Scholarship Dollars and Taxation
Students who receive scholarships or grants need to be aware that some monies they are awarded may be taxable. The portion of a scholarship that is taxable is that which applies to room, board, travel, and other noneducational expenses. On the other hand, scholarship dollars used for tuition, fees, books, supplies, and course-required equipment are nontaxable.
This is not intended to be tax or legal advice; you should consult your own advisor regarding your specific situation.
Copyright © 2002 Liberty Publishing, Inc. All rights reserved.
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Education - Not Too Early To Save
While inflation seems to be under control, the cost of higher education increases with relentless regularity year after year, despite the attempts of college administrators to control costs. At some prestigious private colleges and universities, the total of one year's tuition, fees, room and board has surpassed $20,000. That translates into a final four-year cost for a bachelor's degree of well over $80,000. How can your family build an adequate fund for college? Experts have concluded that a family needs to look ahead and prepare as early as possible for the financial burden. Taxes are also an important concern.
Copyright © 2000 Liberty Publishing, Inc. All rights reserved.
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Your Child's Future Is Now
Many parents put off education funding because they believe the task is overwhelming, or they think that saving the required amount of money will force them to severely compromise their current lifestyle. While these may be legitimate concerns, they need not get in the way of establishing and maintaining an effective college funding plan. Whether considering a public or private college for your child, the key to effective planning is to begin as early as possible. One way to get a jump on your child’s future is to participate in a qualified state tuition program (QSTP). A growing number of states offer programs that allow you to purchase future college credits at today’s prices. It may be worthwhile to investigate whether or not your state offers such a plan.
Copyright © 2002 Liberty Publishing, Inc. All rights reserved.
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College Funding Plan Worth Study*
Many families look for every opportunity to make the most of their children's college savings. Under Section 529 of the Internal Revenue Code (IRC), paying for college and getting tax breaks can go hand in hand. As with any savings endeavor, the key is to begin early.
New Kid on the Block
IRC 529 allows states to offer two types of tax-advantaged college savings programs, sometimes referred to as Qualified State Tuition Savings Programs (QSTPs). Since 529 plans are relatively new, it's important to obtain current and detailed information on the state plan you are interested in, so you can compare it with better-known funding approaches such as Coverdell ESAs (formerly known as Education Individual Retirement Accounts (IRAs)), education trusts, and custodial accounts. In many cases, 529 plans may allow you to be more generous to the student of your choice (who does not have be related); ensures the funds are used for educational purposes; may provide state income tax breaks; and may provide estate planning advantages.
Prepaid Tuition vs. Savings
The more established type of 529 plan is the prepaid tuition plan , which allows you to purchase tuition credits. It offers some tax advantages, but earnings are limited because pooled investments are managed more as a hedge against inflation than for growth. A major drawback is that the credits may be restricted to public schools within a particular state, although plans vary by state.
The second type of 529 plan is the savings plan, which is generally more flexible than the prepaid tuition plan. Most savings plans allow students to attend any accredited post-secondary school, public or private, in the 50 states. Contributions are managed by a state-designated professional money manager, rather than the donor, and are allocated to portfolios based on the age of the beneficiary. The investment objectives of such portfolios are generally straightforward: growth through common stocks for young children; income through bonds for older children; and income consistent with liquidity and preservation of capital for high schoolers nearing graduation. The weighting may shift from stocks to bonds to cash as the child grows.
The sooner the account is opened, the longer the period of time the money has to grow. As with any investment, return and principal value will fluctuate and the account may be worth more or less than the principal invested when withdrawals commence.
Learning about Earnings
Like traditional IRAs, savings plans offer deferral of federal and state taxes on accumulated earnings until withdrawal. Beginning in 2002, withdrawals are excluded from federal income tax. And, since student beneficiaries are likely to be in the 15 percent tax bracket, the tax burden is lessened. Account holders can usually deduct contributions from their state income tax returns. The maximum contribution or account balance allowed varies from state to state. Some states may allow as much as a yearly account contribution of $5,000 or $10,000 for a married couple filing jointly and a maximum total contribution of $100,000. Account holders maintain control of the contributions until recipients actually start college.
Your own financial situation will determine if a 529 savings plan is the preferred vehicle to help someone through college. Part of this determination may include the effect of this funding on the student’s financial aid eligibility. In addition, you and your financial services professional should consider the benefits of 529 plans for your own estate planning.
*Securities offered through Registered Representatives of MML Investor Services, Inc., member SIPC.
Copyright © 2002 Liberty Publishing, Inc. All rights reserved.
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