The first step is to decide which way to proceed: do you want a student to make a debt free or want a student to have some "skin in the game"? If students know they are responsible for part or all of student loan repayments, they often take college seriously. Once you know how much student will be charged through student loans, simply take the total cost of education you are targeting minus the student loan, and the amount that you will cover from the free cash flow each year. This number will give you a rough idea of how much you will need. You may want to start inflation calculations or talk to a counselor to help you with these calculations.
Now that you have a targeted savings amount, the next thing to consider is which vehicle to use for savings in college. We will consider four types of accounts that are commonly used:
• 529 plans
• Coverdell Educational Savings Accounts
• US Savings Bonds
• Custodian accounts.
529 bills are the most convenient way to save in Nebraska and Iowa. Contributions are being prepared for plans with a maximum of $ 70,000 in one year (using 5 years of a $ 14,000 tax gift per year) and a state tax deduction of up to $ 10,000 in Nebraska and $ 3,868 in Iowa. Contributions are invested in different portfolio options offered by each country. Any earnings in the accounts are exempted if it is used for qualified education costs. However, if part of the salary is not used for education, besides income tax there is a fine of 10%.
Coverdell ESAs are similar to 529s, with lower limitations of contribution, but can be used to educate K-12. In addition, Coverdell accounts must be used until the user reaches 30 years of age.
For both 529s and Coverdell ESAs, assets can be transferred to another user if they are not needed or used for the first user, which allows the owner to control the use of funds.
American savings bonds are one of the more flexible options that are best used for low-income savers. Income from bonds can be excluded from federal and state income tax if used for higher education and when income limits are met.
Finally, storage accounts, often referred to as UTMA / UGMA accounts, are the most flexible in terms of what the dollar is using. Contributions to the custody account are gifts to a juvenile who becomes available to juveniles in the "adult age", which is different in each country. Revenue is subject to income tax and may lead to the application of the "Kiddie Tax" rule. In addition, for the purpose of helping students, these accounts are considered as property of the student and the contributor has no control over the use of property.
What should I do if the college is next year, and you have not saved it at all? First, do not panic! The 529 account can still be used as a "current account" for education costs, which allows state tax deductions (restrictions apply) to Nebraska and Iowa. In addition, it is important to pay at least $ 4,500 of eligible pocket education costs or student loans to take advantage of the American tax credit available for the first four years of the faculty.
Finally, the common mistake is that all liquid assets are used in the first few years, ignoring the loans. This can cause a delay in cash later when available loans may not be sufficient. Loans are offered each year, but they have limitations for an annual loan. Typically, lower-income borrowers will qualify for subsidized loans that reward interest after graduation. Higher-income borrowers immediately qualify for subsidized loans subject to interest payments. Since the offered loans may not be sufficient to cover the costs of education (tuition plus room and board), it is important that they are smartly borrowed in the early years. So consider early acceptance of subsidized loans in order to ease the cash flow later.
If in the real dollar education crisis, Roth and Traditional IRA can be tapped without penalty. Roth IRAs can be used for taxes and penalties for higher education costs, with limitations. However, this may affect pension funding. Traditional IRAs can be used for higher education without penalty, but they are still subject to income tax and potentially affect retirement. Some 401k offer credit terms. Normally, I do not recommend 401k loans due to reduced contributions, lower rates of refund and lack of tax deductions for interest. If it can not be reversed anywhere else, a home equity loan may offer a lower rate and better options of deduction of 401k.
No matter how to finance faculty education, it is a good investment in the future of a young person. Proper planning of who will take on financial responsibility and how to do it can alleviate some of the stress. As always, the education financing plan should be reviewed with a counselor or a CPA.
This information does not represent a complete description of the securities, markets or developments listed in this material, this is not a complete summary or statement of all the available information needed to make an investment decision and is not a recommendation. Opinions are expressed by the author and do not necessarily correspond to Raymond James. All opinions are from this date and are subject to change without notice. As with other investments, there are usually fees and expenses associated with participation in the plan of 529. There is also a risk that these plans may lose money or not be good enough to cover college expenses as foreseen. Most countries offer their 529 programs, which can provide benefits and benefits exclusively for their residents. Tax implications can vary greatly from country to country. Keep in mind that changes to tax laws can occur at any time, which could affect your situation. Although I am familiar with the tax regulations in these matters, as a financial advisor to the RJFS, I am not qualified to give advice on tax matters. You should talk about tax issues with an appropriate tax expert.