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5 Ways: Save for a Child’s Education

Monday, October 10, 2016  
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St. Cloud Times (October 10, 2016) - It’s no secret that the costs of higher education have skyrocketed. Financial experts estimate that the average cost of a four-year bachelor’s degree is $120,000 in today’s dollars, per child, a calculation that includes tuition, books and housing. Planning for those costs, even just partial costs, requires good advice from a knowledgeable financial planner.

Here are five savings options for your child’s college education.

1) Regular savings account: This is the most flexible option, but there’s no tax advantage to it. And, most families can’t afford to sock away large amounts of money at a low savings rate. “But if you have no risk tolerance, this might be an option,” says Jessica Filiaggi, financial advisor at Great River Federal Credit Union in St. Cloud. “It’s completely liquid and you can take it out for anything, even if it’s not for school purposes.”

2) Coverdell Education Savings Account: This was one of the first education specific accounts set aside by the IRS. But there are limitations. There’s a $2000 a year contribution limit, you can’t change the beneficiary, and the withdrawals are taxable. Because of these limitations, “Coverdell IRA are becoming a thing of the past,” said Filiaggi.

3) Roth IRA: This is very popular option for many people and not just for education, as it can be used for many purposes, including retirement. There are income limitations to this account. You need to be single and filing singly, making less than $117,000 a year or married, filing jointly and making less than $184,000 in order to contribute. If you fit within those limitations, you can contribute up to $5500; if you’re over the age of 50, you can do $6500. The downside is that the contributions are made after tax and the money should remain in the account for five years. “Withdrawals should be planned out carefully with your financial advisor, as there are a few scenarios that can result in fees or tax penalties,” said Filiaggi.

4) Ugma: In Minnesota, Ugma stands for the Uniform Gift to Minors Act. In other states, it can also be called Utma. Like a Roth, this isn’t college specific, as the funds can be used for anything related to the child (travel, down payments, registration fees, etc). And there’s no contribution limit. However, there are downsides. You are transferring or gifting assets to your child. The gift is irrevocable and belongs to them when they turn 18. Also, you still need to be aware of the gift tax. It is also counted as an asset on a FAFSA form. There are some scenarios that makes sense for an Ugma. “Some parents are really nervous that their child isn’t going to go to college and they’ll end up with a huge tax bill at the end,” says Filiaggi. “This can be a good option as you don’t have to use it for college. For example, a child could take over the family farm and with an Ugma, the funds could be available.”

5) 529 account. This is a savings plan sponsored by the state, meaning that the tax benefits are at the state and federal level. With a 529 account, there is no contribution limit, but gift tax applies. Another benefit is that you can change beneficiary one time per year. “So if one child doesn’t go to college or gets a large scholarship, you can change it change it to another child,” says Filiaggi. Also, this account is an asset owned by the parent, so it doesn’t count on the child’s FAFSA for initially. It is considered income once it’s distributed. The withdrawals are tax-free if used for higher education expenses. And the earnings grow tax differed. There are also ways to fund this account through direct deposit.

Before investing, the investor should consider whether the investor’s or beneficiary’s home state offers any state tax or other benefits available only from that state’s 529 Plan.

Securities and investment Advisory services are offered through Cetera Advisor Networks LLC, member FINRA & SIPC. GRFIS and GRFCU are not affiliated with Cetera Advisor Networks LLC.
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