| State plans make saving for college less taxing | |||
| Mar 4, 2007 | Kansas City Star | ||
MARK DAVIS STASH IT | A good strategy can ensure that adequate education funds are available Contributions to plans provide for tax benefits, as well as giving a child an education nest egg. The Kansas City Star “Hopefully, her grades will get her that scholarship I’m dreaming of. ” Allen Wilson, on his daughter Allyson Six years ago, Allen Wilson opened an account in Missouri’s MOST college savings plan. He invested aggressively, gaining a few extra thousand dollars. “Right now we’re reaping the benefits from it,” Wilson said. “Our daughter’s actually now finishing her first year in college. ” The MOST account has worked so well Wilson wants to start saving for his sixth-grade son’s college. He keeps adding to Allyson’s account, too, for the day she’ll likely transfer from community college to a four-year school. “Hopefully, her grades will get her that scholarship I’m dreaming of,” Wilson said. The MOST plan is Missouri’s version of a 529 college savings plan. Scores of these are available nationwide and they can pay far more benefits than simply investing money for college. Contributions usually earn a state income tax deduction. And investments inside the accounts accumulate without paying taxes along the way. That means more money stays in the account to earn more gains. Once classes start, 529 account gains can be spent tax-free if they’re spent on education. “It’s pretty compelling if you look at saving over 10 years,” said George Syata of Practical Planning LLC in Overland Park. By his calculations, the tax benefits of 529s boost savings 11 percent over a decade. Unfortunately, making college savings decisions isn’t easy. Not only are there lots of 529 plans, there also are other kinds of savings vehicles that offer their own benefits and drawbacks.
And parents’ decisions about how to save for college can affect their student’s chances of qualifying for financial aid. “The fact that they’re saving is the biggest issue,’ Syata said. “Where they do it is the next biggest. ” 529 savings plans Planners’ popular recommendation for parents is to put college savings in a state-sponsored 529 plan. The best choice likely is the plan your state sponsors. Like most states, Missouri grants a state income tax deduction for residents’ contributions to MOST. Kansas does the same for its residents’ contributions to the Kansas-sponsored Learning Quest plan. But starting this year, Kansas has gone a step further. It offers residents a deduction for contributions to any 529 plan. A quick source for these details and more about 529 plans is www. savingforcollege. com, founded by certified public accountant Joe Hurley. Hurley’s Web site rates more than 100 such plans open to investors with 1 to 5 caps (those square mortar boards graduates wear). It explains in clear language what earns a higher rating: high contribution maximums and low minimums, easy deposit and withdrawal procedures, low fees and expenses, investment choice and many more factors. Most states offer their plans directly to savers and through financial advisers and Hurley rates them separately. Morningstar Inc. recently listed Missouri’s adviser-sold MOST plans among the five worst because of added fees and its “mixed bag” of investment choices. Although state tax deductions are valuable, Hurley said savers shouldn’t ignore other facets of plans. The deduction’s value is greatest if the savings will be used relatively soon but investment performance can matter more if savings start when a child is still very young, he said. One source of 529 contributions is the Upromise program available through state Web sites. Register with Upromise and your purchases at many companies and of many brands add small amounts automatically to the 529 account. Most 529 plans have a relatively high contribution limits and don’t limit parents’ contributions because of their income level. Another benefit of 529 plans is that unspent money won’t go to waste. “Even if the child didn’t use it all, you could always change the beneficiary to another child or yourself,” Syata said. It would still be important to use the money for qualified education expenses as non-qualified expenses lose the tax-free status and can trigger a 10 percent penalty. Coverdells Another popular choice is a Coverdell Education Savings Account, sometimes better known by its original name, education IRA. These accounts have the same tax-deferred investment growth and tax benefits when spent on education expenses as 529 plans. They lack the state income tax deduction for contributions. Coverdells have one advantage over 529 plans, especially for parents who are saving for very young children. The gains can be spent tax-free for private high school and elementary school expenses, rather than just post-secondary education covered by 529 plans. Higher-income savers, $95,000 for individuals and $190,000 for joint filers, may not be able to contribute as much to a Coverdell or to contribute at all. Coverdells weren’t that popular when introduced largely because the annual savings limit was $500. Students now can collect up to $2,000 a year in Coverdell accounts. The limit applies to all accounts combined, so be careful the grandparents don’t set up a plan and keep it secret. Coverdells generally have broader investment options because the saver picks where to open the account. States generally offer a selected menu of investment choices in 529 plans. Some limits on Coverdells changed in 2002, according to the Kids/College section of a Tax Guide for Investors at www. fairmark. com. Its extensive discussion of Coverdell accounts said parents can put $2,000 in a Coverdell for a child and still add money to his 529 account. That hadn’t been true. Fairmark noted that parents can switch a Coverdell to a younger child but should make sure the account agreement allows naming a new beneficiary. The new beneficiary also has to be under 30, typically eliminating leftover Coverdell dollars as a source of education money for parents. Custodial trusts At one time, college savings were popular under the Uniform Transfers to Minor Act, an update of the better known Uniform Gifts to Minors Act. But these are less attractive since the advent of 529 and Coverdells. That’s because a UTMA account belongs to the child and can hurt his chances of qualifying for financial aid much more than savings in the newer accounts, said Hal Deuser, who conducts Commerce Bank’s financial aid sessions for parents.
Families pursue financial aid for college by submitting a free federal application for financial aid. Money in a UTMA account is the kids’ and gets counted at the higher rate in qualifying for aid. Many advisers also caution parents that youths can use UTMA dollars any way they see fit, once they reach the specified age limit of 18 or perhaps 21 years old. These accounts also can’t transfer to a younger sibling.
Loans, aid and work
College is costly and most families will need to tap many different resources. Scholarships are readily available for academic skills, athletic ability and even for studying particular fields of interest. Parents may be able to use Series EE and Series I U. S. Savings Bonds for some education expenses without paying taxes on the interest the bonds earn at maturity. They also can tap a Roth IRA account early to pay education expenses. Students can work summer months or possibly during school. Student loans, and even education loans to parents, can fill just about any gap.
Saving for college early means parents will be less dependent on getting financial aid for their children. Kara Bennett, a financial adviser in Kansas City, said families will benefit by searching widely and thinking creatively. “I see that more than anything, a little here, a little loan, a little this, a little that,” Bennett said. “Even though you think about it, and you talk about it, and you put a strategy in place, don’t be married to it. Re-evaluate it. ” Get help Basic and detailed information on state 529 college savings plans: www. savingforcollege. com Morningstar Inc. reviews 529 plans: www. morningstar. com Extensive information about Coverdell and UTMA accounts: www. fairmark. com/college/index. htm
Federal Trade Commission advice to avoid scholarship scams: www. Help finding scholarships and financial aid: www. The starting point for financial aid is the Free Application for Federal Student Aid: www. Find college cost estimates for specific schools with College Opportunities Online Locator: http://nces. ed. gov/ipeds/cool Missouri’s MOST plan: https://missourimost. s. upromise. com Kansas’ Learning Quest: https:// www. learningquestsavings. com College costs Estimated 2006-07 school year expenses, covering in-state tuition, fees, books, on-campus room and board plus other expenses. Kansas State University - $15,717 University of Kansas - $16,262 University of Central Missouri (CMSU) - $14,247 University of Missouri-Kansas City - $22,132 University of Missouri-Columbia - $18,030 Source: National Center for Education Statistics at http://nces. ed. gov/ipeds/cool To reach Mark Davis, call (816) 234-4372 or send e-mail to mdavis@kcstar. |
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