03Feb2016
COLLEGE SAVING: 5 Big Ways to $ave for College
by Bryan Ward, CFP®, CIMA® in Ideas, Hints, Tips, Strategies

With the cost of attending a traditional 4 year university somewhere between “Ridiculous” and “You have to be kidding me,” many students and parents alike have looked towards cheaper alternatives such as online universities or attending a junior or community college for the first year or two before transferring into the traditional universities. And, of course, we would all like to think or dream that our child will receive a full academic or sports scholarship leaving us with little to worry about. But reality is, very few full-ride scholarships are handed out, and unless a wealthy relative decides to front the bill, there is a good chance your child will join the other 70% of students that resort to some other means for financial aid (1). Below are 5 ways you can help with saving for the cost of college.

1).The Education IRA, or Coverdell Education Savings Account (ESA), is an investment vehicle that lets you contribute a maximum of $2000 per year per child into an investment account. Your after-tax dollars go in, the money grows tax-deferred, and the dollars may be withdrawn for qualified educational expenses tax-free. Qualified expenses include K-12 expenses –not just college and university expenses. Assets can be invested in anything you choose and in any manner that you choose which makes this a very attractive option for several people. You may change beneficiaries to immediate family members including step-relatives and in-laws.

The only drawback is for individuals who may have larger incomes and wish to put larger sums of money away for their beneficiary. The Education IRA only allows $2000 maximum annual contribution and the income qualification; that is, you may not contribute to an Education IRA in a year that you make more than $110,000 as an individual or $220,000 as a joint couple. Nevertheless, $2000 each year growing at 10% for 15 years could be a tidy $63,500 for your child’s future.

2.) 529 College Savings Plan. Similar to the Education IRA, investments grow tax-deferred and may be withdrawn tax-free; what’s more, you may save and invest your after-tax dollars for any accredited college or institution nationwide. One other big benefit depending on which state you live in, you may be able to receive a further tax deduction at the state level on your contributions.

Unlike the Education IRA, you can pretty much put as much into 529’s as you like; there may be gift consequences for more than $14,000 gifted per individual, but there is currently a $5 million lifetime gift exemption. Most won’t have to worry about that. You can also change beneficiaries to extended beneficiaries and most importantly, you maintain control of the assets.

One issue with 529s today, is the fact that several state plans WILL NOT let you choose the investments for yourself. You are allowed to rollover the money to another institution once during the year; however the investment firm that particular state chose determines where your money will be invested. Some plans may only offer very limited choices or only age-based allocation, which could limit your ability to achieve the returns you are expecting or control downside risk during downturns like in 2008. (You will have to do your homework on which plan works best for you.)

3.) Roth IRA. Wait a minute, isn’t a Roth IRA for retirement? Yes it is. But there are few reasons that allow for an early withdrawal without penalty. College expenses for the person’s spouse, children or self, currently qualify as one of the reasons.

Just remember, you need to have earned income and you can contribute up to a max of $5,500 annually to a Roth IRA as long as you fall into the income limitations; that is, you may not contribute to a Roth IRA in a year that you make more than $131,000 as an individual or $193,000 as a joint couple. (These limits are capable of changing every year.)

4.) UGMA/UTMA. The Uniform Gift to Minor’s Act (UGMA) used to be the preferred savings vehicle for children. In essence, you gift money to your child, you can invest how you want, the money grows at his/her lower tax rate, and they withdraw the dollars at the lower tax rate of a younger earner.

However, this hardly competes with today’s tax-deferred growth and tax-free withdrawals in IRAs and 529s. The one advantage of the UGMA is that the money can be used for anything, not just education.
Sounds good? It’s not. This is a completed gift to your child, and it can never be taken back. It’s your child’s money at 18 or 21, and they can go and use the money to buy a car or take a trip to Vegas if they so desire. Unless your intention is to gift for estate tax purposes, opening a direct online brokerage or custodial investment account may provide similar results without making a completed gift to your child.

5.) Universal Life Insurance. Not a very typical investment vehicle for college savings and comes with some extra cost, but could be an attractive strategy for those who looking for additional benefits.

The biggest attraction with this vehicle is that you can contribute more than the Education IRA’s $2000, more than the Roth’s $3000, provide life insurance coverage for you or your child, maintain control of the account and in certain policies have choices on how to invest inside the vehicle.

Only the 529 lets you contribute more, but a 529 must be used exclusively for education purposes. In contrast, you can spend the money from a Universal Life policy however and for whomever you please.

When it comes time to tap into that Cash Value of the policy: you may withdraw directly from the principal or cost basis without paying taxes, and you can tap into earnings by taking out an extremely low interest loan from the account. Plus, it is one of the few ways to save and invest for a child’s schooling that will not count against the child’s financial aid picture. The Education IRA, 529, or Roth IRA — those assets will limit what your child can qualify for with respect to financial aid.

(1). 2011–12 National Postsecondary Student Aid Study

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