How important is it to save early and often for college? In 2005-2006, the average total cost was $15,566 for students attending four-year public colleges and universities, while students at four-year private colleges and universities paid, on average, $31,916, according to the College Board. These numbers are likely to keep rising. For the past decade, inflation has been much higher on the college campus than in the world outside.
So, what can you do? As is the case when you save for retirement, it's a good idea to find vehicles that offer both growth potential and tax advantages. Here are a couple to consider:
* Coverdell Education Savings Account: Depending on your income level, you can contribute up to $2,000 annually to a Coverdell Education Savings Account (ESA). Your Coverdell earnings and withdrawals will be tax-free, provided you use the money for qualified education expenses. (Any non-education withdrawals from a Coverdell ESA may be subject to a 10 percent penalty.) You can place your contributions to a Coverdell ESA into virtually any investment you choose - stocks, bonds, certificates of deposit, etc.
* Section 529 savings plan: In this plan, you put money in specific investments. All withdrawals will be free from federal income taxes, as long as the money is used for a qualified college or graduate school expense of the beneficiary you've named - typically, your child or grandchild. (However, 529 distributions will appear as income on the child's tax return, which could affect financial aid calculations.) Withdrawals for expenses other than qualified education expenditures may be subject to federal, state and penalty taxes.
Aside from the tax benefits, a Section 529 savings plan offers other advantages. First, account limits are quite high - you can accumulate more than $200,000 per beneficiary in many state plans, although special gifting provisions may apply.
And, just as importantly, you can get significant estate-planning benefits from a Section 529 savings plan. Because you can contribute large amounts of money to the plan, you may be able to reduce the size of your taxable estate. Plus, even though the assets are out of your estate, you retain control of them. You decide who will get the money and when he or she will get it. You can even change the beneficiary to another family member.
Before investing in either a Coverdell ESA or a Section 529 plan, see your tax advisor. Contributions for Section 529 plans are tax-deductible in certain states for residents who participate in their own state's plan.
While college may look a long way off for your children or grandchildren now, time has a way of sneaking up on you.
Sarah Taylor is an investment representative at Edward Jones Investments. She will be running a class, "Build a Strategy for a Healthy Retirement," which will focus on health issues and health care costs in retirement. Oct. 10, 5:30 p.m., Edward Jones Investments, 963 6th Street S. Call to reserve a spot: 828-9087.[[In-content Ad]]
