College Planning

You're not alone.  Every financial advisor at F.R. Owen & Associates has sent or plans to send children to college.  So, we understand your concerns, including future costs.  We'll help you address these concerns in your college funding strategy. 

Section 529 College Savings Plans  

A 529 plan allows you to put aside money for a future education.  Your money grows tax-deferred and incurs no federal income tax when withdrawn, if used for qualified education expenses including tuition, room, board, books, supplies and equipment.  State taxes, plan earnings and fee structures can vary widely, but for many families, 529 plans are still the preferred way to save for college.

Contributors (usually parents) retain control of the accounts, which also receive favorable treatment in financial aid calculations.  However, a 10% tax penalty and/or deferred sales charges on earnings withdrawn for non-qualified expenses may apply.

Every state offers a 529 plan, but this doesn't necessarily mean you should invest in the plan from your state.  There are many variables to consider, such as the plan's past performance and fees, whether it offers tax breaks and other incentives for state residents, your risk tolerance and your child's age when you initiate the plan.

Your investment style should also be considered.  An active investor might prefer a plan with a number of different investment options so that you can tailor the portfolio.  A busier parent might prefer to turn the asset allocation decisions over to the pros by using an age-weighted option designed to reduce exposure to stocks as your child nears college age.

Many state plans offer their residents tax deductions for 529 contributions, which can be an incentive.  For example, North Carolina recently enacted a $750 tax deduction per filer for its plan, effective 2006 through 2010, for those with incomes below $100,000 for joint filers, $80,000 for head of household filers and $60,000 for single filers.

If your state's investment options meet your criteria and the plan fees are low, then you might as well stay put.  But, don't let state pride or a tax break blind you to any disadvantages.  You may benefit more from another state's program, even if you lose your state's tax break.  Your F.R. Owen advisor can help you assess costs, features and performance to determine your 529 plan strategy.

Educational IRAs 

Educational IRAs are custodial accounts that pay the higher education expenses of the account holder.  New tax laws have increased the annual contribution limit to $2000, making these college savings vehicles more attractive.

Educational IRAs can also include transferability between family members prior to the IRA's termination date and provisions for anyone to contribute up to the annual limit, including your child. 

Educational IRAs differ from 529 plans primarily in these ways: annual contributions are limited; no tax deductions apply; beneficiaries must be under age 18 when the IRA is initiated; and IRAs terminate and must be withdrawn by a specified time, typically by age 30.

Similar to 529 plans, earnings on Educational IRAs are tax-deferred and no federal income tax is incurred when withdrawn, if used for qualified expenses including tuition, room, board, books, supplies and equipment.  State taxes may apply.  A 10% tax penalty applies for non-qualified distributions.

An experienced F.R. Owen advisor can guide you to educational IRAs for consideration in your college savings strategy.

UGMA (Uniform Gifts to Minors Act) 

The UGMA is another popular program where invested funds can be used for any purpose, including education. It's similar to a trust fund, but the terms of the trust are set in the state statute instead of being drawn up in a trust document. 

The UGMA is a simple way for allowing minors to own investments. However, as the funds are owned by the minors and are available to them once they reach adulthood, parental contributors do not retain control.  Contact an F.R. Owen advisor to learn more about the UGMA and how to make it work for your child's future.