Education Funding

The story line from "Fiddler on the Roof" remains the same through the ages. Turn around and they go from babies to teenagers, from teenagers to young men and young women. Time really does march on, and if you have plans to provide for your childrens future - education planning is most likely a part of that planning.

With the Tax Law changes in the 2001 Tax Code new provisions have provided for a much different education funding landscape. Parents and Grandparents now have many more options, and far more affordable funding alternatives available than under the previous tax laws.

While the laws may have changed, funding the education of your children is a daunting task for most middle class families. Most parents know that education is the most important single factor in their children's success or failure, and become understandably concerned as they realize that education costs continue to grown at multiples over inflation and personal income growth.

The federal government has recognized this problem as well and has responded with a number of programs designed to encourage family education savings. It seems as if we have gone from feast to famine. The problem now is deciding which program's are best for you.

We can help you with your individual family situation and preferences - discover the features of design, flexibility, control over proceeds, control over investment policy, cost, tax benefits, and guarantees that will best serve your needs.

Remember, as with any investment starting early puts time on your side, while various tax incentives reduce the burden.

Qualified Tuition Programs - You may contribute up to $100,000 gift per child. The funds grow tax free, and will be tax free upon distribution if used for qualified expenses. These plans contain great estate tax benefits. There are no income limits. The donor retains control of the assets to insure that they are used for the intended purpose, but the gift removes the asset from the donor's estate, and isn't subject to the normal $10,000 gift limitation ($20,000 if the spouse consents to the gift). So, this is a great way for wealthy grandparents to assist their children by providing for their grandchildren's education.

These plans come in two flavors:

Prepaid Programs - Prepayment of Tuition and Board at discounted rates. These plans provide no investment control, but the results are guaranteed. There are some restrictions on transfer, as all institutions may not participate. And not all expenses not covered. So, by itself, prepaid programs are not a complete solution. In the event the funds are not used for qualified expenses, there may be some forfeitures of value when the funds are withdrawn.

College Savings Programs - While there are now hundreds of savings plans, donors have almost no direct investment control. Instead, they must select a plan that has an acceptable investment policy and funds. In the real world, I don't see this as a giant problem. However, these plans have higher administrative costs than a simple Coverdell or Roth IRA account because each custodian or sponsor charges a "wrap fee" in addition to the costs of the underlying investments. The proceeds may be used for qualifying expenses at any approved educational facility.

Coverdell Education Savings Account - Formerly the Education IRA. Previously, the Education IRA was so puny in comparison to the magnitude of the college funding problem that most people ignored it. Not any more. Beginning 2002 contributions of $2000 per year per child accumulating tax free, and tax free if withdrawals do not exceed qualified expenses. If contributions started at birth and earned 9% per year, the account would grow to $90,036 per child at the end of year 18.

Roth IRA - Beginning in 2002, the Roth IRA contribution is $3000 per year or $6000 for a couple. Principal amounts withdrawn from a Roth IRA are not subject to tax. So, if a husband and wife contributed $6000 a year to their Roth IRA's and earned 9%, at the end of 18 years, the accounts would have grown to $270,110. They could withdraw $108,000 tax free. The remaining $162,110 could continue to grow tax free for use during retirement. Advantages: Low cost, total control over investment policy, total control over withdrawals and expenditures. One disadvantage: a withdrawal for education funding will reduce future retirement benefits from the Roth.

UGMA/UTMA - Uniform gifts to minors accounts or uniform trust for minors accounts offer a partial income shifting opportunity. But, amounts over a minimum annual amount are taxed at the patent's rate until the child reaches age 14. Then the proceeds are taxed at child's tax rate. However, the cost is a total loss of control over expenditures, because the child generally obtains full control of the account when he/she reaches age of majority. Children being what they are, occasionally the proceeds are dissipated frivolously. It's hard to generate any enthusiasm for UGMA/UTMA accounts with so many better funding methods available.