Cents and Sensibility
Cents and Sensibility
A child's college education is a daunting prospect for many parents. Start saving now
to pay for college tuitionAmerican Express recently surveyed 400 parents with high-school-age children who plan to attend college and found that 70 percent were concerned about their ability to pay for that expense. More than a third had not yet started putting money away.
It may be hard to think about saving for your child's college education now when you have other financial concerns and you know tuition payments are actually years away. But implementing a college savings plan when your child is young will lessen the burden later.
Three strategies carry attractive tax advantages.
>> Invest in your child's name. If you set up an investment in the name of a child who is under 14, the first $700 in earnings each year are not taxed. The next $700 are taxed at the child's federal tax rate, which is currently 15 percent for income under $25,000. Any amount in excess of $1,400 is taxed at the parent's federal tax rate, which ranges from 15 percent to 39 percent.These strategies should be considered in conjunction with your overall financial plan.>> Contribute to the 529 College Savings Plan. The 529 plan also is an ideal tool for reducing the impact of taxes while saving for college. A person can contribute as much as $10,000 per year per beneficiary without exceeding the annual federal gift tax exclusion. Contributions are not tax-deductible, but your earnings grow deferred from federal taxes (and, in some cases, state taxes) until they are withdrawn. These withdrawals are taxed at the student's income tax rate and can be used to pay for tuition, books, supplies, equipment and other qualified higher-education expenses. There are some limitations; for example, room and board do not qualify.
>> Invest in an Education IRA. Taxpayers can invest $500 per year in an Education IRA for each child. Earnings in the account and distributions used to pay for qualified higher-education expenses are tax-free.
Guy Steele is a financial planner and head
of the Pali Palms office of Edward Jones. Send
planning and investing questions to him at 970
N. Kalaheo Ave., Suite C-210, Kailua, HI, 96734,
or by email at: gsteele2@pixi.com