If you maintain a fully taxable investment portfolio and a 529 plan or ESA, consider concentrating the growth portion of your investments in the taxable accounts and the income-producing portion in your 529 account or ESA. Growth stocks and low-turnover equity mutual funds are already tax-efficient and can take advantage of low capital gains rates, while income-producing investments are less tax-efficient and can benefit from the tax shelter of a 529 plan or ESA. Capital losses in a taxable investment can also provide a tax benefit, while a 529 plan or ESA cannot produce a capital loss (only a miscellaneous itemized deduction if fully liquidated).

Put the right person in control.
Grandparents using a 529 plan to save for a grandchild’s college education should open the account in their names if they want to maintain control and retain the ability to change the beneficiary to another grandchild. However, if the grandparents prefer that the parent control the account, they can simply make a contribution into the parents’ 529 account (assuming that particular 529 plan accepts contributions from a non-owner). Another easy way to “gift” a 529 plan contribution into an account for a grandchild is to make the check out in the name of the 529 plan and hand the check to the parent who can make sure it is contributed on behalf of your grandchild. For gift tax purposes, the grandparent is still the one making the contribution and can make the five-year averaging election discussed in Savingforcollege.com’s Family Guide to College Savings.

Consider professional assistance.
We suggest you consult with experienced and knowledgeable financial, tax, and/or legal advisers about all the matters discussed on these pages. The issues are complex. Be aware that for some financial advisers, 529 plans and ESAs are a new phenomenon. If you are working with one, ask which particular 529 plans are available through the adviser and what makes one 529 plan better than another. In interviewing prospective advisers you might even ask whether they have opened their own 529 accounts. It helps to know that the professional you are relying on has personal experience with 529 plans.

Be flexible with your college planning.
Programs and investments will continue to evolve. Tax laws will change and so will your own circumstances. Review your financial situation periodically and make adjustments whenever it seems appropriate.

Imagine your child coming to you with an acceptance letter from "the" college. The one he’s been dreaming of all through high school. The one that perfectly matches her career aspirations. Perhaps even your own alma mater.

Only one thing could make you prouder.  knowing that you have done your homework, too. That no matter where your child is accepted or what financial aid is offered, you have the resources to afford the college of choice.

Numerous surveys and studies have been published describing how parents prepare for future college costs. You probably don’t need a survey to tell you what you already know:

* Kids grow too fast.
* College is expensive.
* The time to start saving and planning is now.

Your child’s college tuition could be one of the largest expenditures you ever make. And, if you have more than one child, the financial commitment is even greater. The financial challenge you face is shared by millions of others.

Fortunately, American families with a desire to save for future college expenses now have more options than ever before. Traditional investment options—savings accounts, taxable investment accounts, annuities, and U.S. Savings Bonds—are now joined by powerful new investment vehicles including Section 529 college savings programs and Coverdell education savings accounts.

New investment programs bring new opportunities, but they may make decisions more difficult for people who want the best education possible for the children in their lives.

With these pages, we hope to help you gain a basic understanding of your options so that you can maximize the return on every dollar you set aside for a child’s future. Our focus is on the relatively new and increasingly popular “529 plan,” but we also explain other commonly used savings and investment vehicles.

Remember, even if your goal seems overwhelming now, the proper planning and saving can put the cost of any college within your reach.

Most people look at the price of a college degree as an expense, like the electric or cable bill. But what if you looked at it as an investment? According to the U.S. Census Bureau, in the year 2007, the average male college graduate, aged 25-34, earned 58% more than the average male who completed only high school or had a General Education Development (GED) certificate. Among women the same age, college graduates earned 78% more than non-graduates.

Over a lifetime, the additional earnings resulting from this “investment” in education could easily exceed $1 million.

Still, the question remains: How will you finance that investment?

Pay as You Go
Your child could help pay for college by getting a job, but students must already juggle studies and other college activities. Even a part-time job might detract from their primary focus – getting an education.

You can also plan to pay college expenses out of your future income as long as you realize that doing so might require substantial cutbacks in other areas of your family budget.

