It’s Your Money Column – Starting a College Savings Plan for Children

Question: My daughter is 12, and I want to start a college savings program for her. What are my choices?

Answer: Because there are so many choices for college savings plans, this is pretty complicated. I’ll describe some of your choices with a few of the pros and cons, plus I’ll give you some sources of information for your own comparison.

The 529 Savings Plans are offered by each state. Although the details of each state’s plan are different, there are common advantages. Money saved in a 529 plan can be used for any college in the United States and the savings are tax-free (both federal and state in Colorado) when used for qualified expenses including tuition, fees, books, supplies, room and board. If your daughter decides not to go to college, you can get your money back, but you will owe tax on the earnings and will be assessed a 10 percent penalty. Potential disadvantages include higher expenses than if you had invested the money yourself, and the earnings may count as income in financial aid formulas if a grandparent is the donor.

The 529 Prepaid Tuition Programs allow donors to purchase tuition credits for a beneficiary who is expected to attend a public university. The independent prepaid tuition program covers private institutions such as Colorado College. See Pluses of prepaid tuition plans include tax-exempt benefits if used for qualified expenses and state tax breaks. On the other hand, this plan may reduce the amount of financial aid awarded.

The Uniform Transfer to Minors Act is an account set up on behalf of a minor. Income is taxed to the child each year, and the child takes control of the money at age of majority (18 or 21). Because the child owns the account, more of this money will be counted toward the family contribution when determining financial aid eligibility.

Money can be withdrawn from individual retirement accounts for qualified higher-education expenses without penalty. If the money has been invested in a Roth IRA for five years, no tax will be due. Withdrawals from IRAs will be counted as income in financial aid formulas.

The Coverdale Education Savings Account allows you to contribute up to $2,000 per person each year and deduct the contribution from your taxes. Accounts can be established with most brokers and mutual fund companies. These contributions may be used for primary and secondary education expenses. You can make contributions to a 529 plan and a Coverdale Plan, but there is a potential gift-tax consequence if you contribute a total exceeding $11,000 per person.

If your 2004 modified adjusted gross income is less than $53,000 for a single filer or $107,000 for married filing jointly, there are addition tax breaks you can take.

The HOPE Scholarship allows you to deduct 100 percent of the first $1,000 of qualified education expenses and 50 percent of an additional $500 from federal taxes. You can use this credit for two years.

Or you can use the Lifetime Learning Credit, which is 20 percent of up to $10,000 of qualified education expenses. There is no limit to the number of years you can claim the credit. You can’t apply the same expenses for both the HOPE Scholarship and the Lifetime Learning Credit.

A third tax credit is available to families with modified adjusted gross incomes of $65,000 or less (single) or $130,000 (married filing jointly). Up to $4,000 may be deducted with a partial credit for higher adjusted gross income. This tax credit can’t be used in the same tax year if the HOPE or Lifetime Learning Credit is used.

The nonprofit Colorado CollegeInvest Web site at

shows comparisons of some of these options. More information can be found at, and in the 2005 edition of Joseph Hurley’s book, "The Best Way to Save for College."

In my next column I’ll focus on the Colorado CollegeInvest plan.

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Judy McKenna, Ph.D., CFP, Family Economics Specialist, Colorado State University Cooperative Extension,, 491-5772