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College savings could be good deal for parents, grandparents
By SARAH B. AUBREY
Indiana Correspondent

ANDERSON, Ind. — College is expensive. Larry Gregurash, an investment consultant with Old National Investments in Anderson, Ind., said college costs are increasing at a rate of at least 6-8 percent per year.

Combine this with inflation, and finding the money for the traditional four years it takes to earn a bachelor’s degree causes many families to worry about making ends meet and funding higher education. Financial planners consider saving, even small amounts at a time, and starting early, the best bets to be prepared.

“I think everyone, especially farmers, should have investments in addition to their farmland,” said Tammie Steele, owner of Steele Financial, a Pendleton, Ind.-based business that specializes in estate preservation and investments. “I look for investments that aim for a return of at least 6-8 percent annually.”

She said investments need to keep pace with the rate of rising college costs.

Starting to save anytime will help defer college expenses though.

Steele said. So, for those with children or grandchildren seven or more years away from college, financial planners offer three options for putting money away - now.

UGMA
One method for saving money for children is the UGMA or Uniform Gifts to Minors Account. The UGMA is an investment account that can be opened with financial institutions such as brokerages and banks. Money can be left in cash or CDs, but higher-earning options such as stocks and mutual funds can be used, too.

“The contribution to an UGMA is unlimited on behalf of the child and anyone can put money in,” said Gregurash.

He advised that the owner must watch out for taxes with UGMA’s, however, as the money invested is not limited to college expenses, but is fully taxable.

“The first $750 of earnings is tax free (annually), but after that any gains are taxed at the child’s tax bracket.” Gregurash said. Another possible drawback with an UGMA is that the child always owns the money and is legally allowed access to the investment at the age of majority (that age is either 18 or 21 depending on the state where the child resides).

Education IRA
The Education IRA works similar to a traditional retirement savings IRA in that there are IRS-imposed contribution limits and use and age restrictions.

“The Education IRA has a $2,000 annual contribution limit, but the investment money can grow tax free,” noted Gregurash.

He explained that since these accounts are not federally taxed, that noneducation related expenses are penalized at a 10 percent rate and is also considered taxable income. Thus, these accounts should only be used for education expenses, but can be used anywhere from kindergarten through college.

Investments available include from cash, bonds, CD’s, stocks, or mutual funds. Parents and grandparents might consider funding an Education IRA to pay for anything from private elementary school to college. “These are only for school, but a variety of expenses can qualify including travel, foreign exchange programs and books,” he added.

529 plans
The most recent addition to the education savings lineup is the 529 plan.

“529 plans make an excellent grandparent gifting idea, especially if the grandparents are looking to remove money from their estate,” Gregurash said.

These plans have large contribution limits - up to more that $250,000 and can be owned by anyone. Gregurash said the 2005 annual tax-free gifting limit is $11,000 per spouse, so if a grandparent wants to reduce dollars in their estate and provide a federally tax-free investment for another generation, 529 plans can fit. In 2006, that number increases to $12,000 per spouse.

“Anyone can contribute to a 529 plan on behalf of someone else,” Steele added.

“The owner, not the beneficiary (the beneficiary named is often the child), always has control,” she said.

Also, when the child reaches the age of majority, the contract owner still has control over the money - thus helping promote responsible spending.

Gregurash said, “It’s important to note that a grandparent or a parent can own the 529 contract and the beneficiary can have more that one 529 plan.”

Contributions to a 529 plan, like the other investments, can be made in a lump sum or any time. Most 529 plans are invested in mutual funds, so advisors recommend shopping around to evaluate annual fees and anticipated rates of return. Steele highly recommends a scheduled monthly contribution.

“If you make your contribution into a monthly bill, then most likely you’ll do it,” she said.

“I believe anything easy will be more successful and once set up, 529’s are easy to work with,” Steele added.

To learn more about college savings options, consult a financial professional such as an accountant, bank, or financial planner.

To learn more about how everyday purchases at certain retailers can contribute money to a 529 account, visit websites such as www.babymint.com and www.upromise.com

Published in the January 18, 2006 issue of Farm World.

1/18/2006