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College Saving with Putnam's College Advantage
- Control Over withdrawals
| Q: What if your child doesn't go to college? |
A: Since you control withdrawals from your CollegeAdvantage account, you have several options if the beneficiary decides not to attend college.
- Change beneficiaries (Certain beneficiary changes may have tax implications.)
- Leave the assets invested in the plan for later use
- Withdraw the assets and pay a 10% penalty1
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You may change beneficiaries as often as you like, provided the new beneficiary is related to the original beneficiary. The account may be used for educational costs at any accredited post-secondary institution in the United States offering undergraduate or graduate degrees. Unlike UGMA and UTMA accounts, a Putnam College Advantage account always remains in your control.
- Tax benefits
You pay no taxes while your College Advantage account accumulates. Beginning in 2002, withdrawals for qualified education expenses are free from federal income tax.2 The earnings portion of qualified withdrawals made in 2001 is taxed at the beneficiary's income tax rate. Contributions can be as low as $15 a month or as high as $10,00 a year without exceeding the federal gift tax exclusion, and contributions can continue until the account value reaches $229,000.3 Contributing to a College Advantage account may also provide important estate planning benefits because the plan's high contribution limit provides a convenient way to effectively lower the taxable value of your estate.
- A choice of portfolios
You may contribute to any or all of the portfolios, but once invested in an investment option, assets may not be exchanged into or for another option. However, you may direct future contributions as you wish.
Age-Based Portfolio
As the beneficiary approaches college age, the portfolio automatically becomes more conservative with fewer equities and more fixed-income investments.
Balanced Portfolio
This portfolio offers a balanced approach with moderate potential returns and less risk than the growth portfolio.
Growth Portfolio
The growth portfolio offers potentially higher returns with a greater risk of principal loss.
Aggressive Growth Portfolio
This portfolio offers the potential for the highest returns over time, along with a correspondingly higher risk of principal loss.
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| C O M P A R E T H E A L T E R N A T I V E S |
| | CollegeAdvantage
529 SAVINGS PLAN | COVERDELL EDUCATION
SAVINGS ACCOUNT | UGMA/UMTA
ACCOUNTS |
529 PREPAID PLAN |
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| Income limitations | None | AGI limits apply | None | None |
Maximum yearly
contribution per beneficiary | $50,000 in the first year of a five-year period without exceeding the annual federal gift-tax exclusion6 | $500 in 2001
$2,000 in 2002 and thereafter | $10,000 without exceeding the annual federal gift-tax exclusion | $50,000 in the first year of a five-year period without exceeding the annual federal gift-tax exclusion6 |
Ability to change
beneficiaries | Yes | Yes | No | Yes |
| Control of withdrawals | Owner of account | Transfers to child when child reaches age 307 | Transfers to child when child reaches legal age | Owner of account |
| Investment Options | Ready-made portfolios | Wide range of securities | Wide range of securities | Tuition units guaranteed to match tuition inflation |
| State tax deductible contributions | Varies by state | No | No | Varies by state |
| Qualified use of proceeds | Any accredited post-secondary school in the U.S. | Any elementary, secondary, and accredited post-secondary school in the U.S. | Unlimited | Varies by state |
| Penalties for nonqualified withdrawals | 10% penalty withheld on earnings | Federal 10% additional tax payable by account owner | No | 10% penalty withheld on earnings8 |
| Taxation of qualified withdrawals | Taxable at child's rate in 2001; federal income tax free in 20029 | Tax free | A portion may be federal tax exempt; some/all income may be taxed at child's rate | Taxable at child's rate in 2001; federal income tax free in 20029 |
| Ownership of assets for financial aid purposes (may vary with private institutions) | Account owner | Student | Student | Student10 |
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| | Q: What is the Putnam CollegeAdvantage program? |
| A: The Putnam CollegeAdvantage Program (the "Program") is a new variable return college savings program that enables individuals to save and invest on a tax-favored basis in order to fund future college and graduate school expenses of a child or other beneficiary. The Program has been established and is maintained by the Ohio Tuition Trust Authority ("OTTA"), an independent state agency established under the laws of the State of Ohio. The Program is currently administered by certain companies afiliated with Putnam Investments ("Putnam"). The program began investment operations on October 1, 2000.
Under the Program you may set up investment accounts (each such account, an "Account") for family members, other individuals or even yourself (a "Beneficiary"). Each Account will represent an interest in the Ohio Variable College Savings Trust Fund (the "Fund") established by OTTA to hold assets of the Program. Such interest will be limited to one or more portfolios of the Fund established by OTTA, based on the investment option(s) you select for your Account.
Amounts contributed to an Account are invested under one or more of four investment options you select. The four investment options are (1) an age-based option in which the investment becomes more fixed-income oriented as the Beneficiary's age increases, (2) a balanced option, (3) a growth-oriented primarily equity option, and (4) an aggressive growth option. Whichever investment option(s) you select, amounts in your Account will be allocated among several mutual funds sponsored and managed by Putnam. The amount available for withdrawal from the Account will depend on the investment performance of the options chosen. Accordingly, assets in the Account will be subject to investment risks. See "RISK FACTORS".
