How Can I Save for My Child’s College Education?

Once you’ve determined how much it will cost to send your children to college, your next prudent step is to develop a systematic investment plan that will enable you to accumulate the necessary funds.

What are some of your funding options? Which would be appropriate for your situation? We’ve listed several below, along with a brief description of each. Remember, you can use several of these funding methods at the same time.

UNIVERSAL LIFE INSURANCE

Universal life insurance policies build tax-deferred cash value through regular premiums and grow at competitive rates. These policies carry a death benefit. In addition to providing cash to your heirs in the event of your death, this death benefit gives universal life insurance policies their income tax-free status. Money can usually be withdrawn from these contracts through policy loans, often at no interest. These loans and/or withdrawals will reduce the policy’s cash value and death benefit.

NON-QUALIFIED DEFERRED FIXED ANNUITIES

To purchase a deferred annuity, you deposit a lump sum with an insurance company, which then accumulates interest. The interest on this account is not taxed until it is withdrawn — much like an individual retirement account. Generally, any distributions before age 59 1/2 are subject to a 10% penalty from the IRS.

ZERO-COUPON BONDS

Zero-coupon bonds represent the ownership of principal payments on U.S. government notes or bonds. Unlike traditional bonds, zero-coupon bonds make no periodic interest payments. Instead, they are purchased at a substantial discount and pay face value at maturity. The value of these bonds is subject to market fluctuation. Their prices tend to be more volatile than bonds that pay interest regularly. And even though no income is paid, the inherent interest is still taxable annually as ordinary income.

MUTUAL FUNDS

Mutual funds are established by an investment company by pooling the monies of many different investors and then investing that money in a diversified portfolio of securities. These securities are selected to meet the specific goals of the fund.

INDEPENDENT COLLEGE 500-INDEXED CERTIFICATES OF DEPOSIT

The I.C. 500 is the College Board’s index of college inflation based on a survey of the costs at 500 independent colleges and universities. I.C. 500-indexed Certificates of Deposit are a relatively new funding vehicle offered by a few savings institutions. Their rate of return is directly linked to the I.C. 500 index.

SECTION 529 PLANS

Section 529 Plans, or Qualified State Tuition Programs, are a new investment option when saving for college. Recently introduced by the IRS code under section 529, hence the name, these plans are sponsored by individual states and offer higher contributions than education IRAs along with tax-deferred accumulation. Once withdrawals begin, they are tax exempt as long as the funds are used to pay for qualified higher education expenses.

This material was written and prepared by Emerald Publications.

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