Using Mutual Funds To Save For College

Mutual funds from TIAA-CREF offer several possibilities for education savings.

One possibility, is a regular mutual fund account in your name, with the funds earmarked for education. You'll retain control over the funds (perhaps minimally affecting your child's eligibility for financial aid). Contributions won't be deductible and earnings will be taxed at your rate, which is presumably higher than your child's.

Alternatively, you can put in up to $12,000 a year (in 2007) free of federal gift taxes, in your child's* name through a custodial account under your state's uniform gift (or transfer) to minors act. The so-called "kiddie tax" applies to children under age 18 with unearned income. Generally, the first $850 of annual earnings is tax-free, and the next $850 is taxed at the child's rate (usually 10%). Unearned income over $1,700 is taxed at the parents' highest marginal tax rate (unless the parents are taxed at a lower rate than the child). Children age 18 and older pay taxes on all net investment income earned in the account at their tax rate, typically 10%. (These figures apply for the year 2007, are generally adjusted annually and are subject to change due to legislation.) For the 2008 tax year, the kiddie tax will be expanded to include dependents under the age of 19 and dependent full-time students under the age of 24.

Another alternative is a Coverdell Education Savings Account, formerly called an Education IRA. It is a tax-advantaged education savings account. Contributions cannot exceed $2,000 in after-tax dollars, but funds can be withdrawn free of federal income tax and penalties on earnings to pay for qualified elementary, secondary and higher education expenses.Certain tax laws allowing federally tax-free qualified withdrawals are set to expire on December 31, 2010. Congress may or may not extend the law beyond this date. You should consult your tax advisor about the potential expiration of this and other tax benefits applicable to Coverdell Accounts.

When choosing among the mutual fund options for your Coverdell Education Savings Account, you may consider, among other things, your particular financial circumstances, investment time horizon, tolerance for risk and whether or not you have other savings in place for education expenses. For example, if your time horizon spans beyond a decade, you may consider allocating a greater percentage of your contributions to stocks, which have greater risk but historically offered greater potential for growth than other options. Past performance, of course, does not guarantee future results. You should consider the investment objectives, risks, charges and expenses carefully before investing.

You can choose among the wide variety of no-load mutual funds we offer for your Coverdell Education Savings Account. As time for paying tuition nears and fluctuations in the account value become less tolerable, you may want to rebalance your assets and reallocate contributions toward a more conservative strategy.

Keep in mind that Coverdell Education Savings Accounts aren't like IRAs. As tax-advantaged college savings plans, they can't be used for retirement investing and don't affect your eligibility or contribution limits for actual IRAs and/or tax-deferred annuity plans.

For the most current mutual fund performance, click here or phone us at 1 800 223-1200. Past performance should not be taken as a guarantee of future results. Future returns will fluctuate, as will the value of investment principal. The shares you own may be worth more or less than their original value upon redemption.

TIAA-CREF Individual & Institutional Services, LLC and Teachers Personal Investors Services, Inc. distribute securities products. You should consider the investment objectives, risks, charges and expenses carefully before investing. Please click here or call 1 877 518-9161 for a prospectus that contains this and other information. Please read the prospectus carefully before investing.

* For 2007, the Annual Exclusion for gifts of present interests during the calendar year is $12,000.
Past performance does not guarantee future results.

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© 2014 and prior years, Teachers Insurance and Annuity Association - College Retirement Equities Fund (TIAA-CREF), New York, NY 10017