There are several long-term saving plans designed to help save for educational needs. Three common college savings plans are 529 Savings Plans, Coverdell Educational Savings Accounts, and UGMA/UTMA.
A 529 savings plan offers considerable benefits for the participants such as tax-deferred earnings, tax-free distributions for qualified educational expenses, and possibly state income tax deductions depending upon your state of residency. Setting up a 529 plan is quick and easy. Most plans allow you to complete the enrollment form online in less than five minutes. You may set up electronic transfer with your bank account for automatic contributions or manually initiate them at specific times during the year.
A Coverdell Educational Savings Account is a tax-advantaged educational savings account that can be established for any child under the age of 18. The Coverdell account can be used to fund elementary, secondary and higher education. In fact, it is the only tax-deferred account that can be used for education needs other than higher education. The contributions are non-deductible for income tax purposes, but earnings grow tax-deferred. The account can be set up by any one related to the beneficiary and there is no limit on the number of individual beneficiaries for whom one contributor may set up accounts. However, there is a limit $2,000 per beneficiary per year for contributions.
The Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) are two laws designed to set up custodial accounts in a child’s name for the benefit of the child. Both of these accounts provide a simple and inexpensive method of making a gift to a minor without the expense of a trust. In spite of this, there are arguments against investing in a child’s name such as negatively impacting Financial Aid calculations or parents being subject to higher “kiddie-tax”. Once the child reaches the age stipulated by law, the money is legally theirs and they have full power to do as they want with the funds.
A Roth IRA is a good alternative savings method for college. It works well for people who want to avoid potential taxes and penalties later from overfunding education purpose accounts. If done correctly, withdrawals used for college escape taxes and penalties. Also, retirement accounts generally are not included in Financial Aid calculations and left over funds can be used later for retirement. If you cannot make up your mind about which savings vehicle is best for you, consider the good old-fashioned brokerage account, because it gives you the maximum control and flexibility.
There are pros and cons of each savings vehicle and the one or combination that is best for you is dependent upon your unique situation.
Contact our office at 515-284-1011 or email@example.com to discuss which option is best for you and your family.