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Sep
07
2007
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Save Early, Often for College |
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by Reprinted with permission of Investment Representative Celine Richardson of EdwardJones
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Friday, 07 September 2007 |
It's
that time of year when college students across the country reach
for their backpacks and head back to campus - while their parents
reach for their checkbooks and head for the Tylenol. If your children
are still quite young, though, you can take steps now to reduce
the headaches that may come from those big college bills.
Just
how expensive is it to send a child through college these days?
It's pretty expensive. In fact, it costs more than $16,000 for one
year at a four-year public college or university, according to the
College Board. And college costs have been rising considerably faster
than the general rate of inflation, so the high costs of higher
education are, in all likelihood, only going to get higher.
Of
course, you may not have to foot your child's college bills all
by yourself. Scholarships and loans are available, and many students
work part-time jobs, both during school and on summer vacations.
And yet, you may need, or want, to help pay for a sizable percentage
of college expenses. To meet this obligation, you need to save early,
save often - and use the right savings vehicles.
Fortunately,
you've got some attractive options. Here are some of the most popular
ones:
- Coverdell Education Savings Account - Depending on your income
level, you can contribute up to $2,000 annually to a Coverdell
Education Savings Account (ESA). Your Coverdell earnings and
withdrawals will be tax-free, provided you use the money for
qualified education expenses. (Any non-education withdrawals
from a Coverdell ESA may be subject to a 10 percent penalty.)
You can place your contributions to a Coverdell ESA into virtually
any investment you choose - stocks, bonds, certificates of deposit,
etc.
- Section 529 savings plan - In a Section 529 savings plan,
you put money in specific investments, managed by an investment
professional. Contribution limits are quite high - more than
$200,000 per beneficiary in many state plans, although special
gifting provisions may apply. And all withdrawals will be free
from federal income taxes, as long as the money is used for
a qualified college or graduate school expense of your child
or grandchild. This tax benefit was scheduled to expire in 2010,
but it was made permanent by one of the provisions in the Pension
Protection Act of 2006. Withdrawals for expenses other than
qualified education expenditures may be subject to federal,
state and penalty taxes. (Also, Section 529 distributions will
appear as income on the child's tax return, which could affect
financial aid calculations.) Contributions are tax deductible
in certain states for residents who participate in their own
state's plan.
- Permanent insurance - If you own some type of "permanent"
insurance policy, such as whole life or universal life, you'll
have a chance to build cash value. Your earnings have the potential
to grow on a tax-deferred basis, and you can take policy loans
for virtually any reason you choose - including paying for college.
Keep in mind, though, that if you don't fully repay the loan,
your policy may lapse, and if you pass away before repaying
the loan, the total amount owed, including interest, will be
subtracted from the death benefit.
Before
making any of these moves, please consult with your tax and financial
advisors. But don't wait too long - your children may be young now,
but time flies.
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