529 and Other College Savings Plans For Dummies E-Book

Margaret A. Munro

• Herausgeber: John Wiley & Sons
• Kategorie: Ratgeber
• Sprache: Englisch
• Veröffentlichungsjahr: 2011

Seitenzahl: 596

Beschreibung

There's no question: The cost of college continues to soar, even when the rest of the economy stagnates, and this reality is not likely to change any time soon. Fortunately, everyone, including you, the various governments (federal and state), and the colleges themselves, are in on this secret, so everyone can plan and plot, well in advance of that eventual first day of your child's freshman year, ways to get that child there, and ways to help you pay the bills when they happen. Consider this book to be your accomplice. 529 & Other College Savings Plans For Dummies is simply a way to find a reasonable solution to a seemingly unreasonable problem: saving for future college costs in the sanest, least stressful way possible for you. In keeping with the theme of stress reduction, you can use this book in a variety of ways: * As a reference: It's all here: the ins, the outs, the do's, and the don'ts. The world of college savings is one of very specific rules, and they're here, in all their glory, and they're all explained. * As an advisor: It's a case of the very good savings techniques, the merely okay savings techniques, and the truly ugly techniques (which you really want to avoid), and this book highlights them all. * As a little light reading: Amazingly enough, the topic of money can be mildly amusing, and college savings is no exception. Read this with an eye towards the absurd, and you won't go far wrong. This down-to-earth book is designed to explain the strategies that are out there to help you save, save, save. There's no doubt that the bill will be large; there's also no question that, with planning, strategy, and purpose, you can achieve your goal. To help you get there, this book covers all these vital topics, and more: * Evaluating all your resources * Understanding the basics of Section 529 plans * Working around the 529 shortcomings * Contributing to Coverdell accounts * Choosing savings bonds that work * Looking at your investment options * Searching for scholarships, fellowships, and grants * Tapping into your Roth IRA * Financial Aid 101 In this one-size-fits-all world, the powers that be have recognized that all people don't save money the same way. Some save more, some save less, some can live with risk, and others can't tolerate any risk. Clearly, no two are alike, but you're all savers, either present or potential. Numerous options exist that make saving possible and desirable for everyone. 529 & Other College Savings Plans For Dummies is here to tell you that it is possible to understand the costs associated with college, both right now and in the future, and then find ways to pay for those costs.

Leseprobe

529 & Other College Savings Plans For Dummies®

by Margaret A. Munro

529 & Other College Savings Plans For Dummies®

Published byWiley Publishing, Inc.111 River St.Hoboken, NJ 07030-5774www.wiley.com

Copyright © 2004 by Wiley Publishing, Inc., Indianapolis, Indiana

Published simultaneously in Canada

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Library of Congress Control Number: 2003115023

ISBN: 0-7645-3747-4

Manufactured in the United States of America

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About the Author

Margaret A. Munro, EA, (who answers to Peggy and is still trying to figure out why her parents named her Margaret) is a tax consultant/advisor/writer/ lecturer with over 30 years of experience in various areas of finance and taxation. She is an enrolled agent, licensed by the federal government to represent clients in the areas of tax and tax-related issues. She currently operates a widely diverse private practice that specializes in the financial concerns of families with school-age children, a group that is near and dear to her heart.

In addition to counseling her clients with young families on the advisability of college savings plans, Peggy has great personal experience in the area of paying for college. She began receiving grants and loans in 1977, is currently helping to pay for her husband’s education, and realizes that, without college savings, she won’t finish paying her son’s college loans until 2027, fifty years after she began accumulating her own college debt. In the process of writing this book, she has taken her own advice and begun to save regularly.

Peggy is a graduate of The Johns Hopkins University and has also attended University College Cork and the Pontifical Institute of Mediaeval Studies in Toronto. She lives with her husband, Colin; her son, Jacob; and the family dog, Angus Mor, in central Vermont, where she teaches at her son’s religious school and volunteers at the local elementary school.

Dedication

To Colin, Jacob, and Angus Mor, who make sure I’m fed and watered during tax season and beyond. You deal with my episodes of stress and psychosis and love me in spite of them. You knew I could do this even when I didn’t. Everything I achieve is sweeter to me because you’re there to share it with me.

Author’s Acknowledgments

It’s hard to know where to begin when looking back at all the people who helped make this book happen. And I should start with Mrs. Benedetto in the 5th grade and Mr. Hancock, in the 11th, who taught me all about grammar and how to write so that it made sense.

