College Savings Accounts

[cons]

my sister wants to start saving for her childrens college. i told her that these were some options she can lok into. unfortunately, i don't know much about them (max contribution limits, AGI limitations, transferability, etc). she lives in New York by the way, if that helps at all.

i was wondering if any posters could give their thoughts/experiences on these two different college savings accounts out there, the 529 plan and the Coverdall (sp?) plan.

-could someone have a 529 AND a coverdall set up for their child?
-are the income limits the same as for ROTH ($150K MAGI)?
-what are the max contribution limits for each type of plan?
-are contributions/earnings tax free?


she also asked me whether or not she could transfer the account from her son's name into her daughter's name in the future. the reason she asked this is because she's not sure if her son will want to attend college later on and thus does not want this investment to go to waist. would she then be able to transfer the account (all the contributions/earnings from the previous years) into her daughter's name?


i'm going to do a search to see if i can find any threads that have been discussed about this topic. i guess i should've done that before i posted this......anyway, i appreciate any advice/comments/concerns/complaints

 

[Martha]

A good place I learned about not long ago to get answers to your questions is http://www.savingforcollege.com/

There is no upper income limit after which you cannot contribute to a 529 plan.

 

[REWahoo]

cons,

What Martha said. There is an excellent tutorial and a wealth of knowledge on that site.

 

[yelnad]

I have a 529 and I don't even have children yet. My husband is listed as the "student." You can change the beneficiary to another family member for a small fee (like $10). There might be a limit to how many times you can do this.

 

[JPatrick]

What ever you do, it is a good idea to hedge your equity risk with something like I Bonds.
DS had/still has about a 70/30 mix (bonds are 30) and when the market flopped 5 years ago his stocks flopped also so we started cashing the bonds until recently when we reversed to stocks/funds.  Having the 100% safe bonds was a life saver, preventing the old forced sell during a market slump.

 

[laurence]

If she is not maxing her IRA contribution, she would do well to do that first, IMHO. Tax bennies, not as restricted, she'll probably be close to retirement age when he goes to college anyway, and I think he'll have a better shot at financial aid that way.

 

[cute fuzzy bunny]

I looked at all of the college plans and decided to just keep doing what I'm doing and pay for it out of our taxable account. Everything had a catch I didnt like, or the benefits just didnt outweigh the gotchas.

If its pretax, there are penalties and taxes. Some have to be used for college and if they dont go, penalties and taxes. Some can be used for any kind of education, but they're post-tax. Etc.

 

[brewer12345]

I am in the same boat as CFB. All of the tax advantaged plans have shortcomings or catches significant enough that I will just fund school out of taxable assets.

 

[LOL!]

One should probably not save for children's college until they have maxed out 401(k) contributions ($15K) and Roth IRA contributions ($4K for each parent) each year.  You cannot borrow for your retirement, but you can use the Roth IRA for your kids' college.

That said, 529 plans have become less expensive than a couple of years ago.  So be careful.  As mentioned in the previous posts, it may be better to just invest in a tax-managed way outside of a 529. 

For example, suppose you invest after-tax for 10 years in a Vanguard index fund that pays little in the way of distributions.  That's essentially tax-deferred.  When it gets close to college time, you give some of the shares each year to child.  Their basis is same as yours, so when they sell to pay for college they pay 5% capital gains tax.

Suppose you invest the same amount in a 529 plan, but the yearly additional expense ratio is 1% of assets.  You invest in the same fund(s).  That extra fee over 10 years will make your returns less than what you would have in the first scenario after paying taxes.    The non-529 scenario has no strings attached as well.

We have fully funded our retirement plans for years.  We have invested after-tax for years as well.  We only 18 months ago opened up a 529 plan (the Utah plan, www.uesp.org) because the fees are under 0.5%.

Bottom line: be careful about all the hype on 529 plans.  Financial salespeople know that folks want to do the best for their kids, so they use that to get their hands in your pocket.  The 529 plans can be excellent ways to fund college, but most of the plans are more expensive than other ways to do the same thing.  Look if your state's plan has a state-income-tax break AND has very low expenses.

 

[bpp]

I use Coverdell and I Bonds. Not inspired to mess with 529s.

Bpp

 

[TromboneAl]

We used the California 529 plan through TIAA-CREF. Procedurally that went smoothly. Had the Age-based allocation account, where they gradually switched to less aggressive funds as college neared. Had about $11,000 in there when DD started college.

Also had about $26,000 money in a UTMA. That worked fine, but I don't recommend those (google UTMA regret).

Rest will be paid for via our regular taxable accounts.

That strategy probably saved us a little, since we used to be in a high tax bracket.

 

[Nords]

I am in the same boat as CFB. All of the tax advantaged plans have shortcomings or catches significant enough that I will just fund school out of taxable assets.

Same here.

Also had about $26,000 money in a UTMA.  That worked fine, but I don't recommend those (google UTMA regret).

We also started a UTMA back when tax brackets made that attractive.

If I'd realized that 10 years later we'd be in a much lower tax bracket all by ourselves, let alone the reductions in cap gains & dividends tax rates, we wouldn't have done it.

When our kid learns to invest in mutual funds (in a couple more years) we're going to start with a small portion of the UTMA. And of course that's where most of the college cash is coming from, since Hawaii's age of maturity is 21.

