YOUR BUSINESS AUTHORITY
Springfield, MO
YOUR BUSINESS AUTHORITY
Springfield, MO
The most important thing parents can do is to start saving as soon as possible. One of the biggest mistakes parents make is waiting to save for college, assuming it will be easier to save later when parents will presumably be making more money. But waiting until children get closer to college age denies parents one of the most important benefits of saving: compounding.
Many existing college savings plans place money in various investment vehicles. Earnings on those investments are compounded through reinvestment, so while parents continue to contribute funds to their accounts, the money is accumulating by more than just the amount being deposited.
There are many ways to save for college, and each offers different features. Parents should evaluate each one to determine the most appropriate way to save.
Two of the more popular college-savings vehicles available are 529 plans and Coverdell education savings accounts. While these vary greatly in contribution limits, both allow parents to invest money while earnings on invested funds accumulate with federal income taxes deferred. As long as the money is taken out to pay for qualified education expenses, federal taxes will not have to be paid on that money.
However, distributions from 529 plans - such as Missouri Saving for Tuition - are only free of federal income tax through Dec. 31, 2010. As the law stands - though the federal exemption could be extended by Congress - all distributions of 529 earnings will be taxable regardless of the type of expense starting Jan. 1, 2011. For now, earnings on nonqualified withdrawals are taxed at the owner's rate plus a 10 percent penalty.
Coverdell accounts
The Coverdell education savings account allows parents to save up to $2,000 in after-tax contributions each year per child younger than 18 years of age. Contributions and earnings can be withdrawn tax- and penalty-free as long as the money is used to pay for qualified education expenses before the beneficiary turns 30. In addition to higher education expenses, eligible elementary or secondary school expenses also are considered a qualified expense for Coverdell education savings accounts. Account funds also can be used to pay for tuition, room and board fees, books, supplies and equipment required for enrollment or attendance.
Comparisons
Investing in a 529 plan offers an alternative for establishing a systematic way to save for a child's education. Withdrawals from a 529 plan for qualified education expenses are free of federal income taxes. In addition, parents may enjoy state income-tax benefits if the 529 plan is sponsored by the state. (Missouri's plan, MOST, is in the midst of an overhaul; see the story on page 11).
With 529 plans, the account owner retains control of the assets and can change the beneficiary at any time. Unlike education savings accounts, there are no income or age restrictions associated with 529 plan assets. As a result, almost anyone can contribute to 529 plans.
Keep in mind that the value of an investment in a 529 plan will fluctuate, which means that shares may be worth more or less than the original investment when redeemed. All 529 plans have fees and expenses, and before investing in such a plan, parents should read its offering document carefully for information on fees, charges and expenses.
Regardless of the method chosen, putting money aside now for children's college expenses will prepare parents for what lies ahead. Parents should explore their options carefully.
Timothy M. Reese is senior vice president-investments, with A.G. Edwards & Sons Inc. Member SIPC. Reese can be reached at timothy.reese@agedwards.com or www.agedwards.com/fc/timothy.reese.
[[In-content Ad]]
New academic buildings, residence halls in works for sesquicentennial.