Educational Savings Accounts.
You are now able to set up IRAs for the purpose of paying college expenses. Contributions are allowed until your child
reaches 18, and contributions may not exceed $2,000 per child per year. The $2,000 limit is phased out for joint filers with income above $190,000, and single filers above $95,000. Contributions are made with after-tax dollars. There is no tax deduction. This type of IRA allows you to make withdrawals for elementary, secondary and college expenses. Neither ordinary income tax nor the 10% penalty for premature withdrawals applies if the distribution is used for tuition, fees, books, and room and board. Currently you may claim either a HOPE or LLC credit in the same year as the distribution.
CDs and Bank Accounts.
Bank Certificates of Deposit (CDs) and bank savings accounts are two other places to put college savings. Although CDs and bank savings accounts are generally FDIC insured, they generally offer a lower return potential than other investment vehicles and are most appropriate for those with short-term goals.
Tax Considerations
Even if you invest wisely and defer the tax liability on savings for your child's college fund, you'll have to come up with the taxes when you liquidate those investments. Chances are you'll be faced with taxes at a time in the future when you are likely to be in a higher tax bracket and have other additional expenses. You'll need to be sure your investments earn enough to cover the anticipated taxes.
It's important to note, too, that tax laws are constantly changing and this discussion of tax rules provides a general overview. Consult your tax advisor before you begin investing, then check back regularly. If tax law changes negatively affect your college investments, you may want to move the money. How and when you move the funds also can affect taxes, so be sure to talk to your tax advisor first. In particular, some of the tax provisions discussed above are due to expire after December 31, 2010.
Here are just a few examples of tax considerations affecting college funds:
* Loans. If you plan to take out a loan to help pay for your child's college expenses, the interest may be deductible. Generally, if the taxpayer's adjusted gross income is below $130,000 for joint filers and below $65,000 for single filers the following interest may be deductible. The deduction is phased out ratably from $50,000 to $60,000 for single filers and from $100,000 to $130,000 for joint filers. Students may claim this deduction only if they are not claimed as dependents on parents' returns.
* UGMA accounts. You can put assets in a Uniform Gift to Minors Act (UGMA) custodial account for a child. However, if the child is under age 14, all income earned by these assets above a certain level (determined annually by the IRS) is taxed at the parents' income rate, whether or not the parent is the custodian. For children 14 years old and older, the income on assets in a UGMA account is generally taxed at the child's rate. You should keep in mind that putting assets in your child's name may reduce the amount of financial aid he or she is eligible to receive. It is also important to realize that unlike college savings plans (529 plans); UGMA accounts belong to the child. At age 18 the account becomes the child's property, regardless if the child attends college.
Other Avenues for Revenue
Even if you start early, it may be impossible to save enough for your child's college education. That doesn't mean, however, that college is out of the question. You have other cost-saving options available.
Student Strategies.
While they may not be options you should rely on, there are some strategies students can follow to help reduce their expenses prior to entering college and once they're in college. For example, many college students, particularly those who commute to a local school, are able to work part-time and summer jobs to help subsidize their tuition or simply for entertainment money. Be aware, however, that money earned by the child prior to college may reduce his or her eligibility for financial aid. Some colleges offer cooperative education programs where students rotate study with periods of career-related work, allowing them to earn money and credits at the same time. However, it may take more than four years to complete a degree through a cooperative education program. Ask the college admissions office about the specifics of their program.
Depending on a child's scholastic ability, he or she may be able to earn college credits by taking college courses or advance placement exams while still in high school. First- and second-year college students can also take College Level Examination Program tests for course credit. These options can represent a significant savings over the cost of a full-semester course in the classroom. Check with your child's high school guidance counselor or with the college admissions office for eligibility requirements and program specifics.
Another cost-savings possibility is to attend a community college for the first year or two, then transfer to a more expensive four-year college to complete a degree. This can be a more affordable approach to receiving a degree from a prestigious institution that you may have been unable to afford for four years or which may have been more competitive to gain entrance as a freshman.
Financial Aid.
Think of this in broad terms. You needn't be the sole source of funding for your child's higher education. For example, when your child receives a gift of money, put it into a college fund. When grandparents ask what to give for birthdays, suggest college fund contributions.
And don't forget the traditional sources of financial aid: scholarships, grants, work-study programs and government loans. Your child's scholastic record, course of study, athletic ability and choice of college are just a few of the variables that may affect the availability of these options.
If your family meets certain financial criteria, the federal government has a program of low-interest loans with extended payment terms. Relying too heavily on loans, however, is costly and can burden graduates with large debts just when they are working to establish their financial independence. Also, you should be aware that government financial aid programs are subject to change.
Home Equity.
