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From College
Coverdales to Trusts
The Facts on Planning for Your Child's Education
By Kendeyl Johansen
It's important to realize 529s vary widely, and they differ from state to state. Variations include state tax deductions, contribution limits, residency requirements and more. Research a variety of 529s to find the best plan for your family or seek assistance from a financial advisor.
"Think about where your family is financially when deciding how much to invest in a 529," says John Feyche, CPA, manager for Zdonek & Wolowicz Accountancy Corporation in Torrance, Calif. Feyche cautions that 529 funds are counted as student resources and can reduce financial aid.
Families should also consider the need for liquid funds when deciding upon investment amounts. "Once funds are in a 529 they are committed to education and subject to tax and penalty if withdrawn for other purposes," he says.
Recently Feyche helped a divorced woman set up a college savings plan for her daughter. Some funds were invested in a 529, but the remaining funds were kept liquid in a money market account. "There was some concern the daughter might qualify for financial aid or the money market funds would be needed, and the woman wanted to see how things developed," he says. "She can add to the 529 later or access the money quickly if necessary."
Coverdale Education Savings Accounts are a good option if you don't have a lot of money to invest but many years until college funds are needed. These accounts allow investments of up to $2,000 per year per student.
Earnings grow tax-free as long as they are used for eligible expenses, which include higher education as well as elementary or secondary school (tuition, uniforms, transportation, etc.). Contributors must earn less than $110,000 for single filers and $220,000 for married couples. Coverdale ESAs are considered assets of a student and may affect financial aid.
