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How to evaluate college savings programs: Part 2


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In my last post, I discussed the rising cost of college tuition and the myriad ways parents and students are choosing to pay for it.

In light of a recent Wall Street Journal article, I'll begin my in-depth discussion of four college savings plans with the Coverdell Education Savings Account, known as an ESA.

In addition to paying for college tuition, parents now are beginning to borrow money en masse for private secondary education, according to the article. This trend is being driven by groups of middle-class parents who feel the public schools in their area are not providing a sufficient level of education for their children.

The ESA would have been an attractive savings plan for these parents because it can be used to pay for private primary and secondary education, not just college.

The ESA allows up to $2,000 a year of nondeductible contributions into the account per student. This money will grow tax deferred and can be distributed tax free as long as it is used for qualified educational expenses, such as tuition and fees, required books, supplies and equipment and qualified expenses for room and board. If the distribution exceeds the qualified expenses, an additional 10 percent tax penalty will apply.

If any funds remain when the beneficiary reaches the age of 30, the funds must be distributed within 30 days and the earnings will face an additional 10 percent tax penalty. Alternatively, the account can be transferred to another family member to avoid these taxes.

The upside of this account is the flexibility of investment choices. When opening an ESA, you can choose from a wide array of investment choices; work with your financial adviser to see which option is right for you. Unlike other plans I will discuss in the coming weeks, this is an attractive option to help keep your fees and expenses down, since you can control the investment portfolio yourself.

The downside of the ESA is the relatively small contribution allowed each year; $2,000 is a good start and might be sufficient if the parent or grandparents start saving at a very early age. But with tuitions heading skyward, this might not cover even the first year of higher education.

As the years go by and the child nears his or her college years, you can help mitigate your investment risk by scaling back on the aggressiveness of the account. It might be hard to recover from a significant market correction the closer you get to enrollment.

So it might be wise to start here and then look at other options to continue your savings plans. We'll talk about more over the next three weeks. As always, it is best to seek out the advice of a qualified financial professional to help structure an optimal investment portfolio.

Joe Wirbick is president of Lancaster financial services firm Sequinox and specializes in retirement planning and distribution. This allows him to concentrate on developing strategies that help address the unique issues that confront retirees and those approaching retirement.

Tax advice provided for informational purposes only. Tax returns should be completed in conjunction with a qualified tax professional. Sequinox Financial and JWC/JRAG do not offer tax advice and are not affiliated. Mr. Wirbick is an Investment Advisor Representative offering advisory services through Jonathan Roberts Advisory Group and securities through J.W. Cole Financial, Inc. Member FINRA/SIPC. The opinions expressed are those of Mr. Wirbick and based on information believed to be reliable but not guaranteed and subject to change and do not necessarily reflect the position of JWC/JRAG.

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