How to plan for kids education?

[nancydrew]

Hi,

I am a mother of a small kids. I am intesrested in knowing what is the recommended means of planning for kids education. We are not sure if we will continue to be here or in India.

We have started some savings for kids in India. But nothing in US.

Are there any investments that we can do here and withdraw in case we are going back?

Appreciate any details in this regards.

Thanks!

[bollywoodmania]

529 plans were under water in the 2008 market crash and most of the funds are just now returning to black ink with no gains for the past 4 years of our investment !

So if you have not saved much so far, you didn't lose much but don't wait.

The Education IRA is now called the Coverdell Education Savings Accounts,CESA allows for a maximum annual contribution of $2,000 per student. The earnings in the account grow tax-free as long as distributions are used for eligible expenses, which are not limited to college costs. (you can itemize the costs and get tax benefits).

529 plan is state dependent. Look in your state what tax laws apply for that.

For older parents(who will be 59.5, when their kids enter), Roth IRA can invest up to $4,000 a year.

[tara]

If one is planning to return to India, is 529 plan is still good?

[iplrocks]

Tara,

If kids are coming back to US for studies, then it's good but consult with your state website for tax info as 529 are extremely complicated.

We have contributed to 529 but haven't done any withdrawal as the accounts were under water for the past 4 years. From past 6 months, it has started showing very little gain.

I feel if you are going to India and planning to send kids alone, keep the money in good growing funds than all these complicated tax vehicles like ERA, 529 as kids of US Citizens staying in India can get good aid in majority of the US schools as they cannot show many savings here and some of these savings in these accounts might act as deterrent in getting aid.

Please consider this as personal opinion. Think of long term benefits for kid's education planning and understanding all the plans is very necessary.

[tara]

iplrocks, thanks for the information.

So, Is 529 is all about tax saving? How can it go under water if it's a contribution of my own money(as like flex accounts)

[iplrocks]

Mar 31, 2011 7:04:11 GMT -5 tara said:

iplrocks, thanks for the information.

So, Is 529 is all about tax saving? How can it go under water if it's a contribution of my own money(as like flex accounts)

529 (IRS code) is still a tax advantaged investment vehicle for education for kids but it is still like set of mutual funds which is administered by financial institutions. Say for example, you are allocating every year $2000 per kid per year to save 30% on taxes for dual income couple, Unless the money does not decrease below 30% , then it's win. In our case value had depreciated so much, it was not even breaking even. And unlike many balanced funds, 529plan does not have too many options for moving money from loss making funds.

If the plan is to send kids to US with hopes of getting good aid package from good universities, savings in 529 might reduce that aid package IMO.

[readytogo]

IPLrocks, you really rock on this subject.

Can I invest in 529 plan my own or it has to be employer sponsored plan?

[nancydrew]

iplrocks, I agree with above comment. You seem to be really well versed on this subject. I will get back to you if I have more questions. Thank You!

[iplrocks]

Mar 31, 2011 14:06:59 GMT -5 readytogo said:

Can I invest in 529 plan my own or it has to be employer sponsored plan?

There are two types of 529 plans: prepaid tuition and savings. Prepaid tuition plans (sometimes called guaranteed savings plans) are currently available in 13 states and allow for the pre-purchase of tuition based on today's rates and then paid out at the future cost when the beneficiary is in college. Performance is often based upon tuition inflation. Prepaid plans may be administered by states or higher education institutions (colleges themselves). For example now a days, it costs $120K-$160K for 4 year undergrad. If say in 10 years, when your kid is entering college, with an higher inflation like 9%, the cost will be $284K. But with prepaid plan, you are locking at today's rate of $120K to be paid in x number of years.

second option is Savings plans are different in that your account earnings are based upon the market performance of the underlying investments, which typically consist of mutual funds.

Savings plans are administered only by states. 49 states and Washington, D.C. offer a savings plan. Most 529 savings plans offer a variety of age-based investment options where the underlying investments become more conservative as the beneficiary gets closer to college-age. They also offer risk-based investment options where the underlying investments remain in the same fund or combination of funds regardless of the age of the beneficiary. In addition, many savings plans offer a stable value or guaranteed option designed to protect an investor's principal while providing for some investment growth, while others offer investments in certificates of deposit.

So it's not your employer but yourself who have to take the step of studying all the 529 options at your state/universities and then decide to contribute.

If you decide to contribute to 529 of other state, then usually you end up paying taxes or fees.