Education Savings Options
We understand how meaningful graduation day is to your family, therefore we are prepared to assist you select the college savings options that will bring your child's or grandchild's college dreams to fruition.
While there are a number of investment vehicles to help you save for this milestone, it is important to compare your options, determine how much you need to save and choose a vehicle that meets your specific needs.
As you review plans, think about your investment priorities, account ownership preferences and timeline. Your options may include 529 College Savings Plans, Custodial accounts and Coverdell Education Savings Accounts.
529 SAVINGS PLANS
A 529 plan is a college savings plan sponsored by a state or state agency. Assets from the plan can be used for tuition, books, and other education-related expenses. These educational expenses include college or other post-secondary education qualified higher education expenses), as well as tuition for elementary or secondary public, private, or religious schools. U.S. residents age 18 or older are eligible to invest in most state plans.
Why 529 Plan?
People of all income levels can open a 529 plan. In addition, the beneficiary of a 529 can even be the same person who sets up the account. Grandparents, relatives and non-relatives can contribute to the account. 529 plan assets also have a minimal effect on federal financial aid eligibility for college tuition because they are considered assets of parents and not the child when calculating the Expected Family Contribution (EFC).
- Any earnings grow tax-deferred.
- Qualified distributions are federal income tax-free.
- The account owner is eligible for gift and estate tax benefits.
- You can opt to change the beneficiary or withdraw the money as non-qualified distribution if the beneficiary decides not to attend college. The earnings portion of non-qualified distributions are subject to federal penalty tax; the principal is not.
- If your child or grandchild earns a scholarship, you can withdraw the amount of the scholarship award from your 529 plan account penalty-free. However, federal and state income taxes apply.
- The Secure Act 2.0 added a new law which allows alleviate parents fear about over-funding 529 plans, starting in 2024 the Act enables penalty-free rollovers from 529 plans to Roth IRA, with certain limitations.
Choosing the 529 Plan That Is Right for You
There are number of 529 plan options to choose from. You will need to consider tax advantages, plan performance and plan management to choose the most suitable option for you and your family. We are here to help you with your selection.
The following questions should be considered when narrowing down a 529 plan:
- What are the in-state tax benefits?
- What are my investment options?
- Is there age-based portfolio option?
- What are the fees and expenses, including asset-based, low-balance, account maintenance, and non-resident fees?
The Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA) are accounts that are set up on behalf of a minor. Assets are turned over to the beneficiary's control between age 18-21, and at the that time, they can use funds however they choose, whether college tuition or a new car.
Why a UGMA/UTMA account?
A UGMA/UTMA account may be ideal for parents or grandparents who want to take advantage of the "kiddie" tax rate and are not worried about the assets going to the child if not used expressly for college.
- At least part of the investment earnings may be exempt from federal income tax.
- Some or all of non-exempt investment earnings may be taxed at lower child's rate on an annual basis.
- The account holder is eligible for gift and estate tax benefits.
- The custodial account can be established in a child's name.
UGMA/UTMA accounts tend to have a greater effect on federal financial aid eligibility/Expected Family Contribution(EFC) because the assets are deemed the beneficiary's, not the parent's.
COVERDELL EDUCATION SAVINGS ACCOUNT(ESA)
A Coverdell Education Savings Account is a custodial account that allows you to save up to $2,000 a year for K-12 and post-secondary education expenses. Coverdell accounts may be established for any child under age 18.
Why a Coverdell account?
This account is more flexible when it comes to expense eligibility. For example, Coverdell savings can cover a computer cost for a K-12 student. In contrast, computers are only eligible in a 529 plan if your child is in college.
- Any earnings grow tax-deferred.
- Distributions are free of federal income tax when used for qualified expenses.
- The beneficiary can be changed.
- Qualified withdrawals include K-12 expenses (e.g., special needs services, tutoring and private school tuition) in addition to post-secondary education expenses.
Contributions to Coverdell Education Savings Accounts are not deductible. Also, unlike 529s, Coverdell assets are not revocable. The account must be established for the sole benefit of the child. In fact, the account custodian is the bank or other financial institution you use to open the account - not you. Coverdell Education Savings Accounts may be less appropriate for older students since the money must be distributed by age 30 with the exception of special needs students.
The National Education Statistics' school locator to research the current costs. Search For Schools and Colleges (ed.gov)
This calculator can help you estimate how much you should be Saving for College
Crash Course Video on Saving for College 101