Do you have school-age children? If so, the end of the school year means that your kids are now one year closer to college. That means you have even more incentive to launch a college savings strategy — which is essential these days.
During a tough economy, states are scrambling to meet budget shortfalls. As a result, state legislatures may be forced to scale back their support to public colleges and universities, which in turn may raise their tuition. Furthermore, college endowments have been hit hard by the financial crisis; from July through November 2008, endowments suffered more than $94 billion in investment losses, according to a survey by the National Association of College and University Business Officers and Commonfund Inc. Private colleges and universities, which are especially dependent on endowment income, are slashing budgets and warning that continued endowment declines could lead to financial aid cutbacks.
Obviously, you can’t control the economy, state legislators’ actions or the fortunes of endowment funds. But here are some things you can do to help prepare yourself for those future college bills.
Contribute to a
Section 529 plan
In a 529 plan, you invest money in specific securities, managed by professionals. Contribution limits are high, and all withdrawals are free from federal income taxes, as long as the money is used for qualified higher education expenses. Withdrawals for other types of expenses may be subject to federal and state taxes plus a 10-percent penalty. In addition, contributions are tax-deductible in certain states for residents who participate in their own state’s plan. Because tax issues for 529 plans can be complex, you will want to consult with your tax advisor.
Of course, if you already have a 529 plan, your savings probably took a pretty big hit last year and in the first few months of this year, as well. In response to the downturn in the financial markets, the IRS has ruled that, for 2009 only, 529 plan account owners can make investment changes twice in the calendar year, rather than just once. This gives you more opportunities to rebalance your 529 plan investments in a way that could help reduce the effects of volatility.
Open a Coverdell Education Savings Account
Depending on your income level, you can contribute up to $2,000 annually to a Coverdell Education Savings Account. Your Coverdell earnings and withdrawals will be tax free, provided you use the money for qualified education expenses. (Any non-qualified withdrawals from a Coverdell ESA may be subject to federal and state taxes, plus a 10-percent penalty.) You can fund your Coverdell ESA with virtually any type of investment — stocks, bonds, certificates of deposit, etc.
Open a custodial account
You can place assets in a custodial account — a UGMA or UTMA account — for your child’s college education. Although your child will own the account as soon as it is established, you have control of it until the child reaches the age of majority, usually 18. At that point, your child can collect the assets — which again can be in the form of almost any type of investment — and use the money for college.
Whichever vehicles you choose to create a college fund, start soon. In building your savings to meet the high costs of higher education, time is your greatest ally.
• This article was written by Edward Jones for use by your local Edward Jones financial advisor, Ruben Rea. He may be reached at 632-0351.