Saving For Your Child’s
College Education
All
parents struggle to find the funds to send their children to college. Clients
often ask us for help on this topic. For this blog entry, we thought it might
be helpful to go back to basics with an Overview of 529 Plans, Coverdell
Education Savings Accounts, and Custodial Accounts.
As
you begin your search for tax-efficient strategies to pay for college costs,
keep in mind that 529 plans, Coverdell Education Savings Accounts, and
UGMA/UTMA accounts each offer unique benefits. It's critical that you understand
all of them before making a final decision.
Section 529 college
savings plans are named after the section of IRS code that created them.
They are college- or state-sponsored, tax-advantaged plans that allow
individuals to invest in portfolios of stocks, bonds, and cash equivalents.
Contribution limits for 529 plans vary from state to state. Distributions made
to pay qualified education expenses are tax free. Prepaid tuition plans also
fall under Section 529, but for the purposes of this article, the phrase 529
plan refers only to a college savings plan.Coverdell Education Savings Accounts (formerly known as Education IRAs) allow tax-free earnings on nondeductible contributions of up to $2,000 per year, per student. Coverdell Education Savings Accounts can generally hold a variety of investments. They can only be established for a child younger than 18, and the money must be distributed for educational costs before the beneficiary turns 30. Income limits apply: Single filers with modified adjusted gross incomes (MAGI) of more than $110,000 and joint filers with MAGI in excess of $220,000 are not eligible. Qualified withdrawals may be used to fund a primary, secondary, or college education.
An UGMA/UTMA
custodial account allows you to establish a savings or investment
account in a child's name, with one adult named as custodian. Each parent can
contribute up to $14,000 in 2016 without triggering mandatory filing of IRS
Gift Tax Form 706 and possible payment of gift taxes. With an UGMA/UTMA
account, the first $1,050 per year of unearned income is tax free. For children
under 19 (and for children under 24 who are full-time students and whose earned
income does not exceed half of the annual expenses for their support), the next
$1,050 is taxed at the child's rate. Beyond $2,100, the income is taxed at the
parent's or child's rate, whichever is higher.
If
you have any questions on this or with your own planning situation, please feel
free to call us at 201-843-0044.
Required
Attribution
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Because of the possibility of human or mechanical error by Wealth Management Systems Inc. or its sources, neither Wealth Management Systems Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall Wealth Management Systems Inc. be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content.
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