Saving for Juniorís College Want to save for Juniorís college fund? Hereís how. BY CHARLES CURTIN
When it comes time to send your kid to higher education, you're going to need a plan.
Many parents just spent countless dollars on pencils, books and back-to-school clothes in preparation for their childrenís new school year. Such a spending spree can be a stark reminder for parents that they might not be financially ready for the next stage of their child's educationó college.
This scenario is becoming commonplace as the cost of tuition escalates faster than the cost of living. Some studies suggest that many private university tuitions will cost upward of $60,000 annually in the next decade, not including room and board, food, books and other incidental costs. This makes those considering higher education for their children feel helpless when pondering the finances.
So, what options do parents have when planning for the costs of college to ensure their child can attend the university of their dreams? Fortunately, you have an excellent optionóthe 529 Plan.
The "529 Plan" is a tax-advantaged savings plan designed to encourage savings for future college costs. Also known as a "Qualified Tuition Plan," the 529 is sponsored by all 50 states, as well as the District of Columbia. Savings can be used for tuition, textbooks and other potential university costs at most accredited colleges, universities and vocational-technical schools.
What Are The Advantages?
First and foremost, you get unrivaled income tax breaks. While the contributions are not deductible on your federal tax return, your investment grows tax-deferred and distributions to pay for the beneficiaryís college costs are free of federal taxes. Your state may offer some tax breaks in addition to the federal incentives.
Second, you (the donor) stay in control of the account. With few exceptions, the named beneficiary has no rights to the fundsóso Junior can't drive away in a Ferrari.
Third, the plan is simple to establish. Once you decide which 529 Plan to use, you simply complete the enrollment form and make your initial contribution. The ongoing investment of your account is managed by the plan and the assets are professionally managed by either the state treasurerís office or an outside investment company.
Everyone can take advantage of this plan. You can contribute substantial amounts ($60,000 per year for individuals and $120,000 per married couple). In general, there are no income limitations or age restrictions. You can even set up this plan for yourself if you are planning on returning to college or graduate school.
It is important to note that if you withdraw money from a 529 Plan and do not use it on an eligible college expense, you will be subject to income tax and an additional 10 percent federal tax penalty on earnings.
A 529 Plan is the best option for covering your childís higher education expenses other than securing a scholarship or winning the lottery, after all "if you donít play, you canít win." All kidding aside, saving for college is an obtainable goal with careful planning. Speak with your advisor to establish a 529 Plan sooner rather than later.
Charles Curtin is a financial advisor with Householder Group in Stevenson Ranch, CA. He can be reached at firstname.lastname@example.org or 661-254-7164.