While the ability to write is a necessary component of any book, an understanding of your subject matter is also key. I have been blessed to have many fine teachers and mentors who fostered this knowledge along the way: Sheldon Kaplow, who gave me my first job and taught me how to use a ten-key adding machine; Palmer Worthen, who threw me into the tax grinder and made sure I emerged relatively unscathed; and Marvin Sparrow, Monica Lewis, and all the other fine people at Goulston & Storrs, P.C., who honed my basic tax knowledge and taught me to look beyond the mere laws to how they affected people.

Obviously, this book would not exist without input from my extended family, my friends, and my clients (who, for obvious reasons, need to stay anonymous, but who know who they are), who have been coming to me for several years with questions about how, and how much, they should be saving for their children’s educations. Our discussions over time have been largely responsible for my thinking about common misconceptions and the amount of misinformation that flies around every sort of financial topic.

And then there are all the people who worked with me on this book: Scott Mendel and Pam Mourouzis, who started the ball rolling; Norm Crampton, whose enthusiasm is contagious; Jennifer Connolly, Mike Baker, and Chrissy Guthrie, my project editors who did just enough hand holding; Tina Sims for her copy-editing expertise (I’m sure I’ve been a trial to her); and Dave Murray and Molly Yuska at The National Center for College Costs, for their technical expertise. This book stands as a testament to all of you, and I thank you.

Finally, to Jacob, who kept feeding me the names of all of his classmates when I couldn’t think up yet another name for an example, and to Colin, who was (is) my practice For Dummies reader and who made sure he could understand what I was talking about before I shipped chapters off to my editors — I really couldn’t have done this without you guys.

Publisher’s Acknowledgments

We’re proud of this book; please send us your comments through our Dummies online registration form located at www.dummies.com/register/.

Some of the people who helped bring this book to market include the following:

Acquisitions, Editorial, and Media Development

Project Editors: Mike Baker, Jennifer Connolly, Chrissy Guthrie

Acquisitions Editor: Norm Crampton

Senior Copy Editor: Tina Sims

Assistant Editor: Holly Gastineau-Grimes

Technical Editor: Molly Yuska

Editorial Managers: Christine Meloy Beck, Jennifer Ehrlich

Editorial Assistants: Melissa Bennett, Elizabeth Rea

Cartoons: Rich Tennant, www.the5thwave.com

Production

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Layout and Graphics: Andrea Dahl, Joyce Haughey, Clint Lahnen, Barry Offringa, Shae Lynn Wilson

Proofreaders: Laura Albert, TECHBOOKS Production Services

Indexer: TECHBOOKS Production Services

Special Help: Laura K. Miller,Chad Sievers

Publishing and Editorial for Consumer Dummies

Diane Graves Steele, Vice President and Publisher, Consumer Dummies

Joyce Pepple, Acquisitions Director, Consumer Dummies

Kristin A. Cocks, Product Development Director, Consumer Dummies

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Brice Gosnell, Associate Publisher, Travel

Kelly Regan, Editorial Director, Travel

Publishing for Technology Dummies

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Composition Services

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Debbie Stailey, Director of Composition Services

Contents

Title

Introduction

About This Book

Conventions Used in This Book

Foolish Assumptions

How This Book Is Organized

Icons Used in This Book

Where to Go from Here

Part I : Figuring Out the Cost of College — and How to Pay It

Chapter 1: Braving the New World of College Savings

Doing the Numbers

Exploring Section 529 Plans

Checking Out Coverdell Accounts

But Wait! There’s More!

Maximizing Your Savings, Minimizing Your Tax

Chapter 2: Checking Out the Cost of College

Dissecting the Total Bill

Looking into the Costs of Various Types of Schools

Going on to Graduate School

Pushing Forward to Professional Studies

Distance Learning: The Wave of the Future

Chapter 3: Realizing All Your Resources

Identifying How Parents Can Contribute

Accepting Help from Family

Understanding the Tax on Gifts

Seeking Out Student Sources

Chapter 4: Sharpening Your Savings Techniques

Focusing on the Family Budget

Changing Your Perspective — Watching Your Savings Grow

Dealing with Debt

Saving Throughout the Ages

Part II : Piecing Together Section 529 Plans

Chapter 5: Laying Down the Basics of Section 529 Plans

Discovering the Parts of 529 Plans

Figuring Out the Qualifying Criteria

Contributing to a 529 Plan

Picking Your Plan

Chapter 6: Applying Section 529 Plans to Your Household

Finding the Best Plan for You

Opening a Plan

Funding a Plan

Managing Your Investments

Taking Qualifying Distributions

What Does Uncle Sam Have to Say?

