College Planning Overview
By: Karen Rinehart, CFP^®
The Henssler Financial Group Position Paper

If you are planning for a child's education, we suggest that you save to an account that is used only for education. We recommend using a 529 Plan account versus an Education Savings Account.

Section 529 Plans can only be used for post-secondary education. You cannot direct the investments inside a 529 Plan, but you can choose the portfolio track you prefer. The plan manager chooses the mutual funds or fixed investments used. Earnings on nonqualified withdrawals (those not used for higher education expenses) will be taxed as ordinary income at your rate, and a federally mandated penalty equal to 10% of any investment gains will apply. Nonresident owners or beneficiaries may be subject to state income taxes. Taxes must be paid from funds other than the money removed for the higher education expenses. Money removed for qualified expenses must be spent on higher education expenses. For additional information on 529 Plans, read "Section 529 College Savings Plans" in Henssler University.

Begin by investigating the 529 Plan in your state of residence. Many states offer tax benefits to their residents for contributions and withdrawals from their plan. If your state's plan offers tax benefits, you should consider that plan first. However, many states have income limits for receiving the tax deduction. When you choose a plan, your financial situation and goals should be taken into consideration.

If you are a Georgia resident and want to open a 529 account, we recommend considering Georgia's plan. Georgia offers a tax deduction for contributions up to $2,000. There are no income limits, dependency requirements or itemization requirements. Georgia recently removed the income, dependency and itemization requirements from their plan.

Georgia: (www.path2college529.com)

• Managed by TIAA-CREF;
• Fees charged range from 0.50% to 0.76%;
  • This excludes assets held in guaranteed options, which charges no fees;
• Offers seven investment options (two aged-based and three static investment options);
• Allocations among portfolios can be changed every 12 months, or if the account beneficiary is changed;
• New contributions can be directed to different portfolios;
• Maximum contribution limit of $235,000—when an account reaches $235,000, the account does not accept additional contributions, and
• No annual contribution limit—if a contribution is over $65,000, gift taxes could become an issue.

If you are not eligible for Georgia's tax deduction, you may want to consider other state's plans. The plan you choose should offer flexibility in rolling over assets to other state's plans. If the 529 Plan in your state does not offer benefits, consider the following plans. The plans mentioned below have low fees as long as they are purchased through the state and not a broker. These plans also allow new contributions to be directed to different portfolios, the account owner can change the investments every 12 months, and accounts can be rolled over to another state's 529 Plan every 12 months without penalty.

Iowa: (www.collegesavingsiowa.com)

• Managed by Vanguard;
• Underlying Vanguard funds have higher ratings by Morningstar than TIAA-CREF funds;
• Low 0.52% asset-based fees;
• Offers static and age-based options, and
• Maximum contribution limit of $320,000—when account reaches $320,000 account no longer accept additional contributions.

Utah: (www.uesp.org)

• State tax deduction for Utah residents;
• Uses Vanguard funds;
• Offers age-based portfolios and static options;
  • Eight of these options include investments in funds offered by Vanguard. Ninth option is by the Utah Public Treasurers Investment Funds, and
  • You can choose one option per account.
• Funds used are Large Cap funds with high Morningstar ratings;
• There are three parts to the Utah 529 fee structure: Vanguard Fund Operating Expenses, Administrative Asset Fee and the Administrative Maintenance Fee for UESP;
  • Vanguard Operating Expense Ratios:
    • Institutional Total Bond Market Index Fund: 0.05%;
    • Institutional Index Fund Plus: 0.025%;
    • Mid-Cap Index Fund Institutional Shares: 0.08%;
    • Small-Cap Index Fund Institutional Shares: 0.08%;
    • International Growth Admiral Shares: 0.31%; and
    • International Value Fund: 0.46%.
  • UESP Administrative Asset fee of 0.25%, annually:
    • Fee is waived for Utah residents invested in option 1.
  • UESP Administrative Maintenance fee is a maximum of $20, annually:
    • Fee is waived for Utah residents.
• Allowed to change investment options once per calendar year;
• Maximum account contribution is $319,000—when account reaches $319,000 account no longer accepts contributions;
• Accepts a $65,000 ($130,000 for MFJ) contribution; however, additional contributions cannot be made for five years;
• Account cannot continue to be unused indefinitely. Benefit payout must begin at age 27, or 10 years after account was established if beneficiary was older than 18 when the account was established, and
• Withdrawals can be rolled to other family members.

Nebraska: (www.PlanForCollegeNow.com)

• Managed by Union Bank and Trust Company;
• Charges an annual maintenance fee of $20 ($5 per quarter);
• Charges a Program Management Fee of .60% of the average daily net assets, annually;
• Each mutual fund charges an investment management fee and other expenses:

  • The target portfolios and age-based portfolios charge fees from 0.09%-0.37%, and
  • The individual mutual funds charge fees from 0.05%-1.04%.
• This plan offers four age-based portfolios, six target portfolios and 20 individual mutual fund portfolios;
• The 20 individual mutual funds are managed by Vanguard, American Century, Janus, Fidelity and PIMCO;
• Allocations can be changed every 12 months or when you change the beneficiary;
• Nebraska does not impose state or local tax on non-residents;
• Maximum contribution limit is $300,000—when account reaches $300,000 the account no longer accepts contributions, and
• Can contribute up to five times the amount of the annual exclusion from federal gift tax to an account on behalf of the beneficiary.

