Privacy Policy		College Funding Techniques While you're setting up baby's nursery, you might consider setting up a college savings account, too. With college costs increasing at roughly twice the rate of inflation, the younger your child, the more impact you'll feel on future tuition bills. Funding a college education for your children is an important goal. But preparing for the future event has become almost as daunting as funding your own retirement. When you plan in advance and establish a college fund early, you may benefit from one of the most powerful investment principles -- the power of compounding. You can estimate future college costs today. Even if your children or grandchildren are toddlers, you can estimate their college costs. The table below uses College Board figures to estimate average costs for four years at public and private institutions. These estimations assume college costs will continue rising at a rate of 6% annually. So how does a parent go about accumulating enough? First, don't be overwhelmed. Saving any amount is better than none. Once you begin, you can increase the amount. Secondly, don't fall into the trap of investing too conservatively. The longer your time horizon the more aggressive you should be. Despite the possibility for tax savings, putting assets in a youngster's name isn't always a smart strategy. Generally speaking, when it comes to financial aid, you're better off not holding assets in the child's name. That's because under the federal methodology (the criteria used by most public institutions like state universities), you're expected to contribute a maximum of 5.6% of parental assets toward a child's tuition every year. But a student is expected to kick in 35% of his own assets. What's worse, any income is assessed at 50% for students, 47% for parents. Private institutions have their own methodology for awarding financial aid. Now, choosing whether to save in your child's name or in your own is also a major decision. For starters, if you do decide to invest in a taxable account, the choice has significant tax implications. If it's held in your own name, any earnings will be subject to the regular tax rules — meaning long-term capital gains will be taxed no higher than 20%, while short-term gains (those held less than one year) and dividends will be taxed as ordinary income, which can run as high as 38.6% in 2002. If, on the other hand, you set up an account in your son's name, then he'll be subject to the Kiddie Tax. This means that during each tax year, the first $750 earned will be tax free and the second $750 will be taxed at the child's rate of 15%. Anything over that first $1,500 will be taxed at the parent's rate. After the age of 14, gains are taxed as an adult's. So from a pure tax perspective, less will go to taxes if you save in your son's name. (Of course, you can avoid all taxes if you follow our suggestion of investing in a 529 or Coverdell ESA.) The Coverdell Education Savings Account (CESA), formerly Education IRA, is designed to help you set aside money for the qualified education expenses of your children, grandchildren or any other eligible beneficiaries. Its key benefits are: You can choose from a wide variety of investment options. Earnings on contributions are not taxed while they are held in the account. Neither you nor your beneficiary will pay federal income taxes on the earnings when the money is used to pay for qualified expenses at an eligible educational institution. The 2001 tax law has made this education savings vehicle more attractive than ever, thanks to: Higher annual contribution limits. The yearly contribution limit increased from $500 to $2,000. Eligibility to contribute to a CESA is determined by adjusted gross income (AGI). The phase-out range for single tax filers is $95,000–$110,000 AGI and $190,000–$220,000 AGI for joint filers. Expanded definition of 'qualified expenses' to include certain costs of elementary and secondary school. In addition to tuition, fees, books, supplies, equipment, and room and board, qualified expenses include academic tutoring, special need services and other equipment, uniforms, transportation and the purchase of computer technology or equipment used while attending a public, private or religious elementary or secondary school (grades K-12), as well as for college and graduate school expenses. Simultaneous contributions. You can now make contributions to a CESA on behalf of the same beneficiary during the same tax year for which qualified contributions are made to a 529 College Savings Plan. Extended contribution deadline. The contribution deadline is now April 15 of the year following the year for which the contribution is being made (extended from December 31), giving you a longer time frame in which to invest. 529 College Savings Plans allow you to save for higher education for a named beneficiary on a tax-advantaged basis. Here are the basic features of these education savings vehicles: Almost anyone can establish a 529 College Savings Plan Parents, grandparents, siblings, uncles, aunts, friends or colleagues can establish 529 College Savings Plans. You can even set up a plan for yourself as long as it is for education funding needs. Generally, there are no income limitations or age restrictions regarding who can open an account. In addition to accepting all in-state investors, most 529 College Savings Plans will accept investors from out of state as well. Please note that funds must be used for qualified education expenses or they will be subject to income tax as well as a penalty. You can designate — and change — account beneficiaries You can set up a 529 College Savings Plan for just about anybody you want, and you generally can change beneficiaries at any time. Keep in mind, however, that a change of beneficiary must be to a first cousin or closer to the original beneficiary; otherwise, there may be adverse tax consequences. With few exceptions, the named beneficiary has no rights to the funds in the account. You decide when withdrawals are taken and how the money is spent. Choice of investment options You may be able to choose from among several investment options offered by the state's 529 College Savings Plan, including a variety of mutual funds. Investment selection is limited to those investments offered by the state's plan, and the state sponsoring the plan has specific control over the investment of assets. It is important to note that a special rule recently issued by the IRS allows you to change the investments in a 529 College Savings Plan annually as well as upon a change in the designated beneficiary of the account. Flexible rollovers Rollover of benefits from one 529 College Savings Plan to another 529 College Savings Plan for the same beneficiary is no longer treated as a taxable distribution. You are allowed only one such transfer per beneficiary for any 12-month period. This greatly improves the portability of assets from one state plan to another. There's a lot to consider in planning for a child's education. One place to begin may be through an Certified Financial Planner. He or she can help you determine the required amounts and wisely select the proper investment allocation. Securities offered through Cadaret Grant & Co., Inc. Member NASD/SIPC, PPG and CG are separate entities. Securities and/or insurance products not insured by FDIC/NCUA or any government agency. 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