By Jay Fran
With higher education tuition increasing at double digit yearover year percentages an effective saving plan for your kid'seducation is becoming much more important than it has beenbefore. Most families will discover that their future highereducation costs will be much more than they have saved for theirkid's education. This leaves many kids to be faced withobtaining financial aid to pay for a portion of their collegeeducation. The goal of this article is to explore the pros andcons of 4 common investment options when saving for college.This article will also explore why some of these options arebetter than other when considering a portion of your kid'seducation may be funded by financial aid.
529 College Savings Plan: - A 529 college savings plan is afairly new investment option for college saving. It allows justabout anyone to save for college. There is a long list ofbenefits of a 529 college savings plan, but perhaps the mostimportant is that your earnings grow tax free if you use it forqualified education expenses. Additionally, the maximum amountyou can contribute to a 529 plan can go as high as severalhundred thousand dollars depending on your State. In the eventyou do not use the funds for college, you can still withdrawalyour earnings, but you will have to pay taxes and a 10% penalty.The penalty will be waived if your child receives a scholarship,or your child becomes disable or dies.
529 plans can typically be purchased through a broker or mutualfund company, but a disadvantage is that investment choices cansometimes be limited. Since qualifying for financial aid isbased on a calculation that considers your kids assets, anotherbig benefit of a 529 college savings plan is that the money inthe plan is classified as a parents assets so less that 6% ofthe value counts against your kid's financial aid eligibility.
Uniform Gifts to Minors Act/Uniform Transfers to Minors Act
(UGMA/UTA Custodial Account): - The benefit of a UMGA/UTACustodial Account is that there is no limit on the contributionand it is easy to set up at most financial institutions.However, the limitations far outweigh the benefits. The firstlimitation of a UMGA/UTA Custodial Account is that these typesof accounts offer very little tax advantage. If your child isunder 14, only the first $800 of income is tax free, the next$800 is taxed at your child's tax rate and after that there isno tax benefit at all. The other big limitation is that theaccount has to be set up in your child's name. As a result, ifyour child needs financial aid all of the assets will bereviewed at a 35% rate. Therefore, this type of account is notadvisable for those who may need financial aid.
Coverdell Education Savings Account (CESA): - A CoverdellEducation Savings Account is very similar to a 529 collegesavings plan. The main difference is that with a CoverdellEducation Savings Account you can only contribute $2000 perchild and to qualify your adjusted gross income must be lessthan $110,000 if single and less than $220,000 if married filingjointly. The account is classified as a parent's asset so lessthat 6% of the value counts against your kid's financial aideligibility.
In the end, parents should consider planning for college to be ahighly important process. The above 3 alternatives can make thisprocess much more easy and financially sound.
Copyright (c) 2005, by Jay Fran. This article may be freelydistributed as long as the copyright, author's information andthe below active live link is published with the article
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