Once you have decided how
much you need to save and have established a plan for how you
are going to save that money, you will need to choose where to
save your education funds. You have many options and each
comes with their its pros and cons. Family situations are
unique and different savings options will work for each
situation. Become familiar with the basics of each and then
make an informed choice.
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Cash locked
in your home safe -
Don't laugh, there are
families who choose this option! It's the old "money in the
mattress" choice. Money saved in a piggy bank would also fit
in this category. There really aren't any advantages to this
option. The money does not grow, the money may be stolen
(even from a safe!) and the cash is too easy to get to and
spend on other expenses
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Regular
Savings Account -
This is an account you can easily open at any bank or
credit union for a minimum deposit of anywhere from $10 to
$100. Currently interest rates are averaging .25% to .50%.
These accounts allow you easy access to your money and are
insured by the federal government (FDIC) but pay a very low
rate of return.
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Money Market
Savings - This is
an account you can open at your bank, credit union or
investment company. Minimum balances are usually $500 to
$1000. Rates of return are also a bit higher at an average of
2%. The accounts are insured if at a bank or a credit union.
You will have easy access to your money but again the rate of
return is low for long-term savings.
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Certificates
of Deposit (CD's) -
This is an account
purchased from a bank or credit union for a fixed amount of
money, time and interest rate. Minimum deposits range from
$500 to $1000, length of terms range from 3 months to 7 years
and interest rates range from 1.5% to 4.35% depending on the
amount of money deposited and the length of time chosen.
There is a penalty for withdrawing money before the CD is due.
These accounts are insured. The money is not easy to withdraw,
so we are less likely to use it for other expenses. However,
the rate of return is fairly low especially on the shorter
terms and you can't add money to the account on a regular
basis.
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US Savings
Bonds (Series EE and I) -
When you purchase a US Saving
Bond you are loaning the government money and they agree to pay
you an interest rate for using your money. You can purchase US
Savings Bonds at your local bank or credit union or some
employers allow a payroll deduction plan to buy US Savings
Bonds. There are two types of US Savings Bonds available today.
Series EE -
You purchase an EE bond for half of the face value of
the bond.
They are available in denominations ranging from $50
through
$10,000. The government guarantees your bond will
reach full
face value in 20 years. However, the earnings rate is
now
variable and your bond may reach full value in less than 20
years. The interest rate for EE bonds changes semi-annually on
May 1 and Nov 1. (bonds bought before May 1997 have a different
interest rate structure). To find out the current interest rate
go to
http://www.publicdebt.treas.gov/sav/savmktrt.htm.
Series I
Bonds - You purchase I bonds for the full face value, and
like the EE bonds they are available in denominations
ranging
from $50 through $10,000. The I bond earning's rate is a
combination of two rates: a fixed rate of return and a
variable
semiannual inflation rate. The fixed rate
remains the same
throughout the life of the I Bond, while
the semiannual inflation rate
may be adjusted May 1 and Nov 1 of
each year. This allows an
element of protection against the
current rate of inflation. For
current I bond earnings rates go
to
http://www.publicdebt.treas.gov/sav/sbirate2.htm.
Education
Bond Program - This program allows
interest to be
completely or partially excluded from Federal
income tax when
the bond owner uses the bond proceeds to pay
qualified
higher
education expenses
at an eligible institution in the same calendar
year the bonds
are redeemed.
- The bonds need to
be in the parent's name if they are to be used for a child's
education expenses.
-
The bonds need to
be In the adult's name if they are to be used for their own
education expenses (anyone over the age of 24).
-
The owner
(parent) must be at least 24 years old when the bonds are
purchased
-
Series EE and I
bonds issued after 1990 may qualify for the Education expense
tax exemption.
For more information
visit
Savings Bonds for Education
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Coverdell
Education Savings Account (Education IRA) -
This is a trust or a
custodial account set up for a designated beneficiary for the
purpose of paying qualified education expenses. The beneficiary
must be under 18 years of age when the account is established.
Anyone (not just relatives) may set up an account for a child
but no more than a total of $2,000 per year may be contributed
per child. The funds grow tax differed and withdrawals are tax
exempt if used for qualified education expenses. Unlike other
tax advantaged education programs, the Coverdell Education
Savings Account can be used for public, private and
religious
elementary, secondary or post secondary education.
