Four College Savings Solutions
Are you ready to start saving?
Gone are the days when saving for college meant passbook savings or taking out a CD (certificate of deposit). College costs are climbing about 6% a year – twice the rate of current inflation -- and parents must save aggressively. Here are just a few ways you can meet your savings goals:
529 college savings plan
College savings plans may have certain tax benefits, depending upon your State of residence. In addition, an investor must consider the rules and tax implications regarding withdrawals or regarding closing the plan.
State-sponsored college-savings plans – known as 529 plans – are right at the top of the list for long- and short-term college savings. Choose an investment option, make contributions, and the plan does the rest. Earnings can grow tax-free and anyone – parents, grandparents, aunts, uncles, friends – can open an account for a future student with as little as $25 or $50.
*Contribute up to $12,000 ($24,000 for married couples) annually, without gift-tax consequences.
*The maximum value of your account can reach $250,000.
You can contribute no matter how much – or how little – you earn, and you maintain control of the assets. Withdrawals for qualified higher education expenses are free from federal tax.
Coverdell Education Savings Account
A Coverdell Education Savings Account (ESA) is a tax-advantaged investment account that’s designed to encourage savings for future college expenses. In some ways, it is like a 529 college savings plan, with some important differences.
*Coverdell ESAs have lower contribution limits – currently, $2,000 per year per child.
*Coverdell ESAs allow and encompass almost any investment including stocks, bonds and mutual funds; 529 plans only allow certain state run allocation program investments.
*Withdrawals for qualified higher education must be made before the future student reaches 30 years old or gifted to another family member. There is no age limit for 529 plans.
*Coverdell ESAs allow money to be used tax free for qualified elementary and secondary school expenses; 529 plans do not.
UGMA/UTMA
UGMA/UTMA (Uniform Gift to Minors Act/ Uniform Transfers to Minors Act) custodial accounts were designed for individuals with a genuine desire to make a financial gift to a child. These accounts are well suited to relatively small dollar amounts because they’re quick, affordable and simple. There are no contribution or income limits, and students gain control of the assets at age 18 or 21 in most states.
*The first $850 of earnings is tax-free for children under the age of 18.
*Earnings between $850 and $1,700 are taxed at the child’s rate; over $1,700 is taxed
at the adult’s rate.
*Even when your child reaches 18 (or older), earnings are still taxed at a child’s rate.
Parents’ Investment Account
Some parents choose to maintain their own investment account for maximum control since the account is in your name, you decide when and how much money should be used for your child’s education. You should be aware of one major disadvantage: earnings are taxed at ordinary income rates and capital gains, if any, are also taxed at the parent’s tax rate.