College Savings

College Savings 101

We all want the best for our children and grandchildren, and that includes the best education opportunities. However, when considering college expenses, our first thought is usually, "How are we going to pay for this?" The growing costs of tuition, room and board, books and other fees make higher education seem out of reach for many families. Fortunately, there are some strategies you can use to make a college education more achievable.

Above all, the most important step is to start saving, and the earlier the better. In the past there were only limited savings options available.

Today, there are a number of tax advantaged1 approaches to education savings. These strategies and their rules can be complicated and confusing. A review with your tax planner and financial professional is advised.

Tax-Advantaged Strategies

• IRC Sec. 529 Qualified Tuition Plans: These plans allow an individual to either prepay a student’s tuition, or contribute to a savings account established to pay the student’s “qualified higher education expenses.” Contributions are not tax deductible, but growth in an account is tax-deferred. If certain requirements are met, distributions to pay qualified higher expenses are excluded from income.2 In other words the growth is tax free if used for qualified higher education expenses.
  • Prepaid Tuition Plans: Known as the GET or Guaranteed Education Tuition in Washington. Guarantees if tuition is purchased for a year in units, the units in the account will pay for a year of tuition in the future no matter what the costs of education have grown. The account is primarily designed to cover tuition, but under some circumstances may be used for room and board or other qualified higher education expenses.3
  • 529 College Savings Plan: Contributions are invested in stock and/or bond funds through mutual funds or annuities. For long term investors a growth approach may be appropriate while keying it down as college gets closer.
• Coverdell Education Savings Account (C-ESA): Similar to 529 investment accounts, contributions are not tax-deductible, but growth is tax-deferred. Distributions are excluded from income if used for qualifying educational expenses. CESA's differ from 529 plans in several distinct ways: 1) Up to $2,000 per year may be contributed to a C-ESA for an individual. 2)May be used on K-12. Other restrictions may apply.4
• Uniform Gift to Minors Act/Uniform Transfer to Minors Act (UGMA/UTMA): A custodial account established in a minor's name. Custodian is responsible for managing investments in the account until the minor reaches the age of majority. At this time the minor takes ownership of investments and custodian/parent has no rights over the account. Contributions are after tax and provide no tax deduction. Withdrawals are taxed at minor's rate and funds are not limited to education costs. UGMA/UTMA accounts may have a greater impact financial aid.
• U.S. Savings Bonds: Interest on series EE savings bonds issued after 1989, or Series I savings bonds, may (certain limits apply) be excluded from income if qualified education expenses are paid in the year the bonds are redeemed. Contributions are post tax and interest can be tax free if used for qualified higher education expenses.

With so many options available choosing the best one can seem like a daunting task. That is why we recommend consulting your financial representative and tax professional. A few things to consider with your financial professional are: current tax bracket, number of years until student enters college, risk tolerance, and investment experience. Your SFG financial representative is happy to assist in guiding you through these choices please contact your financial representative for more information.

Learn about Advantage and Disadvantages
Back to SFG Home

1 The rules described here concern federal income tax law. State or local income tax law may vary.
2 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 educational expenses or that a beneficiary will be admitted to or permitted to continue to attend an institutional 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 a 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. Consider the place of various educational 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.
3 For more information please review IRS Publication 970 - tax benefits for education.
4 Under current federal income tax law, many of the tax benefits of Coverdell accounts expire after 2010.