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Saving for your child's college education

The U.S. Census Bureau recently reported that over an adult’s working life high school graduates can expect, on average, to earn $1.2 million, those with a bachelor’s degree $2.1 million and those with a master’s degree, $2.5 million. Higher earning potential is one of the benefits to obtaining a college degree.

According to The College Board’s Trends in College Pricing 2012, the average published charges for full-time undergraduates for in-state tuition, fees and room and board at a public four-year college in 2012-13 is $17,860. The average cost at a private four-year college is $39,518.

The same report showed that in the past 10 years, the cost of tuition, fees, and room and board has risen an average 5.2 percent a year at public four-year institutions. If continue to rise at this rate, 18 years from now the total price of a four-year college education at a public institution would approximate $180,000.

If you are a parent of a young child as I am, this information is concerning. While we cannot predict exactly how much tuition costs will rise or which school our child may choose to attend or if they will want to go to college, we should start saving for our children’s higher education.

Depending on a family’s income and assets, some or most of the total cost of higher education can be offset with scholarships and loans. However, all financial aid packages expect a student contribution and all but the poorest families are expected to make a parental contribution as well. The best way to prepare is to establish the savings habit when your child is young and set up automatic regular payments into whatever savings vehicle you choose.

Several options are available and choosing the best one will require careful planning with your tax adviser. Some options are considered assets of the parents while others are considered assets of the child. This can be a factor when applying for financial aid because colleges expect students to expend a much larger percentage of their assets on college costs than they expect of parents.

1) You can choose the traditional savings route and establish a savings account at a bank or invest in stocks, bonds or mutual funds earmarked to pay for future college education costs.

If the account is in the parents’ name, you retain ownership and there is no penalty if the account isn’t used for qualified education expenses. There also is no tax penalty if the assets are not used for college expenses, but the account belongs to the child and parents may object if they are used for anything else.

The downside to going the traditional route is you are giving up the potential tax savings of a financial vehicle designed for education savings.

2) You could use savings in your retirement accounts to pay for college expenses. Traditional and Roth IRAs allow a waiver of the 10 percent early withdrawal penalty if the withdrawals are used for qualified education expenses. Although you will not be penalized for withdrawing funds for college expenses, you will be taxed on the withdrawals from a traditional IRA and you will reduce your retirement nest egg.

3) You could use a tax-favored savings vehicle designed for education expenses, the most popular being IRS Code Section 529 plans and Coverdell Education Savings Accounts (ESA’s).

a) Each state sets up 529 plans, and are not all the same. There are no income restrictions on contributions which are not deductible for federal income tax purposes although Georgia allows taxpayers to deduct up to $2,000 a year on behalf of each beneficiary. Earnings can be withdrawn for qualified education expenses income tax free.

Multiple people can open accounts for a particular beneficiary, but only one person can be named as a beneficiary for each account. Accounts are transferable to another eligible member of the family. If for some reason a non-qualified withdrawal is made, earnings will be subject to federal and state income tax plus an additional 10 percent federal tax unless the beneficiary dies, has a disability or scholarship or attends a military academy.

Contributions to the 529 plan are gifts, and the annual federal gift tax exclusion (currently $13,000) per donor, per beneficiary applies.

Georgia’s 529 Plan is called the Path2College 529 Plan. If you had a newborn child at a hospital in Georgia in 2012, you can sign up to win $5,529 (before taxes of course) with the option to use all or a portion of the prize to open a Path2College 529 Savings Plan for the designated newborn born during 2012. Go to www.path2college529.com for more information.

b) A Coverdell ESA has similar provisions to a 529 plan, but there are income restrictions on contributions and contributions are limited to $2,000 per beneficiary. However, distributions from the account are not limited to post secondary education and can be used for primary and secondary school expenses as well. And the Coverdell ESA does allow a broader range of investments than the menu of investments offered under a state 529 plan.

No single approach to saving for college expenses will apply to each person’s situation due to the complicated rules and restrictions associated with each of these savings vehicles and tax incentives. It is best to contact your tax adviser to discuss what the best approach will be for you.

But whatever you do, start now. Regardless of the age of your child, the sooner you start, the more you will have when the first tuition payment comes due.

Allen Akins, CPA, CVA is an Audit and Valuations Manager at Hancock Askew & Co., LLP. He can be reached at 912-234-8243 or aakins@hancockaskew.com.

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