Financing a college education is a lot like buying a home. There are several ways to pay for it: save, pay as you go, borrow, let someone else pay or a combination of these. All of these options can play a part in making the college dream come true.
Smart planning is the key--and the time to begin is right now. Whether the child in your life is thirteen years old, ten months, or due any day now, it's never too early to start planning. If you feel overwhelmed by the thought of the costs that will be involved in your child's education, remember that the earlier you begin saving towards those costs, the longer your money can work for you. Making the right moves with your money right now can make a big difference. Even though financial planning is very personal, professional advice is often needed.
These days, college isn't just a dream, it's practically a requirement. And it's also getting more and more expensive. However, there are several options and choices available to help ensure that your children or grandchildren will be able to explore and enjoy the advantages of higher education.
Your Financial Consultant can help you to determine the college savings plan that works for you. He or she can help you decide what investments will help you enhance return while maintaining a risk level with which you are comfortable. After all, the goal is to maximize your savings, and help your dreams come true.
What You Should Know
Take advantage of tax benefits.
The tax benefits offered by college savings vehicles can greatly affect how much you accumulate for your child's college education. Tax-free status is a powerful benefit and can make a difference in the value of your account-enabling all of your college savings dollars to be used towards college education expenses.
Know how flexible and accessible your assets are.
What happens to your college savings if your situation changes, you have a financial emergency, or your child gets a scholarship? The answers vary based on the college savings vehicle you chose. Ownership, control of assets, and account flexibility are important factors that should weigh in to your decision-making process. College savings plans also vary in the treatment of non-qualified withdrawals, from not allowing early access to complete penalty-free liquidity.
Understand financial aid implications.
Many families are afraid to save for college, thinking it will hurt their chances for financial assistance. They are unaware that income, not savings, is the most important factor in determining who qualifies for educational grants and/or loans. Since parent income and the saved assets of both child and parent are important factors in determining financial aid, it's important to consider how the college savings vehicle you choose affects financial aid.
Consider income restrictions, contribution limits, and other factors.
With the rising cost of college, it's important to start investing early and regularly to prepare financially for college. High contribution limits allow you to save greater amounts towards college expenses, and income restrictions often dictate who can use each plan.
A 529 plan is an investment plan operated by a state and designed to help families save for future college costs. As long as the plan satisfies a few basic requirements, the federal tax law provides special tax benefits to you, the plan participant (Section 529 of the Internal Revenue Code).
Income Tax Breaks
529 plans offer unsurpassed income tax breaks. Your investment grows tax-free for as long as your money stays in the plan. And when the plan makes a distribution to pay for the beneficiary's college costs, the distribution is federal tax-free as well. Your own state may offer some tax breaks as well, in addition to the federal treatment.
Contributor Stays in Control
Another advantage of the 529 plan is that the contributor stays in control of the account. The named beneficiary has no rights to the funds, with very few exceptions. You, the contributor, decide when withdrawals are taken and for what purpose. Most plans even allow you to reclaim the funds for yourself any time you desire, no questions asked. However, the earnings portion of the "nonqualified" withdrawal will be subject to income tax and an additional 10% penalty tax.
In addition, a 529 plan can provide a very simple way to save for college. Once you decide which 529 plan to use, you complete a simple enrollment form and make your contribution (or sign up for systematic deposits). That's all there is to it. The ongoing investment of your account is handled by the plan, not by you. Plan assets are professionally managed either by the state treasurer's office or by an outside investment company hired as the program manager.
Everyone is Eligible
Finally, everyone is eligible to take advantage of a 529 plan, and the amounts you can put in can be substantial. Generally, there are no income limitations or age restrictions.
As with all tax-related decisions, consult your tax advisor. Withdrawals for expenses other than qualified education expenses are subject to income tax and an additional 10% penalty on earnings. You should consider a 529 Plan's fees and expenses such as administrative fees, enrollment fees, annual maintenance fees, sales charges, and underlying fund expenses, which will fluctuate depending on the 529 Plan invested in and the investments chosen within the plan. You should also consider the inherent risks associated with investing in 529 Plans such as investment return and principal fluctuation, which will also vary based on the investments made within the plan. More information is available in each plan's official statement. The official statement should be read carefully before investing.
Investors should consider, before investing, whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Consult your tax advisor.
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