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"Oh damn, 10 years of college down the drain!"

Bluto Blutowsky (aka John Belushi)
in the 1978 hit movie Animal House

College Funding

Other 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 Plan

One area of great confusion is the 529 plan. There really are two different types of 529 plans:
  • State guaranteed tuition programs: Many states are offering tuition programs, and if that is all you want to do, it is better than not doing anything at all. But these programs have many drawbacks, and you should check them carefully. Some stipulate that they will only pay for college if your child goes to school in that particular state. What if he/she chooses a school outside the state? What if he/she does not want to go to college? Do you get your money back?

    Our main complaint with these state guaranteed tuition plans is that if your child does not use the tuition, the state usually pays a fairly low return on the money invested, which means you can certainly invest your money elsewhere. So let us check it out for you to determine the pros and cons.
     
  • 529 College Savings Plans: Many states have designated particular mutual fund companies to sponsor their 529 college savings plans. These plan DO NOT guarantee tuition, but are merely investment accounts with tax advantages. (Note that investments will grow tax-deferred until 2010. At that time the law may change the rule to tax this amount or they may continue letting it grow tax-deferred.) These accounts can also have state income tax deductions .

    The maximum deposits into these plans are quite high, so you can invest a large sum of money today to help pay for your child's education. Call us at 703-683-4660 to explain the pros and cons.
     

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 Minors

This 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 Account

If 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.


 
Nearman Financial
1005 Cameron Street
Old Town
Alexandria, VA 22314

Phone: 703-683-4660
Fax: 703-683-9433
Cell: 703-587-4321
Email: snearman@securitiesmail.com
 
Neither the information nor any opinion contained on this website constitutes a solicitation or offer by Nearman Financial Consulting Inc. or any entity named in this website to buy or sell any insurance, financial securities or investment products or services.

Securities offered through Representatives of Lincoln Financial Securities Corporation, Member FINRA and SIPC to residents of the District of Columbia and the states of Virginia, Maryland, West Virginia, Alabama, New Jersey, New York, North Carolina, Georgia, Florida, Arizona, Pennsylvania, Massachusetts and California. Advisory services are offered to residents of Virginia through representatives of Lincoln Financial Securities Corporation. Nearman Financial Consulting Inc. and Lincoln Financial Securities Corporation are not affiliated. In California, insurance may be offered through LFS Marketing & Insurance Sales Corporation. Some life insurance and annuity policies involved exclusions or limitations. For costs and complete details of coverage, contact your agent.