Bricks for Building Your College Funding Plan
Submitted by: Kevin Friedrich
College costs continue to skyrocket – at a pace that far exceeds the rate of inflation. But there is a bright side to planning for college expenses, and it’s getting a little brighter all the time – thanks to federal tax breaks that can make paying for college more affordable. The key point to remember is that you can create a college funding plan brick by brick, by combining a variety of investment accounts, tax benefits and financial aid sources.
Here is a quick guide to get you going:
- 529 Plans—State-sponsored versions of these plans are now available in all 50 states, and you aren’t limited to the plan of your own state. In a 529 Plan, you set aside after-tax dollars2 on behalf of a beneficiary, and earnings grow on a tax-deferred basis. Distributions are not taxed, if taken for qualifying education expenses. As the account owner, you maintain control of the account and may change beneficiaries, subject to restrictions. In addition to state-sponsored plans, private colleges also may set up a form of Qualified Tuition Plan that allows tuition to be prepaid.
- Coverdell Education Savings Accounts—These accounts allow annual after-tax contributions of up to $2,000 per child per year. Distributions made for qualifying education expenses are tax free, and the costs of high school or elementary school tuition may qualify.
- Loans or Withdrawals from Permanent Life Insurance—Parents often find it convenient to fund part of college costs by taking loans or withdrawals from permanent life insurance contracts – i.e., life insurance with a cash value. In most contracts, loans may be taken tax free.
- Traditional IRA Withdrawals—If you have a Traditional IRA, you can make penalty-free withdrawals for purposes of paying qualifying college expenses for your child, grandchild or spouse (or even yourself). Ordinary income tax will apply on the amount withdrawn.
- Roth IRA Withdrawals—If you have a Roth IRA, you can make income tax-free and penalty-free withdrawals equal to your contributions (i.e., basis). Withdrawals in excess of your basis are distributions of earnings and are subject to ordinary income taxes unless you are over age 59 ½ and your Roth IRA has been open for at least five years, however, the 10% early withdrawal penalty will not apply if the withdrawal is used to pay for qualified higher education expenses.
- Federal Tax Credits—Many parents can use federal tax credits to meet a portion of the children’s educational costs. The American Opportunity Tax Credit applies in the first four years of post-secondary education. You can get a maximum annual credit of $2,500 per
- Before investing in a 529 plan, please consider the investment objectives, risks, charges and expenses carefully before investing. The official disclosure statement and applicable prospectuses, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
- Some states allow a state income tax deduction for 529 plan contributions.
- There are modified adjusted gross income limitations to making contributions as well as age restrictions for contributions to Coverdell Educational Savings Accounts.
- Permanent life insurance may not count as a resource for financial aid purposes for public colleges eligible student. If the credit brings the amount of tax you owe to zero, you can have 40
percent of any remaining amount of the credit (up to $1,000) refunded to you..
- Deductible Interest on Student Loans—If your child needs education loans and you repay them, you may qualify to deduct up to $2,500 of the loan interest per year.
- Employer-provided Education Benefits—Some companies have set up programs that allow the organization to contribute education benefits on behalf of workers and their children.
Federal law currently allows up to $5,250 of employer-provided education benefits to be
excluded from taxable income.
- Financial Aid—Today, more and more students are applying for financial aid. In most cases, students must demonstrate financial need to qualify for this type of assistance.
Time Is On Your Side
The more time you have available to save money for educational expenses, the better your chances
of meeting your financial goals may be. Keep in mind, too, that the tax benefits and financial aid
mentioned above may not be available to everyone. Your qualification for some of these may depend
on your Modified Adjusted Gross Income. Your financial professional can help you learn more – and
help you identify specific solutions that may work best to help you reach your long-term financial
goals, based on your personal situation.
Prepared by The Guardian Life Insurance Company of America. The information contained in this article is for general,informational purposes only. Guardian, its subsidiaries, agents or employees do not give tax or legal advice. You should consult your tax or legal advisor regarding your individual situation.
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