Saving For A Child’s Education

I wonder what happened to that sack of hundreds after the photo was taken. Source: 401k / Flickr

Telling Tips is a series of articles from local experts to help you save money, make better decisions and plan for a better future.

If you have a child, you probably want to save to pay for their college education. Remember, however, before you save for college, save for your own retirement. Children may not go to college, or they may receive a scholarship, or they have the option of student loans. You, on the other hand, will retire one day, you will not receive a scholarship to retire (lottery excepted), nor will you get a loan to retire. So, after taking care of yourself, here’s a rundown of what you can do to save for your child’s college education.

Here are some of the basics to save for a child’s college education:

  • 529 Plans. A 529 is a state-sponsored educational plan. Although you do not determine the individual investments, you can determine the type of portfolio you are most comfortable with, including aggressive growth, growth, mid-cap, bonds, or interest accumulation. You can also have the plan choose age-based investments for you, and choose to be conservation, moderate, or aggressive. The amounts contributed grow tax-deferred, and are tax-free when withdrawn if used for college. If you are subject to New York State tax, you can contribute $5,000 a year, and take a New York State tax deduction in the year of contribution. Your spouse can do the same; and so can grandparents, relatives, or just friends. Everyone can contribute, and be eligible for a deduction. Suggestion: when your children receive birthday money, instead of using it all on toys and games, put some of that into the 529 plan. Child in college? You can contribute to the NYS 529 plan today, take out the money in 10 days, and receive a tax deduction. So easy, a caveman can do it. See: NYS Plan and All State Plans.
  • Pre-paid Tuition Programs. If you are looking for a private college education, consider the pre-paid tuition programs. You lock in tomorrow’s tuition at today’s rates. New York State participating colleges include Syracuse (my alma mater), Pace University, and Wagner College. Higher educational costs will rise quicker than your savings or investment rates, so check out the Independent 529 Plan, which is a national pre-paid tuition program representing approximately 250 schools throughout the country.
  • Coverdell Education Savings Accounts. This is a custodial account, or trust, specifically for qualified educational expenses for the designated beneficiary. This type of account is not tax-deductible, but it grows tax-free, and is distributed tax-free, if used for education for any public, private, or religious school, and covers kindergarten through grade 12 as well as postsecondary schools. Like the other accounts, the beneficiary can be changed, but the funds must be distributed by the beneficiary’s 30th birthday. This type of account must be established before the beneficiary reaches 18. The maximum contribution for any one beneficiary is $2,000 a year, but your Adjusted Gross Income cannot exceed $110,000 if single, or $220,000 if married.
  • U.S. Government Bonds. Another way to save for a child’s education is with EE Bonds or I Bonds. Both of these bonds can be purchased at a bank or from Current rates are 0.60 percent fixed for EE Bonds, and 2.20 percent for I Bonds through October 31. The bond must be in your name, not your child’s, for the interest not to be taxable when you cash them in for college expenses. You figure the tax-free amount on Form 8815. Unfortunately, the threshold is low to take advantage of this savings: The 2012 phaseout is: If single, $72,850 to $87,850; if married, $109,250 to $139,250.
  • Employ Your Child. Have an unincorporated business? For 2012, you can pay your child up to $5,950, take a tax deduction for your business, and if this is their only income (no interest, etc.), there’s no Federal income taxes, Social Security, Medicare, or unemployment taxes. My suggestion would be to contribute up to $5,000 of those wages into a Roth IRA. When needed, the contribution could be used for college, wedding expenses, to buy a house each year or, preferably, to grow tax-free over the next 50 years or more. (One spoiler: New York State and New York City residents will pay $195.) Note: Tax professionals disagree as to the age you can ‘hire’ your child. I would say a child of eight can sweep, file, and even answer the phone.
  • Child Currently In College? There are a number of benefits you must be familiar with, including scholarships, fellowships, grants, tuition reductions, the American Opportunity Credit, the Lifetime Learning Credit, the Student Loan Interest deduction, the Student Loan Cancellations and Repayment Assistance, the Tuition and Fees deduction, the education exception to additional tax on early IRA distributions, and employer-provided educational assistance. Remember, no one is perfect. Ask your tax preparer if you have any question, or call my office.
  • Want more detailed information? Check out IRS Publication 970.

Quip: The earthquake in Washington obviously was the government’s fault.

Have a good week.

Joseph Reisman, of Joseph S. Reisman & Associates, has been serving tax prep and business accounting expertise from his Coney Island Avenue office for more than 25 years. Check out the firm’s website.