Easing the Financial Burden

A higher education opens the doors to lifelong personal and professional relationships. And it’s a worthy investment. Although the numbers may seem frightening, the situation isn’t hopeless. If your children are young, time is on your side. If not, don’t despair. It’s never too late to begin. Use this worksheet to calculate how much you’ll need to save.

Example:
1. Age 4
2. 14 years to save
3. Public: $19,180
4. (5%) = 8.5338
5. $163,678.28
6. (8%) = 34.1842
7. Annually: $4,788.13
8. Monthly: $399.01

¹ Root and Mortensen
² Source: The College Board
³ Peterson’s Undergraduate Database 2004

The Child’s Age and Types of Investments to Consider

Now that you’ve determined how much you’ll need to save, you need to decide which types of investments will benefit you the most. The answer often depends on your child’s age.

Newborn to 10 Years: Consider investments that have the potential to grow in value, such as common stocks or stock mutual funds.

10 to 14 Years: Consider a balanced investment portfolio that consists of growth stocks or stock mutual funds, and limited maturity bonds or bond funds.

14 Years and Older: Consider investments that provide income and liquidity, such as income-oriented mutual funds, limited maturity bonds, and bond funds.

Sources of Education Income

CESAs
Coverdell Education Savings Accounts (CESAs), formerly known as Education IRAs, allow you to make annual non-deductible contributions designated to an investment account. The contribution limit is $2,000 annually.

If any balance remains in a CESA after all expenses are paid, the account can be transferred to another eligible family member. If an account is not transferred prior to the recipient reaching age 30, the remaining funds are deemed distributed with income taxes and a 10% penalty due on the earnings.

Advantages:
• Money grows tax-deferred.
• Withdrawals for up to the child’s amount of qualified education expenses for that year are exempt from federal taxes.
• Rollovers to other eligible family members under age of 30 are permitted.

Considerations:
• Beneficiary must withdraw the money before age 30 unless a special needs beneficiary or assets transferred to another family member.
• Limits on contributions by upper-income tax payers.
• May affect financial aid eligibility.

529 Plans
529 plans are qualified tuition programs maintained by states or eligible educational institutions that offer investors professionally managed, tax-advantaged portfolios to help meet rising college expenses through investment management firms. These plans are designed to help families save for future college costs.

There are two general types of 529 plans: prepaid tuition plans and savings plans. The states offering prepaid tuition contracts covering in-state tuition will allow you to transfer the value of your contract to private and out-of-state schools, although you may not get full value depending on the particular state. If you decide to use a savings plan, the full value of your account can be used at any accredited college or university in the country, along with some foreign institutions. The savings plans are managed by some of the best mutual fund companies and investment management firms in the country.

Advantages:
• Tax-deferred accumulation and tax-free withdrawals (when solely used for qualified education expenses).
• No income restrictions on eligibility of donor gifting money to 529 plan.
• Estate tax benefits: 529 plan value removed from donor’s estate.
• Donor can gift forward $60,000 in the first year or $12,000 annually per donee (for 2006, indexed thereafter) without gift tax consequences.
• Larger contribution amounts (up to $250,000).
• Donor is in control of account.
• In-state residents may qualify for state income tax deductions and exemptions (state tax laws may vary).

Considerations:
• Prepaid tuition plan is designed only to match rate of tuition inflation of in-state public universities, whereas a savings plan is flexible depending on investment selections and returns.
• The number of eligible colleges may be restricted in some states with the prepaid tuition plan; the savings plan has no restrictions.
• Non-qualified distributions subject to income tax and a 10% penalty on the earnings.
• Tax benefits expire 2010, unless extended by Congress.

UGMAs and UTMAs
The Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Account (UTMA) let you gift cash and other assets to minor children for tax advantages.

Advantages: • Custodian manages account when child is a minor.
• Investment income typically is taxed to child.
• No costly legal fees or reporting requirements.

Considerations:
• Transfer of assets is irrevocable.
• Child gains control of account when reaching majority age (usually 18 or 21).
• Assets may be considered when applying for financial aid.

Life Insurance
Cash value life insurance is another alternative for college planning. Variable Universal Life insurance (VUL)⁴ provides tax-deferred growth with the bonus of permanent life insurance protection.

A primary purpose of life insurance is to provide for dependents at the death of a primary wage earner paying for everyday needs, the home mortgage, or education of family members.

Advantages:
• Owner controls money and chooses from multiple investment options.
• No pre-59 1/2 restrictions on withdrawals.
• Tax-deferred accumulation with tax-free withdrawals.
• Self-completing in the event of death.
• Accumulation value generally not considered an asset when applying for financial aid.

Considerations:
• Typically 10-year minimum time horizon for withdrawals.
• Minimum funding requirements.
• Must be insurable.
• Underwriting requirements must be met.

⁴ Risks associated with this investment product include the potential for principal loss. Consider that policy loans and withdrawals will decrease the cash value and death benefit of the policy.

Additional Funding Sources
• Government Series EE and I Savings Bonds
• Home Equity Loans
• Retirement Funds
• Scholarships
• Zero Coupon Bonds
• Grants
• Federal Loans
• Roth and Traditional IRAs
• Tax-efficient Mutual Funds
• Real Estate
• Financial Aid

Other Considerations
• HOPE and Lifetime Learning Credits
• Student Loan Interest Deductions
• Tax credits and deductions

For More Information
Financing a higher education for someone important to you is a challenge you don’t have to face alone. PrimeVest offers personal financial services, a full line of investment products, and advice to help you make wise decisions now and in the future. For more information, consult your PrimeVest Investment Executive.