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College Savings for the Rest of Us

As I reported in today’s Tax Guy column about taxes and financial aid, the costs to attend some colleges are approaching astronomical levels. For top-rated private universities, the annual hit can be $50,000 or higher. Some public schools charge out-of-state students $35,000 or more.

If your kid is a natural-born athlete or braniac destined for a big-money scholarship or tuition discount from a desirable college, no need to read on. For everyone else, keep reading.

If you have plenty of time to save, I still think Section 529 college savings plans are an attractive option, partly because gains are tax-free. (SmartMoney wrote more on 529 plan providers in November, detailing some things you need to be aware of, too.)

To save more modest amounts, Coverdell Education Savings Accounts (CESAs) are a good choice because you can withdraw account earnings federal-income-tax-free to pay qualified college costs. You can’t put more than $2,000 a year into a CESA, but if you have several kids, you can set up separate accounts for each and contribute up to $2,000 annually to each account. Note that CESA contributions aren’t allowed for higher-income folks (the contribution privilege is phased-out between adjusted gross income of $95,000 and $110,000 for singles and between $190,000 and $220,000 for married joint-filing couples). But you can get around that problem by funneling contributions through a child’s grandparent or another relative who is unaffected by the income restriction.  More on college planning and your money here.

If you still have big capital loss carryovers from the 2008 stock market meltdown, consider saving for college with a brokerage firm account set up in your own name. Saving in your own name is usually not recommended because you have to pay taxes on the income and gains that accumulate in the account, but having a big capital loss carryover allows you to completely shelter any capital gains (long-term or short-term) from taxes until you exhaust the loss carryover. (Remember: a capital loss carryover won’t shelter income from interest or dividends.)

Setting up a college savings custodial account in your college-bound child’s name can save taxes if you can manage to avoid the Kiddie Tax–which taxes some of a child’s capital gains, interest, and dividends at the parent’s marginal rate. However, custodial accounts have non-tax issues that can be cause for concern.

Finally, if it’s too late for anything other than the pay-as-you-go approach (been there, done that), the good news is you’ll probably qualify for some nice tax breaks that will help pay the bills. Some are detailed in a WSJ analysis of tax breaks in the December tax deal. Don’t overlook them.

Readers, are you using any of these strategies to save for college expenses? Any others you’ve tried?


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About The Tax Blog

  • The Tax Blog brings together a team of award-winning tax journalists from the Dow Jones network and around the web to examine the tax issues, changes and legislation that affect families, investors and small business owners. Our contributors include Tax Report columnist Laura Saunders (WSJ), Tax Guy columnist Bill Bischoff and senior reporter Jilian Mincer (SmartMoney.com), retirement-focused reporter Anne Tergesen (WSJ), wealth management writer Arden Dale (Dow Jones Newswires), TaxWatch columnist Eva Rosenberg and personal finance reporter Andrea Coombes (MarketWatch), and reporter Alyssa Abkowitz (SmartMoney). They’ll provide the latest news and insight, mine the tax code for tips and loopholes, and answer your questions about tricky tax situations. Contact the The Tax Blog with ideas, suggestions or tax questions at thetaxblog@dowjones.com.