The investment income and gains in the Account will not be taxed until withdrawn. Amounts withdrawn before January 1, 2002, to pay qualified higher education expenses will be taxed at the Beneficiary's income tax rate, which is often lower than the contributor's income tax rate. Amounts withdrawn on or after January 1, 2002, to pay qualified higher education expenses will not be subject to federal income tax. Amounts withdrawn for reasons other than payment of qualified higher education expenses generally will be subject to a 10% penalty on earnings in addition to the income tax which is due. Effective January 1, 2002, the 10% penalty will be replaced with a federal 10% additional tax on earnings.
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| Q: How can you postpone that college bill? |
| A: Here's a little-known year-end planning jewel, courtesy of the Bush Tax Cut legislation. Starting next year, you may qualify for a new break allowing you to deduct up to $3,000 of college-tuition costs paid for your dependent child/student. This is welcome news for all parents of college kids, but parents of seniors need to be extra careful that they can take advantage of this new break, since they (mercifully) have a limited number of bills ahead of them. If you fall into this camp, and you have (or soon will) receive the tuition bill for your kid's final semester, hold off on payment until next year, since the write-off only applies to amounts paid after 2001.
So if you pay the final tuition bill this year, you'll get stiffed in 2002. Joint filers are elgible for this new break if next year's adjusted gross income turns out to be $130,000 or less. The income limit for singles is $65,000. (No dice for married folks who file separate returns in 2002.) Keep in mind you may qualify for this new write-off even though your income is too high to be elgible for the Lifetime Learning college tax credit or the college-loan-interest deduction.
Also, for you to claim the write-off, your student-child must be a deductable dependent on your 2002 return. That means you must pay over half the child's support next year. Plus the child must either be a full-time student for at least five months during 2002 or have no more than $3,000 of income next year.
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Notes:
- The earnings portion of any nonqualified withdrawal is generally taxed at the tax rate of the recipient and is subject to a 10% penalty, which will be withheld.
- State income taxes may continue to apply. Please read the offering statement for complete details.
- Contribution limit as of 2001. Subject to periodic review.
This example assumes contributions of $500 per month, a hypothetical 8% nominal rate of return compounded monthly with an effective return of 8.30% and a 28% tax bracket for the taxable account. The return is shown for illustrative purposes only and is not intended to predict the return of any one investment, which will fluctuate. Regular investing does not ensure a profit or protect against loss in a declining market. Nonqualified withdrawals are taxed at the recipient's rate and are subject to a 10% penalty. Effective 2002, the 10% penalty will be replaced with a federal 10% additional tax that must be separately reported and paid to the IRS.
- This fund appears only in the Aggressive Growth Portfolio.
- An investment in the fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve an investment at $1.00 per share, it is possible to lose money by investing in the fund.
- If an account owner elects to treat a contribution as having been made over a 5-year period and dies before the end of the 5-year period, the portion of the contribution allocable to the remaining years in the 5-year period (not including the year in which the account owner died) would be included in computing the account owner's gross estate for federal estate-tax purposes. Account owners may be required to file a gift tax return in each of the 5 years. In addition, account owners may wish to consult their tax or estate-planning counsel to ensure that they obtain the tax consequences they desire.
- Owners of Putnam Coverdell Education Savings Accounts (formerly Education IRAs) retain control for the life of the account.
- Effective 2002, the 10% penalty is replaced with a federal additional 10% tax that must be separately reported and paid to the IRS.
- State taxes may still apply. Nonqualified withdrawals are subject to tax and penalty. Read the offering statement for complete details.
- Funds in a prepaid plan are not considered as an asset but are used to reduce the "cost of attendance" or are considered estimated financial assistance, resulting in a dollar for dollar reduction of financial need and, potentially, a dollar for dollar reduction in financial aid.
This information is general in nature and should not be considered tax or investment advice. Numerous recent changes in the tax law have made college savings plans more accessible and attractive to many people. You should consider the place of various education planning vehicles in the context of your overall financial plan with a financial and/or tax advisor. This guide, which is only a summary of various education savings options, should not be treated as a substitute for qualified tax or investment advice. This guide Web page must be accompanied or preceded by a CollegeAdvantage offering statement. Please carefully review the offering statement for the program before making any investment decisions.
| Not FDIC Insured | May Lose Value | No Bank Guarantee |
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Diversified Securities Inc. 1000 Lakes Dr #420, West Covina, California 91790
Telephone (626) 919-3456 / (909) 949-3300 / (800) 365-7749 Fax (626) 919-6127
E-Mail joerubins@yahoo.com
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Last update: 14 January, 2008
Copyright © 1996, 1997, 1998, 1999, 2000, 2001, 2002, 2003, 2004, 2005, 2006, 2007, 2008 by Joe Rubinstein/Diversified Securities, Inc. and CitiVU. All rights reserved.
Securities and Investment Advisory Services offered through H. Beck Inc. H. Beck, Inc. and Diversified Securities are not
affiliated. H. Beck, Inc. Member FINRA, SIPC, MFA
Joseph Rubinstein is securities registered in the following states: AZ, CA, CO, FL, GA, HI, ID, IL, ME, MT, NE, NH, NJ, NM, NV, NY, OK, OR, PA, TN, TX, VA, WA.
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