Where to Save for College? Part 2

Putting money in a piggy bank529 Plan, Stocks , Mutual Funds, UTMA, UGMA, Coverdell, Roth IRA, Cash Value Life Insurance… How do you decide which savings plan or combination of plans are right for you?

There are many components that should be considered in the decision of where to save your valuable college funds. In “Where to Save For College? Part 1”, we discussed how to calculate how much you’ll need to save and the basic (yet key) factors to keep in mind when taking into account different college savings plans.

Most commonly, I hear parents worried about taxation when deciding on their specific savings strategy. Taxation can be a big deal in a good way and a bad way. As an example, 529 Plans have the tax advantage that earnings are not taxed if the money is withdrawn for a qualified education expense. That’s the good taxation. The bad taxation arises if you need some of that money for a non-qualified education expense or if your student decides that higher education is not for them. In either case, you’d have to pay the tax plus a 10% penalty to get access to the money.

Another frequently discussed feature is whether the college money should be in the parent’s name or the child’s name (UGMA or UTMA). The tax decision will depend on the child versus parent’s tax rate, when the money will be accessed and the kiddie tax rules. The other central feature that parents sometimes forget is access to that money. It is essentially the child’s asset and they gain control of it at age 18.

The Roth IRA’s taxation rules allow money to be taxed when earned, but not taxed during accumulation or withdrawal (subject to some limitations). Roth IRA limits contributions and these limits are dictated by family earned income as well as IRS rules (only $5000 per year for an adult under 50).

One lesser known savings vehicle is to save money is cash value in a permanent life insurance policy.  Savings will accumulate tax deferred and, if the policy is designed correctly, are available to being spent… tax-free!  Contributions can be high and money from the cash value in the policy can be accessed for any need (not only college).

When it comes to college savings and funding, a chief element for many familiesmay be whether the savings are visible or invisible to the financial aid calculation. Every family should assess whether it’s possible that they may qualify for need based financial aid, and if they do, then the financial aid visibility becomes all-important.

To give you a clear visual, the chart below compares different savings plans and the possible benefits of each.

Possible Benefits
Guaranteed Growth Tax Deferred Accumulation Tax Free Use for College High Contribution Limits Investment Choices Transferable (beneficiary) No Income Ceiling for Contribution Access to Money Financial Aid Invisible
529 Plans NO YES YES YES Some Limitations YES YES NO NO
Coverdell NO YES YES NO Some Limitations YES YES NO NO
UTMA / UGMA NO NO NO YES YES NO YES NO NO
Stock / Mutual Funds NO NO NO YES YES YES YES YES NO
ROTH IRA NO YES YES NO YES YES NO Some Limitations YES
Permanent Life Insurance YES YES YES YES Some Limitations YES YES YES YES

When we work with a family to design their college savings plan, it typically will include a combination of these different plans. This allows a family to take advantage of the benefits of each, but lessen the disadvantages. Give us a call to help design your unique college savings plan.

Listen to the April 26th College Smart Radio show to understand the pros and cons of different savings plans, so you can determine which savings plan or combination of savings plans will integrate best with your family’s needs.

This post highlights information discussed during our College Smart Radio “Tackling the Runaway Cost of College” April 26th broadcast where Beatrice Schultz and Mark Guthrie discussed the pros and cons of different college savings plans.  Listen to this broadcast on YouTube here.

Tax advice is not offered by Beatrice Schultz or Westface College Planning. Please consult your tax professional for additional guidance regarding tax related matters.

Photo Credit: Images Money

Tax Advantaged College Strategies

Luxury tax space on Monopoly boardOften times, college planning entails helping a family increase their opportunity to qualify for financial aid.  But what can be done for families who will likely NOT qualify for financial aid, given their income level and/or countable assets?

Parents who are small business owners have additional college funding tools available to them that other families don’t have.  Implementing a tax-advantaged college plan can help these families fund college education for their children in a way that reduces their overall income taxes.

The purpose of tax-advantaged planning is to increase family funds available for future college costs by reducing taxation.  In other words, every dollar saved on taxes is a dollar in your pocket that can then be put towards future college costs.  In tax-advantaged college planning, income and assets are better off in the student’s name.  This is different from aid-advantaged planning, where income and assets are better off in the parents’ name.  It is critical to know whether or not you will qualify for financial aid, so you know which strategy (tax-advantaged or aid-advantaged) to implement.

In the United States, we are subject to a progressive tax system, meaning the tax rate increases as taxable income increases.  This type of tax system is designed to reduce taxes for those with a lower ability to pay them and conversely, to increase taxes for those with a higher ability to pay.  However, the progressive nature of this system leaves the door open for “income shifting” – a strategy of moving a person’s income from a higher income tax bracket to a lower one.

Unfortunately, a taxpayer does not have unlimited ability to shift income and/or assets because the IRS has implemented Gift Tax limits and Kiddie Tax rules in order to limit such shifts.

A Tax Advantage College Strategies (TACS) analysis shows you how to shift income from the parents to the student within these constraints and within the student’s Tax Capacity.

Jodi Eramo, CPA, CCPRS with College Planning Relief® has partnered with Westface College Planning to develop “Tax-Advantaged College Strategies” (TACS): an analysis aimed specifically toward families who will likely not qualify for “need-based” financial aid.  Even for these families, a TACS analysis will typically add $5k – $8k to their children’s college funding.

Contact Westface College Planning for your TACS analysis and to learn more about college financial planning.

Jodi Eramo was a guest on College Smart Radio “Tackling the Runaway Costs of College” on February 22nd, 2014 where we discussed Tax Advantaged College Strategies.  Listen to this broadcast on YouTube here.

Photo Credit: Philip Taylor