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 College
Savings 
There are three main methods
of saving for college expenses:
- Taxable Account
- Educations Savings Account (ESA)
- Section 529 Plan
The taxable
account is the least preferred method of the
three because gains may be taxed each year
and there may be capital gains taxes due when sold.
Education Savings Accounts (ESA)
grow tax deferred and subsequent distributions are tax free for qualified
expenses, but ESAs have limits to the annual contributions allowed ($2,000 per
year per beneficiary) as well as income limits for contributors ($190,000 to $220,000
phase out period for married filing joint and $95,000 to $110,000 for all others). ESAs can be used for elementary and secondary expenses in addition to
post-secondary education expenses.
Section 529 Plans are
sponsored by individual states. The assets grow tax deferred and
subsequent distributions are tax free for qualified expenses (post-secondary
only). There are no income limitations and each state may or may not have
tax incentives for their program. The Commonwealth of Virginia allows for
a $2,000 state income tax deduction for each account per year.
Most Section 529 state college
savings plans allow parents, grandparents, other relatives, and friends to
contribute to a child’s higher education fund. Grandparents can set up and
manage accounts in the same manner as parents. The contributor makes decisions
concerning pre-paying tuition or choosing investment options, and retains
ownership of the contract or account until it is used to pay the child’s college
expenses.
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Why save for a child’s post-secondary
education?
According to the College Board, the average cost of a four-year education at a
public university is currently $42,544, and $107,416 for private colleges. Over
the past decade, expenses at public institutions have increased nearly 40%, and
costs will almost certainly continue to rise. So it is very important that
families think about these costs while children are young. By starting to save
today, parents and grandparents can help their loved ones have the resources
necessary to attend college.
How can you begin to save for a child’s college
education?
Section 529 state college savings plans allow
grandparents or others to set aside funds for the express purpose of paying for
a child’s future education. The plans provide tax benefits and offer the
opportunity for long-term growth. They allow donors to maintain control over the
funds until they are needed, and ensure that the money will only be used for
higher education-related expenses. By setting up a savings plan and making
regular contributions, you can help your student deal with the significant costs
of college.
What needs to be done before starting an account?
The first thing to do is research the various plans
currently available. There are many options available, and each plan is unique.
Savers should look for the investment strategies, tax benefits and other
incentives that best suit their needs and those of the beneficiary. Often, a
person’s home state will offer a plan with advantages that other plans do not
have.
What about state prepaid
tuition programs?
The prepaid programs offered by individual states vary greatly.
Virginia's prepaid program has some very serious limitations that need to be considered
before making a decision. Also, prepaid tuition programs pay for tuition
only, which is approximately half of the total cost of college.
Call or email for more information.
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