Saving for College

How to save mega-bucks for college

By Ryan M. Lenox

Wondering how you are going to pay for the rising cost of college? You can save tax-free thanks to The Economic Growth and Tax Relief Reconciliation Act of 2001.

Yes, that’s right — tax-free! You put after-tax dollars into an account under IRS Section 529 and the money will grow tax-free and the distributions, when used for college, are tax-free.

In addition to the tax benefits of the program, it allows a couple to contribute up to $110,000 in one year per child. This is a huge benefit considering the average tuition at public universities increased 234 percent between 1980 and 1995 according to the U.S. General Accounting Office. At that rate, by the year 2015 you could expect to pay anywhere between approximately $100,000 to $300,000 for college depending on whether it’s a public, private or Ivy League school.

The 529 plans are state-sponsored investment programs that allow parents, grandparents, extended family, friends, etc. to save for a child’s college education. You put after-tax dollars into the plan, which is invested into mutual funds, and the money grows tax-free. When your child goes to school, the money can be withdrawn tax-free as long as the distribution is “qualified.” Qualified distributions include tuition, fees, supplies, room and board costs, books, and equipment required for attendance or enrollment at an eligible school.

Another one of the benefits of the 529 is that there are no income limitations on parents preventing them from contributing to a 529 plan. In addition, there are high contribution limits so parents can actually put enough away to pay for college. The IRS allows you to put up to $110,000 into a 529 plan by lumping five years worth of gifts into one year. They also don’t put limits on parents based on their income levels. They allow you to put enough away to actually pay for college — imagine that!

The 529 plans do not allow buying and trading of individual stocks or bonds. This is a benefit for most investors because it forces us to remain disciplined while preventing us from chasing the next hot tech stock.

We are only allowed to invest in mutual funds from investment companies that are included in the particular plan. You will not be able to pick individual funds but you will decide how the money is invested (all stock mutual funds, all bond mutual funds, or an age-based allocation).

The allocation of your assets will be based on the child’s age, parents’ risk tolerance, and any other pertinent information that is needed.

Another benefit of the 529 plan is that it can be used in estate planning. The money that is put into a 529 plan is considered a completed gift to the beneficiary (student) and thus the money is considered out of the participant’s (contributors’) estate.

In effect, if there are 10 grandchildren you can remove $1.1 million from your estate and provide a college education for them in the process.

On top of that, the participant not only enjoys the estate benefits but they retain control of the assets. This means that you can change the beneficiaries or pull the money back into your estate if circumstances change.

There are other education savings options available to investors: the Tuition Assistance Program (TAP), the Education IRA (Ed IRA), and Uniform Gift to Minors Act (UGMA) accounts.

The TAP allows you to pay for future college credits at today’s prices. In an Ed IRA, investors can invest in individual stocks, individual bonds, and mutual funds. The money from an Ed IRA can be used for expenses at primary schools, secondary schools, colleges, or universities. Your contributions are limited based on your income level (for a couple, your income must be below $160,000/year).

There are also limitations on the amount you can save per year. The limit was just raised from $500 to $2,000 per year with the passing of the Economic Growth and Tax Relief Reconciliation Act of 2001.

Finally, under the UGMA you can save as much as you want and invest the money however you wish but without any gift-tax incentives. For children 14 and under the first $750 of investment income is tax-free; the next $750 is taxed at the child’s tax rate; any income above $1,500 is taxed at the parent’s rate.

For children 14 and older, all the income is taxed at the child’s rate. The major problem with this type of account is that it is in the child’s name and when they reach majority age they can use it for whatever they want – whether it is school or an expensive sports car.

In conclusion:

• Parents, grandparents, corporations, even friends can contribute to 529 plans.

• Assets can be used at any accredited post-secondary school in the U.S.

• Earnings grow tax-free.

• Qualified distributions are tax-free.

• Couples can contribute up to $110,000 in a single year without gift tax.

• There are no income restrictions.

There are other options available to investors looking to save for college. Depending on your unique situation, an Education IRA may make more sense for you. The 529 plans are not the end all, be all for college savings — they are merely an extremely helpful tool in the investor’s toolbox.

Ryan Lenox is a financial advisor with Merrill Lynch who specializes in helping his clients with retirement planning, education planning, and investment management. He can be reached by phone at (800) 937-0257, ext. 2266, by mail at 8380 Old York Road, 4th Floor, Elkins Park, PA, 19027, or e-mail at rlenox@pclient.ml.com.




