Ask Ken

Smart ways to save for your children's college tuition

by Ken Lassen, CFP™ and Senior Vice President, Agribusiness Financial Services and Marketing

Q. I have three children in grade school. What is the best way to save for their college tuition?

A. This is a great question to ask now rather than when your children are in high school. The best plan of action is: 1) start saving and investing today; 2) regularly contribute to a plan; 3) take advantage of a tax-deferred plan.

Two popular plans are the federally sponsored Coverdell Education Savings Account and state-sponsored 529 plans. Both allow you to save after-tax dollars for future educational expenses of a beneficiary. Income that an account generates is tax-deferred, and withdrawals are currently tax-free when the beneficiary uses the funds for qualified educational expense. If funds are not used for educational expense, penalties are the same as early withdrawal from an IRA.

Those are some similarities. Now, let’s talk about some of the differences:

– A Coverdell contributor can be the controlling custodian of the plan, but contributions cannot be taken back. When the beneficiary turns 30, the funds transfer to his/her control. A 529 contributor remains in control and can take contributions back at any time, with a penalty.

– Coverdell contributors may make annual $2,000 contributions per beneficiary prior to the beneficiary’s 18th birthday. Contributors to 529 plans may contribute up to $55,000 in a single year ($110,000 for couples) with no annual income cap for the donor and no beneficiary age limitations.

– You do not have to live in the state that sponsors your 529 plan nor are your students required to attend college there. However, some states offer tax benefits for using its home state plan. Arizona and California currently do not.

Which plan is right for you? Call me. I can help you sort through the choices and set up a savings plan. CALL: 602.431.4150. E-MAIL: kenyon.lassen@fcssw.com.

CFP™ and CERTIFIED FINANCIAL PLANNER™ are certification marks owned by the Certified Financial Planner Board of Standards, Inc. These marks are awarded to individuals who successfully complete the CFP Board’s initial and ongoing certification requirements.

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