|Strategies for Funding
and Growth Mutual Funds.Good
investments in the stock market have the potential to provide
better returns than insured, fixed-rate investments (such as
savings accounts and CDs, which are generally FDIC insured) - if
you have time to let the money ride the ups and downs of the
market. This is a long-term approach to investing. And remember:
What the stock market did in the past is no guarantee of how it
will perform in the future.
The word to look for here is growth. When
assessing the growth potential of a particular stock, consider
looking for long-term appreciation rather than dividends. Growth
stocks also allow you to postpone paying taxes on the capital
appreciation realized until you withdraw funds.
Investing in just one or two stocks is always
risky. If you'd like to participate in the growth potential of
the stock market with less risk, consider a growth mutual fund.
Money invested in such a fund is professionally managed and is
usually diversified over many stocks, which helps reduce risk.
Also, you can start investing in mutual funds with a relatively
small amount of money.
U.S. Savings Bonds (Series EE).You
need only go as far as your local bank to invest in Series EE
U.S. Government Savings Bonds. The face values of these bonds
range from $50 to $10,000, but you buy them at only half their
face value. For example, when you buy a $50 bond, you pay $25
for it. The interest rate paid on these bonds varies, and EE
bonds reach face value in a maximum of 17 years.
These bonds can offer substantial tax savings
if they're used to pay qualified higher education expenses. If
all requirements are met, no federal income tax is due on the
interest. To get this important advantage, you'll need to follow
certain guidelines. Among them: The savings bonds must be issued
in 1990 or later and be purchased in one or both parents' name(s)-not
the child's. Married taxpayers must file a joint return. The
owner must be at least 24 years old before the bond's issue
date. The bonds must be redeemed by the owner in the year
they're used to pay for qualified higher educational expenses.
Qualified higher educational expenses generally include tuition
and fees and exclude room and board. Talk to your tax advisor
and the person selling you the bond to be sure you've set up the
purchase properly. Also, there are income restrictions on who
can take advantage of this benefit. You'll need to call the
Internal Revenue Service or your tax advisor to verify your
shouldn't purchase life insurance unless you need protection. If
you have a permanent life insurance policy paid with fixed
annual premiums, you generally have the option of borrowing
against its cash value. Of course, the amount of cash value
available to borrow against varies, depending on the specific
policy. The death benefit will be decreased by the amount of the
outstanding loan. The interest rate charged on such loans is
often reasonable, and in many cases you can pay back the loan on
a flexible schedule. Talk to your insurance representative about
the advantages of life insurance when planning your child's
Prepaid Tuition Plans.Certain
states, such as Alabama, Alaska, Colorodo, Florida,
Massachusetts, Michigan, Ohio, Oklahoma, Pennsylvania,
Tennessee, and West Virginia offer various types of prepaid
tuition plans, generally for students attending state schools.
Residents of these states can buy a contract or bonds at a fixed
price, based on the rates of college tuition today. Payments can
be made in lump sums or monthly installments. The state, in
turn, invests the money to earn the difference between the
amount you are paying and the projected cost of tuition at the
time your child reaches college age. Those who sign up are fully
protected, as the state assumes all the risk of the investments.
Check with your state's commission on higher education to see if
a prepaid tuition plan is available where you live.
Prepaid tuition plans are not for everyone.
They mostly attract middle-income families who tend to be more
conservative in their investments. Lower-income families using
this option may jeopardize their chances for state aid and
forfeit money needed for immediate essentials. If you're
interested and a plan is offered in your state, you'll want to
know if it covers only the cost of tuition, or room and board,
too. Also, check to see if it applies to other than state
schools. Finally, confirm that your original deposit will be
returned if your child attends a private or out-of-state
college, is not accepted at a state school or chooses not to
attend college at all.
Savings Plan Trusts.
Certain states such as Connecticut, Iowa, Kentucky, Louisiana,
Massachusetts, New Hampshire, and New York offer special college
savings accounts known as savings plan trusts. These accounts
allow the contributor to save as little or as much as they like
on behalf of a designated beneficiary's qualified education
expenses. Contributions may be as little as $25. These accounts
may guarantee a minimum rate of return and generally provide
favorable tax treatment. The monies from the account may be used
at any qualified institution of higher learning within the
United States. If you move to another state, the money in the
trust goes with you. Some savings plan trusts allow monies to be
used for other family member's qualified education expenses.
Check with your state's commission on higher education to see if
a savings plan trust is available where you live.
Hope Scholarship Credit.
Generally, for tax years after 1997, this credit
will reimburse up to $1,500 per year of the cost of tuition and
fees paid during the first two years of secondary education for
joint filers with adjusted gross incomes of up to $80,000 and
single filers up to $40,000. This credit phases out as your
adjusted gross income increases and you are not eligible for
this credit if your joint income is above $100,000 and single
income is above $50,000.
Lifetime Learning Credit (LLC).
Effective July 1, 1998, this credit will
reimburse up to $1,000 of college tuition and fees per year
through the year 2002 and $2,000 each year afterward. To qualify
for the full credit, a taxpayer would need to spend $5,000 on
qualifying expenses through 2002 and $10,000 each year after.
Parents with more than one child may claim a LLC for one child
and a HOPE credit for a different child in the same year. The
two credits, however, may not be claimed in the same year for
You are now able to set up IRAs for the purpose
of paying college expenses. Contributions are allowed until your
child reaches 18, and contributions may not exceed $500 per
child per year. The $500 limit is phased out for joint filers
with income above $150,000, and single filers above $95,000.
Contributions are made with after tax dollars. There is no tax
deduction. This type of IRA allows you to make withdrawals for
the purpose of paying college expenses. Neither ordinary income
tax nor the 10% penalty for premature withdrawals apply if the
distribution is used for tuition, fees, books, and room and
board, and the taxpayer has not claimed either a HOPE or LLC
credit in the same year as the distribution.
CDs and Bank AccountsBank
Certificates of Deposit (CDs) and bank savings accounts are two
other places to put college savings. Although CDs and bank
savings accounts are generally FDIC insured, they generally
offer a lower return potential than other investment vehicles
and are most appropriate for those with short-term goals..