Posted: January 27, 2012
Maximize your college savings
Here are some tipsBy Wayne Farlow
There are two main financial planning goals that my clients most often want addressed. One is attaining an abundant retirement; the other is saving for college expenses. One method of minimizing your child or grandchild's college expenses is to maximize tax savings. Another is to maximize college aid opportunities. Here are some ideas on how to maximize your college savings funds:
1. Section 529 College Savings Plans
Section 529 College Savings Plans allow a one-year donation up to $65,000 per person, to each potential beneficiary. While the donor does not have "direct control" of the plan's contributions/earnings, the donor can choose among the limited number of investment options available in the chosen 529 Plan. Investment options can be changed as often as every 12 months and the account beneficiary may be changed to another qualifying family member at any time.
Distributions from the Section 529 College Savings Plan can be used for any qualified higher education expenses, including tuition, books, fees, equipment, special needs services, and/or room and board costs. All distributions that are used for qualified college expenses are never taxed. Thus, the growth and income from a 529 Plan are tax free, as long as the funds are used for qualified college expenses.
For Colorado residents, a Colorado income tax deduction is available for contributions to the Colorado College Invest Plan. If you contribute $20,000 to a child's or grandchild's College Invest 529 Plan in 2012, you will be able to deduct $20,000 from your 2012 Colorado income taxes.
2. Coverdell Educations Savings Accounts
A Coverdell Educations Savings Account (ESA) allows for annual non-deductible contributions of up to $2,000 per year for each child that is age 18 and under. Parents with three children can save up to $6,000 annually in Coverdell ESAs for their children's education. A Coverdell ESA is similar to an IRA, where most custodial firms, such as Schwab, Ameritrade, etc. provide low or no cost ESA accounts. When used for qualified educational expenses, Coverdell ESA funds can be withdrawn on a tax-free basis. The investments allowed with a Coverdell ESA are virtually unlimited, which may provide for a better investment return than the limited selection of funds offered in a 529 Plan.
3. Series EE Bonds and Series I Bonds
While the current return is very low on both Series EE and Series I Savings Bonds, they virtually guarantee that slightly more than the original amount invested will be available when withdrawn. When used for qualified educational expenses, the interest that is earned on these government backed savings bonds is received tax-free.
4. Maximize College Aid
The most important single year for maximizing the potential of receiving college aid is the year that begins on January 1st of the student's junior year in high school. This is often called the "base income year" for financial aid. During this financial year, parents should accelerate all expenses possible, including paying property and income taxes for the following year. It is also important to minimize your controllable income and capital gains during this year.
Another method for lowering income is to maximize retirement contributions during the base income year. Retirement contributions are not considered as income, and retirement savings assets, held in a qualified retirement plan, are not considered as financial resources available for college tuition by financial aid assessors.
A final tip for maximizing financial aid is to minimize the assets owned by your children. 20 percent of a student's assets are considered available for college funding, as opposed to only 5.64 percent of parental assets. If your child has a UTMA or UGMA account, it might be advisable to roll these account assets into a 529 College Savings Plan, with your child as the plan beneficiary. This approach will significantly reduce the amount of assets that will be counted against available college aid funds.
Planning is the key to successfully maximizing the funds that will be available for your children's education. An excellent website to gather more information on this is www.savingforcollege.com . Every parent and grandparent wishing to help fund their children's college education should work with their financial adviser to devise the best possible plan to maximize college savings funds.
Wayne Farlow is the founder of Financial Abundance, LLC, a Registered Investment Advisor firm. He is a Certified Financial Planner (CFP®), focusing on Retirement Planning, Investment Management, Small Business Owner Planning and Sudden Wealth/Inheritance Planning. His book, “Financial Abundance Guide,” is available free at www.farlowfinancial.com . He can be reached at firstname.lastname@example.org or at 303-554-0309.