529 and Other College Savings Plans For Dummies

Margaret A. Munro

• Publisher: For Dummies
• Year: 2011
• ISBN:
  9781118068885
• Edition: 1
• Topic: Personal Development
• Subtopic: Personal Finance

There's no question: The cost of college continues to soar, even when the rest of the economy stagnates, and this reality is not likely to change any time soon. Fortunately, everyone, including you, the various governments (federal and state), and the colleges themselves, are in on this secret, so everyone can plan and plot, well in advance of that eventual first day of your child's freshman year, ways to get that child there, and ways to help you pay the bills when they happen. Consider this book to be your accomplice.

529 & Other College Savings Plans For Dummies is simply a way to find a reasonable solution to a seemingly unreasonable problem: saving for future college costs in the sanest, least stressful way possible for you. In keeping with the theme of stress reduction, you can use this book in a variety of ways:

• As a reference: It's all here: the ins, the outs, the do's, and the don'ts. The world of college savings is one of very specific rules, and they're here, in all their glory, and they're all explained.
• As an advisor: It's a case of the very good savings techniques, the merely okay savings techniques, and the truly ugly techniques (which you really want to avoid), and this book highlights them all.
• As a little light reading: Amazingly enough, the topic of money can be mildly amusing, and college savings is no exception. Read this with an eye towards the absurd, and you won't go far wrong.

This down-to-earth book is designed to explain the strategies that are out there to help you save, save, save. There's no doubt that the bill will be large; there's also no question that, with planning, strategy, and purpose, you can achieve your goal. To help you get there, this book covers all these vital topics, and more:

• Evaluating all your resources
• Understanding the basics of Section 529 plans
• Working around the 529 shortcomings
• Contributing to Coverdell accounts
• Choosing savings bonds that work
• Looking at your investment options
• Searching for scholarships, fellowships, and grants
• Tapping into your Roth IRA
• Financial Aid 101

In this one-size-fits-all world, the powers that be have recognized that all people don't save money the same way. Some save more, some save less, some can live with risk, and others can't tolerate any risk. Clearly, no two are alike, but you're all savers, either present or potential. Numerous options exist that make saving possible and desirable for everyone. 529 & Other College Savings Plans For Dummies is here to tell you that it is possible to understand the costs associated with college, both right now and in the future, and then find ways to pay for those costs.

Part I

Figuring Out the Cost of College — and How to Pay It

In this part . . .

**IN a DROPCAP**

Any discussion about saving money, including one about saving cash for college, needs to begin with a careful look at your finances. If you can’t figure out how much you’re going to need and locate the resources available to you, all the information in the world will remain theoretical, not practical.

In this part, I help you check out your current financial situation — including your assets and, especially, your debts — and where you think you need to go — in terms of future college savings costs. I outline the costs associated with various forms of higher education, from piano-tuning vocational education to medical school. I provide tips on how to start thinking about meeting college costs, including the resources you currently have and those that you’ll have down the road. Finally, I provide a plan so that you can examine how you’re spending money now and find ways to trim your current expenses without butchering your lifestyle.

Chapter 1

Braving the New World of College Savings

In This Chapter

Figuring out what and how to save

Considering Section 529 plans

Taking a look at Coverdell Education Savings Accounts

Evaluating other savings options

Making the most of your savings

You may have just found out that you’re pregnant. Maybe you’re at the point where the college catalogs are beginning to accumulate on your dining room table. Or perhaps your family is somewhere in the middle, with your children out of diapers but not yet into calculus. Wherever your family falls in the age spectrum, one thing is certain: either in your immediate family or in your extended one, some people will want to continue their educations beyond that once-adequate but now insufficient stopping point of a high school graduation.

And therein lies a problem: Although your child can receive a primary and secondary education without incurring any added expense in your budget (unless you take into consideration your local parents’ group’s fundraisers), postsecondary education of any type isn’t free for the asking. You must pay for the privilege of having your child attend college. If you’ve already explored the costs of a postsecondary education, you know that the numbers being discussed are large; if you haven’t yet experienced the pleasure, rest assured that the amounts in question will likely take your breath away.

In solving any problem, you need to remain calm and focused on the task at hand. That’s where this book may help — by making you methodically look at your lack of college savings, helping you leave your misconceptions about saving at the door, and showing you ways to actually begin saving. After you convince yourself that you’re able to save something and you actually begin to put some money away, you’ve won a major victory; everything that follows will be easier. Just keep in mind that saving now will create opportunities and open doors for your children in the future.

Doing the Numbers

Up until now, crunching the numbers and figuring out what you think college will cost has usually been where you begin and end your exploration of the topic of how to pay for future educational costs. But after you resolve to start saving and you take the projected costs and create a plan to save for that amount, it’s time to take this exercise a bit more seriously.

Figuring up the costs

Depending on the size of your family and your expectations, adding up the cost of a college education can be a fairly straightforward calculation, or it may become quite involved.

