Get an Early Start Saving for College

Physician's Money Digest, September30 2003, Volume 10, Issue 18

The good news is that while the costof college keeps increasing, so dothe number of programs availableto help you pay for them. As long as youstart early, the opportunity to meet yourcollege savings goal is there. The followingare a solid list of options:

• 529 savings plans. 529 plans aredesigned to help you save exclusively forcollege education expenses. States thatsponsor 529 plans contract with investmentmanagement firms to administerthe programs and invest the funds inthese accounts.

Participation is not restricted by income,state residency, or age, and thepotential growth of the investments istax-deferred. Currently, distributions usedfor qualified expenses are exempt fromfederal income tax, and, for residents ofsome states, they may even be statetax–free. Keep in mind that the federal taxexemption is due to sunset on January 1,2011, unless extended by Congress.

You can contribute up to $11,000 peryear to a plan without gift tax consequences.Additionally, you can accelerate5 years of $11,000 in annual gifts into 1year without paying gift tax. Keep inmind, if you choose to accelerate yourcontributions, no additional contributionsmay be made for 5 years and a portionmay be subject to recapture if the donordies within those 5 years.

Many parents and grandparentschoose a 529 plan over other college-savingmethods because it allows them toretain control over the account at alltimes and change the beneficiary toanother member of the same family. Inaddition, account owners are able towithdraw money from the account forany purpose, at any time. However, thegrowth portion of any withdrawalstaken will be taxed at the accountowner's income tax rate and will also besubject to a 10% penalty.

• Coverdell education savings accounts.Education savings accounts (ESA)are designed to help pay for qualifiedexpenses for elementary, secondary, andhigher education. Qualified expensesinclude tuition fees, tutoring costs, androom and board. You can contribute up to$2000 annually to an ESA for any childunder age 18. However, eligibility to makecontributions is based on the contributor'smodified adjusted gross income, so somerestrictions may apply.

One advantage offered by theseaccounts is that the potential growth ofthe investments is tax-deferred and qualifieddistributions are federal incometax–free. On the other hand, the distributionsmust be made before the bene-ficiary turns 30 years old and state taxtreatment may vary.

• Custodial accounts. With this account,the custodian would control thefunds until the age of termination forthe child, which ranges from age 18 to21, depending on the state where theaccount is held. You can contribute up to$11,000 per year to a child's custodialaccount without gift tax consequences,but keep in mind that the potentialearnings are taxable to the child.

Furthermore, you are not able tochange beneficiaries, and once the childreaches the age of termination, they takeover the account and are able to use thefunds in whatever way they choose.

As you can see, there are severalinvestment choices available to help yousave for your child or grandchild's collegeeducation. Regardless of the college-saving method you choose, theimportant thing is to get going andbegin saving as soon as possible.

Joseph F. Lagowski is vice president,investments, and a financialconsultant with AG Edwards inHillsborough, NJ. He welcomesquestions or comments at 800-288-0901 or This article was providedby AG Edwards & Sons, Inc, member SIPC.