 

[brewer12345]

We have an UTMA set up for our daughter. All of the birthday, etc. gift money gets tossed here, plus I did a smallish dump in at bonus time this year. Money goes to a balanced index fund. Ideally, this money will not be used for college and instead will be the start of a future fortune. I intend to use it as a teaching tool, and if she squanders it in the future, so be it.

 

[cute fuzzy bunny]

We have another approach to funding the college costs, should we choose to use it. My dads whole retirement stash is in older EE bonds paying a very nice interest rate. His spending rate right now is lower that the compound interest rate the bonds are earning, and declining. By the time Gabe is old enough to go to college, my dad will probably be living with us.

As a co-owner of his bonds, I can legally use them to pay for Gabes college expenses tax free. If I have to compensate my dad for that by paying some of his living expenses as part of our regular withdrawal, its still a good deal. Chances are after he moves in with us, his personal/individual out of pocket expenses will be pretty nominal. A few rounds of golf a week, a few lunches out with his friends.

Bet those $400 tax preparers didnt suggest THAT one...

Sooo...for those of you with college bound kids, if you or your parents have a leaning towards EE's (or ibonds for that matter), make sure your name is on them as co-owner and if they're not used for retirement expenses, they become college tuition. Or they can be cashed and used for any other non-education purpose.

Crappy returns and I wouldnt personally buy EE's or ibonds for gabes education; education costs are going up far faster than inflation plus a few percentage points. But for an older retiree thats equity averse thats going to buy them anyway...

 

[LOL!]

As a co-owner of his bonds, I can legally use them to pay for Gabes college expenses tax free. 

There are income limits to getting the tax-free benefit from bonds for qualifed education expenses.
http://www.irs.gov/publications/p970/ch10.html#d0e10890

It looks there are other restrictions on ownership as well. So your name and dad's name does not meet the criteria.

 

[cute fuzzy bunny]

Yes there are limits. We dont exceed them and its unlikely that we will since we keep our AGI low.

My name as co-owner does qualify to use the bonds for my dependents education. This is one of those fuzzy areas.

Specifically, the language says

"For purposes of eligibility for the exclusion only, the designation of a child as co-owner with his or her parent isn't permitted. Bonds must be in the name of the taxpayer, with or without a beneficiary, or in the name of the taxpayer and the taxpayer's spouse as co-owners to exclude the bond interest from the taxpayer's gross income."

You could intgerpret that to say I must be the sole owner or have my wife on the bond; the interpretation I got from the IRS was that they simply wish to exclude the name of the dependent childs that is having their education paid for name from being on the bond. The interpretation I received was that having my dads name as co-owner would be irrelevant in meeting the requirements, excepting that he has to agree to cash in the bond and the proceeds to go towards paying for the education costs. There is no specific language supporting or excluding multi-generational ownership where the bond is used for a 2nd generation child where the first generation child is a co-owner.

As with anything, I hate to enter new ground with the IRS and dont find audits entertaining, but I think I win this one, if it comes to that.

 

[cute fuzzy bunny]

Lifted right from the tax form:

"To qualify for the exclusion, the bonds must be series EE or I U.S.
savings bonds issued after 1989 in your name, or, if you are married,
they may be issued in your name and your spouse’s name. Also, you
must have been age 24 or older before the bonds were issued. A
bond bought by a parent and issued in the name of his or her child
under age 24 does not qualify for the exclusion by the parent or
child."

Doesnt say I cant be co-owner with a parent...

 

[SteveR]

We funded college for both kids out of wage income over the past several years (back to back college for 8+ years). I bought both of them EE bonds way back when it was OK to put them in their name. They don't even know they exist so they will be a nice wedding or whatever present.

We are looking at opening 4 529 state accounts, one for each grandkid. We are still in the discussion stage with their parents. We could all contibute and could all take a state income tax deduction for the contributions. The expenses are high but look lower than some other plans not run by the state (Vanguard was higher). We have two major issues: the kids think getting married and having kids is better than getting a degree and/or the tax incentives (deferral of tax on gains) is not renewed in 2010(?). We could fund our contibution out of our own investment accounts but don't want the Gifting limits to be an issue and could really use any tax help we can get.

 

[youbet]

I'm contributing $2k annually to Coverdale ESA's for each of my three grandkids.  My research showed that the Coverdale ESA was superior to the 529b plans other than the $2k annual contribution limitation.  (More control.  More flexibility.) However, in my case, $2k per year per grandkid is all I can afford anyway.  Am I missing something about the 529b accounts?  Are the 529b's actually a better deal due to some feature I'm missing?

 

[Nords]

Am I missing something about the 529b accounts?  Are the 529b's actually a better deal due to some feature I'm missing?

Yes, mutual-fund companies & financial advisors make way more money "administering" 529s than they do Coverdells.

I'd like to see a 529 with an ER under 40 basis points. How hard could that be, Fidelity?!?

 

[cute fuzzy bunny]

I thought TIAA-CREF had a pretty cheap coverdell. And cant 529's be used for almost 'any' education besides college?

 

[TromboneAl]

Are the 529b's actually a better deal due to some feature I'm missing?

The contribution limit was what made us go with 529's instead of ESA's. For your own kid, $2K per year isn't going to make much difference (I think the limit was $500 back when we started).

 

[yelnad]

I don't put much into my 529, but I like it since tuition at the university I work for (and my children will probably attend) has gone up about 40% in the last 2 years. The PA TAP programs freezes tuition at the rate you purchase it at.