College Planning

 

Funding education may be one of the largest financial challenges facing many of us today.  Even the costs to attend public institutions are increasing yearly.  Over the past 10 years, the cost of tuition and room and board has risen twice as fast as the consumer price index.  There seems to be no end in sight.

 

The VBC registered representative can assist you in establishing a realistic savings strategy.  How to save depends upon the age of the children. 

  • If the child is under ten, moderately aggressive investment vehicles may be best. 

  • For a child between ten and sixteen, moving into growth-and-income funds and short-term bonds may be best. 

  • For the seventeen year old and older, the principle will need to be conserved in order to meet funding requirements so moving into certificates of deposit, money market accounts or short-term bonds may be best.

 

Custodial Account - UGMA or UTMA

 

Uniform Gift to Minors Act (UGMA) was enacted to provide a simple way to transfer cash and securities to a minor without the complications of establishing a formal trust and without the restrictions that apply to guardianship of a minor’s property.   The assets in an UGMA account are managed by a custodian appointed by the donor.  The donor can name themselves as custodian.  Since the property in the account must be turned over to the minor at 18 or, in some state at 21, these accounts are often used to set aside assets to fund higher education costs.

 

Uniform Transfers to Minors Act (UTMA) accounts are similar to UGMA accounts except they allow for the account to include real estate, paintings, royalties and patents.  The minor is prohibited from taking control of the assets until 21 (25 in California).

 

 

Coverdell Education Savings Account

 

A Coverdell Education Savings Account (CESA) allows for a maximum annual contribution currently of $2000.  Similar to a non-deductable IRA contribution, no income tax deduction is allowed for the CDSA contribution, however, earnings on these funds accumulate free of tax.  Distributions are also nontaxable if used for tuition and related expenses.

 

529 College Savings Plan

 

529 College Savings Plan is a qualified tuition plan allowed by the Internal Revenue Code (IRC) Section 529 for an account to be established with cash contributions for the benefit of any person, including a minor with an approved sponsor.  Account balances accumulate income tax free but are not required to be dispersed at any particular age and the account beneficiary can be changed by the account owner, usually the person who establishes the account.  Distributions from a 529 account can be taken at any time for any reason; however, if the funds are not used for qualified higher education expenses, any earnings would be subject to federal income taxes at the Distributee’s rate and a 10% federal penalty tax.

 

State Prepaid Tuition Programs

 

Under IRC Section 529, contributions to a qualified tuition plan may be used to purchase tuition credits, a so called prepaid plan.  In a prepaid plan, the plan sponsor guarantees that purchase of tuition credits will entitle the beneficiary to the same number of tuition credits in the future, in spite of the increase in tuition due to inflation.