College Savings Tax Strategies
Saving for college ');
document.write('is hard not just because it\'s a huge expense, but because you can\'t predict how much, if any, financial aid you\'ll get.<');
document.write('/p> That\'s why you need to save what you can now. Fortunately, you have a number of tax-advantaged federal and state');
document.write(' college-savings vehicles at your disposal. The best option is the state-sponsored 529 plan, which comes in two f');
document.write('lavors: the prepaid tuition plan and the savings plan. A state\'s prepaid plan allows you to pay now at today\'s r');
document.write('ates for school tomorrow. In return, your account (or contract as it\'s often known) is guaranteed to pay for the tuition');
document.write(' and fees at the state\'s public universities and colleges by the time your child graduates from high school. A pre-paid ');
document.write('plan often does not, however, cover the costs for room and board. Your child also may use the pre-paid account t');
document.write('o attend a private or out-of-state school but you might risk forfeiting some of its value depending on how the plan valu');
document.write('es its contracts. Note, too, that most pre-paid plans require that the account owner (you) or the beneficiary (your chil');
document.write('d) be a resident of the state in which the plan is offered. The 529 college savings plan, now offered in most st');
document.write('ates, is far more flexible. The money may be used at any school you choose and for all qualified higher education expens');
document.write('es, including room and board. Each state determines what the lifetime contribution limit or account balance cap ');
document.write('will be in its 529 plan, but typically such limits range between $100,000 and $270,000. Investment minimums are low (mos');
document.write('t plans let you sock away as little as $25 a month), and there is no restriction on how much you may contribute every ye');
document.write('ar unless the account is nearing the lifetime cap. However, since 529 contributions are treated as gifts subject to gift');
document.write('-tax limitations, if you want to make a tax-free contribution, it shouldn\'t exceed $11,000 annually ($22,000 if you\'re c');
document.write('ontributing with your spouse). Actually, you may contribute as much as $55,000 tax-free in one year ($110,000 with your ');
document.write('spouse), but that contribution will be treated as if it were being made in $11,000 installments over the next five years');
document.write('. That means you can\'t make other tax-free gifts to the beneficiary during that time. Most 529 savings plans off');
document.write('er a menu of age-based portfolios, and some also offer a small selection of stock and bond funds. In the former case, yo');
document.write('ur annual contributions get invested in a pre-selected portfolio of stocks and bonds. Early on, the portfolio is tilted ');
document.write('toward stocks, and as the time for college nears, the weighting shifts more heavily toward bonds. Note, however, that on');
document.write('ce you choose an investment track, it can be cumbersome to change. The quality of 529 college savings plans may ');
document.write('vary by state, but in most instances you may open an account in any state you\'d like. All 529 plans offer genero');
document.write('us tax breaks, provided you use the money for qualified expenses. While your contribution is not deductible on your fede');
document.write('ral taxes, your investment will grow tax-free and withdrawals will not be subject to federal tax. In prior years your mo');
document.write('ney had grown tax-deferred and earnings withdrawals were taxed at the student\'s income tax rate. (Note, however, this fe');
document.write('deral tax-free provision is set to expire in 2010 unless Congress passes a law to extend it.) What\'s more, you may get s');
document.write('tate-tax deductions on contributions or exemptions on withdrawals. One caveat: Having a 529 is likely to reduce ');
document.write('your chances of getting financial aid. The 529 college savings account is considered the parent\'s asset, and hence is as');
document.write('sessed at a much lower rate than if it were the child\'s. Yet withdrawals from a savings plan are considered the child\'s ');
document.write('income, which is assessed at a 50 percent rate for financial aid assessment purposes. A prepaid tuition plan is treated ');
document.write('somewhat differently. The amount in benefits paid out essentially reduces dollar-for-dollar the amount assessed as your ');
document.write('child\'s financial need. Another tax-advantaged option is the Coverdell Education Savings Account (formerl');
document.write('y known as the Education IRA). The contribution limit is $2,000 and withdrawals are tax-free. To qualify for a full or p');
document.write('artial contribution, your adjusted gross income must be less than $110,000 if you\'re single; $220,000 if you\'re married ');
document.write('and filing jointly. One of the drawbacks is that the annual contribution cap is per child, meaning if you and your paren');
document.write('ts want to contribute to an account for your daughter, your combined contributions can\'t exceed $2,000. You may ');
document.write('contribute to both a 529 and a Coverdell Education Savings Account on behalf of the same beneficiary in the same year wi');
document.write('thout penalty, but your contributions will be treated as gifts subject to gift-tax limitations.