College Planning

Big Dreams Bright Futures

Before your child was even born, you were planning. What will we name him? What color should we paint her room? What is the best childcare alternative?

But with all the demands and decisions that new parents face, one important aspect is often unintentionally overlooked in those early stages – college planning. However, with tuition rates rising, college planning should be at the top of every parent’s planning list … no matter what the child’s age.

What’s more, saving for a child’s education doesn’t necessarily have to rest entirely with parents. With the flexibility and convenience of today’s savings plans, many alternatives make good sense for grandparents, aunts and uncles, other family members and friends, as well as for the child.

You have big dreams for the child in your life. Don’t let a lack of college planning sidetrack those aspirations. As Raymond James financial advisors, we’re here to assist. Our knowledge and professional guidance can help you give your child the opportunity for the bright future he or she deserves.

Plan Today for a Bright Future Tomorrow

Although it is best to start the college investment process when your child is young, it is never too late to begin. No matter your child’s age, what’s important is that you plan now. It is easy to put off thinking about these expenses, hoping that your child will receive scholarships or financial aid. But don’t count on them. While these awards do help with college funding, they are not guaranteed, not always comprehensive and not available to everyone.

Investing for a Younger Child’s Education

If your child is young, then time is on your side. Because you’ll have plenty of time, you may be able to invest less money now and, thanks to the potential impact of compounding returns, let your savings do much of the work for you.

Investing for an Older Child’s Education

Don’t panic if your child is already in high school. While you may need to invest more money in a shorter time frame, you should still be able to afford at least a portion of college costs.

Take a close look at options without specific contribution limits, as they may be more appropriate for you now.

Also, talk to your child about specific goals. What schools is he or she interested in? Is college an option or does your child have his or her sights set on a vocational school? Some plans limit the beneficiary’s choices, so it is important to understand your child’s expectations.

Which Plan is Right for You?

With many new college savings alternatives available, it is critical to choose the one that’s appropriate for you. Selecting the wrong plan – or not investing properly within the right one – can prohibit you from maximizing your savings. However, with the help of our experienced guidance, choosing the right alternative can be easy.

Consider the Following Before Selecting a Plan

The following alternatives address these issues with a variety of different savings features.

529 Savings Plans

These state-sponsored plans offer flexible, tax-deferred ways to save.

Benefits

529 savings plans offer several advantages over other savings plans.

Other Considerations

While 529 savings plans offer many benefits, there are potential drawbacks.

Investors should carefully consider the investment objectives, risks, charges and expenses associated with municipal fund securities before investing. More information about municipal fund securities is available in the issuer’s official statement and should be read carefully before investing.

529 Prepaid Plans

These plans allow you to purchase a certain percentage of tuition over time that is guaranteed to be equivalent to the same percentage of tuition in the future. We can assist you in determining if a 529 prepaid plan is available in your state.

Benefits

With tuition rates rising, these plans may be appropriate for some families.

Other Considerations

Consider these plans carefully since there are limitations.

UGMA/UTMA Custodial Accounts (Uniform Gifts/Transfers to Minors Act)

This act allows you to transfer ownership of assets to your child without needing to establish a more costly trust.

Benefits

While not specifically designed for educational funding, these accounts can be advantageous as they allow you to accumulate funds in your child’s name.

Other Considerations

These accounts are not specific college savings plans, and there are several noteworthy issues to think about.

Coverdell Education Savings Accounts

Formerly known as the “Education IRA,” this savings alternative is a trust or custodial account used for education expenses.

Benefits

Coverdell Education Savings Accounts (ESAs) offer several advantages.

Other Considerations

Before investing in a Coverdell Education Savings Account, consider these points.

Other Ways to Save

While the previously mentioned alternatives are specifically designed for higher education plan­ning, other strategies also exist. While not intend­ed specifically for this purpose, these alternatives can help you pay for expenses. Talk to us before implementing any of these strategies to find out how they may affect your overall investment plan.

IRAs

You can withdraw funds from your IRA to pay qualified higher education expenses. While this may seem like a viable savings option, remember that you will be spending your retirement savings. In addition, amounts withdrawn may count as income and affect eligibility for need-based financial aid.

The 10% penalty tax for withdrawals is waived when funds are used for higher education purposes, but the money may still be subject to income taxes.

Typically, if you own a traditional IRA, the full amount will be taxed, while Roth IRAs allow tax-free withdrawals in certain circumstances. Discuss this issue with us to determine if your withdrawal will be subject to taxation.

Company-Sponsored Retirement Plans

If additional money is needed to pay college expenses, you may be able to borrow from your 401(k) or 403(b) plan. Typically, these loans charge a percentage point or two above the prime lending rate. Interest charged does get deposited into your retirement account, but you will lose the benefit of compounding interest. In addition, the loan must be repaid in five years and, if employment is terminated, the loan may be due immediately.

Life Insurance

While the main purpose of life insurance is to pro­vide money to your family after your death, it can also be used to fund higher education expenses. While it is inappropriate to buy a policy for the sole purpose of college savings, the cash value of your whole, variable or universal policy can be used to pay for such expenses. Talk to us for specific guidelines before withdrawing funds, and remember that life insurance is not a college savings plan by nature. Other alternatives can better help you save for these expenses.

The chart below will allow you to directly compare features of the various college savings alternatives. We’ll be glad to review your options with you to help determine a plan that best suits your family’s needs.

1 Tuition, fees, books, supplies and equipment required as a condition of enrollment and room and board (amount set by the institution) as long as the student attends at least half time.
2 In most cases, if the student’s grandparent is account owner, the asset will have no impact on financial aid.
3 There are no tax implications as long as the “new” beneficiary is a member of the original beneficiary’s family and from the same generation. A family member of a designated beneficiary is a son, daughter, grandson, granddaughter, stepson, stepdaughter, brother, sister, stepbrother, stepsister, father, mother, stepfather, stepmother, niece, nephew, aunt, uncle, first cousin, son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, sister-in-law, spouse or the spouse of any of the other foregoing individuals. For this purpose, a child includes a legally adopted child, and a brother or sister includes a brother or sister by half blood. If the new beneficiary is a family member from a younger generation, the transaction may subject the original beneficiary to gift taxes and generation-skipping transfer taxes. The beneficiary may be changed to a non-family member; however, this is not a tax-free transaction.
4 If the contributor front loads the contribution (e.g., $65,000 contribution in a single year), then dies within the five year period, a prorated portion of the contribution may be included in the contributor’s estate.
5 Tuition, fees, academic tutoring, special needs services, books, supplies and other equipment which are incurred in connection with the enrollment or attendance at a public, private or religious school and expenses for the purchase of computer technology or equipment or Internet access to be used by the beneficiary during any years the beneficiary is in school.
6 Distributions from a Roth IRA come out of the account in the following order: contributions, conversion amounts, earnings.
7 Exceptions to the 10% penalty are: death, disability, attainment of age 59 1⁄2, first time home buyer, qualified higher education expenses, substantially equal payments, medical bills greater than 7.5% of AGI and medical insurance premiums after losing a job.
8 This is a provision of the Economic Growth and Tax Reconciliation Relief Act of 2001 (EGTRRA ’01). Remaining provisions are scheduled to expire on December 31, 2010, at which time the law may or may not be reinstated.
9 Favorable state tax treatment for investing in a Section 529 college savings plan may be limited to investments made in a Section 529 plan offered by your home state.

Have a Question for David?
Click Here>>