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Special section 7 Bankrate experts with 7 top tips for '07

Planning for college is a complicated and time-consuming process, says College Money Guru Joseph Hurley. His seven financing rules can help.

 

7 steps to saving for college

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.

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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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-- Posted: Dec. 18, 2006
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