Chapter 7: Weighing the Pros and Cons of Section 529 Plans

Pondering the Pros of Section 529 Plans

Working Around the 529 Shortcomings

Part III : Uncovering Coverdell Accounts

Chapter 8: The Changing World of Coverdell Education Savings Accounts

Covering the Basics

Making Account Contributions

Taking Distributions

Transferring Accounts and Changing Account Beneficiaries

Chapter 9: The Mechanics of Coverdells

Getting a Handle on What You Want

Opening a Plan

Devising an Effective Investment Strategy

Selecting Investments and Placing Buy Orders

Paying Into a Coverdell Education Savings Account

Managing Your Account

Making Distributions

Chapter 10: Figuring the Pluses and Minuses of Coverdell Accounts

Knowing the Pluses of Coverdells

Dealing with Coverdell Snags

Part IV : Filling In the Gaps: More Ways to Save for College

Chapter 11: Saving for College with Qualified U.S. Savings Bonds

Choosing Savings Bonds that Work

Determining Who’s Eligible

Buying and Redeeming Savings Bonds

Rating the Usefulness of Saving Bonds for You

Chapter 12: Setting Up Personal Investment Accounts for Yourself and Your Kids

Pondering Personal Investment Accounts

Looking at Your Investment Options

Registering Your Account

Managing Your Personal Investment Account

Chapter 13: Saving for College in Trust Accounts

Getting the Definitive Word on Trusts

Looking at Types of Trusts and How They Work

Paying Tax on Your Trust

Identifying the Pros and Cons of Trusts in Relation to College Savings

Chapter 14: Saving in Your Retirement Plans: The IRA Dilemma

Using Your Traditional IRA to Cover College Expenses

Tapping into Your Roth IRA for College Savings

Making Early Distributions from Other Retirement Accounts

Rolling Over Retirement Accounts to Obtain Maximum Benefit

Chapter 15: Selling or Refinancing Your Family’s House

Saving for College in Your House

Using Home Equity

Chapter 16: Accessing Scholarships and Awards

Searching for Scholarships, Fellowships, and Grants

Acquiring College Funding in Exchange for Service

Looking at Tax Issues Regarding Scholarships, Fellowships, and Grants

Chapter 17: Turning On the Financial Aid Faucet

Financial Aid 101

Applying for Aid (Yes, the Dreaded FAFSA)

Squeezing Out Every Drop of Available Money

Part V : The Part of Tens

Chapter 18: Ten Musts for Successful Savings

Paying Into Your Savings Plans First and Regularly

Understanding Your Investments

Changing Investments When Necessary

Staying Current on Tax Law Changes

Being Realistic about Investment Returns

Not Counting on Great-Aunt Sadie’s Inheritance

Funding Your Account Now — Not Later

Feeding Your Retirement Plan

Asking Questions of the Experts

Learning from Your Mistakes

Chapter 19: Ten Ways to Dodge the Tax Code Minefield

Knowing Who’s Giving and How Much

Being Aware of Your Income and Phaseout Amounts

Keeping Track of Your Contributions

Avoiding the Penalties from Overfunding an Account

Knowing Your Effective Tax Rate

Staying Aware of Tax Laws in Your State

Keeping Track of Your Qualified Education Expenses

Staying Informed about Changes in Current Laws

Being Honest about Your Child’s College Plans

Getting Answers by Asking Questions

Appendix: Section 529 Plans, State by State

Introduction

Welcome to 529 & OtherCollege Savings Plans For Dummies, the practical reference for those who are thinking about and planning for college in the future for themselves or those nearest and dearest to them, and who want an explanation of all the options, pro and con, that can help them save for it.

College. Whether you’ve been there yourself or not, you’ve read all the information, looked at the charts and graphs, and you know that people who graduate from college land better jobs and earn better pay than those who don’t. So, of course, because you want the very best for yourself and your family (you do — that’s why you’re reading this), you want everyone you know, including yourself, to have that opportunity.

That is, until you look at the price tag. You’re already paying for food, housing, and clothing (not to mention phone, cable, insurance, and everything else under the sun, including dog grooming) and maybe even stashing a little bit into your retirement plan. And then you sneak a peek at the projected cost of college for the year in which your student expects to begin. And just as you never look at the least wrinkled car in a car crash, your eye automatically drifts to the highest number on that chart of projected college costs. And you begin to sweat.

