A college education remains one of the singlemost important factors that determine a person'sfinancial success. According to theAmerican Youth Policy Forum, individuals with abachelor's degree earn an average of $16,000 a yearmore than those with just a high school diploma. Andthe more education you have, the higher your incomelevel tends to rise.
Making sure your children get the best education isan important part of the strategy to ensure their financialsuccess and the financial dreams you have forthem. And as many of you are no doubt still paying offyour medical school loans, you know this comes witha high and continually increasing price tag attached.
To give you an idea of just how much a collegeeducation is going for these days, following are currentestimations by the College Board. For 2005-2006, yearly tuition and related costs at private collegesclimbed 6% since the previous school year,reaching over $29,000. And while state colleges offera less expensive alternative, tuition continues to riseat these institutions as well.
To be fully prepared, you will need to be disciplinedabout saving and make sure you select an appropriateinvestment vehicle. You have the following three differentoptions from which to choose: section 529 collegesavings plans; Coverdell savings accounts, or the long-establishedcollege savings plans; uniform gift tominors accounts (UGMAs); and uniform transfers tominors accounts (UTMAs).
The following are brief introductions to each ofyour options:
•If you are familiar with today's personal financeoptions, then you've most likely heard of 529 collegesavings plans. While there are many that fall under the529 title, all offer individuals the opportunity to saveand invest $120,000 in tax-deferred savings in order tofund future college and graduate school expenses of achild or other beneficiary. Monies can be withdrawntax-free, as long as certain requirements are met. Andunlike UGMAs and UTMAs, you retain control of themoney instead of it being turned over to your son ordaughter when they turn age 18. With 529 plans, ifyour child decides not to go to college, you may nameanother beneficiary. But, if the money is returned toyou, a 10% tax penalty will be due on any earnings.
•Coverdell savings accounts allow a maximum$2000 contribution per year, per child. Savings arewithdrawn tax-free. Be aware, though, that if yourchild decides not to go to college, they—not you—receive the money, and a tax penalty may apply.
•UGMAs and UTMAs allow you to contribute asmuch as you like, but if you exceed $12,000 a year, certainfederal taxes may apply. With these accounts, themoney is turned over to your child once they reach age18 or 21, whichever age you designated when theaccount was established.
Your financial planner can help you choose whichinvestment vehicle best suits your situation. They canalso help you determine how much you should investeach month to place you in a comfortable position bythe time your son or daughter graduates from highschool. Imagine the financial advantage you giveyour children if they can graduate debt-free—everyparent's dream that, with a little planning and discipline,can become reality.
Katherine B. Paal, MBA, CFP®, RFC, CTFA, is a Certified FinancialPlanner™practitioner at Heritage Financial Consultants inLutherville, Md, and is an investment advisor representative,registered representative, and licensed insurance broker withLincoln Financial Advisors, a registered investment advisor andbroker-dealer (1300 York Road, Lutherville, Md; 410-339-6675). She welcomesquestions or comments at kpaal@LNC.com. This information should not be construedas legal or tax advice. You may want to consult a tax advisor regarding thismaterial as it relates to your personal circumstances.