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						How to save mega-bucks for college By Ryan M. Lenox Wondering how you are going to pay for the rising cost of college? You can save tax-free thanks to The Economic Growth and Tax Relief Reconciliation Act of 2001. Yes, that’s right — tax-free! You put after-tax dollars into an account under IRS Section 529 and the money will grow tax-free and the distributions, when used for college, are tax-free. In addition to the tax benefits of the program, it allows a couple to contribute up to $110,000 in one year per child. This is a huge benefit considering the average tuition at public universities increased 234 percent between 1980 and 1995 according to the U.S. General Accounting Office. At that rate, by the year 2015 you could expect to pay anywhere between approximately $100,000 to $300,000 for college depending on whether it’s a public, private or Ivy League school. The 529 plans are state-sponsored investment programs that allow parents, grandparents, extended family, friends, etc. to save for a child’s college education. You put after-tax dollars into the plan, which is invested into mutual funds, and the money grows tax-free. When your child goes to school, the money can be withdrawn tax-free as long as the distribution is “qualified.” Qualified distributions include tuition, fees, supplies, room and board costs, books, and equipment required for attendance or enrollment at an eligible school. Another one of the benefits of the 529 is that there are no income limitations on parents preventing them from contributing to a 529 plan. In addition, there are high contribution limits so parents can actually put enough away to pay for college. The IRS allows you to put up to $110,000 into a 529 plan by lumping five years worth of gifts into one year. They also don’t put limits on parents based on their income levels. They allow you to put enough away to actually pay for college — imagine that! The 529 plans do not allow buying and trading of individual stocks or bonds. This is a benefit for most investors because it forces us to remain disciplined while preventing us from chasing the next hot tech stock. We are only allowed to invest in mutual funds from investment companies that are included in the particular plan. You will not be able to pick individual funds but you will decide how the money is invested (all stock mutual funds, all bond mutual funds, or an age-based allocation). The allocation of your assets will be based on the child’s age, parents’ risk tolerance, and any other pertinent information that is needed. Another benefit of the 529 plan is that it can be used in estate planning. The money that is put into a 529 plan is considered a completed gift to the beneficiary (student) and thus the money is considered out of the participant’s (contributors’) estate. In effect, if there are 10 grandchildren you can remove $1.1 million from your estate and provide a college education for them in the process. On top of that, the participant not only enjoys the estate benefits but they retain control of the assets. This means that you can change the beneficiaries or pull the money back into your estate if circumstances change. There are other education savings options available to investors: the Tuition Assistance Program (TAP), the Education IRA (Ed IRA), and Uniform Gift to Minors Act (UGMA) accounts. The TAP allows you to pay for future college credits at today’s prices. In an Ed IRA, investors can invest in individual stocks, individual bonds, and mutual funds. The money from an Ed IRA can be used for expenses at primary schools, secondary schools, colleges, or universities. Your contributions are limited based on your income level (for a couple, your income must be below $160,000/year). There are also limitations on the amount you can save per year. The limit was just raised from $500 to $2,000 per year with the passing of the Economic Growth and Tax Relief Reconciliation Act of 2001. Finally, under the UGMA you can save as much as you want and invest the money however you wish but without any gift-tax incentives. For children 14 and under the first $750 of investment income is tax-free; the next $750 is taxed at the child’s tax rate; any income above $1,500 is taxed at the parent’s rate. For children 14 and older, all the income is taxed at the child’s rate. The major problem with this type of account is that it is in the child’s name and when they reach majority age they can use it for whatever they want – whether it is school or an expensive sports car. In conclusion: • Parents, grandparents, corporations, even friends can contribute to 529 plans. • Assets can be used at any accredited post-secondary school in the U.S. • Earnings grow tax-free. • Qualified distributions are tax-free. • Couples can contribute up to $110,000 in a single year without gift tax. • There are no income restrictions. There are other options available to investors looking to save for college. Depending on your unique situation, an Education IRA may make more sense for you. The 529 plans are not the end all, be all for college savings — they are merely an extremely helpful tool in the investor’s toolbox. Ryan Lenox is a financial advisor with Merrill Lynch who specializes in helping his clients with retirement planning, education planning, and investment management. He can be reached by phone at (800) 937-0257, ext. 2266, by mail at 8380 Old York Road, 4th Floor, Elkins Park, PA, 19027, or e-mail at rlenox@pclient.ml.com.