College Planning

Two popular investment vehicles that can help with College Planning are:

• Section 529 College Savings Plans
• Coverdell Education Savings Accounts.

529 Plans

Section 529 college savings plan are tax-exempt college savings vehicles with a low impact on need-based financial eligibility. Unlike prepaid tuition plans, there is no lock on tuition rates and no guarantee. Investments are subject to market conditions, and the savings may not be sufficient to cover all college costs. However, with this added risk comes the opportunity for potentially earning greater returns.

Most 529 college savings plan offer an adaptive asset allocation strategy based on the age of the child or the number of years until enrollment. These plans start off aggressively when the child is younger, and gradually switch to more conservative investments as college approaches.

Most 529 college savings plans also offer a variety of risk-based asset allocation portfolios, ranging from aggressive 100% equity funds to more conservative balanced funds and money market funds.

Some 529 college savings plans offer a fund that protects the principal against inflation and guarantees a minimum fixed rate of return.

The money in the plan is controlled by the account owner, not the child. So, if the child decides to not to go to college, they do not have access to the funds as they would with an UGMA account.

Section 529 college savings plans are similar in many ways to retirement plans, Such as 401(k) and IRAs, although with much higher contribution limits and more favorable tax treatment.

Every parent should consider investing in a 529 plan college plan for their children.

529 Contributions

Anyone (relative, friends, colleagues, acquaintances and even complete strangers) can contribute money on behalf of a beneficiary. The favorable gift tax treatment of 529 plans makes them a good estate planning tool, especially for grandparents.

Federal law requires that a 529 college savings plan must have safeguards to prevent contributions in excess of those necessary to provide for the qualified higher education expenses of the beneficiary, but does not otherwise specify a limit on contributions. Each state therefore sets its own limit. Most states use a limit that is based on an estimate of the amount of money that will be required to provide seven years of post-secondary education (including both undergraduate and graduate school.) Even so, there is considerate variation in state cumulative contribution limits. New York State, for example limits contributions to $235,000.

Most states allow for periodic transfers from your checking or savings account in addition to lump sum contributions. Automatic payroll deduction is less common, but is growing in popularity as the states add it.

529 Tax Status

Currently, earnings in 529 plans are usually exempt from federal taxes when used for qualified expenses*.

• Earnings in section 529 plans accumulate on a tax-free basis. The annual increase in value is not subject to annual capital gains taxes.
• Redemptions are also exempt from federal income tax if used to pay for qualified education expenses such as tuition, room and board fees, books, supplies and equipment.
• If you take a non-qualified withdrawal, you will have to pay federal income taxes on the earnings, plus possibly a 10% tax penalty. The earnings portion of non-qualified withdrawals is taxed as ordinary income to the distrbutee, which is typically the account holder. There is also a 10% tax penalty, except in cases of death or disability or receipt of a scholarship. In such cases the account owner has the option of changing the beneficiary to avoid income tax on the earnings. There also may be state and local income taxes and penalties, in addition to any plan penalties.
• Most states accord a similar favorable tax treatment for 529 plans, letting the earnings accumulate on a tax-deferred basis and exempting them from state and local income tax used for qualified higher education expense.

*Before investing in a 529 plan, investors should carefully consider whether their home state offers any state tax or other benefits that are only available for investments in their state's 529 college savings plan.

Coverdell Education Savings Accounts

You may be able to contribute to a Coverdell Education Savings Account (ESA) to finance a beneficiary's qualified education expenses. The contribution is NOT deductible.

A Coverdell ESA is a trust or custodial account set-up in the United States solely for the purpose of paying qualified education expenses for the designated beneficiary of the account. Qualified higher education expenses include expenses for tuition, fees, books, supplies, and equipment required for enrollment or attendance. If the designated beneficiary is enrolled at least half time at an eligible education institution, certain room and board expenses are qualified education expenses. Expenses also include amounts contributed to a qualified tuition program for the same designated beneficiary. Qualified expenses include public, private and religious elementary and secondary school expenses.

The designated beneficiary must be under the age of 18 when the account is established. Any balance in a Coverdell ESA must be distributed within 30 days after the date the beneficiary reaches age 30. These age limits do not apply to beneficiaries with special needs.

There is no limit to the number of Coverdell ESAs that can be established for one beneficiary. However, total contributions made to all Coverdell ESAs for any beneficiary in one tax year cannot be greater than $2,000.

In general, the designated beneficiary of a Coverdell ESA can receive tax free distributions to pay qualified education expenses. The distributions are tax free to the extent the amount of the distributions do not exceed the beneficiary's qualified education expenses.

*Consult your legal or tax counsel for advice and information concerning your particular circumstances. Neither Cetera Investment Services nor any of its representatives my give legal or tax advice.

For Details Contact Registered Representative
Carl Janasiewicz at (866) 440-0391 Ext. 3343

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