Morningstar Advisor - Summer 2008 - (Page 36)

Spotlight Sizing Up the Options We inspect the more popular college-savings vehicles and tally up their pluses and minuses. 529 College-Savings Plan There is no shortage of ways for clients to save for college, and no one option is perfect. Each has its own set of quirks that make deciding the best course of action a bit complicated. And much depends on a client’s particular situation. Whether it’s deciphering the differences in contribution levels, income-tax breaks, investment choices, how the money can be used, who controls the assets, or the financialaid implications, making detailed comparisons between options can be time consuming. To give you a head start in your research, here are some pros and cons to look for when determining the most appropriate college-savings vehicles for your clients. Morningstar mutual fund analyst Marta Norton, attorney and MorningstarAdvisor.com contributor Susan T. Bart, and Sue Stevens, Morningstar’s former director of personal finance, contributed the information in this report. N Plus N Tax-free asset growth. N Tax-free distributions for qualified education expenses. N Some states give tax breaks on contributions or matching grants. N Can claim HOPE and Lifetime Learning Credits for qualified expenses not paid by plan. N Donor controls the account. N Anyone can contribute. No earnings restrictions on donor. N Can gift up to $60,000 a year per child without triggering gift tax, if election made. N Account owner can change beneficiary to another member of the family. N If owner is a parent or dependent student, financial aid will only count 5.6% in the family contribution formula. N Account owner can reacquire funds. N Some states offer credit protection. N Federal bankruptcy protection, with limits. Account owner can reacquire funds. M Minus M Limited investment options. M Layer of fees adds to investor’s expenses. M States must have a cap on account size or contribution amounts. M States can change features of plans and place savings with new managers. M Account owners can only invest cash, not appreciated securities. M Nonqualified withdrawals are taxed as income and may incur 10% penalty; also counts as income for financial aid. M Plan may be tapped by Medicaid if account owner needs nursing-home care and does not have other funds available. M Not all states have protections against account owner’s creditors. N Some states give tax breaks for contributions. N No income restrictions on donor. N No investment risk, unless the state mismanages the funds. M Fees may apply. M Limited number of schools participate. M May have a limited enrollment and contribution period. M Account owner or beneficiary is generally required to be resident of state offering plan. M If child attends out-of-plan school, some costs may not be covered. M Room and board usually not covered. M If owner terminates plan, state usually only returns original contribution and levies cancellation fees. M States may encounter shortfall risk. M Ability to change beneficiary may be limited. Coverdell Education Savings Account N Tax-free asset growth. N Tax-free distributions for qualified education expenses. N Can claim HOPE and Lifetime Learning Credits for qualified expenses not paid by Coverdell account (until 2011). N Great flexibility of investment choice. N Expenses may be lower than that of some 529 plans. N If owner is a parent, financial aid will only count 5.6% in the family contribution formula. N Funds can be used for primary and secondary school costs (until 2011). M The Pension Protection Act of 2006 did not make features permanent. Contributions will revert to $500 per year starting in 2011, and funds won’t be able to be used for elementary and secondary school costs. M Contributors face earnings restrictions. M Total contributions may not exceed $2,000 a year per beneficiary. M No state-income tax deduction for contributions. M Nonqualified withdrawals are taxed as income and incur 10% penalty. 529 Prepaid Tuitions N Prepaid tuition credits lock in future tuition costs at today’s rates. N Benefits are federally tax-exempt if used for qualified expenses. 36 Morningstar Advisor Summer 2008 http://MorningstarAdvisor.com

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Morningstar Advisor - Summer 2008 Contents Letter from the Editor Contributors Inbox College Planning: Solutions and Concerns ETFs: The Next Chapter Engineering Financial Advice Investment Briefs Flexible vs. Style-Pure Managers: The Evidence Forging a New Commodity Index Work Your Way Through College Planning Sizing Up the Options Best and Worst 529 College-Savings Plans A 529 Travel Guide 10 Tax-Smart Tips for College-Savings Planning Global Dialogue How Sequoia Cranks Out Good Returns Year After Year The Many Layers of David Winters Living on the Edge Stocks to Buy Once a Decade With Munis Feeling the Pain, Some Opportunities Arise Health Care Provides Shelter from Economic Storm Help Your Clients Get More Out of Their Bond Portfolios Mutual Fund Analyst Picks 50 Most Popular Equity ETFs Undervalued Stocks Most Popular Variable Annuities New at Morningstar New on MorningstarAdvisor.com Closer to Fine

Morningstar Advisor - Summer 2008

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