Education Planning

Create a smart strategy and save for college

The already high cost of a college education continues to rise, adding tens of thousands of dollars in burdensome student debt each year. To be competitive in today’s market, students are encouraged to pursue not only four-year degrees, but also graduate programs. The costs of these programs vary significantly based on course of study and institution, but they can easily cost nearly $100,000 annually, and this doesn’t even take into account the cost of books, room and board.

Despite these figures, families are willing to help students pay for a college degree because the perceived benefits outweigh the costs in terms of salary. The bottom line: While college continues to pay over the long haul, the cost of higher education continues to rise, and funding continues to be an issue families face.

Aside from opportunities for scholarships, grants and student loans, there are other options to help you plan for your children’s educational future. These range from outright gifts or gifts in trust to custodial arrangements. Your Middleburg Financial Advisor can help review your goals, address concerns, and develop a plan that will work best for your family.

Tax strategies of college savings plans

  529 plans Coverdell ESA U.S. Savings Bonds Custodial Account
Participation restrictions No, though state-run prepaid tuition plans are generally limited to state residents Yes, income limit for contributions and $2,000 maximum annual contribution per child No, but ability to exclude bond proceeds from federal income tax depends on income No
Control of underlying investments No Yes Yes Yes
Federal tax-free withdrawals if funds are used for qualified education expenses Yes (withdrawals may also be exempt from state income tax, depending on state law) Yes (withdrawals may also be exempt from state income tax, depending on state law) Yes, but income limits and other requirements must be met (bond proceeds are generally exempt from state income tax) No
Penalty if funds are not used for qualified education expenses Yes, a 10 percent federal penalty applies to the earnings portion of all nonqualified withdrawals (a state penalty may also apply) Same as 529 plans No, but the bond proceeds won't be exempt from federal income tax No, but withdrawals from the account can only be made for the child's benefit
Federal financial aid treatment (student assets are weighed more heavily than parent assets) Parent asset, if parent or student is account owner, or if 529 plan was funded with custodial account funds Parent asset, if parent is account owner Parent asset, if parent is owner of bonds Student asset
Fees and expenses College savings plan: typically an annual maintenance fee, administration fees, and investment expenses based on a percentage of total account value

Prepaid tuition plan: typically an enrollment fee and various administrative fees
There may be fees associated with opening and/or maintaining an account, depending on financial institution There may be fees associated with opening and/or maintaining an account, depending on financial institution There may be fees associated with opening and/or maintaining an account, depending on financial institution

Information has been obtained from sources considered reliable, but we do not guarantee that the material presented is accurate or that it provides a complete description of the securities, markets or developments mentioned. Raymond James financial advisors do not provide tax advice. You should contact your tax advisor concerning your particular situation.

Certain conditions may apply. Earnings in 529 plans are not subject to federal tax, and in most cases, state tax, so long as you use withdrawals for eligible education expenses, such as tuition and room and board. However, if you withdraw money from a 529 plan and do not use it on an eligible education expense, you generally will be subject to income tax and an additional 10% federal tax penalty on earnings. Investors should consider before investing, whether the investor's or the designated beneficiary's home state offers state tax or other benefits only available for investments in such state's 529 savings plan. Such benefits include financial aid, scholarship funds, and protection from creditors. 529 plans offered outside their resident state may not provide the same tax benefits as those offered within their state. 

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