Firm Guides Parents Through College Savings Plans
Below is a MRR and PLR article in category Finance -> subcategory Personal Finance.
Firm Assists Parents with College Savings Strategies
Overview
A New York-based College Board survey highlights that college tuition costs are escalating faster than inflation. From 1993 to 2003, tuition and fees increased by 47% at public colleges and 42% at private institutions. Given these rising costs, it's crucial for parents to begin saving early for their children's education.
Key Insights
Stuart Ritter, a certified financial planner at T. Rowe Price, emphasizes the importance of starting college savings early. One effective method is utilizing state-sponsored 529 college savings plans. These plans stand out due to their attractive tax benefits, including a federal income tax exemption on withdrawals for qualified education expenses. They also feature high contribution limits, making them a superior option compared to taxable accounts and Uniform Gift to Minors Act (UGMA) accounts. Families can typically contribute over $200,000 in total to a 529 plan.
Benefits of 529 Plans
All states offer some form of a 529 plan, with approximately half providing incentives for residents. While starting with your state’s plan might seem practical, families are not restricted and should consider shopping around. Ritter suggests assessing potential state tax benefits, fees, expenses, and investment options for an optimal choice.
Additional Tools
For further insights, the College Savings Comparison Calculator can help families compare the benefits of a 529 plan versus a UGMA account.
Important Considerations
Be aware that the federal tax exemption for qualified educational expenses under the current law expires in 2010 unless Congress extends it. Post-2010, earnings may be treated as income for the beneficiary, which is often manageable since young adults are typically in a lower tax bracket. However, distributions not used for qualified expenses could incur income taxes and a 10% federal penalty.
Navigating through the various 529 plans can be daunting, but it’s essential for maximizing returns on your savings. By carefully evaluating the options available, parents can make informed decisions to secure their children's educational futures.
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