A Section 529 plan is a tax-advantaged investment plan, issued and operated by a state or educational institution, that helps families save for education. Section 529 plans1 are named after the tax code that governs them. Almost all 50 states offer these plans, and rules vary by state. In many cases, you don’t have to be a state resident to take advantage of them; in fact, you can invest in multiple 529 plans in multiple states, if desired.
Please contact your registered representative for more information on 529 plans and/or obtain the appropriate Plan Disclosure Statement and the applicable prospectuses for the underlying investments of the 529 plans we have available. Investors are asked to consider the investment objectives, risks, charges, and expenses of a portfolio carefully before investing or sending money. The Plan Disclosure Statement and prospectuses contain this and other information about the plans and their underlying investments. Please read this material carefully before investing or sending money.
College savings plans.
Generally, college savings plans offer tax-deferred earnings; distributions from qualified state tuition plans are tax free if they are used to pay for qualified higher education expenses (some states offer tax exemptions and deductions, so check around). However, the earnings portion of any nonqualified withdrawal is subject to federal income taxes, applicable state income taxes, and an additional 10% federal tax. Maximum contribution amounts range from state to state. Please keep in mind that the underlying investment options are subject to market risk and will fluctuate in value. Check the IRS website and contact your tax professional for the current contribution amounts and for more details regarding income limitations. If an investor or a beneficiary of a 529 plan is not a resident of the state that issues the 529 plan he or she is considering, he or she should consider, before investing, whether a home-state 529 plan provides state tax and other benefits only available to in-state taxpayers.
Other 529 plan details include:
• You can name yourself the account owner and beneficiary if you are planning for your own educational expenses. (You can also withdraw funds for noneducational expenses, but the earnings may be subject to ordinary income taxes and a 10% federal tax penalty.)
• You can also rename beneficiaries. Some states allow the account owner to be a friend as well as a relative.
Potential investors in 529 plans may get more favorable tax benefits from plans sponsored by their own state. Consult your tax professional to learn how 529 tax treatments would apply to your particular situation.
Keep in mind that there are fees, expenses, and tax ramifications associated with 529 plans that you should take into account before choosing one. State tax treatment varies.
Prepaid tuition plans.
• Some universities have set up programs where college expenses can be paid in installments over many years, or in a lump sum prior to attending the school. The advantage is that you can lock in the current price. Any earnings are tax-deferred, and distributions are excludable from gross income if they are used to pay for qualified higher education expenses.
With Coverdell Education Savings Accounts (formerly known as Educational IRAs), you can make contributions for each child, until the child is 18.
There are contribution limitations and income eligibility requirements. Money contributed to a Coverdell Education Savings Account may grow, tax-deferred, and may be withdrawn—free from federal income taxes—for any qualified higher educational expense incurred by the child before age 30. After that time, any remaining balance must be distributed to the beneficiary. Any gains will be taxed as ordinary income and will incur a 10% penalty tax. State taxes may also apply. The account owner can retain control of the money in the account, if desired. The beneficiary can even be renamed in some cases. Check the IRS website for current contribution limits.
These custodial accounts allow you to set up an account in the child’s name. You can make transfers to a UTMA/UGMA account on a per-child, per-year basis. Check the IRS website for current contribution limits. Check with your tax advisor prior to making any decisions.
Setting up an UTMA/UGMA account in a child’s name is easy. The account will involve a custodian; your registered representative can guide you in completing the application. Separate accounts are required for transfers to each child. Be sure to provide the child’s Social Security number (not the Social Security number of the person making the gift or that of the custodian). The custodian will have full authority to make decisions, including control over the assets. Since transfers must be permanent, parents can’t gain access to the money for their own use. Also, all assets in the UTMA account will belong to the child when he or she reaches the age of majority. You may also want to consider the possibility that assets held in your children’s names may affect the level of financial aid they’ll be eligible to receive when they apply to schools.
These days, most people borrow at least a portion of the money needed to cover college expenses. You may want your children to look for student loans with special rates and repayment terms. For details on these options, check out the US Department of Education’s site at www.ed.gov.
