Hot Topics

When And How To Start Saving For Your Child's Education
When it comes to saving for a college education, we all know we should do it, but when and how are common questions. In short, the sooner, the better. Even modest savings can make a difference if you give it enough time to grow. Assuming an 8 percent average annual return, an investment of $100 a month for 18 years can yield a savings of $48,000(i) .

With college tuition for many schools increasing nearly 250%(ii) in the last 15 years, whether you are saving for your child's or grandchild's education, it's never too early to start. There are many funding options available. Not every option is right for every family. Some options may affect your child's ability to qualify for financial aid. Sit down with a financial professional to weigh the pros and cons of what's right for you and your future.

529 Plans(iii)
A 529 savings plan may be a good way for you to save for college and get a great tax break. 529 plans are administered by individual states to help people set aside savings for qualified higher education expenses. Most state 529 plans have open enrollment, which allow both residents and non-residents to participate. Plans differ from state to state and many states may offer different contribution limits and investment strategies depending upon the account holder's investment goals.

Currently, qualified withdrawals are now free from federal tax and most plans let you save around $200,000 per beneficiary(iv) . Keep in mind that there aren't any income limitations or age restrictions, which means you can start a 529 plan no matter how much you make or how old your beneficiary is. Under the Economic Growth and Tax Relief Reconciliation Act of 2001, this will be the case through the year 2010. At that time, pending any United States Congress action to keep this existing provision permanent, this taxation benefit is subject to change. In addition, contributions of more than $11,000 may be subject to gift tax. Earnings and withdrawals may be subject to state tax.

There are two types of 529 savings plans:
The Prepaid College Tuition Plan(iii): This plan allows you to prepay college tuition at current rates. For example, if the cost in current dollars to attend a four-tear public university is $35,000 and college costs increase six percent each year, the cost of attendance in 15 years will equal $83,880 annually, but your child can go to college at the lower rate. With this plan you can lock in the current cost of attendance by prepaying college tuition at today's prices. Keep in mind that most plans only guarantee 100 percent coverage if the beneficiary goes to a public in-state college or university. You can transfer prepaid tuition contracts to a private or out-of-state school, but you may not receive the contracts full value.

The College Savings Plan: This plan operates like a 401(k) plan, except it is funded by after-tax contributions. The plan will invest your contributions into mutual funds, stocks, bonds and CDs (may vary by state). Fund strategies differ from plan to plan, so do your research. Some funds may follow an aggressive growth strategy (stock funds) when the beneficiary is young and later convert to a conservative growth strategy (bond funds) when the beneficiary nears college age.

Consider the benefits of 529 plans. The named beneficiary can withdraw funds from the 529 plan tax-free to pay for qualified education expenses; i.e. tuition, room and board, books and fees. A federally mandated penalty of 10% applies to any earnings withdrawn for non-qualified expenses. The donor can also transfer the account to another beneficiary if the original beneficiary decides not to attend school. The donor maintains complete control over the account, naming the beneficiary and controlling how the funds may be used.

Coverdell Education Savings Accounts (ESA)
Once called Education IRAs, Coverdell ESAs are not retirement accounts, but investment accounts for education savings. Family members can set up a custodial account with a designated beneficiary who can take out funds to pay for qualified education expenses. Unlike the 529 plans that allow for larger contributions and have no age requirements, Coverdell ESAs permit a maximum contribution of only $2,000 per year and beneficiaries must be under 18 years of age(v) . While earnings from the account are tax-free, contributions must be made with after-tax dollars. Distributions are also tax-free as long as they are used for qualified education expenses (such as tuition, room and board, books, fees, supplies and equipment).

Unlike the 529 plans that are for higher education only, since 2002, Coverdell ESAs can be used to fund elementary and secondary school education. Coverdell ESAs also have income restrictions. Only individuals with a modified adjusted gross income of less than $110,000(v) or $220,000(v) filing jointly can make the maximum $2,000 per year contribution. If individual gross income is between $95,000(v) and $110,000(v) ($190,000(v) – $220,000(v) filing jointly), the donor is only eligible to make a reduced maximum contribution. Persons with incomes of more than $110,000(v) ($220,000(v) filing jointly) are not eligible to contribute to a Coverdell ESA. Also, unlike 529 plans where the plan is administered by the state, you, the Coverdell ESA investor, can select the fund manager for the account.

Traditional Investments
If you prefer a different means of investing, you may choose to use traditional investment vehicles to help with college expenses. You may decide to invest in mutual funds 3 . Investing in mutual funds puts a professional fund manager in charge of your savings so that as the investor, you are not involved in the day-to-day maintenance of the portfolio. As your child approaches college age, you can help protect your returns by converting them to bonds and cash, Keep in mind however, that depending on the investment strategy you choose, certain investments may be subject to taxation or tax penalties for early withdrawal.

Grant & Loan Programs
Don't be too troubled if you haven't saved enough to cover the entire cost of tuition for four years. Federal, state and private grants and loans can bridge the gap between your savings and tuition bills. During the years you are paying tuition you may be able to take two federal tax credits – the Hope Credit and Lifetime Learning Credit. There are income limitations to consider, but if your income level exceeds the maximum, you may qualify for a new higher education expense deduction that will be in effect from 2002 to 2005.

There are also ways to cut cost after graduation when payments on student loans begin. For example, instead of paying the minimum balance due, increasing your payment by even $10 per month can pay down your principle faster. Taxpayers with student loans are also eligible for a tax break. You may deduct the interest you pay up to $4,000(v) per year if your adjusted gross income is $80,000(v) or less if you are single; and $160,000(v) or less if you're married filing jointly.

Before you begin your college savings plan, do your homework. Explore all of your investment options, become familiar with all the grant and loan opportunities (federal, state and private) and stay abreast of federal education tax laws. Whatever means you choose to begin a college savings fund, remember that sooner rather than later is optimal, but that it's never too late to start planning for the future.

Investment Risk Disclaimer
All figures are for illustrative purposes only and do not reflect an actual investment in any product, nor do they reflect the performance risks, expenses or charges associated with any actual investment. Past performance is not an indication of future performance. Actual results may vary substantially from the figures in the example. All rates of return are hypothetical and are not a guarantee of future performance of any asset, including insurance or other financial products. Higher rates of return have been associated with higher volatility. All inflation rates and rates of return on current financial holdings are estimates provided by the client. Examples including information on Variable Universal Life and Variable Life insurance policies' death benefit and return of policy values are guarantees subject to the claims-paying ability of the issuing insurer.

(i) All figures are for illustrative purposes only and do not reflect an actual investment in any product. They do not reflect performance risks, expenses or charges associated with any actual investment. Past performance is not an indication of future results.

(ii) This data is an average, intended to reflect the average prices set by institutions (1993/94 - 2008/09). Source: Annual Survey of Colleges, The College Board, New York , NY .

(iii) This product is offered through securities registered representatives. An investor should consider the investment objectives, risk, and charges and expenses associated with municipal fund securities before investing. More Information about municipal fund securities is available in the issuer's official statement.

(iv) Source: A Guide to Understanding 529 Plans. Copyright © 2002 by the Investment Company Institute

(v) Source: Department of the Treasury Internal Revenue Service, Publication 970: Tax Benefits for Education.