For college funding, start early and keep saving

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By Colleen Hasey Schuhmann, CRPC Special to The Pineapple Every client has different goals, but nearly all tell us that funding college for their children and grandchildren is a top priority. College gets more expensive every year, but one thing is certain: the sooner your funding strategy begins, the better. We’d like to share this information so you can learn about some options. At current rates of tuition inflation, parents of children born this year can expect to pay more than $500,000 for a four-year private college education and over $250,000 for a four-year public in-state college education. But the sooner you start, the better prepared you’re likely to be. For example, by starting to save when a child is born and contributing $350 monthly for 18 years, total assets in an education account could surpass $135,000 by the time college arrives. Delaying just a few years can significantly reduce potential available assets—and to catch up, you’d have to make much larger contributions. 529 plans: more flexibility to invest and contribute A 529 College Savings Plan is a popular way for parents and grandparents of younger children to save for college. A 529 account allows tax-free accumulation and withdrawal of assets for qualified expenses at most U.S. colleges and universities. Earnings on nonqualified withdrawals may be subject to federal income tax and a 10% federal penalty tax, as well as state and local income taxes. Offered and administered by individual states, 529 plans provide a variety of professionally managed investment options—typically mutual funds—from which to choose. And many 529 plans offer special state income tax deductions to investors. These plans are especially versatile when it comes to contributions and gifting. Anyone, such as grandparents, relatives and even family friends, can make tax-free contributions up to their individual annual gift exemption of $14,000 or $28,000 for married couples. Consider asking grandparents or extended family members to serve as owners of 529 plans, because assets held this way do not factor in to your Expected Family Contribution (EFC), which affects financial aid eligibility. In addition, 529 plans allow you to make a one-time accelerated contribution without incurring gift tax. The contribution may be equal to as much as five years’ worth of annual contributions, up to the combined annual gift tax exemption. Based on the 2013 gift tax exemption of $14,000 per person, you and your spouse could contribute $140,000 ($28,000 x 5) to a 529 plan at once, putting more money to work faster and removing assets from your taxable estate more quickly. Tax law allows the couple to spread the gift over five years in order to avoid federal gift tax, provided no other gifts are made to the same beneficiary during that period. Beyond 529 plans, you might consider establishing a Coverdell Education Savings Account, which is similar to an IRA. A Coverdell allows for contributions of up to $2,000 per year per child, provided the contributor meets certain income guidelines. Unlike 529 plans, proceeds from a Coverdell ESA can be used for all levels of education, including K-12. However, only individuals with adjusted gross income of less than $110,000 ($220,000 for married couples) may contribute to a Coverdell ESA. Starting early is key to building up the financial reserves you’ll need to for your children’s college fund and these options are some of the best strategies available to help you do just that. Let’s talk more about how these plans may be a good choice for you and your family. Colleen Hasey Schuhmann, CRPC, is Vice President – Wealth Management at UBS Financial Services in Boca Raton. Colleen also serves on the Board of the Delray Beach Library. She specializes in all facets of your financial life, including retirement planning, portfolio management, life insurance and long term care planning, and estate planning strategies. For more information, please contact Colleen directly at 561-367-1817.