There’s no question: The cost of college continues to soar, even when the rest of the economy stagnates, and this reality is not likely to change any time soon. Fortunately, everyone, including you, the various governments (federal and state), and the colleges themselves, are in on this secret, so everyone can plan and plot, well in advance of that eventual first day of your child’s freshman year, ways to get that child there, and ways to help you pay the bills when they happen. Consider this book to be your accomplice.

About This Book

The world of college savings plans is new, exciting, and changing daily (or so it seems — legislative leaders can’t seem to resist continuously tweaking the laws). Which is another way of saying that it also can be complicated and confusing — to everyone including the professionals, the financial planners, the tax folks, and your local bank or brokerage.

In this one-size-fits-all world, the powers that be have recognized that all people don’t save money the same way. Some save more, some save less, some can live with risk, and others can’t tolerate any risk. Clearly, no two are alike, but you’re all savers, either present or potential. Numerous options exist that make saving possible and desirable for everyone.

Piling savings option upon savings option has created opportunities for most people. But all the new options have also muddied the waters, because choosing between Plan A and Plan B can be downright difficult when they seem so similar. So many people may choose to opt out, admitting confusion and doing nothing, because it’s all so confusing, and no one wants to screw up a choice that has so much riding on it.

And yet, it doesn’t have to be that way. I’m here to tell you that it is possible to understand the costs associated with college, both right now and in the future, and then to find ways to pay for those costs, in the most advantageous manner for you, both from a personal point of view and from a tax perspective. And you can’t focus on the personal and ignore the tax implications, nor can you do the reverse. Both are essential components, and the most successful savings program takes both elements into consideration.

That’s where this book comes in. It’s designed to explain the strategies that are out there to help you save, save, save. There’s no doubt that the bill will be large; there’s also no question that, with planning, strategy, and purpose, you can achieve your goal and provide the means that will allow you and your family all the benefits of a college education.

529 & OtherCollege Savings Plans For Dummies is simply a way to find a reasonable solution to a seemingly unreasonable problem: saving for future college costs in the sanest, least stressful way possible for you. In keeping with the theme of stress reduction, you can use this book in a variety of ways:

As a reference: It’s all here: the ins, the outs, the do’s, and the don’ts. The world of college savings is one of very specific rules, and they’re here, in all their glory, and they’re all explained.

As an advisor: It’s a case of the very good savings techniques, the merely okay savings techniques, and the truly ugly techniques (which you really want to avoid), and this book highlights them all. It’s true that what works for you may not work for your neighbor, but every savings option involves risks, concerns, and just-plain crystal ball reading. This book explores all the ups and downs and ins and outs.

As a little light reading: Amazingly enough, the topic of money can be mildly amusing, and college savings is no exception. Read this with an eye towards the absurd, and you won’t go far wrong.

Parts of 529 & OtherCollege Savings Plans For Dummies are about very specific situations that you will, most likely, never come across. Still, this book would be lacking as a complete reference if I didn’t include a lot of the minutiae in the text on the chance that someone, somewhere, may need to know what happens to a Section 529 plan in the event of a death of a plan owner, for example.

Also, as a caution, be aware that any projections in the book are just that: projections. I have no special hotline to the powers that determine rates of returns on investments, increases in tuition payments, inflation rates, tax rates, utility rates, or postage increases (which might be really useful). Increases and decreases may be greater or lesser over time — I have no way of really knowing. All the projections should provide you with is a picture of relationships between like numbers; don’t read any more into my crystal ball projections than that.

Conventions Used in This Book

To help you navigate through this book, I use the following conventions:

Italic is used for emphasis and to highlight new words or terms that are defined.

Boldfaced text is used to indicate keywords in bulleted lists or the action part of numbered steps.

Monofont is used for Web addresses.

Sidebars, which look like text enclosed in a shaded gray box, consist of information that’s interesting to know but not necessarily critical to your understanding of the chapter or section topic.

Foolish Assumptions

The world of money and taxes is rife with assumptions, foolish and otherwise. Here are some of the assumptions I’ve made about you:

You’re not aware of the variety of college saving options available to you, or you’re aware but baffled by the number of plans or the way the plans work.

You may have some idea of how much sending Junior to college will put you back, but you need more details.

If you are saving for college, you probably feel as though you’re not saving enough.