The account could be used throughout a child's education years.
Contributions may be made until the beneficiary reaches 18 years
old unless there are special needs. The beneficiary becomes the
owner of the account at age 18. The funds in the account must be
completely distributed by the time the beneficiary reaches 30
years old and if not used for education expenses the earnings
will be subject to a 10% penalty and income tax. The
contribution limits to a Coverdell Education Savings Account are
reduced when a contributor's adjusted gross income is more than
$95,000 ($190,000 if filing a join return). Because of the limit
on contributions it would be important to start this type of
account very early in a child's life. The account owner may
choose how the funds are invested.
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Section 529
Plans - Each state
can create "Qualified State Tuition Programs" to assist families
in saving for their children's future education. The regulations
for these accounts were established by Congress in 1996 and are
governed by the IRS under section 529 of the Internal Revenue
Code. Therefore, they are often called 529 plans. There are two
types of plans, a prepaid tuition plan and a savings plan.
The prepaid
tuition plan is a trust operated by the state allowing
parents to place funds in the trust based on current tuition
rates in
return for an agreement that the trust will pay the
tuition expenses
at a state institution when the child attends a
post secondary
school. This is a guard against the expected rise
in tuition
expense over the years. North Dakota does not have a
529
prepaid tuition plan.
The savings plan
is a state sponsored mutual fund with special
tax provisions. A
parent can sign up for the program and
place funds in
the plan. The money will grow until it is needed for
education
expenses in the future. The contributions are not tax
exempt but
the earnings grow tax deferred and will be tax-free
if they
are used for qualified education expenses. Some states
also
offer a state income tax exemption for 529 plan earnings.
However, North Dakota does not offer this benefit. North
Dakota�s 529 plan is called College Save and is managed
by
Morgan Stanley.
An account can be established by a parent, grandparent,
relative
or friend for a designated beneficiary. An account can be
opened
with as little as $25 and the account owner can contribute
any
amount annually or as a lump sum until the total reaches a
limit of $269,000. The owner may contribute up to $55,000 per
beneficiary to a 529 plan in a single year without triggering
the
federal gift tax. There are no income limitations for those
that contribute.
The owner of the
account is allowed to choose how the funds
are invested from a
number of managed investment portfolios
offered by the plan.
Since North Dakota does not offer a state
income tax break on
the earnings from their College Save plan,
you may choose a 529
plan from another state if you find it offers a
better return.
If the beneficiary
does not use the funds for qualified education
expenses, the
account may be transferred to another family
member
without a penalty. The funds may be withdrawn for other
uses but
a 10% penalty and income taxes will need to be paid.
For more information,
visit North Dakota College Save
For more information on comparing all state 529 plans, visit
Saving For College
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Regular
Investment Account -
Parents may also choose to
invest the money they are saving for education in a variety of
bonds, stocks or mutual funds. Any returns received will be
subject to income or capital gains taxes but at the time of
actually paying for qualifying education expenses the parents
may be able to take advantage of the tax benefits of the Hope Scholarship,
Lifetime Learning Credit and the Higher Education Expense
Deduction.
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Roth IRA -
Some parents
may choose to save their education funds in a Roth IRA. The
contributions are not tax deductible but the earnings grow tax-free. In 2005, each parent may contribute $4,000 to a Roth IRA.
Once the Roth IRA has been in place for 5 years, withdrawals can
be made for higher education expenses penalty free but not tax
free if the owner is not over 59-1/2 years old. The parents could
then use the tax benefits of the Hope Scholarship, Lifetime
Learning Credit or the Higher Education Expense Deduction for
the qualifying education expenses. If the child does not need
the funds for education, the account can be saved for other
goals. There are income limits on who may open and contribute to
a Roth IRA.
The choices on where to place
our education savings are numerous and varied. One size will
not fit all; many families will find a combination of accounts
the best option. Take your time and make an informed decision.
Return to Saving for Education topics:
The Value of Education
What Will It Cost?
Who's Paying?
How To Make It Happen
It's Never Too Late
Resources
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