One of the greatest financial worries of most American families has always been, will we have enough money to live comfortably during retirement? Families with children are also worried about whether they will be able to afford to send their kids to college
According to Trends in College Pricing -- a survey of over 3,200 U.S. post-secondary institutions conducted in 2002 -- when a child born in 2003 is ready for college, a four year degree at a public in-state institution will cost $83,169. Four year degrees at public out-of-state and private colleges will cost significantly more, $136,387 and $217,644 respectively. These figures account for a 5 percent college inflation rate.
After the shock from seeing those numbers for the first time wears off, parents start looking into their options, says John Walters, executive vice president for The Hartford's Investment Products Division. Some will choose to put away money in a savings account every month, others in CDs or mutual funds, but they're really doing themselves a disservice. All of those options are taxable investments and as a result, don't maximize earning potential?
If you're looking for a college savings plan where your money will grow tax deferred,(1) there are two options out there: the federal government authorized Coverdell Education Savings Account and the 529 College Savings Plans, sponsored by each of the 50 states and certain private institutions.
Coverdell accounts allow you to put away up to $2,000 per year per beneficiary for education related expenses, but they are very limiting. You can have more than one Coverdell set up, but have to keep track of how much you put into each account per year. If you exceed the $2,000 maximum for all accounts, you will face tax consequences; and you can only contribute until the beneficiary is 18.
People who invest in 529 plans have more flexibility. The plans can be opened for anyone considering going to college, including children, relatives and parents. You can even set up an account for yourself. These college savings plans usually require only modest amounts to open; and you can add any sum up to the maximum that each plan authorized. Furthermore, you can gift up to $55,000 to a beneficiary once every 5 years without incurring a federal gift tax. (2)
All 50 states have passed legislation authorizing 529 plans, and most have a college savings plan and/or prepaid plan in operation. The nice thing about 529s is you don't have to live in or go to school in the state that is sponsoring your plan, says Walters.
Hartford Life Insurance Company administers the SMART529 plans offered by the state of West Virginia. Thousands of people from all 50 states have enrolled in SMART529. The plan offers investors access to dozens of investment options, including individual fund options, static portfolios and age-based portfolios. It also offers net asset value transfers, meaning transfers from other 529 plans or Coverdell accounts can be made without an upfront sales charge.
For more information about SMART529 products, visit your financial advisor. If you want to get a better idea of how much college will cost when your child is ready to go, there's an online calculator on the Hartford Investor's Web site. Log onto www.hartfordinvestor.com. Under Education Center? on the left hand side of your screen, click on the link that says calculators, then scroll down to the link that says SMART 529 college savings calculator.