Investing for College

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Investing for College
Financial Planning for Women Jean Lown, FCHD
Dept., USU Tiffany Smith, student
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Upcoming FPW Programs

• April 13 Getting Ready for Estate Planning
• May 11 Stock Mutual Funds
• June 8 Teaching Kids About Money
• July 13 Retirement Planning Workbook
• August 10 Voluntary Simplicity

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Class Objective
To learn about tax-advantaged ways to invest for
college

• Coverdell Education Savings Accounts
• 529 College Savings Plans

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Overview

• Balancing goals Setting priorities
• Coverdell ESAs
• 529 college savings plans

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What about Retirement?

• Before you contribute to college savings for
  children
• Is your retirement investment plan on track?
• Pay down high interest consumer debt

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Set Priorities Balance Your Goals

• Ensuring retirement security is more important
  than investing for college
• Don't use retirement funds for college
• Students can borrow for college retirees can use
  reverse mortgages but
• Before investing for college, review your
  retirement goals investment plans
• Investing for these two goals is not mutually
  exclusive (especially with grandparent help)

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Coverdell Education Savings Accounts (ESAs)

• Formerly called education IRAs
• Federal tax breaks
• Funds grow tax-free
• Withdrawals tax-free
• NO deduction for contribution
• All levels of education (K-12 college)
• No sunset provision
• Unlimited investment options
• Considered asset of parent for financial aid

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Coverdell Limitations

• Maximum contribution 2,000/year/child
• Contributors must have less than 190,000 in
  modified adjusted gross income (95,000 for
  single filers) in order to qualify for a full
  2,000 contribution
• No state tax advantages
• Child owns the at maturity (18 in UT)

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529 College Savings Plans

• Section 529 of IRS Code
• Federal state tax advantages
• Each state offers a different plan
• Owned by contributor (parent, etc.) for
  beneficiary (child)
• 10 penalty if not used for higher ed

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529 Advantages

• Funds grow tax-free (federal most states)
• Withdrawals are tax-free (federal state)
• Higher contribution limits than Coverdell
• Contributions are state tax deductible (UT)
• Owner controls the account
• Simple process

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Federal Financial Aid

• Account is treated as an asset of the parent or
  other account owner in determining eligibility
  for federal financial aid.
• Your expected contribution towards your child's
  college costs will include 5.6, or less, of the
  value of your non-retirement assets
• 35 assessment against assets owned in your
  child's name or in a custodial account

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School-based Financial Aid

• Each school sets its own rules for its own
  need-based scholarships
• many schools take 529 accounts into account
• Federal financial aid rules change often
• Most financial aid is in the form of loans, not
  grants

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529 Disadvantages

• Sunset provision current law expires Dec. 31,
  2010
• Some state programs
• High fees
• Poor investment choices
• Brokers charge additional fees

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Utah Educational Savings Plan

• UESP is one of the best in the nation!
• Kiplingers Personal Finance Magazine
• Money magazine
• Savingforcollege.com

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UESP Features

• 9 investment options
• Ultra low fees
• No enrollment fees
• No minimum contributions
• No yearly fee for Utah residents (owners)

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Contributions Account Balances

• Contributions can be made by anyone
• No income limits for contributor
• No minimum initial contribution
• No minimum subsequent contribution
• May contribute up to 315,000/beneficiary

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Tax Advantages

• Earnings grow free from federal income tax
• When used for qualified higher ed expenses
  earning are exempt from
• federal income taxes
• Utah income taxes (for account owners who are UT
  residents)
• In 2005 UT taxpayers can deduct contributions
  from UT income tax up to 1510 (3,020 for joint
  filers)

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Fees Charges

• Deal directly with UESP
• No enrollment fees
• Administrative fee fund expense ratios
• 0.25 - .0414
• Max. annual maintenance fee 25
• Waived for owners who are Utah residents

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Qualified Expenses

• Tuition
• Room Board
• Books, supplies equipment
• Eligible post-secondary schools in U.S. or abroad

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Account Owner Control

• How when the money is used
• Change beneficiaries within family
• Child does not attend post-secondary
• Transfer funds to family member
• Control disbursements
• Parental asset for financial aid

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Investment Options

• 4 static options
• Investment mix does not change
• 5 age-based options
• Investment mix becomes more conservative as child
  ages
• UT Public Treasurers Investment Fund (PTIF)
• Vanguard Group mutual funds

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Static Investment Options

• Money market (Utah Public Treasurers Investment
  Fund, PTIF)
• SP Index Stock Fund
• Bond market Index Fund
• 5 Stock funds

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Age-Based Options

• SP/Bonds/Money market
• SP/bonds
• Diversified A
• Diversified B
• Diversified bonds emphasis

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Investment Options

• Review handout with 9 options

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Tax Deferral Pays!

• Tax-deferred money continues to grow
• The longer you defer paying tax,the more you
  accumulate
• Money contributed to a 529 plan grows
  tax-deferred and is withdrawn tax free

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Non-qualified Disbursements

• 10 federal tax penalty on earnings
• No penalty on contributions
• All contributions are after-tax
• Made with money that was already taxed
• Similar to a Roth IRA

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What if law is not renewed?

• Current law expires 12/31/2010
• Earnings portion of disbursements will be taxed
  at beneficiarys (childs) tax rate

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Related Resources

• UESP http//www.uesp.org
• 1-800-418-2551
• Internet Guide to Funding College
  http//www.savingforcollege.com

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Questions?