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Investing for College

Financial Planning for WomenJean Lown, FCHD Dept., USU

Tiffany Smith, student

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Class Objective:

To learn about tax-advantaged ways to invest for college

• Coverdell Education Savings Accounts

•529 College Savings Plans

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Overview

Balancing goals; Setting priorities Coverdell ESAs 529 college savings plans

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What about Retirement?

Before you contribute to college savings for children» Is your retirement investment plan on

track?» Pay down high interest consumer debt

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Set Priorities; Balance Your Goals

Ensuring retirement security is more important than investing for college

Don't use retirement funds for college Students can borrow for college; retirees can

use reverse mortgages… but Before investing for college, review your

retirement goals & investment plans Investing for these two goals is not mutually

exclusive (especially with grandparent help)

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Coverdell Education Savings Accounts (ESAs)

Formerly called education IRAs Federal tax breaks

» Funds grow tax-free» Withdrawals tax-free» NO deduction for contribution

All levels of education (K-12 + college) No sunset provision Unlimited investment options Considered asset of parent for financial aid

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Coverdell Limitations

Maximum contribution: $2,000/year/child Contributors must have less than $190,000

in modified adjusted gross income ($95,000 for single filers) in order to qualify for a full $2,000 contribution

No state tax advantages Child owns the $ at maturity (18 in UT)

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529 College Savings Plans

Section 529 of IRS Code Federal & state tax advantages Each state offers a different plan Owned by contributor (parent, etc.) for

beneficiary (child) 10% penalty if not used for higher ed

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529 Advantages

Funds grow tax-free (federal & most states)

Withdrawals are tax-free (federal & state)

Higher contribution limits than Coverdell

Contributions are state tax deductible (UT)

Owner controls the account

Simple process

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Federal Financial Aid

Account is treated as an asset of the parent or other account owner in determining eligibility for federal financial aid.

Your expected contribution towards your child's college costs will include 5.6%, or less, of the value of your non-retirement assets

35% assessment against assets owned in your child's name or in a custodial account

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School-based Financial Aid

Each school sets its own rules for its own need-based scholarships» many schools take 529 accounts into

account Federal financial aid rules change often Most financial aid is in the form of loans,

not grants

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529 Disadvantages

Some state programs» High fees» Poor investment choices

Brokers charge additional fees

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Utah Educational Savings Plan

UESP is one of the best in the nation!

» Kiplinger’s Personal Finance Magazine

» Money magazine

» Savingforcollege.com

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UESP Features

9 investment options

Ultra low fees

No enrollment fees

No minimum contributions

No yearly fee for Utah residents (owners)

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Contributions & Account Balances

Contributions can be made by anyone

» No income limits for contributor

No minimum initial contribution

No minimum subsequent contribution

May contribute up to $315,000/beneficiary

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Tax Advantages Earnings grow free from federal & state income tax

When used for qualified higher ed expenses earning are exempt from:

» federal & state income taxes

For 2007, UT taxpayers may deduct contributions of up to $1,650 ($3,300 if filing jointly) or take a tax credit of $82.50 ($165 if filing jointly) per beneficiary.

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Fees & Charges

Deal directly with UESP <www.uesp.org>

No enrollment fees

Administrative fee + fund expense ratios

» 0.25% - .0414%

Max. annual maintenance fee = $25

» Waived for owners who are Utah residents

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Qualified Expenses

Tuition

Room & Board

Books, supplies & equipment

Eligible post-secondary schools in U.S. or abroad

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Account Owner Control

How & when the money is used Change beneficiaries within family

» Child does not attend post-secondary» Transfer funds to family member

Control disbursements Parental asset for financial aid

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Investment Options

4 static options

» Investment mix does not change

5 age-based options

» Investment mix becomes more conservative as child ages

UT Public Treasurer’s Investment Fund (PTIF)

Vanguard Group mutual funds

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Static Investment Options

Money market (Utah Public Treasurers Investment Fund, PTIF)

S&P Index Stock Fund

Bond market Index Fund

5 Stock funds

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Age-Based Options

S&P/Bonds/Money market S&P/bonds Diversified A Diversified B Diversified bonds emphasis

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Investment Options

Review handout with 9 options

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Tax Deferral Pays!

Tax-deferred money continues to grow

The longer you defer paying tax,the more you accumulate

Money contributed to a 529 plan grows tax-deferred and is tax-free when used for qualified higher education expenses

» Can be used in U.S. and Canada

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Non-qualified Disbursements

10% federal tax penalty on earnings No penalty on contributions

» All contributions are “after-tax”

–Made with money that was already taxed

–Similar to a Roth IRA

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Related Resources

UESP http://www.uesp.org

» 1-800-418-2551

Internet Guide to Funding College http://www.savingforcollege.com

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Questions?