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2.
Consider a 529 plan. 529 plans and education
savings accounts are still useful even for older children.
Just because your child is already in high school doesn't
mean you can't benefit from tax-advantaged college plans.
If your most recent Form 1040 shows income tax on interest,
dividends or capital gains distributions, you have the
chance to save taxes with a 529 plan or ESA even if
only for a few years. If your state offers a tax deduction
for contributions to its 529 plan, you might even benefit
by opening an account and immediately taking distributions
to pay college bills.
3.
Invest tax-free whenever possible. If your child
will be attending a private or religious elementary
or secondary school, consider opening an education savings
account and contributing up to $2,000 per year. There
may be no better way to invest tax-free. If your child
still has money in the ESA after high school it can
then be used tax-free for college.
4. Create
the right asset mix. Diversify between taxable and tax-free investments.
If you maintain a fully taxable investment portfolio and a 529 plan or ESA, consider
concentrating the growth portion of your investments in the taxable accounts and
the income-producing portion in your 529 account or ESA. Growth stocks and low-turnover
equity mutual funds are already tax-efficient and can take advantage of low capital
gains rates, while income-producing investments are less tax-efficient and can
benefit from the tax shelter of a 529 plan or ESA. Capital losses in a taxable
investment can also provide a tax benefit, while a 529 plan or ESA cannot produce
a capital loss.
5.
Put the right person in control. Grandparents
using a 529 plan to save for a grandchild's college
education should open the account in their names if
they want to maintain control and retain the ability
to change the beneficiary to another grandchild. However,
if the grandparents prefer that the parent control the
account, they can simply make a contribution into the
parents' 529 account (assuming that particular 529 plan
accepts contributions from a nonowner). Another easy
way to "gift" a 529 plan contribution into
an account for a grandchild is to make the check out
in the name of the 529 plan and hand the check to the
parent who can make sure it is contributed on behalf
of your grandchild. For gift tax purposes, the grandparent
is still the one making the contribution and can make
the five-year averaging election discussed in Savingforcollege.com's
Family Guide to College Savings.
6.
Consider professional assistance. We suggest
you consult with experienced and knowledgeable financial,
tax and/or legal advisers about all the matters discussed
on these pages. The issues are complex. Be aware that
for some financial advisers, 529 plans and ESAs are
a new phenomenon. If you are working with one, ask which
particular 529 plans are available through the adviser
and what makes one 529 plan better than another. In
interviewing prospective advisers you might even ask
whether they have opened their own 529 accounts. It
helps to know that the professional you are relying
on has personal experience with 529 plans.
7.
Be flexible with your college planning. Programs and investments will continue
to evolve. Tax laws will change and so will your own circumstances. Review your
financial situation periodically and make adjustments whenever it seems appropriate.
Joseph Hurley is the founder of Savingforcollege.com,
a Web site of independent information on 529 plans and
other college-savings options and a Bankrate.com partner
site.
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