bizSanDiego the business of san diego county

Financing College posted on Monday, 18 January 2010

Smart options for saving for the future.

As an entrepreneur, you may know the ins and outs of business insurance, contracts and accounting procedures, but you may not have a handle on how to save for your children’s education. According to the College Board, the average annual cost of tuition and fees for 2009-2010 at a private university is $26,273, and public institutions have an average cost of $7,020 a year. These costs are increasing at approximately six percent a year.

Whether you have young children and are calculating the costs for about 15 to 18 years from now, or you wish to enhance your child’s existing college fund, there are steps you can take to help assure a substantial savings for college.

529 Savings Plan

The 529 Savings Plan offers:

• Tax-free Savings. It allows parents to save without paying tax on the investment’s growth. Anyone, regardless of income, can contribute up to $200,000 per beneficiary.
• Variety. Nearly all states offer tax-free plans. Different states have different investment companies administering the plans and have varying annual fees and investment options, so it’s worth shopping for the right one. (You don’t have to select your state’s plan.)
• Flexibility. If needed, the beneficiary of these accounts may be changed.

One thing to note: the proceeds from these accounts are only tax-free if they are used for educational purposes. If you take out money for other uses, expect to pay taxes and a ten percent penalty.

State Prepaid Education Plans

If you expect your child to attend a state university, a State Prepaid Education Plan may be a good option.

• Pay in advance. This plan allows you to pay the current cost of tuition and guarantees that the tuition will be waived when your child attends the state college.

If your child doesn’t go to a state school, then you may lose a portion of the money you invested. Since it is often hard to predict where a child will want to go to school, many parents decide against this option.

Individual Retirement Accounts (IRAs)

IRAs can also help fund higher education. The following are characteristics of IRAs for education:

• Contribution Limits. Contribution limits for different types of IRAs vary, so check with your financial adviser.
• Waived Penalties. Early withdrawal penalties are waived when Roth IRAs and traditional IRAs are used to pay for higher education for yourself, your spouse, your children or your grandchildren. (Taxes may still be due on the withdrawn amount.)
• Transferrable. The account may be transferred to another person (similar to the 529).

Since low contribution limits won’t let you save enough to pay for the child’s full education, this option is best used with other investments.

Coverdell Education Savings Account (ESA)

Similar to 529 plans, these special educational savings accounts allow earnings to grow tax-free. ESAs have:

• Higher Limits. ESAs have a $2,000 limit per year on contributions.
• An Expiration Date. At age 30, if the money is not transferred to a new beneficiary or used for higher education, then the beneficiary receives those assets and the account is assessed taxes and penalties.
• K-12 Funding. In addition to college, the money held in an ESA can also be used for K-12 expenses.

In 2010, if Congress does not extend the current limits on the ESA, the plan may change to a contribution of only $500 per year. Please check with your financial adviser before establishing one.

Other options:

• Grants and Scholarships. There’s nothing better than free money to help fund your child’s education. Grants and scholarships are usually tax-free and don’t have to be repaid. These are offered in limited numbers so it is best to have a backup plan in place.
• Loans. While investing your money and planning ahead is ideal, a loan may still be necessary to pay the remainder of college expenses. Federal and state loan programs can help.

It’s never too late to start saving for college. Contact your financial adviser today to discuss these various options, whether you have an older child or are just beginning to set up a college fund for a young child.

Amy Taylor is the Priority Banking manager for the San Diego Main Branch of Union Bank, N.A. Union Bank, N.A., is a full-service commercial bank providing an array of financial services to individuals, small businesses, middle-market companies, and major corporations. Visit www.unionbank.com for more information.

Posted by Amy Taylor