Alaska: (www.uacollegesavings.com)

• Managed by T. Rowe Price;
• The fee for static investments ranges from 0.49% to 0.75%. Annual maintenance fee of $25, which can be waived:
  • When you invest regularly through the Automatic Asset Builder or by payroll deduction;
  • For each of the beneficiary's accounts when at least one account is invested in the ACT portfolio;
  • If your total balance for a beneficiary is $25,000 or more, and
  • If your combined account balance, regardless of beneficiaries, is $75,000 or more.
• Funds have outperformed the funds in the plans managed by TIAA-CREF;
• The funds in this plan are directed toward small cap and mid-cap funds;
• Investments can be changed every 12 months;
• New contributions can be directed to different portfolios;
• Plan does not charge a 10% penalty, but the federal government does charge the 10% penalty for nonqualified withdrawals;
• No age limits on the accounts;
• Maximum contribution limit is $320,000—when account reaches a value of $320,000 account no longer accepts contributions;
• Maximum annual contribution $13,000 ($26,000 for MFJ);
• Accepts a $65,000 ($130,000 for MFJ) contribution, but additional contributions cannot be made for five years, and
• Fees are higher than other plans listed.

Minnesota: (www.mnsaves.org)

• Managed by TIAA-CREF;
• Charges a basis point fee of 0.65%;
• Offers static investments (all assets are invested into growth investments or fixed investments);
• Offers aged-based portfolios (allocation shifts more toward fixed income as a child nears college age);
• Allocations among the portfolios can be changed every 12 months;
• New contributions can be directed to different portfolios;
• Plan does not charge a 10% penalty for nonqualified withdrawals, but a 10% penalty will be due to the federal government through the taxpayer's federal income tax return;
• Maximum annual contribution is $13,000 ($26,000 for MFJ);
• Accepts a $65,000 ($130,000 for MFJ) contribution, but additional contributions cannot be made for five years;
• Maximum account contribution limits is $235,000, and
• Underlying funds are not rated as highly by Morningstar, as funds in Iowa's or Alaska's plans.

If you would like to have many investment options or choose an individual fund for investment, we suggest Nebraska's plan. Nebraska's plan is not suggested if you want to use an age-based portfolio, or a target portfolio.

Georgia has a one-year holding period in their 529 Plan before qualified distributions can be made from the account. If you are not eligible for the Georgia tax deduction, we suggest that you establish a plan in another state.

This information is subject to change.

Custodial Accounts

If you are not concerned with retaining control of investments intended for your child's college education, you can use a custodial account. With custodial accounts, you must be aware that when your child reaches the age of majority, the assets legally belong to the child. The child then can use the money anyway he or she sees fit. Unlike 529 Plans, you can control how the assets are invested in custodial accounts. For more information, read "Custodial Account—Uniform Gift/Transfer to Minors Act" in Henssler University.

Roth IRA

If you want to save for your child's education, but are having a hard time funding your retirement accounts, we suggest that you use a Roth IRA account for your child's education account. Roth contributions can be withdrawn from a Roth IRA Account at any time. For example, if you deposit $5,000 in 2009 and 2010 in your Roth account, you can withdraw $10,000 from this account in 2011, without tax or penalty, because this amount ($10,000) is the original contribution.

The contribution limits for Roth IRAs are as follows:

• 2010: $5,000 per year, with a $1,000 catch-up contribution for those older than 50, and/or
• The annual contribution limit will increase with a Cost of Living Adjustment.

For more information, read "Saving to the Roth IRA for Future College Expenses in the Parent's Name" in Henssler University.

Basic Rules for Earnings:

Earnings can be withdrawn from a Roth account after five years without penalty. However, taxes will be due if the distribution is used for qualified higher education expenses.

Earnings distributions from a Roth IRA account must meet the following criteria to be tax-free and penalty free.

The distribution is made five years after the initial contribution and one of the following:

• Distributions are made after attaining age 59½;
• The account holder becomes disabled;
• For the purchase of the account holders first home, or
• The distribution is due to death.

When a distribution is made from a Roth IRA account, contributions are considered withdrawn first. For example, if you have an account worth $10,000 ($8,000 is contributed money, and $2,000 is earnings). If you withdraw $6,000 today, there is no tax consequence or penalty, as contributions are pulled from the account first.

Other Alternatives

If you are unable to pay for your child's higher education, the following are alternatives: loans, grants, scholarships and other types of financial aid. For more information on loans, read "Sources of Education Loans" in Henssler University. If you are a Georgia resident, you may be eligible for the Georgia HOPE Scholarship. For more information, read "Georgia HOPE Grant & HOPE Scholarship" in Henssler University.

For more information regarding this topic, please contact The Henssler Financial Group at 770-429-9166 or comments@henssler.com.