Saving for College
Many of the education plans available today offer tax advantages that can potentially lessen your financial burden by striving to reduce the amount you need to save. Educational costs have been increasing at a rate greater than the general level of inflation for more than a decade. While we cannot control these increasing costs, we can more effectively save using the right type of savings plan.
One of the most popular types of products are 529 Plans, which are tax-preferred savings vehicles for higher education costs. There are two types of plans: Prepaid Tuition Plans and Tuition Savings Plans. Prepaid Tuition Plans provide a guarantee that the value of the account will increase at the same rate as tuition (In Kentucky, this is gurantee is made if you invest in the Kentucky Affordable Prepaid Tuition plan, which is currently closed to new enrollment. Other states have similar plans).This allows a contributor to prepay a child's college tuition at or close to today's prices. In Tuition Savings Plans, growth is based upon the market performance of the investments in the plans.
There are benefits to 529 plans that are very attractive to parents and grandparents and are also unique among ways to save for college. Rollovers of 529 plans are permitted between certain family members should the beneficiary decide not to attend college or should surplus funds remain in the account after funding the expenses. If ultimate distributions exceed qualified expenses, however, or the donor makes withdrawals for non-qualifying purposes, earnings are subject to income tax with a 10% additional penalty tax imposed.
Alternative methods for saving for college include:
Uniform Gifts to Minors Act Accounts (UGMAs) and Uniform Transfers to Minors Act Accounts (UTMAs)
