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Where
to Stash Cash For College
by Candace
Bahr and Ginita
Wall, CPA, CFP
 How
old are your kids? How much have
you saved for their education? If
your answer is "not enough," you
are not alone. Most people don't
really start to save for college
until their kids are teenagers, and
a third of parents who intend to
send their kids to college have saved
less than $5,000. But you aren’t
alone: Uncle Sam can help. Today's
tax laws give you some unique new
tools to boost college savings. Here
are a few:
An IRA for Your Child
If your child has earnings , she can contribute to
an IRA in her own name. When she draws out the
money to pay for college, she'll pay tax at her
income tax rate, but penalties will be waived because
the money is used for college. If she puts the
money into a Roth IRA, she won't get a tax deduction
when the contribution is made, but the money will
grow tax-free, and she can pull out all her contributions
(but not the earnings) tax- and penalty-free to
pay for college.
An IRA for You
You can contribute to a Roth IRA in your own name
if your income is $95,000 or less ($150,000 on
a joint return.) You can take out the contributions
tax- and penalty-free to pay for your child's college
costs, and the earnings will continue to grow in
the account, to help pay for your own retirement.
An Education Savings Account
These accounts, also known as Coverdell ESAs, let
you sock away $2,000 a year for any child under
age 18, if you don’t exceed the income limitations.
Withdrawals are tax free if used for education
expenses for elementary and secondary schools or
colleges.
529 Plans
These state-sponsored savings plans
allow you to stash up to $11,000
a year for each of your children.
You can choose from a variety of
investment portfolios, and in some
states you may even deduct your contribution
on your state income tax return.
Withdrawals are tax-free if used
for higher education expenses.
Prepaid Tuition Plans
Some states offer plans that
let you lock in tomorrow’s tuition
at today’s rate for designated
schools. If your child decides to
go elsewhere, the money you invested
in the prepaid plan may be refunded
to you, minus a fee.
Qualified US Savings Bonds
You can set aside up to $30,000
a year in savings bonds, and the
earnings are exempt if you use the
funds to pay higher education expenses,
if you don’t exceed the income
limitations.
UGMA/UTMA Accounts
The rules for these accounts
are simple: you can set aside $11,000
and invest in anything. But here’s
two reasons why this simple solution
may not be best:
- The funds are considered the
child’s property under financial
aid formulas. That can affect your
child’s eligibility for financial
aid, since 35 percent of the child’s
assets count toward college costs,
vs. only 6 percent of your own
assets. And
- When your child reaches the
age of majority in your state,
the money is theirs to do with
as they please. Ouch!
Tax Credits
Some nifty tax credits are available if you have
children in college. The Hope Scholarship credit
gives you a tax credit of $1,500 per child for
tuition during the first two years of college.
The Lifetime Learning Credit will whack another
$1,000 from your taxes for each year after that.
But these credits begin to phase out if your income
is over $41000 ($83,000 on a joint return.) |
