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College FundingOther than your retirement, the single-biggest one-time expense for you may just be your child or children's education. With college tuition inflation rising faster than the overall U.S. inflation rate, you must plan ahead to make sure you will have the funds available to put your children through four years of advanced education.
Try this on for size: for a child born today who goes to four years of college at Georgetown University 18 years from now, you will need to invest $450 per month every month for the next 18 years, assuming a 12% return on your investment and if Georgetown's tuition increases track current tuition inflation! Will you have enough money save for your kids to take the bus all the way to college graduation?
There are many choices for funding college education, and you should be aware of the pros and cons. There are plenty of both.
The 529 PlanOne area of great confusion is the 529 plan. There really are two different types of 529 plans:
Coverdell Education Savings Account (formerly Education IRA)The Education IRA has been renamed to the Coverdell Education Savings Account (or "Coverdell ESA"). The Coverdell ESA was created to give individuals a method to save for a child's education (both elementary/secondary education (k-12) and post-secondary education (college, graduate school, vocational school, etc.)) and may be established for the benefit of any child under age 18.
Eligibility requirements - The account must be established for the benefit of a child (designated beneficiary) under the age of 18. Contributions to the account will not be accepted after the designated beneficiary reaches his or her 18th birthday, unless the beneficiary is a special needs beneficiary.
You may contribute up to $2,000 annually to a child's Coverdell ESA if your modified adjusted gross income is less than $95,000 as a single tax filer (phaseout to $110,000), or less than $190,000 (phaseout to $220,000) as a married couple filing jointly in the tax year in which you contribute. The $2,000 maximum contribution limit is gradually reduced if your modified AGI exceeds these limits.Anyone may contribute to a child's Coverdell ESA, as long as his or her income falls within the income guidelines and the total of all contributions for one beneficiary does not exceed the $2,000 limit.
The annual contribution limits is $2,000 per child (designated beneficiary of the account).
Gift to MinorsThis is a trust account which allows you to put unlimited amounts of money away for your child's education. This account is typically taxed at the child's rate, but the money does belong to your child at the age of majority, 18 years of age in most states. Call us at 703-683-4660 for more details.
Special Investment AccountIf you are not sold on the idea of putting money in an account specifically earmarked for your child's education and you are afraid that the Gift to Minors proceeds will end up paying for your child's dream motorcycle after his/her 18th birthday, we suggest you set up a special investment account separate from your other investments to set aside money for your child's education or whatever you choose. There are no particular tax advantages here.
Also, when financial aid officials look at your situation, they will include that special account in their calculations. They may assign a much lower weighting to monies set aside in a 529 plan in your child's name.
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Alexandria, VA 22314
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