You can’t walk into a bookstore or surf the Internet without buying every book you see with a snazzy, eye-catching, strikingly-appealing, jaw- droppin’ good-looking yellow-and-black cover.

If you’re not yet saving for college, you may feel that you don’t have room in your budget for that expense. After paying your monthly living costs, you may have nothing left to save.

If you find yourself identifying with any of the above, then 529 & OtherCollege Savings Plans For Dummies gives you the information you need to start saving or kick your savings into high gear.

How This Book Is Organized

This book takes all the different components of college savings — from the necessity for it, through all the different sorts of savings plans, and finally to ways to augment with grants, loans, and scholarships — and breaks them down into easily digestible chunks — okay, parts, if you want to get technical about it. And each part is comprised of a few chapters. The following is a brief description of each part:

Part I: Figuring Out the Cost of College — and How to Pay It

There’s no question, the number is huge, but how huge is it? Sounds like the start of a bad joke, eh? Well, it isn’t a joke, but dealing with the big cash question doesn’t have to be that bad. After a brief overview of the scope of the book, this part looks at the current and projected future cost of postsecondary education, including vocational and trade schools, public and private colleges, two- and four-year institutions, and graduate and professional schools. It focuses on savings techniques, and finally, it lets you know who’s available to make contributions into the savings pool.

Part II: Piecing Together Section 529 Plans

One of the recent entries into the college savings plan sweepstakes, Section 529 plans offer seemingly unlimited choices and high contribution limits (at least if you listen to the people who are trying to sell you their particular plan). This part dissects these plans, explaining how they work, why they work, and when they work, or don’t, as the case may be.

Part III: Uncovering Coverdell Accounts

The new, improved, and renamed Coverdell Education Savings Accounts (formerly known as Education IRAs) have now become real players in the college savings arena, and more and more financial advisors, banks, and brokerages are touting their benefits. This part explores them in full detail, showing their good and bad points and explaining how and when they may, or may not, make sense for you.

Part IV: Filling In the Gaps: More Ways to Save for College

Saving for college has been around a lot longer than Section 529 plans or Coverdell accounts. So Part IV examines some of the more traditional ways to save for college and shows situations where these tried and true methods still may make sense for you. But what happens when all else fails and your savings come up a bit short? This part explains how the world of financial aid — loans, grants, and scholarships — works and how your college savings may factor into college financial aid decisions.

Part V: The Part of Tens

It’s the part you’ve hopefully come to know and love. The For Dummies Part of Tens — this time with a college-savings twist. You like easily accessible top-ten lists? Here you go. The whole point of so-called “college savings plans” is first, to save, and second, to pay as little tax on your savings as possible. The chapters in this part give you hints on saving successfully, and tell you what you must do to dodge as many taxes as possible. The book includes one final element that’s not technically a Part of Tens — it lists way more than ten things. But I thought I should let you know about the appendix, which gives you a more detailed look at the various Section 529 plans offered by each of the 50 states and the District of Columbia. The appendix gives you an apples-to-apples comparison of what is currently out there so you can make the best decision for your particular situation.

Icons Used in This Book

The icons that you come across in this book identify information or words of caution that you may find especially helpful.

You have a lot to remember when you’re trying to slot your savings into the rules and regulations surrounding many of these college savings plans. This icon alerts you to important information that you don’t want to forget, because it can often make the entire process of saving for college go a lot smoother.

If you’re the type of person who always needs to know more than the basics, check out the information next to this guy. It points out information that you don’t absolutely need to know to save for college (but you can always use it to impress your friends).

Life is rarely straightforward, and saving for college may be even less so. When you see this icon, you’ll find a strategy that will help you get the most out of your savings or make it easier to put money away.

This book is littered with ideas of what not to do if you want to successfully save for college. When you find this icon, you’ve just landed on one of them.

Where to Go from Here

You can, if you want to and have the time, read this book from cover to cover, and it will give you a great view of how much, how, and where to save money for college. But if you don’t have the time or the interest, you may choose to hop around from topic to topic, skipping those that don’t apply at all to you and paying more careful attention to those that do. That’s one of the great things about For Dummies books. You can get in and get out wherever and whenever you choose. If information that you need to understand a certain topic is covered elsewhere, the text will direct you, so you don’t need to worry that you’re missing basic information by skipping over a portion of the book.

Part I

Figuring Out the Cost of College — and How to Pay It

In this part . . .

