1 Investing for College Financial Planning for Women Jean Lown, FCHD Dept., USU Tiffany Smith, student

2 Class Objective: To learn about tax-advantaged ways to invest for college Coverdell Education Savings Accounts 529 College Savings Plans

3 Overview l Balancing goals; Setting priorities l Coverdell ESAs l 529 college savings plans

4 What about Retirement? l Before you contribute to college savings for children » Is your retirement investment plan on track? » Pay down high interest consumer debt

5 Set Priorities; Balance Your Goals l Ensuring retirement security is more important than investing for college l Don't use retirement funds for college l Students can borrow for college; retirees can use reverse mortgages… but l Before investing for college, review your retirement goals & investment plans l Investing for these two goals is not mutually exclusive (especially with grandparent help)

6 Coverdell Education Savings Accounts (ESAs) l Formerly called education IRAs l Federal tax breaks » Funds grow tax-free » Withdrawals tax-free » NO deduction for contribution l All levels of education (K-12 + college) l No sunset provision l Unlimited investment options l Considered asset of parent for financial aid

7 Coverdell Limitations l Maximum contribution: $2,000/year/child l Contributors must have less than $190,000 in modified adjusted gross income ($95,000 for single filers) in order to qualify for a full $2,000 contribution l No state tax advantages l Child owns the $ at maturity (18 in UT)

8 529 College Savings Plans l Section 529 of IRS Code l Federal & state tax advantages l Each state offers a different plan l Owned by contributor (parent, etc.) for beneficiary (child) l 10% penalty if not used for higher ed

9 529 Advantages l Funds grow tax-free (federal & most states) l Withdrawals are tax-free (federal & state) l Higher contribution limits than Coverdell l Contributions are state tax deductible (UT) l Owner controls the account l Simple process

10 Federal Financial Aid l Account is treated as an asset of the parent or other account owner in determining eligibility for federal financial aid. l Your expected contribution towards your child's college costs will include 5.6%, or less, of the value of your non-retirement assets l 35% assessment against assets owned in your child's name or in a custodial account

11 School-based Financial Aid l Each school sets its own rules for its own need-based scholarships » many schools take 529 accounts into account l Federal financial aid rules change often l Most financial aid is in the form of loans, not grants

Disadvantages l Some state programs » High fees » Poor investment choices l Brokers charge additional fees

13 Utah Educational Savings Plan l UESP is one of the best in the nation! » Kiplinger’s Personal Finance Magazine » Money magazine » Savingforcollege.com

14 UESP Features l 9 investment options l Ultra low fees l No enrollment fees l No minimum contributions l No yearly fee for Utah residents (owners)

15 Contributions & Account Balances l Contributions can be made by anyone » No income limits for contributor l No minimum initial contribution l No minimum subsequent contribution l May contribute up to $315,000/beneficiary

16 Tax Advantages l Earnings grow free from federal & state income tax l When used for qualified higher ed expenses earning are exempt from: » federal & state income taxes l For 2007, UT taxpayers may deduct contributions of up to $1,650 ($3,300 if filing jointly) or take a tax credit of $82.50 ($165 if filing jointly) per beneficiary.

17 Fees & Charges l Deal directly with UESP l No enrollment fees l Administrative fee + fund expense ratios » 0.25% % l Max. annual maintenance fee = $25 » Waived for owners who are Utah residents

18 Qualified Expenses l Tuition l Room & Board l Books, supplies & equipment l Eligible post-secondary schools in U.S. or abroad

19 Account Owner Control l How & when the money is used l Change beneficiaries within family » Child does not attend post-secondary » Transfer funds to family member l Control disbursements l Parental asset for financial aid

20 Investment Options l 4 static options » Investment mix does not change l 5 age-based options » Investment mix becomes more conservative as child ages l UT Public Treasurer’s Investment Fund (PTIF) l Vanguard Group mutual funds

21 Static Investment Options l Money market (Utah Public Treasurers Investment Fund, PTIF) l S&P Index Stock Fund l Bond market Index Fund l 5 Stock funds

22 Age-Based Options l S&P/Bonds/Money market l S&P/bonds l Diversified A l Diversified B l Diversified bonds emphasis

23 Investment Options l Review handout with 9 options

24 Tax Deferral Pays! l Tax-deferred money continues to grow l The longer you defer paying tax,the more you accumulate l Money contributed to a 529 plan grows tax- deferred and is tax-free when used for qualified higher education expenses » Can be used in U.S. and Canada

25 Non-qualified Disbursements l 10% federal tax penalty on earnings l No penalty on contributions » All contributions are “after-tax” –Made with money that was already taxed –Similar to a Roth IRA

26 Related Resources l UESP » l Internet Guide to Funding College

27 Questions?