Funding your child’s college education

1. Funding your child’s college education Vince Hilton Jared Peterson Brian King

2. Up Front Decisions • How much are you going to pay for? • All • Some • None • Fixed Amount • Percentage of the cost *Don’t let society influence your decision

3. Do Your Homework • Try and guess where your child may choose to enroll • Investigate a group of possible schools to find out the costs of attending there • This will impact how you choose to save • Take the time to get acquainted with different plans and what your state offers

4. Different Vehicles • State College plans • UTMA (Uniform Transfer to Minors Act) • Coverdell Education Savings Accounts (Education IRA) • Section 529

5. Advantages Effectively can lock-in a tuition rate After 2002 contributions tax deductible Disadvantages Narrows School possibilities If your child goes out of state problems arise with contribution. (Check with state) Reduces possibilities for financial aid Only covers tuition and fees in many states State pre-paid Tuition Miscellaneous • Some states allow out-of-state participation but may not allow tax benefits (Check with state) • Varies greatly by state!!!

6. Uniform Transfers to Minors Act (UTMA)&Uniform Gift to Minors Act (UGMA) • Allow you to set aside money on behalf of a child • Retaining control of the money, until the child reaches 18 or 21 whichever is the age of majority in the state • UGMAs will permit only transfers of: • bank deposits • Securities • insurance policies • UTMAs permit the transfer of • any kind of property, such as real estate or artwork to the child

7. Disadvantages At age of maturity money belongs to child – regardless of educational aspirations It may affect a child's ability to get financial aid UGMA & UGTA Pros/Cons Advantages • You have control over the account until the child's age of majority, 18 or 21, depending on the state • You can choose what type of investments to make

8. Tax Consequences • For children under 14 • the first $700 of income earned is tax-free. • income from $701 through $1400 is taxed at the child's rate • income over $1,400 is taxed at the custodian’s rate • For children over 14 • all income is taxed at the child's rate

9. Similar Programs • Donor-designated • Money is designated for child’s education, but ownership is never transferred • Greater chance for financial aid • Taxed at adults rate • Child’s Trust • Allows various people to contribute to a single trust • Does not affect Financial Aid opportunities • Attorney’s fees to set up • Gives the trustees power to deny funds if child doesn’t go to college

10. Coverdell Education Savings Accounts Education IRA • Starting 2002 up to $2,000 a year until child reaches age of 18 • Can be used to pay for public or private education at any levels • Income level restrictions • Grows-tax deferred • Withdrawals for education are tax-free • Money must be withdrawn before age 30 • At age 30 withdrawals must begin and 10% tax penalty and earnings are taxed as income

11. EIRA Continued • Depending on the state and account the beneficiary can be renamed • Anyone can contribute • Contributor does not have to have any gross income for that year • Not tax deductible • Beneficiary can be changed to a relative only • If withdrawals exceeds expenses for the year a 10% penalty and withdrawals are taxed • Tax credit implications

12. Section 529 Plans • The Small Business Job Protection Act of 1996 included a provision for college savings • This provision became known as the 529 plan (IRS code section 529), or Qualified Tuition Program (QTP) • Two types: Prepaid Tuition and College Savings

13. 529 Prepaid Tuition Plans • Prepaid Unit Plans: • sell units that represent a fixed percentage of tuition • 1 unit typically corresponds to 1% of a year's tuition • Contract Plans: • parent agrees to purchase a specified number of years of tuition

14. 529 Prepaid Tuition Plans • Benefits: • Parents lock in tuition prices at current rates • tuition rates typically increase at about twice the inflation rate • Good diversification strategy • During recessions, state governments tend to reduce support for higher education, thus increasing public college tuition rates • So when return on stock market investments decline, returns on prepaid tuition plans will tend to increase • Guaranteed by state government (or private institution sponsoring the plan) • Anyone can contribute

15. 529 College Savings Plans • Similar to a Roth IRA • Funded with after-tax dollars • Earnings grow tax deferred • Differences: • No income limits • Contribution limits are much higher

16. 529 College Savings Plans • Benefits • Earnings grow tax-deferred • 529 accounts are not subject to estate tax • Up to 5 times the normal gift-tax exclusion (currently $11,000 annually) may be contributed tax-free to each child • Account owner (usually a parent) retains control over both the assets and the beneficiaries • Beneficiaries may be changed at any time penalty-free

17. 529 College Savings Plans • Rules • Principal may be withdrawn penalty-free at any time, for any reason • Earnings can be withdrawn penalty-free for qualified educational expenses • Earnings withdrawals for non-educational expenses subject to 10% penalty • Withdrawals reduce beneficiary’s eligibility for federal financial aid