Any discussion about saving money, including one about saving cash for college, needs to begin with a careful look at your finances. If you can’t figure out how much you’re going to need and locate the resources available to you, all the information in the world will remain theoretical, not practical.

In this part, I help you check out your current financial situation — including your assets and, especially, your debts — and where you think you need to go — in terms of future college savings costs. I outline the costs associated with various forms of higher education, from piano-tuning vocational education to medical school. I provide tips on how to start thinking about meeting college costs, including the resources you currently have and those that you’ll have down the road. Finally, I provide a plan so that you can examine how you’re spending money now and find ways to trim your current expenses without butchering your lifestyle.

Chapter 1

Braving the New World of College Savings

In This Chapter

Figuring out what and how to save

Considering Section 529 plans

Taking a look at Coverdell Education Savings Accounts

Evaluating other savings options

Making the most of your savings

You may have just found out that you’re pregnant. Maybe you’re at the point where the college catalogs are beginning to accumulate on your dining room table. Or perhaps your family is somewhere in the middle, with your children out of diapers but not yet into calculus. Wherever your family falls in the age spectrum, one thing is certain: either in your immediate family or in your extended one, some people will want to continue their educations beyond that once-adequate but now insufficient stopping point of a high school graduation.

And therein lies a problem: Although your child can receive a primary and secondary education without incurring any added expense in your budget (unless you take into consideration your local parents’ group’s fundraisers), postsecondary education of any type isn’t free for the asking. You must pay for the privilege of having your child attend college. If you’ve already explored the costs of a postsecondary education, you know that the numbers being discussed are large; if you haven’t yet experienced the pleasure, rest assured that the amounts in question will likely take your breath away.

In solving any problem, you need to remain calm and focused on the task at hand. That’s where this book may help — by making you methodically look at your lack of college savings, helping you leave your misconceptions about saving at the door, and showing you ways to actually begin saving. After you convince yourself that you’re able to save something and you actually begin to put some money away, you’ve won a major victory; everything that follows will be easier. Just keep in mind that saving now will create opportunities and open doors for your children in the future.

Doing the Numbers

Up until now, crunching the numbers and figuring out what you think college will cost has usually been where you begin and end your exploration of the topic of how to pay for future educational costs. But after you resolve to start saving and you take the projected costs and create a plan to save for that amount, it’s time to take this exercise a bit more seriously.

Figuring up the costs

Depending on the size of your family and your expectations, adding up the cost of a college education can be a fairly straightforward calculation, or it may become quite involved.

Be realistic, both about the capabilities and ambitions of your future student and your ability to pay.

Your straight-A daughter may have to scale back on her dreams of MIT if your budget, including amounts that you can add from your current earnings, only goes as far as your local state college (although not necessarily — she may want to seriously consider applying for some scholarship aid as outlined in Chapter 16).

Likewise, there’s little point in your saving for an Ivy League education if your child has plans to open his own auto repair shop. And clearly, the more children you’re sending to college, the thinner your resources may be stretched per child (although, depending on how closely spaced your children are in age, this situation may actually work to your advantage if you need to apply for financial aid, as can you find out in Chapter 17).

Finding resources to help you save

No matter how late you may begin to save specifically for future college costs, the entire weight of the enterprise doesn’t necessarily need to rest solely on your shoulders, nor do you need to begin to save for college from nothing.

Chapter 3 helps you find hidden assets you may have available, to augment your college savings. It may also alert you to other resources you haven’t even thought of — family and friends or even the student himself. Just because these are your children, you don’t have to come up with the full amount of their college costs from your pockets alone.

Saving efficiently

Too many people equate saving for the future with current deprivation. For most people, living expenses currently equal, or even exceed, income, and they may not have money left over in the family budget for saving. Clearly, if you fit into this category, you’re not going to be able to save unless you make some changes in your life. And although I would never advocate giving up your morning coffee and sticky bun every day as a savings technique, Chapter 4 shows you some relatively painless adjustments that will maximize the amount of money you can shave from your current budget while minimizing the effect on your life.

Exploring Section 529 Plans

Saving money is a good thing, or so the federal government would have you believe. Uncle Sam is prepared to back up that philosophy with a variety of savings programs that contain built-in tax incentives, some of which you may already be using (tax-deferred retirement plans, anyone?). One of the newest types of incentive savings plan is the Qualified Tuition Program, or Section 529 plan, which is designed solely for the purpose of saving for college or any other type of qualified postsecondary education, either tax exempt or tax deferred, depending on a number of factors. Like almost everything else the government cooks up, though, Section 529 plans aren’t as simple to navigate as everyone selling these plans would have you think. Chapter 5 gives you the tools you need to understand how these accounts work and how you can best make them work for you.

