StateTrust has extensive experience in helping clients design strategies to meet future higher educational expenses for designated beneficiaries.
Educational 529 Plan
Named after section 529 of the United States Internal Revenue Code, a 529 plan is a tax-advantaged savings plan designed to encourage saving for future college costs. 529 plans, legally known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions.
There are two types of 529 plans:
Differences Between 529 Plans
|Pre-Paid Plan||College Savings Plan|
|Locks in tuition prices at eligible public and private colleges and universities.||No lock on college costs.|
|All plans cover tuition and mandatory fees only. Some plans allow you to purchase a room & board option or use excess tuition credits for other qualified expenses.||Covers all "qualified higher education expenses," including: Tuition, Room & board, Mandatory fees, Books, computers.|
|Most plans set lump sum and installment payments prior to purchase based on age of beneficiary and number of years of college tuition purchased.||Many plans have contribution limits in excess of $200,000.|
|Many state plans are guaranteed or backed by the state.||No state guarantee. Most investment options are subject to market risk. Your investment may make no profit or even decline in value.|
|Most plans have an age/grade limit for the beneficiary.||No age limits. Open to adults and children.|
|Most state plans require either owner or beneficiary of plan to be a state resident.||No residency requirement. However, nonresidents may only be able to purchase some plans through financial advisers or brokers.|
|Most plans have a limited enrollment period.||Enrollment open all year.|
|May be administered by states or higher education institutions.||May only be administered by states. Although states administer savings plans, record-keeping and administrative services for many savings plans are usually delegated to a mutual fund company or other financial services company.|
Advantages of 529 Plans
While most plans allow investors from out of state, there can be significant state tax advantages and other benefits, such as matching grant and scholarship opportunities, protection from creditors, and exemption from state financial aid calculations for investors who invest in 529 plans in their state of residence.
Most 529 savings plans offer a variety of age-based asset allocation options where the underlying investments become more conservative as the beneficiary gets closer to college age.
With the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), 529 plans gained their current prominence and tax advantages. Distributions from 529 plans for qualified higher education expenses are exempt from federal income tax.
There are many advantages to a 529 plan:
Disadvantages of 529 Plans
There are some disadvantages for 529 Plans:
The Education IRA, also known as Coverdell Education Savings Accounts or simply "ESA", is a tax-advantaged investment account in the United States designed to encourage savings to cover future education expenses (elementary, secondary or college), such as tuition, books, uniform, etc.
The following Table describes the principal characteristics of an Educational IRA plan:
|#||Characteristics of an Educational IRA|
|1.||A nondeductible, cash contribution up to $2,000 can be made once a year for each beneficiary before they turn 18 years old.|
|2.||You can open more than one IRA for each individual but the contribution limit will stand at $2,000 per year. It must be designated for qualified higher-education expenses such as fees, school supplies and equipment, tuition (eligible post-secondary institute), room and board, and textbooks. Elementary and secondary school expenses are now included.|
|3.||Withdrawals are tax-free. Any IRA earnings are tax-free provided that annual expenses amount to more than the withdrawals. In a case where annual expenses are higher than the IRA distribution, the beneficiary would be required to pay income tax on either all of the earnings or a portion thereof.|
|4.||Money left in the IRA when a beneficiary turns 30 years old will incur taxes along with a 10% penalty.|
|5.||You cannot make contributions to an Education IRA if you pay into a qualified state tuition program.|
The tax treatment of an Educational IRA allows money to grow tax deferred and proceeds to be withdrawn tax free for qualified education expenses at a qualified institution.
US Series EE Savings Bonds
US Savings Bonds are another investment option that could be used to help you save for college expenses. Interest earnings on certain US savings bonds are completely tax free if you use the money to pay your child's qualified higher education expenses. However, there is a ceiling on the amount of income your family can be earning at the time you cash in the bonds to qualify for the tax break. There are also other restrictions on purchase and ownership.
Series EE US Savings Bonds are safe, low-risk savings products that pay interest based on current market rates for up to 30 years. These bonds have the following characteristics:
Investors should carefully review the objectives, risks, charges and expenses of any investment company before investing. Prospectus and, if available, the summary prospectus, contains important information about the investment company. You can contact us to request our prospectus, which we encourage you to read carefully. The value of your investment may fluctuate, and when redeemed, shares may be worth more or less than their original cost. Investments in a fund (Investment Company) are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.
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