College Savings Options

What's your strategy for paying for college?

You can pay as you go. But will your future income and budget support such a large expenditure?

Scholarships, grants and loans may be enough to cover your college bills. But what if your financial aid package falls short? And if a large percentage of the aid package is comprised of loans, (and recent studies indicate that it will be) will your future income be sufficient when it comes time to repay them?

Or, you can begin saving now for the cost of college. Saving now ensures you and your child have the most options available in the future. With a solid college savings plan, you can be assured that you are on the way to affording the best education possible.

Types of College Savings Accounts

Custodial Accounts

A custodial account is a savings account in your child's name that you control until they reach maturity — either at 18 or 21 years of age, depending where you live. It's easy to open and you can deposit as much money as you like — however funds over $13,000 per year will be subject to federal gift tax.

Some of the drawbacks associated with custodial accounts are:

• Once selected, you can't change the account beneficiary
• Your child controls the funds when they become an adult, and can use the savings however they please — the funds do not have to be used for higher education
• Earnings and withdrawals are taxed at the child’s tax rate

Coverdell Education Savings Accounts

Coverdell accounts function very much like Roth IRAs, but are used to fund education costs instead of retirement. Earnings within the account grow tax-free, and withdrawals are not subject to tax if they are used for qualified education expenses. In the case of Coverdell accounts, qualified education expenses include expenses for elementary and high school expenses — not just college.

Contributions to a Coverdell account are limited to $2,000 a year per child. And there are income restrictions for contributions that should be carefully considered. Married couples filing a joint tax return can contribute $2000 if their adjusted gross income is less than $190,000, a partial contribution if their adjusted gross income is between $190,000 and $220,000, and can make no contributions if their income is above $220,000. For single individuals, the limits are half of those amounts.

Advantages of a Coverdell account:

• Can be used to fund elementary, high school and post-secondary education costs
• Earnings are tax-free
• Withdrawals for qualified education purposes are tax-free

Limitations of a Coverdell account:

• Contributions are limited to $2,000 per year per beneficiary
• Income restrictions apply
• Beneficiaries must be under 18 years of age at account opening, and withdrawals must be completed by the time the beneficiary is 30

Section 529 Plans

Section 529 Plans are a flexible savings option for funding college education costs. Like the Coverdell Education Savings account, 529 Plans allow for tax-free earnings and withdrawals when used for qualified higher education expenses. But unlike the Coverdell account, there are no income restrictions. Contribution and earning limits per beneficiary vary by state for a Section 529 account.

Even though the plans are administered on a state-level, students can attend any accredited college in the country. However, residents may enjoy state tax advantages if they open an account in their own state. See your tax advisor for more information.

Advantages include:

• No income restrictions for contributions
• Tax-free earnings
• Withdrawals for qualified higher education expenses are tax-free
• No age restriction for beneficiaries
• Variety of investment or FDIC-insured savings options

Summary

Saving for college is critical, and the earlier you can get started the better. It’s important to do your homework before choosing a savings method. As with most financial decisions, you must consider your needs, long-term objectives and unique financial situation before deciding which account is best for you. Be mindful of the tax implications, and consult your tax advisor before you open your college savings account.