Following the rules

Section 529 of the Internal Revenue Code is long, complex, and not for the faint of heart. Still, savings accounts that fall under its regulations can be a fantastic way to save for future educational expenses. To make it work, though, you have to understand its requirements; there’s little point in setting up one of these accounts if you don’t cross your t’s and dot your i’s just like the IRS wants. Remember, the IRS doesn’t have a category of “close, but no cigar.” Your account will either qualify under the regulations for tax deferrals or exemptions, or it won’t. And if it doesn’t, the consequences may be costly.

Making your money work for you

Creating a successful savings plan involves more than following the rules, although compliance with the rules is a big part. Chapter 6 shows you how to actually begin saving money and then put those savings to work for you.

You’re a big factor in determining whether your savings program flies or falls. Your understanding of the various ways your savings may earn money and of the different investment options available to you is an important piece of creating the substantial amount of savings you’ll need to see your children through college.

Choosing the best options

Even when you understand the rules, manage to regularly save major portions of your income, and discover how to manipulate the investment choices to your best advantage, events in your life may require you to make sudden changes in your Section 529 plan savings accounts. Life happens, whether you’re prepared or not, and often the last thing you want to think about when it does is the effect on your investments. Chapter 7 alerts you to some planning opportunities you’ll have with your Section 529 plan accounts and how to make corrections to your college savings when your life doesn’t exactly follow the course you originally laid out.

Checking Out Coverdell Accounts

If the world of tax deferred/tax-exempt savings accounts were an ice cream parlor, Coverdell Education Savings Accounts (ESAs) would be a new and improved flavor, still not everyone’s favorite, but just what you may want on a particular day. And, not surprisingly, many people, when shopping for a place and a way to save money for college, prefer Coverdell accounts, whether for their wider range of investment options, the account owner’s increased level of control over the account, or the fact that certain expenses qualify for tax exemption under Coverdell rules that aren’t under Section 529 requirements. Whatever your reasons, Coverdell ESAs may be just the flavor of account you want today.

Understanding the rules and regulations

Code Section 530, covering Coverdell ESAs, follows hot on the heels of Code Section 529 (those government sorts are sticklers for going in order). In it you find all the rules, regulations, and other assorted gobbledygook that govern these sorts of accounts.

But you don’t have to mess with the Internal Revenue Code. In Chapter 8, you discover what rules you need to know to open an account, save money inside an account once it’s been opened, and then make distributions from the account, tax-free or tax-deferred (depending on a number of factors), for qualified educational expenses.

Getting the most from your Coverdell account

You’ve probably discovered by now that successful savings involve far more than sticking your money in a passbook savings account at your local bank. And, while your investment options are seriously limited inside a Section 529 plan, you have far more latitude in investment decisions when you open a Coverdell ESA. In Chapter 9, you explore where you can open an account, what information you need to open that account, what sorts of investments you can put into an account, and how to decide what sorts of investments work best for you. Finally, you look at the nuts and bolts of what happens when you begin to make withdrawals from your student’s Coverdell account to pay for qualified educational expenses.

Seeing if Coverdell accounts work for you

Saving now for future college expenses may seem like a no-brainer to you, but negotiating the ins and outs of any tax-deferred/tax-exempt savings plan isn’t quite so simple. And, not to put too fine a point on it, Coverdell ESAs, while a valuable weapon in the arsenal of college savings accounts, may not be the right choice for you. Chapter 10 gives you some insights into what’s involved in effectively managing a Coverdell account for your student and what pitfalls to avoid. Finally, if despite your best efforts you unintentionally land in a pile of muck, you find some strategies here to turn lemons into lemonade and perform some damage control.

But Wait! There’s More!

People went to college long before there was an Internal Revenue Code, and parents and grandparents saved for college costs even when tax deferrals and/or tax exemptions weren’t around. You can save money in lots of other ways, some of them even specifically for college. Even though they may not be as tax advantageous as Section 529 plans and Coverdell ESAs, they may make perfect sense in your overall savings plan. And if you’re not able to save enough to cover the full cost, all is still not lost: Various scholarships, grants, and loan programs are available to cover any shortfall you may have between what you’ve saved and the cost of your child’s education.