Pay Later
Some might suggest that you approach college tuition as you would buying a home – borrow the money to pay for college and simply repay the debt with higher earnings after graduation. Though many parents see advantages in having children contribute to their education expenses, a college education can be as costly as buying a home. How many parents want their children to start out with such substantial debt?

Find Someone to Help Pay
Scholarships and grants are the ideal financial aid. They don’t have to be paid back. But according to the College Board, less then 22% of all federal financial aid comes from scholarships and grants, while over 71% is loans (The rest is federal work-study and the value of education tax benefits.)*

Save Now for More Freedom and More Choice Later
Saving now is the best way to ensure that you have options later. After all, you would like your child to select a college that offers the best education and not necessarily the best financial aid.

You probably also want the comfort of knowing that you won’t be dependent on outside sources like loans or scholarships to meet college expenses.

Many strategies and investment vehicles are available to help you maximize your college savings. Selecting a suitable strategy and the best combination of investment vehicles is critical. For each option, you face the task of evaluating key characteristics including:

* The potential for growth
* Risk of loss
* Tax implications
* Ownership and control
* Ease of management
* Fees and expenses

The decisions you make now can have a significant impact on how much money is available for tuition payments in the future. In this tutorial, we focus on the most common components of a sound college savings plan – a plan that can give you and your future college student a high degree of financial security and the confidence that you can afford the college of choice.

Tough choices: retirement versus college

Paying for college is not your only financial concern. Providing for your own retirement can be even more important since no one offers grants, scholarships, or federally guaranteed loans to support you when you leave the workforce.

Ideally, college and retirement should be part of the same financial plan, but you should still expect some trade-offs as you try to balance these goals. You may have to work longer than you would like or your children may have to borrow more money than they would like. The important thing is that it is possible to meet these two major financial responsibilities.

Keep these key facts in mind when thinking about retirement and college savings:

* Most advisers agree that you should take full advantage of special retirement accounts such as 401(k), IRA, and 403(b) tax-sheltered annuities before funding your college savings accounts. These retirement plans offer special tax advantages, and, in some cases, matching contributions from your employer.
* Assets in retirement accounts will not affect your child’s prospects for federal financial aid (unless you actually take distributions from them during the college years). Neither will life insurance or annuities. If your child is earning a small amount from working, a Roth IRA can be a great way to invest unspent income.
* IRAs can even be a secondary source of college funding. Tax law permits you to tap your traditional or Roth IRA for qualified college costs without incurring the 10 percent penalty for distributions before age 59 1/2. Income tax may apply, however.
* Except in unusual circumstances, your 401(k) is less accessible for college. You might be able to borrow from your 401(k), but any money borrowed will have to be paid back in short order.

Just remember that using any of your retirement money to pay for education costs means it won’t be there for your own retirement expenses. You probably don’t want to support your children through college only to risk becoming a burden to them in your later years.

Typical Grandparent Goals

Concern about the estate planning implications of college savings choices. Many grandparents see a dual benefit in advancing their grandchildren’s education and reducing estate tax exposure.

Control and accessibility. You may want to retain control of your funds and keep them easily accessible to you in case of unexpected expenses.

Ease of management. You probably want an investment vehicle that doesn’t complicate your overall financial management.

Flexibility. You may have several future college students to think about. They may be spread around the country and their financial situations may vary greatly depending on the financial security of their parents and their other grandparents.

Your Place in the Overall Education Savings Plan

If you decide to assist your grandchildren, it’s important to involve their parents in the decision-making process. Your desire to pay college bills directly or to set up educational trusts impacts the financial aid application filed for the student.

And if you gift money or other property to your grandchildren under the Uniform Gifts to Minors Act (“UGMA”) or Uniform Transfers to Minors Act (“UTMA”), any future earnings or capital gains will be reported to the child and may require the parents to prepare tax filings.

Be sure to consider the benefits of a 529 plan. Many grandparents find it to be a particularly attractive investment program. Your ownership and use of the 529 plan to pay grandchildren's college expenses has no impact on their eligibility for federal student aid under the current rules.

Surveys show that many grandparents want to help fund the college education of their grandchildren, particularly if they already have enough money to ensure a comfortable retirement income. Grandparents in this position should investigate college savings options just as parents do, but often with different objectives in mind.
source: www.savingforcollege.com/

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