You may just be settling into your back to school routine, and for many of us that means our kids are one step closer to college. While savings overall are up over the last 2 years, many families still aren’t able to save much if anything towards their children’s college educations, and I admit this is one place we need some help.

I had the opportunity to interview Steve Jobe, Principal and Director of 529 Programs at iShares, about 529 programs.

I hope you find this info as useful as I do!

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Kelly: Can you give Centsible readers an overview of college saving options, and share tips for getting started saving?

Steve: Today, families are regularly faced with the daunting task of identifying the best way to save money for their child/children’s college education. There are many college savings strategies available today including:

• Your own taxable investment account
• Coverdell Education Spending Account – An account created as an incentive to help parents and students save for education expenses. The total contributions cannot exceed $2,000 in any year, and this amount will likely revert back to $500, unless Congress acts to extend this provision of the 2001 Tax Relief Act.  As will other provisions, such as the ability to use the money for K-12 expenses, instead of just for college.
• UGMA (Uniform Gift to Minor’s Act) / UTMA (Union Transfer to Minor’s Act) Custodial Accounts – The UGMA and UTMA are commonly used to gift assets and property to minors while providing the benefit of lower tax rates — the first portion of earnings being tax-free, the second portion being subject to the minor’s rate, and the remainder being subject to the “kiddie tax,” or the parent’s rate.  These accounts offered a reasonable way to set aside general funds for children to access as they came of age — but when the objective is funding higher education, custodial accounts fall somewhat short of the mark for maximizing available tax breaks.    Consider that years ago custodial accounts offered tax breaks for beneficiaries up to 14 years of age.  Under current kiddie tax rules, however, that age has been effectively raised to 24.[1][1]
• 529  Plans — these Plans, sponsored by the states and established under Internal Revenue Code Section 529, come in two varieties: 529 Pre-paid Tuition Plans and 529 College Savings Plans.

o   529 Pre-paid Tuition Plans allow you to “pre-pay” all or part of the costs of an in-state public college education. (Note: “The Independent 529 Plan” is currently the only Pre-paid Plan that is not sponsored by a Sate, but rather is for use for private college tuition.)

o   529 College Savings Plans are the more popular of the two types of 529 Plans. They are programs which offer families a flexible, tax-advantaged way to build a college nest egg.  Money in a 529 College Savings Plan account grows tax-deferred, with taxes waived on withdrawals that are used for qualified expenses.

The iShares 529 Plan, sponsored by the State of Arkansas, was launched in 2008 as the first 529 plan designed with portfolios that invest exclusively in Exchange Traded Funds (ETFs).  This gave financial advisors and their clients an alternative to more traditional Plans, which typically invest in regular, actively-managed, open-end mutual funds.  The iShares 529 Plan offers much lower fees than the average advisor-sold 529 Plan[2], as well as the transparency of ETFs — meaning a client will always know exactly what their money is invested in, unlike regular mutual funds, which are only required to publish their holdings twice a year.  The iShares 529 Plan offers three different portfolio options — Year-of-Enrollment Portfolios, based on the amount of time until a child enters college; Asset Allocation Portfolios, based on risk profile or desired asset allocation; and Custom iShares Portfolios, offering exposure to a broad range of assets classes, through individual-fund Portfolios, which can be mixed and matched to create a custom asset allocation.

[2] Source: FRC, 6/30/10.

The Saving for College website — www.savingforcollege.com — is an excellent source for unbiased information on all available 529 Plans.  But, the choices can be dizzying, so it may be advisable to speak with your financial advisor to discuss the best options for your family. A few things to consider when evaluating the various college savings strategies available to you:

• What type of school – public or private – do you expect to be paying for?
• When do you expect to start paying for college?
• How much savings do you have today that could be put in an account earmarked for college?
• How much can you regularly (e.g., from each paycheck or monthly) save for college?
• What is your risk tolerance?
• If you decide a 529 college savings plan is right for you, work with your financial advisor to decide which Plan is best suited for your needs:
• What State benefits are available to you where you live, and do those benefits outweigh the advantages of other Plans?
• What are the expenses of the Plan, and how do they compare to the average (e.g., the average advisor-sold 529 Plan has nearly 1.25% of annualized asset-based expenses)?
• What is the reputation of the investment manager(s) in the Plan?
• Are there broad investment choices?  Remember: what’s right for your child today may not be appropriate in years to come.
• Can you easily tell what the holdings in your account are?  Some Plans only publish their holdings twice a year — others post them daily.

Kelly: If families don’t feel they have enough to save for a full 4 years of college, should they still save what they can? Even if that’s only $20 month?

Steve: Absolutely, families should save regardless  of how much they can put away. There are several benefits to investing in college savings plans. The 529 plan enables parents – or other relatives, like grandparents – to invest in the education for a family member. Participants can receive a tax break with earnings growing tax-free very similar to a Roth IRA.  Additionally, the money saved doesn’t need to be applied to one specific child’s education, it can continue to accumulate, so if college plans change or the amount saved is greater than your first child’s education costs, the funds can be used for another child, even a niece, nephew or grandchild.  But, most importantly, any monies in a 529 Plan account — however small or large the amount — benefit from the power of tax-free compounding.

Kelly: What if I have a child who is closing in on college age and I don’t have anything saved, should I start now?

Steve: Similar to planning for retirement, it is never “too late” to begin saving for a child’s education – especially if it’s in a tax-advantaged account.  We often lose sight of the fact that even if the child is entering college, your money has four years to grow.  And, remember: some states offer a state tax deduction for contributions to a 529 account, even if you take the money out the same year you made the contribution.

I hope you found this info on 529s as useful as I did! Are you saving for your children’s college education?

Kelly

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