|
Last week
we looked briefly at 529 plans and this educational savings
program's basic pros and cons. The "pro" for this educational
savings program is contained in federal tax advantages. State
tax advantages depend on the state where you purchase the
529 plan. The "con" to this plan is that it's state-based,
which means that each state provides different guidelines
for its specific 529 program. One key item to look for in
this hodge-podge of selections is savings security. If you
see a line that states that your savings are not FDIC insured,
get out of there, and quick.
I also
had a few other questions regarding this program, like what
penalties or benefits I might experience if I live in one
state and my child lives in another state. I found that -
dependent on the state where I purchase the 529 - I would
experience a wide variety of different scenarios. The worst-case
problem is that I wouldn't enjoy residential state tax relief
from my input into a 529 portfolio in another state. That
problem alone is reason to ponder why I would invest in another
state's program. No tax benefit means a loss in earnings in
this case.
Another
problem with the 529 program is that it seems to benefit parents
who are in higher tax brackets more so than those parents
who live on the edge. Here's why: The 529 is counted as an
asset until the money is withdrawn for educational funding.
While parents' assets are assessed at the lowest possible
rate for financial aid purposes, gains from a 529 count as
student's income, up to 50% of which is considered available
to pay tuition. This means a healthy 529 could cut financial
aid considerably. However, there are state- and income-based
caveats to this issue. For more information, see the
529 Solution at CNNMoney.com.
On the
other hand, do 529 tax benefits really help? Tax reductions
by the Bush administration seem to affect tax advantages within
this savings program. Stories of poor performance and increasing
529 program fees add to doubts whether 529 plans are really
worth the effort. You might inspect a
weak argument for 529 plans at SmartMoney.com for
further explanation on these issues (even the author admits
the argument is a bit shallow).
What if
we finally decide that the 529 is too "iffy" and problematic
for us? What are our alternatives? One choice is the Coverdell
ESA, formerly called the Education IRA. This is a great way
for middle-income parents to save for their child's education,
especially if we can't afford to save more than $2,000 per
year. While savings into this plan aren't tax-deductible,
the earnings grow in a tax-deferred environment until the
money is withdrawn. And - big bonus - we can open a Coverdell
ESA at BUYandHOLD. For answers to questions about this account,
see BUYandHOLD's
Coverdell ESA Q&A.
Other
choices include standard investment and savings programs.
However, some choices are designed for parents who can afford
to save money in often volatile options without fear of loss
at crucial times. For example, what if the stock market tanks
the month our child heads for college? What if our income
is eaten alive by expenses or destroyed by unforeseen disasters?
If we
can't save, or if our savings are destroyed by other problems,
we can rely on the government to step in with help. I say
"help" with tongue-in-cheek, because the assistance arrives
in loans that MUST be repaid. If you accumulate school loans
through any FAFSA
loan program and then pass on to that higher school in the
sky, your survivors are responsible for repayment. If you
die intestate (without a will), or without assets (you left
with nothing, and you left nothing), then your adult children,
spouses, and other relations are stuck with repayment. If
- heaven forbid - a child dies during their college career,
the same rules apply. School loans acquired through government
plans must be repaid. In fact, we can't include these loans
in any bankruptcy, because - to be redundant - they must be
repaid.
Even though
we're often strapped for cash, five ways to save - and save
now - follows:
- Pay
off those credit cards and cut them up.
- Open
a compound interest savings account.
- Open
a BUYandHOLD account with a goal in mind to save at least
$25 per month in a diversified portfolio.
- Invest
in a Coverdell ESA.
- Buy
some long-term savings bonds.
The steps
above offer a simple way to diversify savings without headaches
and without divesting an inordinate amount of time and money.
A few more hints:
- Junior
must get a job.
- Junior
can ride the bus instead of own a car.
- Junior
can look at a state college instead of a private college
for those mandatory electives that occur within the first
two years.
- Junior
can get a scholarship in a field that demands expertise
or promise.
- Junior
can work to prove ancestral ties to the Revolutionary War
or some other affiliation, like ethnic ancestry. There's
money involved with affiliation to past events and specific
bloodlines. There's money tied to certain occupations, also.
To address
#5, go to Fastweb.com,
click on their "Start Your Free Scholarship Search," and fill
out their questionnaire. You'll discover how certain affiliations
bring up certain scholarship opportunities. This site offers
just one example of many sites that contain scholarship databases.
Some scholarships are very obscure, and searches for this
money can take as much time as it takes to find a suitable
529. Scholarships, however, are a lot like winning the lottery,
because the odds of obtaining substantial funds rely upon
so many factors.
We'll
take a look at how scholarships and other funds might affect
our taxes next week.
Until
Then,
Linda Goin
|
