Educational Planning

The 2009 How America Saves for College survey by Sallie Mae shows that just 14% of parents consider saving for education is their top financial priority. Two-thirds to three-quarters of families say that they are currently saving for their children's college education. Of families that are saving for college, one-third have saved less than $5,000. These current savings habits illustrate just how few parents are doing enough to meet the rising cost of college.

There are many ways to save for college: 529 Plans, Coverdell Education Savings Accounts, and UGMA/UTMA Accounts. 529 College Savings Plans are a great way to save for educational expenses and offer investors a convenient, tax-advantaged way to save for college, plus a measure of flexibility and control that other education plans may not offer, including professionally managed investment options. Payroll contributions to 529 plans are generally preferred; however, if your employer does not have this benefit, you can set one up with your financial representative. Below is information on the components and benefits of setting up a 529 College Savings Plan.

Educational Planning

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Compare College Savings Accounts

 

529 College Savings Account
A tax-advantaged way to save for qualified higher education expenses

Coverdell Education
Savings Account
These accounts can be used for qualified expenses for K-12 education.
UGMA/UTMA
These custodial accounts let college savers take advantage of lower tax rates for children.
Income Limits
None; anyone can contribute
Ability to contribute is phased out for married couples with incomes between $190,000 and $220,000, and for individuals with incomes between $95,000 and $110,000
None
Contribution Limits
$350,000 per beneficiary
$2,000 per year per beneficiary
None
Income Tax Treatment
Earnings can grow free from federal tax, and withdrawals for qualified higher education expenses are free from federal tax.   
Earnings can grow free from tax, and withdrawals for qualified elementary, secondary and higher education expenses are free from federal tax.  
For children under 19 and for full-time students under 24 whose earned income is less than one-half of their support, the first $1,000 of earnings is tax-free. Earnings between $1,000 and $2,000 are taxed at the child’s rate; earnings above $2,000 are taxed at the parents’ rate. 
Oversight
The owner maintains control of the assets, decides when withdrawals will be made and can change the beneficiary.
The beneficiary may assume control at age of majority  — 18 or 21 in most states.
The beneficiary assumes control at age of majority  — 18 or 21 in most states.
Investment Flexibility
Assets can be changed among funds once each calendar year and when a new beneficiary is selected.    
Assets can be changed at any time.      
Assets can be changed at any time, but each transfer usually is a taxable event.      
Uses
Higher education expenses, such as required books, tuition, room and board and supplies.    
Education expenses, including required books, tuition and room and board for kindergarten through high school, college and graduate school.  
Any use that  benefits the child.
Investment Options
Full range of mutual funds.
Full range of mutual funds.
Full range of mutual funds.
Ability to Change Beneficiaries     
Yes
Yes
No
Penalties on Non-Qualified Withdrawals     
Subject to ordinary income tax and a 10% federal tax penalty on earnings. 
Subject to ordinary income tax and a 10% federal tax penalty on earnings.
Not applicable
Contribution Deductible From  State Taxes    
Yes, dependent upon plan. Check with your Tax Advisor.
No
No
Rollovers
Allowed once every 12 months.
Allowed once every 12 months.
Not applicable

 

An investor's home state may only offer favorable state income tax treatment for investments made in a plan offered by such state. Selecting a state plan where you are not a resident may limit your ability to take advantage of any available state income tax exemptions or state tax deductions for contributions that your resident state offers. Certain state plans may impose a penalty for "non-qualifying" withdrawals and if you were able to deduct the original contributions on your state income tax return, there may be a state "recapture" of income tax due. Participation in a 529 College Savings Plan (529 Plan) does not guarantee that contributions and investment return on contributions, if any, will be adequate to cover future tuition and other higher education expenses or that a beneficiary will be admitted to or permitted to continue to attend an institution of higher education. Contributors to the program assume all investment risk, including potential loss of principal and liability for penalties such as those levied for non-educational withdrawals. Depending upon the laws of the customer’s home state, favorable state tax treatment for investing in a 529 Plan may be limited to investments made in a 529 Plan offered by the customer’s home state. Assets in a 529 Plan can potentially reduce the beneficiary’s ability to qualify for some forms of college financial aid. Customers should consult their tax advisor about any state tax consequences of the investment.Depending upon the laws of the home state of the customer or designated beneficiary, favorable state tax treatment or other benefits offered by such home state for investing in 529 college savings plans may be available only if the customer invests in the home state’s 529 college savings plan; any state-based benefit offered with respect to a particular 529 college savings plan should be one of many appropriately weighted factors to be considered in making an investment decision; and the customer should consult with his or her financial, tax or other adviser to learn more about how state-based benefits (including any limitations) would apply to the customer’s specific circumstances and also may wish to contact his or her home state or any other 529 college savings plan to learn more about the features, benefits and limitations of that state’s 529 college savings plan. Consider the place of various education planning vehicles in the context of the overall financial plan with the appropriate professional(s). For more complete information, including a description of fees, expenses and risks, see the offering statement or program description.


 

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