You went to college, and your kids are going to college, too. But their education will cost far more when they attend than when you did. The College Board's recently released Trends in College Pricing report shows that the total average cost at in-state public colleges rose to an average $21,447 per year, while the average annual cost for private colleges rose to $42,224. Given that costs increased at a rate of 5.6% per year over the last decade, a young physician family with three children might expect college to cost about $1.2 million in the future. It's unlikely that your kids will qualify for substantial student aid and impossible for them to earn that much, so you'll need to do some financial planning to help them matriculate. When saving for college, a Section 529 college savings plan is the best vehicle for most physician families.
Three reasons to consider 529s
The tax benefits are a good fit for doctors. In many states, you get a tax deduction for making a contribution, including Colorado, Georgia, Idaho, Iowa, Kansas, Louisiana, Maryland, Michigan, Mississippi, Missouri, Montana, Nebraska, New Mexico, New York, Ohio, Oklahoma, Oregon, Rhode Island, South Carolina, Utah, Virginia, West Virginia, and Wisconsin. No matter where you live, your account grows tax-deferred until you withdraw the money. Then, when you use the money to pay qualified higher education expenses (QHEE), the money can be withdrawn tax-free. Qualified higher education expenses include tuition, fees, books, supplies, equipment, andfor students pursuing a degree on at least a half-time basisa limited amount of room and board. The cost of a computer is not QHEE unless it's required by the school.
Section 529 plans yield one other valuable break: estate taxes. Contributions to the plan are seen as a completed gift by the estate tax code, so your contribution qualifies for the $13,000 annual gift tax exclusion amount. In fact, you can contribute up to $65,000 per child and then elect to treat the contribution as if it were made over a 5-year period. So a physician family with two children could move as much as $260,000 into the planand out of their estatein a single year.
Worried about getting sued? You might want to move a chunk of cash into a 529 plan to get some creditor protection. Under Section 541(a)(6) of the federal Bankruptcy Code, certain contributions may be exempted from bankruptcy, depending on how much you contributed, when you contributed, and the relationship between you and the beneficiary (student). Some states also protect 529 plan accounts from creditors. Consult with your estate planning attorney before relying on a 529 to shield your assets.
One form of protection for 529s is certain: The account is protected from your kids. When you open an account, your name goes on the account application and your child/student's name goes on the blank labeled "beneficiary." In this case, the word beneficiary doesn't mean "the person who gets your money if you die" (that's the "successor account owner"). The beneficiary is the child who's going to college. Unless you crack open the account and give the money directly to your child, he cannot spend it himself. Unlike other arrangements including the Uniform Transfers to Minors Account and the Coverdell Education Savings Accountthe money is beyond his reach. This means your college money goes to college, not the local sports car dealer.
Section 529 plans are right for most doctors, but not all. For example, I've seen one case where a physician was intent on sending his children to a religious-based school that did not qualify for accreditation. As a result, tuition paid to that school does not meet the test for qualified higher education expense, so a 529 plan would not have been the best savings vehicle.
There is also a chance that you might end up with too much money in your account. For example, if you saved enough in your 529 for your daughter to attend Brown but she decides to go to Michigan State instead, you'll probably have two times as much money in the account as she needs. To get the excess balance out, you could either use the balance to pay for a family member's college expense or make a nonqualified withdrawal, incurring taxes and a 10% penalty.
Steps toward saving
1. Calculate how much you will need to save. A number of online calculators help you get the right answer. Be sure to include money you've already saved and money that grandparents have promised.
2. See if your state offers the best option. Compare the investment performance of your state's plan with options available from other states. Weigh the benefits of the tax break that may be available in your state at www.savingforcollege.com.
3. Open an account and decide how to invest. Caution: The yearsto- college option is easy to use but it may bring more risk than you're prepared to bear. Investment options geared for younger children are front-loaded with exposure to the stock market. Ask your registered investment advisor to help you choose the option that's right for your family.
4. Start saving. Most plans allow you to open an account with as little as $100 per month. A married couple can easily contribute up to $26,000 per child each year without running afoul of estate tax issues. Joe Hurley, the leading expert on saving for college, calls the 529 plan "the best way to save for college." Even though the tax benefits, creditor protection, and kid-friendly usability were intended for everyone's benefit, these features make 529 plans the best way for physician families to save for college, too.
W. Ben Utley, C.F.P., helps young doctors get on track with a personalized one-page plan to own a home, save for college, invest for retirement, and become financially secure. Physician Family Financial Advisors Inc. delivers fee-only financial planning and independent investment advice to clients coast-to-coast from its headquarters in Eugene, Ore. Visit www.physicianfamily.