Friday, September 16, 2011

Take a refresher course on saving for college the tax-smart way

With tuition costs climbing ever higher, setting aside funds for college can be a formidable task. Here’s a refresher course on the various programs and tax breaks you can use to lessen the financial burden of college.
Coverdell education savings accounts. These accounts offer several advantages over other college savings plans. First, there’s flexibility. Like an IRA, you can choose from a wide variety of investments to meet your individual needs. Also, funds in the account can be withdrawn tax-free if used for qualified education expenses such as tuition, room and board, books, even a computer. Unlike other programs, qualified expenses include costs of elementary and secondary school.

However, the maximum annual contribution for a beneficiary is $2,000 – from all sources. Also, funds must be used by age 30. If the funds are not spent on college by the time the beneficiary is 30 years old, the unspent money must be withdrawn (subject to income tax and a 10% penalty) or rolled over into another family member’s education savings account.
Section 529 plans. If you want to put a large lump sum into a college savings account, a Section 529 plan may be your best option. In this type of account, there are no phase-out limits for high earners, and plan sponsors set maximum allowable contributions.

• Custodial accounts. With custodial accounts (Uniform Transfers to Minors Act or UTMA), you can generally invest in a wider variety of investments than with a 529 plan. The proceeds can be taken out penalty-free – even if used for something other than education. The biggest potential disadvantage is that you gift the funds irrevocably to the child. At a certain age, your child controls the account and could spend the funds on a sports car instead of college.

American opportunity credit. With this credit you reduce your taxes dollar for dollar for education expenses incurred during four years of college. The credit has an annual limit of $2,500 per student.

• Lifetime learning credit. The limit for this credit is $2,000 per tax return, and qualified expenses include tuition, fees, and books for both undergraduate and graduate programs. You’re limited to using only one credit (American opportunity or lifetime learning) per student.

• Other options. Roth IRAs and U.S. savings bonds are additional options worth considering. You may also qualify for an interest deduction on education loans.

If you need help reviewing the options that best fit your situation,give us a call at (219) 769-3616 or e-mail your questions to