Mutual funds are sold by prospectus. The prospectus contains detailed information about the particular mutual fund's goals, objectives, investment style, charges, and expenses. A prospectus for a particular mutual fund can be obtained from BB&R and should be read carefully before you invest. Investors should realize that return and principal value of shares in a mutual fund, other than a money-market mutual fund, will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Investors should also remember that funds whose investments are concentrated in a specific sector may be subject to a higher degree of market risk than funds whose investments are diversified. All mutual funds involve investment risk, including the possible loss of principal.
For information on how to choose mutual funds to fund your child's or grandchild's college education, contact us.
Zero-coupon bonds work like U.S. Savings Bonds: you buy them at a deep discount and receive the face value at maturity. Most zero-coupon Treasury bonds (often called "zeros") are available with a minimum $1,000 face value. They are backed by the full faith and credit of the United States government. When used for college savings, investors will usually buy them with a maturity date that matches the date that the child will enter college.
The issuer makes no interest payments during the life of the security. When it matures, you receive the full face amount, which equals your initial investment plus the interest compounded over the life of the bond. There are many different structures available for U.S. Treasury zero-coupon bonds, including STRIPS, FICOs, and REFCOS.
For more information on how zero-coupon bonds can help you fund your child's or grandchild's education, contact us.
Custodial accounts, established under the Uniform Gift to Minors Act or Uniform Transfers to Minors Act, allow parents or others to contribute to a child's education, and help secure a child's future. With these accounts, benefactors can invest up to $11,000 individually—$22,000 if funds are given jointly with a spouse—per year, per child.
All investments in the custodial account are owned by the minor, yet benefactors will have control over the account until the beneficiary reaches age 18 or 21 depending on the state. The custodians can invest in individual securities such as stocks, Treasury bills, and zero-coupon bonds; mutual funds; and Series EE U.S. Savings Bonds. The age limit differs for accounts established under the UTMA in that parents or the custodian maintains control over the account for a longer period, and can make different types of investments.
One of the main benefits of custodial accounts is that parents and others do not incur a gift tax as long as they stay within the individual and spousal gift limits set by the IRS. Also, while these accounts offer tax advantages, earnings on these accounts may be subject to the "kiddie tax" if the child is younger than 14 years old. In essence, earnings on the account above a certain amount are taxable at the parent's highest marginal rate. If assets are invested in growth-oriented investments with minimal dividends or interest until the child turns 14, the impact of the "kiddie tax" can be minimized. It is important to remember that UGMA/UTMA accounts are irrevocable gifts: the money belongs to the child, and control goes to him or her at the age of majority (which varies by state) and these accounts can also reduce a child's eligibility for financial aid.
Families may contribute $2000 per year to a special ESA IRA for each child up to age 18. Contributions are nondeductible; but interest, dividends, and capital gains accumulate tax-free until the student reaches age 30. At that time, the funds must be withdrawn and are free of taxes and penalties if used for higher-education expenses. Or they can be transferred to an education IRA for a qualified family member.
The income limits for those contributing to an Education Savings Account are as follows:
Statistics show college costs are rising about 5% a year, well above the rate of inflation. What does this mean for you? It's startling to realize that by the year 2020,the cost of a four-year college education at a public university is expected to be about $100,000. For a private university, the cost is expected to be about almost $260,000.1
State-sponsored investment programs have special tax status under section 529 of the Internal Revenue Code. A 529 Savings Plan, also known as a "qualified state tuition program" or "QSTP," provides for tax-deferred accumulation of all account earnings until the student makes qualified withdrawals for higher-education expenses. Withdrawals will be taxed to the student at that time. 529 Savings Plans feature low minimum contribution requirements and higher contribution limits than the Coverdell Education Savings Account.
1 Source: College Board, "Trends in College Pricing 2002." Year 2002 - 2003 costs — which include tuition, mandatory fees, and room and board — are used to project hypothetical future costs, assuming a 5% rate of increase.www.collegeboard.com
*Please be aware there are potential risks and costs associated with 529 College Savings Plans. The exemption of qualified withdrawals from federal income tax will expire on December 31, 2010 unless extended by Congress.
FinAid, The Financial Aid Information Page
FinAid offers a wide range of resources. It's well worth a visit on the strength of one of these alone: FastWEB (Financial Aid Search Through the WEB), a database that uses an online questionnaire to match your needs to more than 180,000 private-sector sources of aid. FinAid is maintained by Mark Kantrowitz, author of The Prentice-Hall Guide to Scholarships and Fellowships for Math and Science Students, and is sponsored by the National Association of Student Financial Aid Administrators.
CollegeNet is designed mainly to help users search databases for appropriate colleges, but it also offers a financial-aid link to a variety of resources. Information sources found through the links include the Department of Education, the Federal Trade Commission (for avoiding financial-aid scams), and banks offering student loans.