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College Savings

College educations are constantly growing in price. Fortunately, there are several ways to finance it: save beforehand, pay as you go, take out loans, or a combination of these. All of these options should be considered when trying to accomplish the goal of paying for a college education.

Planning ahead is the key to affording college.  Whether you’re planning for a ten year old, a first grader, or an infant, it’s best to get going today.  While feeling weighed down at the costs involved with college is common, it is important to remember that the longer you give your money the opportunity to grow, the longer it can work for you. College expenses might seem to be far away, but planning correctly now can make a big difference later. 

College is becoming close to a requirement for many people. And it’s also becoming more expensive.  However, with BestVest’s help, there are several choices available to help you ensure that your children will have all the advantages of a college education.

Your BestVest financial consultant can help you to determine the college savings plan that’s best for you. He or she can help you decide what risk level you are comfortable with, and suggest investments that meet this risk and maximize your rate of return.  Our goal is to help you maximize your savings and realize your college goals.

And, if you need assistance with the Financial Aid application Process, your FAFSA form or other areas such as choosing a college, grants, scholarships and athletics, BestVest has an affiliate relationship which provides these services.  Feel free to contact us for further information.

What You Should Know

Tax Benefits

College savings vehicles often offer great tax benefits, which can increase the amount of money accumulated for your child’s education.  Tax-free status, offered by some college savings vehicles, is a great benefit that can enable all of your college savings to be used towards college education expenses rather than taxes. 

Flexible and Accessible Assets

Depending on what college vehicle you choose, your college savings may be accessible under an emergency situation or if your child gets a scholarship. Factors that should be considered before choosing a college savings vehicle are ownership of the funds, control of the assets, and account flexibility.  Early, non-qualified access to college funds also varies with the vehicle chosen, with plans ranging from not allowing early access to such withdrawals being completely penalty free.  

Financial Aid Repercussions

Concerns about adverse affects on financial assistance from colleges cause many families to refrain from saving for college.  However, income, not savings, is the most important factor in determining who qualifies for educational grants and loans.   When choosing a college savings vehicle, it is important to consider how parental income and the saved assets of both the child and parents will affect financial aid packages.  

Income Restrictions and Other Factors

With the cost of college constantly rising, it’s important to start saving early to prepare.  Regularly investing is very important, and high contribution limits allow you to save greater amounts towards college expenses.  Income restrictions determine who can utilize each plan. 

529 Plans

529 plans are investment plans operated by the state and designed to help families save for future college costs.  As long as the plans satisfy a few simple requirements, the federal government extends special tax benefits to the plan participant (Section 529 of the Internal Revenue Code).

Income Tax Breaks

The income tax breaks offered by 529 plans are unrivaled.  Investments in 529 plans grow tax-free for as long as your money stays in the plan. In addition, distributions used to pay for the beneficiary’s college costs are also tax free.  These benefits apply for distributions in the years 2002 through 2010. If Congress does not choose to extend this tax break, distributions made after 2010 will be taxable to the beneficiary (the earnings portion only). Individual sates may offer additional tax breaks as well.

Contributor Retains Control

Another advantage of the 529 plan is that the contributor fully controls the account. The named beneficiary has no rights to, or control of, the funds, with very few exceptions. The contributor decides when withdrawals are taken and for what purpose. Most 529 plans even allow reclamation of the funds with no questions asked.  However, reclaiming the earnings portion of the "nonqualified" withdrawal will be subject to both income tax and an additional 10% penalty tax. 

Simple Savings

An additional advantage of 529 plans is the simplicity with which it allows one to save for college.  After choosing which 529 plan to use, you simply complete an enrollment form and make your contribution or sign up for systematic deposits.  The ongoing management of your account is handled by the plan, not by you. Thus, plan assets are professionally managed either by the state treasurer’s office or an outside company hired by the program manager. 

Eligibility

Everyone is eligible to take advantage of 529 plans, and there are generally no income or age limitations. 

As with all tax-related decisions, consult your tax advisor. Withdrawals for expenses other than qualified education expenses are subject to income tax and an additional 10% penalty on earnings. You should consider a 529 Plan’s fees and expenses such as administrative fees, enrollment fees, annual maintenance fees, sales charges, and underlying fund expenses, which will fluctuate depending on the 529 Plan invested in and the investments chosen within the plan. You should also consider the inherent risks associated with investing in 529 Plans such as investment return and principal fluctuation, which will also vary based on the investments made within the plan. More information is available in each plan’s official statement. The official statement should be read carefully before investing.