Paying for College

Features

Accounts must be set up for children under age 18 and all contributions made before age 18 (unless the beneficiary meets the special needs designation which allows for later contributions) Total maximum contribution per year per child = $2,000 Contribution eligibility currently phases out at between $95,000 and $110,000 of modified AGI for singles and $190,000 to $220,000 for married, joint filers Withdrawals can be used for many elementary and secondary school expenses as well as higher education expenses Beneficiary can be changed to another family member

Tax Considerations

Earnings are exempt from federal income taxes until disbursed; withdrawals are tax free if used to cover qualified elementary, secondary or higher education expenses at an eligible institution 10% penalty on withdrawals if not used to cover qualified education expenses

Current Consideration Under the Federal Formula

Considered the asset of the account owner (not the beneficiary) and subject to parent asset rules under the formula unless owned by someone outside the student's household

*Important information regarding Asset Treatment under the Federal Formula:

• Parents are given an asset protection allowance based on the number of parents in the household (1 or 2) and the age of the older parent. Only parent assets above the parent asset protection allowance are considered under the federal formula. For exposed assets (those above the asset protection allowance), the "worst case" contributions is approximately 5.6% in calculating the Expected Family Contribution (EFC).
• For students, the contribution expected under the federal formula is 20% of all current student assets in calculating the EFC.

For more information visit the following sites:

www.irs.gov/pub/irs-pdf/p970.pdf

www.savingforcollege.com/coverdell_esas/

Features

Two types: Prepaid Tuition Plans – purchase of tuition units today to cover tuition in the future; some states’ plans limit purchase of tuition to in-state colleges; offered by states and some private colleges College Savings Plans – money invested to cover qualified higher education expenses at any qualified college or university for beneficiary in the future Most states have Section 529 plans and individuals can select a home state plan or open an account in another state; typically administered by third-party money managers; (note: compare fees carefully from plan to plan as they can vary tremendously.) There are no household AGI limits restricting who can contribute to such accounts Anyone can establish an account for a given student and anyone can contribute to that account; students can be the beneficiary of more than one account; the aggregate total of all account values for a given beneficiary is subject to the maximum contribution limits designated by each state’s plan Beneficiary can be changed to another family member

Tax Considerations

Earnings and distributions are not subject to federal income tax if withdrawn to cover qualified higher education expenses at eligible institutions; earnings and withdrawals also are exempt from state income tax in many states. Some states also provide deductions or credits for contributions to home state plans. Withdrawals from Indiana’s 529 Plan (CollegeChoice Plan) are free from state taxes for Indiana residents when used for qualified higher education expenses. Beginning in 2007, a 20% tax credit on up to $5,000 in contributions per individual tax return per year will be available (maximum yearly credit is $1,000). Some states provide a tax deduction or credit for contributions if you invest in your home state's plan(s) Contributions/gifts subject to federal gift tax rules; however, there is a one-time individual gift exception of up to $60,000 (subject to certain provisions) One annual rollover (for example, from one state’s plan to another) is allowed without penalty 10% penalty on earnings if not used for qualified higher education expenses

Current Consideration Under the Federal Formula

Considered the asset of the account owner (not the beneficiary) and subject to parent asset rules under the formula unless owned by someone outside the student's household

*Important information regarding Asset Treatment under the Federal Formula:

• Parents are given an asset protection allowance based on the number of parents in the household (1 or 2) and the age of the older parent. Only parent assets above the parent asset protection allowance are considered under the federal formula. For exposed assets (those above the asset protection allowance), the "worst case" contributions is approximately 5.6% in calculating the Expected Family Contribution (EFC).
• For students, the contribution expected under the federal formula is 20% of all current student assets in calculating the EFC.

For more information visit the following sites:

www.collegesavings.org

www.savingforcollege. com

Features

Established for minors by adults who act as custodians of accounts until the age of majority (18 or 21 depending on state) At age of majority, student is entitled to trust (no change in beneficiary allowed) and money is available for use at student’s discretion No limit on contributions

Tax Considerations

Tax liability lies with minor – “kiddie tax rules” apply Subject to federal gift tax rules

Current Consideration Under the Federal Formula

Considered a student asset (even if access is restricted until age 21) and is subject to corresponding student asset rules under formula* Trusts restricted by court order for specific purposes typically are not considered

*Important information regarding Asset Treatment under the Federal Formula:

• Parents are given an asset protection allowance based on the number of parents in the household (1 or 2) and the age of the older parent. Only parent assets above the parent asset protection allowance are considered under the federal formula. For exposed assets (those above the asset protection allowance), the "worst case" contributions is approximately 5.6% in calculating the Expected Family Contribution (EFC).
• For students, the contribution expected under the federal formula is 20% of all current student assets in calculating the EFC.

Features

Only Series EE bonds issued January 1990 and later, along with all Series I Bonds, are eligible for this special tax treatment under the Education Bond Program There are maximum limits on Series EE and I bond purchases in a calendar year Interest bearing maximum = 30 years

Tax Considerations

Interest is excluded from federal income tax when used to cover qualified higher education expenses incurred by the bond owner, his/her spouse or his/her dependent (based on tax exemption) at an eligible institution in the year of redemption; interest is exempt from state and local income taxes Both principal and interest from bonds must be used for qualified higher education expenses to avoid tax on interest Tax exclusion currently phases out at $98,400 and $128,400 of modified AGI (MAGI) for married filing jointly and between $65,600 and $80,600 for single filers Bond owner must be at least 24 years old on the first day of the month in which the bond is issued to get preferential tax treatment listed above

Current Consideration Under the Federal Formula

Considered the asset of the bond owner and subject to the corresponding parent asset rules under the formula if the bonds are in the parent(s) names(s); subject to the student asset rules if bonds are inthe student's name* Current value of bonds reported at time of FAFSA filing

*Important information regarding Asset Treatment under the Federal Formula:

• Parents are given an asset protection allowance based on the number of parents in the household (1 or 2) and the age of the older parent. Only parent assets above the parent asset protection allowance are considered under the federal formula. For exposed assets (those above the asset protection allowance), the "worst case" contributions is approximately 5.6% in calculating the Expected Family Contribution (EFC).
• For students, the contribution expected under the federal formula is 20% of all current student assets in calculating the EFC.

For more information visit the following sites:

www.irs.gov/pub/irs-pdf/p970.pdf
www.publicdebt.treas.gov/save/saveduca.htm
www.savingsbonds.gov

Features

Accounts can be set up for ownership and use according to contributor’s specifications No maximum contribution limits Can be invested and used at the owner’s discretion

Tax Considerations

Earnings subject to federal, state and local income tax and capital gains regulations

Current Consideration Under the Federal Formula

Considered the asset of the owner(s) and subject to corresponding asset rules* Interest income may affect the adjusted gross income (AGI) of the account owner(s)

*Important information regarding Asset Treatment under the Federal Formula:

• Parents are given an asset protection allowance based on the number of parents in the household (1 or 2) and the age of the older parent. Only parent assets above the parent asset protection allowance are considered under the federal formula. For exposed assets (those above the asset protection allowance), the "worst case" contributions is approximately 5.6% in calculating the Expected Family Contribution (EFC).
• For students, the contribution expected under the federal formula is 20% of all current student assets in calculating the EFC.