College tuition shopping for back-to-school season
A: The state of Illinois hasn't announced another sale of zero-coupon bonds, which grow tax-free to maturity to fund college.
So you're left with CollegeIllinois.com -- the prepaid tuition plan -- and BrightStartSavings.com, the 529 plan. The former guarantees tuition at an in-state school -- in effect buying tomorrow's tuition at today's prices. But if your child decides to attend an out-of-state school, this benefit might not yield enough to pay for tuition elsewhere. The BrightStartSavings plan involves an investment in chosen mutual funds, and the amount at the time for college depends on the investment return, which is not guaranteed.
You could also invest in another state's 529 plan -- but Illinois residents get a state tax break on contribution up to $10,000 in Bright Start, and no state taxes on the withdrawals as an incentive to use our own state's plan.
Q: I'm planning on purchasing a prepaid college tuition plan here in Florida for my granddaughter. Since California doesn't offer a similar plan, I'm looking into a 529 plan for my grandson, who lives there. Is it true I could fund both of these purchases with money from my IRA without being a taxable event? If this is the case, I can invest considerably more than I had planned.
A: Well, you can withdraw a certain amount of money penalty-free from your
IRA for educational purposes, but don't do it! You'll need that money for your own retirement. And I promise that your grandchild will never, ever appreciate the sacrifice.
If you want to give money for a 529 plan, do it out of your after-tax dollars. You can gift up to $55,000 (!) in one year -- a combined five years of the annual $11,000 allowable gift -- and that gets the money out of your estate, but keeps it under your control in a 529 plan. That way, if your grandchild doesn't go to college, you can transfer it to another member of your family -- or take it back, paying a penalty and taxes on the gains.
By the way, it doesn't matter which state plan you use for the 529 account as they are transferrable from state to state. The only reason to stick with your own state plan -- if there is one -- is to take advantage of any state tax deductions they might allow on contributions or withdrawals. Some state plans do have this feature. Go to www.savingforcollege.com to compare plans, costs -- and be sure to buy directly from the state plan of your choice at their site to avoid sales commissions.
Q: I have a 35-year-old friend. Her husband has recently passed away and did not leave any considerable amount of money. She has recently received a payment of $30,000 in life insurance, a $21,000 annuity fund, and a $30,000 settlement for her husband's illness. In the near future she might receive up to an additional $100,000 for other settlement cases.
She is an assistant nurse and her income is less than $30,000, plus $14,000 in Social Security income for the kids only.
How can she protect herself against possible taxes for additional income? And considering her children are 4 and 10, where we can she secure a college fund for the kids?
A: You know, this really requires some study -- a look at what her expenses are, and her own savings as well as college for the kids. My advice would be to put this all in a money market fund at her bank for a while -- not an annuity, just a simple money market fund while she sorts her life out. That way it will earn a little interest, won't subject her to much more income taxes, and she can consider alternatives.
It's nice to put money away for the kids college, and you might consider a small amount in BrightStartSavings.com -- but if her income remains low, the kids might qualify for financial aid. A lot depends on where that money is when it comes time for college.
Without knowing more -- her housing situation, etc, and whether she's contributing to her own retirement account -- it's hard to be more specific.
She might benefit from going to Consumer Credit Counseling -- 800-388-2227 for the nearest local office. It's not just for people who are in debt trouble, but to help guide people to a new understanding of their current finances, and budgeting process.
Copyright © Terry Savage Productions