Options for Saving for College



If it’s important to you that your children attend college, the time to start saving is now, no matter how young or old they are; the question for you to ask is where to place your savings.


If you start saving early in your child's life, you can afford to be a risk-taker in the early years, but the closer you get to needing the money, the less risk is acceptable. A sharp downturn in the stock market right when you need money can be devastating if your investments are in market-sensitive investments.


Regardless of which savings vehicle you use, it’s key that you stay connected to your investments. Handing them over to a financial advisor blindly is not your best bet.


There are two main types of savings vehicles I do recommend you consider:


The “529 Plan” and the Wealth Creation Trust.


529 Plan


The 529 Plan is the most common way to save for college. This is a college savings opportunity that is named for the section number of the Internal Revenue Service Code that provides for its use. Under a 529 Plan, taxes are not paid on the earnings if used for college, including tuition, books, and living expenses. If the money in a 529 Plan is not used for college, a 10% penalty is assessed on the earnings, though the principal may still be withdrawn tax-free.


Wealth Creation Trust


The Wealth Creation Trust does not offer any tax savings, but it does offer more flexibility. You can establish a Wealth Creation Trust for your child at an early age and then ask all of your family members to contribute to the trust for the benefit of your child at important birthdays and other rites of passage. The funds in the Trust are held for the benefit of your child, who can become a Trustee of the Trust and learn to manage the assets when she hits a level of maturity you determine is appropriate.


Funds in a Wealth Creation Trust can be used to start a business, travel the world, or for any other purpose you determine. And sometimes that can be an even better education than college, these days.


Alternatives to big savings and risk-taking are to tap money that has been saved for other purposes--most notably, retirement. Using these funds, however, can affect a student's eligibility for various need-based tuition assistance programs. Retirement funds withdrawn to pay college expenses are reported on the Free Application for Federal Student Aid (FAFSA) as additional income.


Consequently, the Expected Family Contribution derived from the FAFSA will be higher and will, therefore, reduce the possibility of financial assistance when using retirement funds.


Two bright spots in the challenge of paying college expenses are the American Opportunity Tax Credit and the Lifetime Learning Credit. These are tax credits that allow a student or her parents-

to reduce his tax liability dollar for dollar based on tuition payments. The AOTC gives a credit of 100% of the first $2,000 in tuition- costs, and 25% of the next $2,000. The Lifetime Credit allows a credit of 20% of the first $10,000 in tuition costs regardless of how many children are incurring the expenses. Both programs have income limits to qualify: $180,000 and $134,000 respectively for those married and filing joint tax returns. If single, the limits are $90,000 and $67,000.


This article is a service of the Law Office of Keoni Souza, LLC, an estate planning law firm in Honolulu, Hawaii. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That's why we offer a Family Wealth Planning Session, ™ during which you will get more financially organized than you’ve ever been before, and make all the best choices for the people you love. You can begin by contacting our office today to schedule a Family Wealth Planning Session and mention this article to find out how to get this $750 session at no charge.


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All information available on this website is for informational purposes only and is not legal advice. You should contact an attorney directly regarding your specific situation. The use of and access to this website or the transmission of information via email or through this website does not create an attorney-client relationship between the Law Office of Keoni Souza, LLC and any users or any other party. Transmission of information via email or through this website may not be secure, therefore confidentiality cannot be assumed.  By using this website or transmitting information via email or this website, the user agrees to this information being collected, stored, or transmitted to a third-party.

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