It’s Your Money: It’s never too early to start a college fund

Scotts Valley voted last month to spend $35 million on its public schools with a goal of maintaining the district’s excellent record of sending 97 percent of its students to college.
Preparing students academically requires a team effort by schools, parents and students. But the next step in getting kids into college falls mainly on parents: Paying for it.
Just as kids should not put things off until the last minute when tackling a school project, parents should not procrastinate.
That means starting a savings plan as early as possible to pay for an education that can cost $100,000 or $200,000 or more.
Parents, grandparents, aunts and uncles can start putting money into 529 plans or Coverdell College Savings Accounts as soon as a child is born.
No one can know if a young child will eventually go to college, but both 529 plans and Coverdells allow for all eventualities.
Here are rules of the two plans:
n 529: Lets you invest large amounts of money. Most 529s limit the investments to a family of mutual funds. Growth is tax-free. When the child starts college, the money can be withdrawn tax-free as long as it is used for tuition or other “qualifying” expenses.
The donor names a child as beneficiary, but can later switch to a related beneficiary, or reclaim the funds for himself. Any withdrawal that isn’t used for higher education will subject the donor to income tax plus a 10-percent penalty on the earnings.
n Coverdell: Much the same as a 529, but contributions are limited to $2,000 a year, and if a donor’s income is too high, he or she can’t do a Coverdell.
Also, money can be invested in individual stocks or bonds, not just mutual funds. And you can take money out of a Coverdell for any education expenses, including kindergarten through 12th grade.
Coverdell donors have the flexibility of switching the beneficiary to an eligible family member, but unlike a 529, the donor can’t reclaim the money for himself.
Any withdrawal not used for education will subject the donor to income tax plus a 10-percent penalty on the earnings.
Two other ways to save for college are simply to set aside money in the parent’s name – which offers complete control, but no tax advantage – or to give money to a child in the form of a Uniform Transfer to Minors Account (UTMA), under which growth is taxed at the child’s low tax bracket.
A UTMA belongs to the child, so the money can be used for any expense that benefits the child, like a car, not just for education. But money in a UTMA can reduce the amount of financial aid a student can qualify for.
Money in Coverdells, 529s or in parents’ names are treated equally in financial aid qualifying, and provide an advantage over UTMAs, said Joseph Hurley of Savingforcollege.com, the nation’s premier expert on the topic.
In an e-mail, Hurley said: “529s and Coverdells do not throw off taxable income, so they are also better when it comes to the income side of the financial aid equation.”
When the time comes to pay for college, parents can patch together savings, financial aid, loans and scholarships.
Kids can start winning scholarships as early as middle school. Google “Scholarships for Children Under 13” to see opportunities.
Mark Rosenberg is a financial adviser with Financial West Group in Scotts Valley, a member of FINRA and SIPC. He can be reached at 831-439-9910 or mr********@fw*.com.