Parents with college-bound children are undoubtedly concerned with setting up a financial plan to fund future college costs. The goal for parents whose children are already of college age is to pay for current or imminent college bills.
The two main education savings account vehicles are Coverdell Education Savings Account and a 529 College Savings Plan. Some individuals also create Uniform Gift to Minors (UGMA) custodial accounts and provide funds directly to the child. Below are the highlights of these three methods.
Coverdell Education Savings Account
- Contributions are made with after-tax dollars. Money in the account grows tax-free and there are no taxes on the distribution if the funds are used for educational expenses.
- Contribution limitation per child per year is $2,000.
- Contributions are made until the beneficiary reaches age 18 unless they have special needs.
- Maximum contribution amount is phased out once the adjusted gross income reaches $95,000 or $190,000 for joint return filers.
- Distributions can be used to pay for elementary, secondary and higher education expenses.
- Funds must be withdrawn by the time the child reaches age 30 or the earnings will be taxed as ordinary income.
- The student or the student’s parent may be the account owner.
529 College Savings Plan
- Contributions are made with after-tax dollars. Money in the account grows tax-free and there are no taxes on the distribution if the funds are used for educational expenses.
- No income limits, age limits or annual contribution limits.
- Distributions are not taxable to the extent they are used for qualified secondary institution expenses.
- The parent is the permanent account holder and remains in sole control of the funds.
Uniform Gift to Minors (UGMA) custodial accounts
- Used to gift assets to minors.
- Any assets given are owned by the child.
- Funds and assets received by the child can impact the child’s ability to receive financial aid in the future.
- There are no distribution limitations.
- The custodian can sell the assets for the child’s benefit at any time or for any reason once the child reaches 18 or 21, depending on the state.
Not all of the above breaks may be used in the same year, and use of some of them reduces the amounts that qualify for other breaks. So it takes planning to determine which should be used in any given situation.
If you would like to discuss one or more of the above planning or payment possibilities, or any other alternatives, in more detail, please give us a call.