There is an expense that many of you may be facing in the near future, and it is one that has increased at a rate of nearly 500 percent since 1985! This outsize bill is college tuition. For those of you with children in – or recently graduated from – college, you know the impact of this incredible price inflation first-hand. According to InflationData.com, over the past 30 years, college tuition has grown at a rate of nearly 4.5 times that of the overall Consumer Price Index. In fact, in-state tuition for a four year state university now hovers at around $120,000.
So how does one go about saving for such a daunting expenditure? For some suggestions, Help Squad turned to Julie Shechtman, CFP, Financial Planning Specialist, Vice President and Financial Advisor at Morgan Stanley. She discusses three options, below.
529 College Savings P`lan
A savings account that allows invested money to grow tax-deferred to fund the education expenses of a child or other family member.
Pros:
- Earnings are exempt from federal income tax. If you deposit $25,000 that grows to $75,000 you don’t pay tax on the $50,000 of appreciation. In Illinois, contributions up to $20,000 for married people can be deducted from state income taxes. If used for qualified education expenses, withdrawals are tax-free.
- Plans are available to everyone, regardless of income. Anyone can be named a beneficiary, and the beneficiary can change at any time.
- 529’s are considered a parent-owned asset – beneficial for financial aid purposes.
- There are generous contribution limits: up to $350,000 in Illinois. Contributions are excluded from your estate and not subject to estate tax.
Cons:
- If beneficiary receives a scholarship, money can be withdrawn up to amount of the scholarship, but tax must be paid on any appreciation. If beneficiary doesn’t attend college, and beneficiary can’t be transferred, tax plus a 10 percent penalty must be paid on appreciation.
- Investment options are not infinite like Coverdell or UTMA/UGMA.
- Money cannot be used for K-12 expenses.
Coverdell Education Savings Account
Formerly known as the Education IRA, Coverdell was created to pay for qualified educational expenses.
Pros:
- Unlimited investment options, and considered a parent-owned asset for financial aid.
- Beneficiary can be changed to an eligible family member.
- Money can be used for K-12 expenses.
Cons:
- Contributions are limited to $2000 per year and there are income limits for who cancontribute.
- Contributions must end when beneficiary turns 18, and all monies must be used by age
30.
- If money is not spent on qualified education expenses, treated the same as 529 plans.
UTMA/UGMA (Uniform Transfer/Gifts to Minors Act) Account
A custodial account opened specifically for the purpose of transferring money or other assets to a minor.
Pros:
- No limit to contributions and money can be spent on anything, as long as it benefits the child.
- No income restrictions on contributions.
Cons:
- Custodianship terminates when minor reaches age of majority (18, 19 or 21, depending on the state), at which point parent loses control of the assets.
- Beneficiary cannot be changed.
- Contributions are irrevocable and non-deductible, and all appreciation is taxable.
- For financial aid purposes, account is considered a student asset, and withdrawals are counted as income.
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Editor’s Note: Julie Shechtman is a Financial Advisor with the Global Wealth Management Division of Morgan Stanley in Glenview. The information contained in this article is not a solicitation to purchase or sell investments. Any information presented is general in nature and not intended to provide individually tailored investment advice. The strategies and/or investments referenced may not be suitable for all investors as the appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Investing involves risks and there is always the potential of losing money when you invest. The views expressed herein are those of the author and may not necessarily reflect the views of Morgan Stanley Smith Barney LLC, Member SIPC, or its affiliates.