Broker Check

College Saving Strategy Misconceptions

August 12, 2015
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It seems almost everyone has an opinion on the merits of the typical college saving strategies, or lack thereof. In many cases, these opinions are formulated on some erroneous assumptions of the regulations behind these instruments.

For instance, there seems to be a widely held belief that if a plan beneficiary goes to an international university, the proceeds from some types of strategies might not qualify for tax-free withdrawal. This is actually not the case. The US Department of Education assigns a school code to approved international institutions. The best way to check if the international university is eligible is to visit the Department of Education website

Another area of confusion pertains to scholarships. A recent client of mine was convinced through his peer network that his withdrawal proceeds would be penalized if their child got a scholarship. Everyone he was speaking with seemed to be convinced that the entire proceeds could be penalized. In reality, non-qualified withdrawals from conventional plans are subject to ordinary income tax and a 10% penalty on the earnings, not the original contributions. However, the penalty is not applicable on amounts withdrawn equal to or less due to scholarships received. Also, it should be mentioned, there are no penalties if withdrawn due to the unfortunate death or disability of the plan beneficiary. For more explicit state and federal tax ramifications, it is best if clients check with their local tax advisor. 

Housing is another area of confusion. I have heard assumptions from many clients that off-campus housing, that is not owned and operated by the college, is not an eligible expense. In reality, you can claim expenses on off-campus housing as long as it is not in excess of the school’s estimate of room and board, and as long as the student is enrolled at least half time. 

Finally, in a recent conversation with a physician client, he was under the impression there is no creditor protection in place for his daughter’s college saving vehicle. The truth is, individual states offer varying degrees of creditor protection. Since the creditor protection component varies from state to state, the best advice to consult an asset protection attorney. There is a complete, though not frequently updated link of state by state exemptions, visit here.   

For Texas residents, I find it interesting that there is protection for savings accounts established under other states’ programs.    

Ashvin Chheda, ChFC®, CLU®
Opes One Advisors
President 

For more information on the topic of college savings strategies, email Ashvin_Chheda@opesone.com, or call 214-334-5656. 

Investors should consider the investment objectives, risks, charges and expenses of college savings instruments carefully before investing. This and other information are contained in the Program Description, which may be obtained from your investment professional.  Please read it before you invest. 

This material contains the current opinions of the author but not necessarily those of Guardian or its subsidiaries and such opinions are subject to change without notice.