If you bought your home when your child was small, you're likely to have built up a significant amount of equity by the time college is in the picture. You can tap that resource for your child's education with a home-equity line of credit. Interest payments may be tax deductible.
reaches 18, and contributions may not exceed $2,000 per child per year. The $2,000 limit is phased out for joint filers with income above $190,000, and single filers above $95,000. Contributions are made with after-tax dollars. There is no tax deduction. This type of IRA allows you to make withdrawals for elementary, secondary and college expenses. Neither ordinary income tax nor the 10% penalty for premature withdrawals applies if the distribution is used for tuition, fees, books, and room and board. Currently you may claim either a HOPE or LLC credit in the same year as the distribution.
CDs and Bank Accounts.
Bank Certificates of Deposit (CDs) and bank savings accounts are two other places to put college savings. Although CDs and bank savings accounts are generally FDIC insured, they generally offer a lower return potential than other investment vehicles and are most appropriate for those with short-term goals.
Tax Considerations
Even if you invest wisely and defer the tax liability on savings for your child's college fund, you'll have to come up with the taxes when you liquidate those investments. Chances are you'll be faced with taxes at a time in the future when you are likely to be in a higher tax bracket and have other additional expenses. You'll need to be sure your investments earn enough to cover the anticipated taxes.
It's important to note, too, that tax laws are constantly changing and this discussion of tax rules provides a general overview. Consult your tax advisor before you begin investing, then check back regularly. If tax law changes negatively affect your college investments, you may want to move the money. How and when you move the funds also can affect taxes, so be sure to talk to your tax advisor first. In particular, some of the tax provisions discussed above are due to expire after December 31, 2010.
Here are just a few examples of tax considerations affecting college funds:
* Loans. If you plan to take out a loan to help pay for your child's college expenses, the interest may be deductible. Generally, if the taxpayer's adjusted gross income is below $130,000 for joint filers and below $65,000 for single filers the following interest may be deductible. The deduction is phased out ratably from $50,000 to $60,000 for single filers and from $100,000 to $130,000 for joint filers. Students may claim this deduction only if they are not claimed as dependents on parents' returns.
* UGMA accounts. You can put assets in a Uniform Gift to Minors Act (UGMA) custodial account for a child. However, if the child is under age 14, all income earned by these assets above a certain level (determined annually by the IRS) is taxed at the parents' income rate, whether or not the parent is the custodian. For children 14 years old and older, the income on assets in a UGMA account is generally taxed at the child's rate. You should keep in mind that putting assets in your child's name may reduce the amount of financial aid he or she is eligible to receive. It is also important to realize that unlike college savings plans (529 plans); UGMA accounts belong to the child. At age 18 the account becomes the child's property, regardless if the child attends college.
Other Avenues for Revenue
Even if you start early, it may be impossible to save enough for your child's college education. That doesn't mean, however, that college is out of the question. You have other cost-saving options available.
Student Strategies.
While they may not be options you should rely on, there are some strategies students can follow to help reduce their expenses prior to entering college and once they're in college. For example, many college students, particularly those who commute to a local school, are able to work part-time and summer jobs to help subsidize their tuition or simply for entertainment money. Be aware, however, that money earned by the child prior to college may reduce his or her eligibility for financial aid. Some colleges offer cooperative education programs where students rotate study with periods of career-related work, allowing them to earn money and credits at the same time. However, it may take more than four years to complete a degree through a cooperative education program. Ask the college admissions office about the specifics of their program.
Depending on a child's scholastic ability, he or she may be able to earn college credits by taking college courses or advance placement exams while still in high school. First- and second-year college students can also take College Level Examination Program tests for course credit. These options can represent a significant savings over the cost of a full-semester course in the classroom. Check with your child's high school guidance counselor or with the college admissions office for eligibility requirements and program specifics.
Another cost-savings possibility is to attend a community college for the first year or two, then transfer to a more expensive four-year college to complete a degree. This can be a more affordable approach to receiving a degree from a prestigious institution that you may have been unable to afford for four years or which may have been more competitive to gain entrance as a freshman.
Financial Aid.
Think of this in broad terms. You needn't be the sole source of funding for your child's higher education. For example, when your child receives a gift of money, put it into a college fund. When grandparents ask what to give for birthdays, suggest college fund contributions.
And don't forget the traditional sources of financial aid: scholarships, grants, work-study programs and government loans. Your child's scholastic record, course of study, athletic ability and choice of college are just a few of the variables that may affect the availability of these options.
If your family meets certain financial criteria, the federal government has a program of low-interest loans with extended payment terms. Relying too heavily on loans, however, is costly and can burden graduates with large debts just when they are working to establish their financial independence. Also, you should be aware that government financial aid programs are subject to change.
Home Equity.
If you bought your home when your child was small, you're likely to have built up a significant amount of equity by the time college is in the picture. You can tap that resource for your child's education with a home-equity line of credit. Interest payments may be tax deductible.
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