Rediscovering U.S. Savings Bonds

Whether you’re able to save only relatively small amounts, you’re uncertain about your potential student’s future plans, or you love the safety and security found only in U.S. Savings Bonds, you may find that this is an attractive way to save for future college expenses and still take advantage of some tax exemptions on the interest earned on your bonds. Chapter 11 explains how you may be able to use certain U.S. Savings Bonds to pay at least some of your child’s postsecondary educational expenses tax-free. It shows you who may invest, how you may invest, and how to allocate and report your earnings, both taxable and tax-exempt, when you redeem your bonds.

Saving for college the old-fashioned way

It may seem strange to even think this, but the trade-off for taking advantage of the income tax breaks available through Section 529 plans and Coverdell ESAs is that you’re guaranteeing that you will use that money to pay for qualified educational expenses. If only all of life were so certain and so sure.

Many of you may be hesitating over how much to save in these plans, or whether to save at all, because of your great uncertainty over your child’s future plans. When you save in traditional investment and savings accounts, you eliminate that uncertainty because you’re not tied to using your savings in any one way. Of course, in exchange for that freedom to spend your savings as you will, you lose any opportunity to defer or exempt tax on your earnings, but if your world is an uncertain place, you may find that’s a small price to pay.

In Chapter 12, you find out about different types of investment accounts, different options of account ownership and their consequences, ways to invest and manage a personal investment account, and, finally, the taxation of investment income.

Putting your faith in a trust fund

For most people, the phrase “trust fund” brings to mind visions of great wealth and privilege; in other words, it has nothing to do with you. And that picture couldn’t be further from the truth. If you save money in any form, then you’re a potential candidate to create and fund a trust. Chapter 13 explores some different types of trusts and explains why a trust may actually make sense for you in a college savings context.

Saving in your retirement accounts

Using retirement funds to pay for college probably isn’t the best way to put money away for college. In certain limited circumstances, however (such as when parents are older or you face completely unplanned educational expenses), it may make some sense to access funds from a retirement account to pay qualified educational expenses. Chapter 14 explains the tax consequences when you use so-called retirement savings to pay for educational expenses, and it alerts you to some major considerations you need to factor into your decision.

Accessing your home equity

If you (or you and the bank) own your own home, you may be sitting on a larger nest egg than you ever considered. A combination of rising home values and shrinking mortgage loan balances has created a large pool of equity for many people, equity that may be made available to fund educational expenses. Chapter 15 illustrates how you may use your house to help put one or more children through college.

Identifying sources of free money

Not every potential student is an academic genius or a future first-round NFL draft pick, but you don’t necessarily need to conclude that your child won’t qualify for scholarships and grants.

Chapter 16 describes many sources of outright scholarships and grants. Some of them carry no strings whatsoever for your student (other than actually attending college), and others require some sort of payback, either upfront or after your child completes his education.

Borrowing to fill in the gaps

You’re obviously reading this because you don’t want to have to resort to borrowing money to pay for your children’s college costs. And hopefully, you’ll never have to touch the pages of Chapter 17. Still, if you do, it’s not the end of the world. This chapter explains what types of financial aid are available and assesses the costs. It also peeks at some of the benefits and the downsides of borrowing money for college.

Maximizing Your Savings, Minimizing Your Tax

This book is, at its heart, about successfully saving and investing money for future college costs on the one hand and paying little or no tax on the other. And if that were the beginning and end of the matter, you’d be looking at a fairly straightforward task, one in which, if you followed all the rules, you’d achieve the desired result at the end of the game.

Unfortunately, you don’t live your life in a vacuum, and many forces impact your ability to save adequately, to achieve reasonable investment returns on your savings, and to limit the amount of income tax you’ll pay on those investment returns. You’re operating on a field that is rarely level and that shifts and shimmies through no fault of your own. As a result, you need to be aware of how large and small changes, whether they’re a result of government policy, market forces, or changes in your family’s projected college cost needs, will affect your savings programs. And you need to be prepared to move with those changes — to adjust your savings programs to account for these other factors.

At the end of the day, your success will depend not only on how often you make deposits into your college savings plans or how large the deposits are but also on how well that money works for you. Your goal is not achieving a large balance in one or more college savings accounts. Your goal is watching your children begin their adult lives with good educations, marketable skills, and no college debt.

Chapter 2

Checking Out the Cost of College

In This Chapter

Figuring out all the pieces of the financial puzzle