Bush
Makes Big Changes To College Savings Plans
by
Carl Hampton
09/26/2006
Saving money for our children's higher
education is a little like walking through a
mine field, which plan best suites our
needs. President Bush has just signed the
Pension Protection Act, the act outlines
strengthening the financing rules for
defined benefit plans. The main problem I
found with this act is that the Pension
Protection Act eliminates the 2010 sunset
provision for tax-free withdrawals from the
Section 529 tuition savings plan.
This plan was created in 1996 and it allows
after-tax income (which means it will not be
taxed there after) to be invested in
state-sponsored plans and to grow free of
federal and state taxes. Fortunately, the
Economic Growth and Reconciliation Act of
2001 states that as long as the 529 money is
used for college expenses that income earned
can be withdrawn free of federal and state
taxes. But the tax-free withdrawals are set
to expire at the end of the year 2010. If
and when that happens the distributions from
the plan are taxable, albeit at the student
rate.
Most experts are now saying that more 529
options only represent more ways to make the
same mistake of investing in these plans.
Your investments are locked into specific
rules just for a tax benefit and the plan is
completely lacking in flexibility. The
Coverdell Education Savings Account is
another alternative to Section 529. Both
plans are similar in that they allow money
to grow tax deferred. The Coverdell
Education Savings Account may also be put
towards primary and secondary education.
If your children qualify for financial aid
and you want to use the 529 plans then put
it in your name. You really don't want the
plan to be considered your child's assets
when financial aid calculates an aid
package. For those high-income parents who
probably won't qualify for financial aid, it
would make sense to place the Section 529
under you child's name to take advantage of
the lower tax rate.
Experts recommend purchasing a Series I
United States savings bond with the child's
name on it. It can be used for higher
education and the interest income is exempt
from federal income taxes. Another option
for a high-income family is custodial
accounts – Uniform Transfers to Minors
Account (U.T.M.A.) or Uniform Gifts to
Minors' Accounts (U.G.M.A.). These accounts
are a way to shift assets to your children.
You could also set up a complex trust which
would include restrictions so that once the
child turns 18 they would not be able to
spend all the money on a car or sound
system.
Have an opinion or a question you would like
me to answer, then write me!
http://www.CarlHampton.com
“Your” Money Matters By Carl Hampton
From the Author of “
From
Credit Despair To Credit Millionaire”
