College Planning

A higher education opens the doors to lifelong personal and professional relationships, and it's a worthy investment.Although the numbers may seem frightening,the situation isn't hopeless. If your children are young, time is on your side. If not, don't despair. It's never too late to begin.

The Child's Age and Types of Investments to Consider

• Newborn to 10 years: Consider investments that have the potential to grow in value, such as common stocks and mutual funds.
• 10 to 14 years: Consider a balanced investment portfolio that consists of growth stocks or stock mutual funds.
• 14 and older: Consider investments that provide income and liquidity, such as income-oriented mutual funds, limited maturity bonds and bond funds.

Sources of education income

CESA's

• Coverdell Education Savings Accounts (CESA), formerly known as Education IRAs, allow you to make annual non-deductible contributions designated to an investment account. Starting in 2003, the contribution limit is $2,000 annually.

Advantages:

• Money grows tax-deferred
• Withdrawals for up to the child’s amount of qualified education expenses for that year are exempt from federal taxes.
• Rollovers to other children are permitted

Considerations:

• Must withdraw the money before beneficiary turns age 30
• Limits on adjusted gross income
• May affect financial aid eligibility

529 Plans

There are two general types of 529 plans: prepaid
tuition plans and savings plans. The states offering
prepaid tuition contracts covering in-state tuition will
allow you to transfer the value of your contract to
private and out-of-state schools, although you may
not get full value depending on the particular state.
If you decide to use a savings plan, the full value of
your account can be used at any accredited college
or university in the country, along with some foreign
institutions. The savings plans are managed by some
of the best mutual fund companies and investment
management firms in the country.

Advantages:
• Tax-deferred accumulation and tax-free withdrawals
(when solely used for qualified education expenses).
• No income restrictions on eligibility of donor gifting
money to 529 plan.
• Estate tax benefits: 529 plan value removed from
donor’s estate.
• Donor can gift forward $60,000 in the first year or $12,000 annually per donee (for 2006, indexed thereafter) without gift tax consequences.
• Larger contribution amounts (up to $250,000).
• Donor is in control of account.
• In-state residents may qualify for state income tax
deductions and exemptions (state tax laws may vary).

Considerations:
• Prepaid tuition plan is designed only to match rate of tuition inflation of in-state public universities, whereas a savings plan is flexible depending on investment selections and returns.
• The number of eligible colleges may be restricted in some states with the prepaid tuition plan, the savings plan has no restrictions.
• Non-qualified distributions subject to income tax and
a 10% penalty on their earnings.
• Before investing in a 529 plan, investors should carefully consider whether there home state offers any state tax or other benefits that are only available for investments in their state's 529 college savings plan.