Be realistic, both about the capabilities and ambitions of your future student and your ability to pay.

Your straight-A daughter may have to scale back on her dreams of MIT if your budget, including amounts that you can add from your current earnings, only goes as far as your local state college (although not necessarily — she may want to seriously consider applying for some scholarship aid as outlined in Chapter 16).

Likewise, there’s little point in your saving for an Ivy League education if your child has plans to open his own auto repair shop. And clearly, the more children you’re sending to college, the thinner your resources may be stretched per child (although, depending on how closely spaced your children are in age, this situation may actually work to your advantage if you need to apply for financial aid, as can you find out in Chapter 17).

Finding resources to help you save

No matter how late you may begin to save specifically for future college costs, the entire weight of the enterprise doesn’t necessarily need to rest solely on your shoulders, nor do you need to begin to save for college from nothing.

Chapter 3 helps you find hidden assets you may have available, to augment your college savings. It may also alert you to other resources you haven’t even thought of — family and friends or even the student himself. Just because these are your children, you don’t have to come up with the full amount of their college costs from your pockets alone.

Saving efficiently

Too many people equate saving for the future with current deprivation. For most people, living expenses currently equal, or even exceed, income, and they may not have money left over in the family budget for saving. Clearly, if you fit into this category, you’re not going to be able to save unless you make some changes in your life. And although I would never advocate giving up your morning coffee and sticky bun every day as a savings technique, Chapter 4 shows you some relatively painless adjustments that will maximize the amount of money you can shave from your current budget while minimizing the effect on your life.

Exploring Section 529 Plans

Saving money is a good thing, or so the federal government would have you believe. Uncle Sam is prepared to back up that philosophy with a variety of savings programs that contain built-in tax incentives, some of which you may already be using (tax-deferred retirement plans, anyone?). One of the newest types of incentive savings plan is the Qualified Tuition Program, or Section 529 plan, which is designed solely for the purpose of saving for college or any other type of qualified postsecondary education, either tax exempt or tax deferred, depending on a number of factors. Like almost everything else the government cooks up, though, Section 529 plans aren’t as simple to navigate as everyone selling these plans would have you think. Chapter 5 gives you the tools you need to understand how these accounts work and how you can best make them work for you.

Following the rules

Section 529 of the Internal Revenue Code is long, complex, and not for the faint of heart. Still, savings accounts that fall under its regulations can be a fantastic way to save for future educational expenses. To make it work, though, you have to understand its requirements; there’s little point in setting up one of these accounts if you don’t cross your t’s and dot your i’s just like the IRS wants. Remember, the IRS doesn’t have a category of “close, but no cigar.” Your account will either qualify under the regulations for tax deferrals or exemptions, or it won’t. And if it doesn’t, the consequences may be costly.

Making your money work for you

Creating a successful savings plan involves more than following the rules, although compliance with the rules is a big part. Chapter 6 shows you how to actually begin saving money and then put those savings to work for you.

You’re a big factor in determining whether your savings program flies or falls. Your understanding of the various ways your savings may earn money and of the different investment options available to you is an important piece of creating the substantial amount of savings you’ll need to see your children through college.

Choosing the best options

Even when you understand the rules, manage to regularly save major portions of your income, and discover how to manipula...

Table of contents

• Title
• Contents
• Introduction
• Part I : Figuring Out the Cost of College — and How to Pay It
• Chapter 1: Braving the New World of College Savings
• Chapter 2: Checking Out the Cost of College
• Chapter 3: Realizing All Your Resources
• Chapter 4: Sharpening Your Savings Techniques
• Part II : Piecing Together Section 529 Plans
• Chapter 5: Laying Down the Basics of Section 529 Plans
• Chapter 6: Applying Section 529 Plans to Your Household
• Chapter 7: Weighing the Pros and Cons of Section 529 Plans
• Part III : Uncovering Coverdell Accounts
• Chapter 8: The Changing World of Coverdell Education Savings Accounts
• Chapter 9: The Mechanics of Coverdells
• Chapter 10: Figuring the Pluses and Minuses of Coverdell Accounts
• Part IV : Filling In the Gaps: More Ways to Save for College
• Chapter 11: Saving for College with Qualified U.S. Savings Bonds
• Chapter 12: Setting Up Personal Investment Accounts for Yourself and Your Kids
• Chapter 13: Saving for College in Trust Accounts
• Chapter 14: Saving in Your Retirement Plans: The IRA Dilemma
• Chapter 15: Selling or Refinancing Your Family’s House
• Chapter 16: Accessing Scholarships and Awards
• Chapter 17: Turning On the Financial Aid Faucet
• Part V : The Part of Tens
• Chapter 18: Ten Musts for Successful Savings
• Chapter 19: Ten Ways to Dodge the Tax Code Minefield
• Appendix: Section 529 Plans, State by State