The federal government offers Parent Loans to Undergraduate Students (PLUS loans), where eligible parents can borrow the full amount of the undergraduate tuition education, including room and board and any other eligible school expenses minus any aid their dependent child receives from the federal government. The interest rates for loans disbursed after July 1, 2019, and before July 1, 2020, is 7.08%.
Direct subsidized loans are available to undergraduate students with financial need. The school determines how much can be borrowed. And the US Department of Education pays the interest as long as the student is in school at least half-time.
Direct unsubsidized loans are available to undergraduate and graduate students, with no requirement to demonstrate financial need. The school will determine how much can be borrowed. Interest on the loan will accrue while the student is in school.
Interest on student loans may be deductible as well. To read more about student loans from a tax standpoint, go to the “Forms and Publications” section of www.irs.gov.
HELPFUL HINT…You may want to take a look at your permanent life insurance policies, such as whole life, universal life, and variable universal life, which offer cash value accumulation in addition to their essential financial protection. Over the long term, the cash value accumulation may be significant enough to access to help fund a portion of college expenses if you determine that the full death benefit is no longer needed. Accessing cash value will reduce the death benefit and available cash surrender value.
You can invest money in an account earmarked for your child’s education costs. Generally, it is better to invest when the child is young (less than five years old)
Many people buy zero-coupon Treasuries—known as STRIPS (Separate Trading of Registered Interest and Principal of Securities)—as they are backed by the US government and are noncallable, which means they can’t be called, or redeemed, before the maturity date. STRIPS are not issued or sold directly to investors; they can be purchased and held only through financial institutions and government securities brokers and dealers. Interest earned on STRIPS is taxable in the year it is earned. There are also savings bonds, including the Series EE Savings Bonds, or education bonds. PLEASE NOTE: Your NYLIFE Securities registered representative does not offer STRIPS or education bonds.
The U.S. Department of Education has the following Student Financial Assistance Programs:
A federal Pell Grant, unlike a loan, does not have to be repaid. Pell Grants are awarded only to undergraduate students who have not earned a bachelor’s degree or a professional degree. The maximum grant for 2017–2018 is $5,920.
There are also Federal Supplemental Educational Opportunity Grants, or FSEOGs, for $100–$4,000 a year. These grants are awarded to students in need of financial aid. US students in approximately 3,800 participating institutions are eligible. Priority is given to students with “exceptional need” and those who are also Pell Grant recipients. These grants do not need to be paid back.
For more information, visit the US Department of Education’s website at www.ed.gov.
Tax credits are better than tax deductions, as you subtract the credit from your total taxes due. Check the IRS website for the current tax credit amounts, and for more details regarding credits.
The American Opportunity Tax Credit is a tax credit to help with the first four years of tuition of post-secondary education. It is available to tax payers and their dependents. The maximum credit is $2,500 (per student, per year).
The Lifetime Learning Credit is for post-secondary education students. The maximum credit is $2,000 per tax return.
With both programs, your income must not exceed a certain amount to qualify. Also, note that these two credits can’t be claimed if you use an IRA to pay expenses in the same tax year.
There are billions of dollars available each year in scholarships, grants, and work-study programs. Financial aid to middle income families may be tough to come by, but some universities may be more willing to offer generous financial aid packages.
There are thousands of financial aid programs available. They fall into three general categories:
Federal, state, and campus-based grants. (Grants are free money generally offered on a financial-need basis.)
Student loan programs (from special rate guarantees to special repayment schedules).
“Special situation” scholarships (given for achievement without regard to income or assets).
It’s certainly worth contacting your child’s high school and prospective college financial aid office to see if you’re eligible.
HELPFUL HINT… Your role in providing financial support to pay for your children’s college education is crucial. Life insurance can help assure that, if you die and, as a result, your income is lost, your children’s dreams of a college education need not be lost as well.
The information in this article is for educational purposes only and is not intended to be an offer for any specific product. Neither New York Life nor its affiliates are in the business of offering tax advice. You should consult with your professional advisors to examine tax aspects of any topics presented.
1 Securities offered by properly licensed registered representatives of NYLIFE Securities LLC (Member FINRA/SIPC) A Licensed Insurance Agency and a New York Life Company, 51 Madison Avenue, New York, NY 10010.