BACK • 
Harley vs. Harvard
I am often asked by clients, ‘What is the best way to save for my child’s college education?’ While the knee-jerk reaction might be, ‘Have their grandparents pay for it,’ for most, this is not a viable solution.
The two most common ways that people tend to put money aside for a college education, is either through an Education IRA or a trust account (UGMA/UTMA). However, there are some catches to those investments. With an Education IRA, you can only contribute $500 per year, and because of income limitations, not everyone can open one. With the UGMA/UTMA, while there are no income limits and to avoid gift taxes, you can only put in $10,000 per beneficiary per year. There are other limits on taking the money out. When you take the money out of the Education IRA, for education purposes, the withdrawals are income tax free. However, those distributions must be taken by age 30. With the trust accounts, there are not age limits on using the money, but when the child reaches the age of majority (some states age 18, others age 21) the money is theirs! They can do whatever they want…including buying that Harley instead of going to Harvard.
What if there was a way that you could put more money away, keep the control over it, have it grow tax-deferred and with no age or income limits? Well, there is. It’s called Internal Revenue Code Section 529. Currently, 44 of the 50 states offer some kind of college savings plan. The rules of Section 529 remain the same for all the states, but there are intricacies that differ from one state to another.
In general, you can put aside up to $50,000 per beneficiary without exceeding the federal gift tax exclusion. The government lets you use five years of gifting to avoid gift taxes. This money grows tax-deferred, and when it comes time to take out the money YOU the owner, decide what it’s used for. If it is used for qualified higher education expenses, the money comes out and is taxed at the beneficiary’s income tax level. However, if you want, you can choose to never distribute the money, change the beneficiary and start setting up some lineage-college funding. You can also choose to reclaim the money and use it for yourself.
The best part is the estate tax advantages. You get this money, up to $100,000 if married, out of you estate, but you keep the control over the money, as long as the owner and the beneficiary are not the same person. Something you may not know; if you have set up a UTMA/UGMA account and you are the custodian, if you die with money in the account and you as the custodian, the money goes right back into your estate.
According to the College Board, average fixed costs including tuition, fees, room and board at a public university total $8,470 in the current academic year, and $22,541 at a private four-year institution. Now take that number and multiply it by the four or five years it takes for your child to graduate, and the numbers are staggering. That’s also if you have only one child and he or she is getting ready to go to college right now. The costs of college are increasing faster than the rate of inflation. This is going to be a large cost waiting for you and your children. If you haven’t thought about saving for college, you should start right away. Some plans can be started for as little as $250.
Finally, the government has put together a powerful way to save for college, with tax advantages. Though currently taxable at the beneficiary’s tax rate, there are a number of pieces of legislation on Capital Hill that will make distributions for higher education expenses income tax free. Look for that to become law later this year.
This is a very brief look at this fascinating new way to save for college. There is even a website set up that compares the different features of each state’s plan. That site is www.savingforcollege.com. For more information about Section 529 and all of its benefits and rules, contact a qualified full service investment professional. We’ve said it here before and we’ll say it again, saving for your children or grandchildren’s college education is far too important to be left to a do-it-yourself project.
(Garrett Butenhoff is a Financial Consultant with J. E. Liss and Company, Inc.
in Milwaukee. The views are his, and not necessarily those of Liss
Financial Services or the Job Connection/Hiring
Network.)