In this day and age, there are dozens of options for saving for college and there is a plan that works for every family.  One of the first step parents should take in planning their child’s future college expenses is to establish a savings goal.  There are many useful college cost calculators available on the Internet that should be utilized, as they are very helpful.  You can also get a rough idea of how much you should be saving every month based on your monthly savings goal.  These targets should be based on the current four-year cost of the college or university your child expects to enroll in and the amount of savings you already have set aside for their college fund.

Parents should take full advantage of the fact that their child can receive up to $850 in investment income every year without paying federal income taxes.  By gifting income-generating assets into a UTMA account or gifting appreciated assets later, parents can effectively shift their income and capital gains out of their higher tax bracket.  Any assets gifted to your children are theirs to control once they reach a certain age under state law.   A student’s assets and income are counted more heavily under financial aid formulas.  It’s wise to consult with a tax advisor before making any tax-related decisions to verify that you’re able to count this income. 

Qualified state tuition programs help enable participants to contribute to an account, which is established to pay future college expenses for a beneficiary.  These programs allow participants to invest and take advantage of recently enacted Federal and state tax breaks.  Forty states and the District of Columbia offer qualified state tuition programs and are competing for the program dollars.  All Federal tax on investment earnings are deterred until the money is withdrawn and then the earnings are taxed at the beneficiary’s rate.  Participants in this program never pay state tax on earnings in their state’s plan and certain states allow residents to deduct contributions from their adjusted gross income when calculating their state income tax.  Having a qualified state tuition program will likely lessen the aid one could get and are best suited for people who do not expect to receive much financial aid.

The Section 529 College Savings Plan is a state-sponsored college savings program, which allows individuals to accumulate tax-advantaged funds for financing college expenses for a beneficiary.  Unlike gifting accounts and Coverdell Education Savings Accounts, 529 College Savings Plan assets are currently attributed to the account owner, not the student, and helps lower the impact on financial aid.  The 529 College Savings Plan offers tax-deferred growth, tax-free qualified distributions, higher contribution limits, no income of age restrictions, and greater control for the account owner. The 529 College Savings Plan assets may be used to pay for qualified education expenses at almost any college or post-secondary programs in the United States or select foreign institutes.  The qualified expenses under the 529 College Savings Plan include tuition, room and board, books, fees, supplies, and equipment including a computer.  This plan is limited to undergraduate and graduate tuition and expenses only and cannot be used for private elementary or high school tuition.

Parents, grandparents, other family members, or friends may establish a 529 College Savings Plan or the students may establish the plan for themselves.  There are no age or income restrictions, making this plan quite beneficial.  The maximum contributions vary by plan and you may utilize as much as $55,000 in any five-year period without exceeding your federal gift tax exclusion. Another option is available to roll over or transfer assets from any gifting or qualified savings plan to a 529 College Savings Plan.  The 529 College Savings Plan offers a number of tax benefits also.  Both your contributions and earnings grow tax-deferred and no Federal taxes need to be paid when funds are withdrawn to pay for qualified expenses.  Exemption on earnings from state taxes is determined by the individual state.  In most cases, both your contributions and earnings are not considered part of your taxable estate.  When investing in a 529 College Savings Plan, your earnings will not be assessed Federal or state taxes, which allows your assets to accumulate without paying taxes on capital gains, dividends, or interest. 

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