Saving For College
Parents today have more choices than ever when it comes to saving for college. While the many options provide more flexibility, it also requires for parents to do more research and have more knowledge, just to make sure the right college saving strategy is being used.
Coverdell Education Savings Accounts (ESAs)
When these plans were first introduced, they were known as education IRA’s and provided very little benefit. Today, with a new name and under different tax laws, these plans could be used as a college savings strategy. They allow for parents to contribute up to $2,000 a year, per child. The earnings from the investments in these accounts are tax free, if the withdrawals are made for qualified elementary, secondary, or post-graduate educational expenses. Withdrawals outside the guidelines are considered non-qualified and become subject to both income taxes and a 10% federal tax penalty on earnings.
To discover more about Coverdell Education Savings, contact us today.
529 Plans
This type of account or plan is generally offered by the states. In fact, 49 states and the District of Columbia offer 529 college savings plans. Many of these plans are national, and available to residents of any state. There are many unique features associated with 529 plans. They allow for contributions in excess of $200,000 per beneficiary or child, earnings are tax deferred, and the assets can be transferred to another member of the same family, just to name a few. The assets in these plans must be used for qualified educational expenses, otherwise the withdrawals are considered non-qualified and become subject to both income taxes and a 10% federal tax penalty on earnings.
Contact us to discuss 529 plans.
Custodial Accounts
Custodial accounts are basically your average everyday minor’s savings account. They are also known as UGMAs and UTMAs, which stands for Uniform Gifts to Minors Act or Uniform Transfers to Minors Act. Custodial accounts allow for unlimited investment amounts, the ability to use the assets on anything for the benefit of the minor, and usually provide some tax relief, because the earnings are taxed at the child’s income tax rate. However, these accounts do not provide for the ability to potentially defer or escape taxes on investment earnings. Another disadvantage of custodial accounts is that they become the child’s asset once he or she reaches the legal age of adulthood. At that time, if a child wishes to use the money, a parent has no legal right to stop them.
Saving for college has become very complicated, contact us so we can help you choose the right college savings strategy.
Prior to investing in a 529 Plan investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.
