Qualified tuition plans. Coverdell accounts. UGMA/UTMA accounts. Personal investments. Choosing among college savings options is challenging. How do you identify the options that will work best for your family?
Begin the process by narrowing the playing field. Income ceilings, contribution limits, and eligibility restrictions apply to a variety of college savings vehicles. Knowing what the limits are may help you reduce some choices.
Qualified tuition programs come in two varieties. Prepaid tuition plans allow you to lock in today’s tuition rates to pay future costs of attendance at eligible institutions. College savings plans allow contributions to an investment account set up to pay qualified education expenses at accredited institutions.
If your goal is to save as much as possible for your child’s education costs, a 529 college savings plan might be a good choice. While contributions are not deductible on the federal tax return, some states allow a deduction, and both contributions and earnings may be withdrawn tax free to pay qualified education expenses. There are no income limitations on contributions to a 529 plan.
Funds in the account can be withdrawn tax free to pay qualified education costs. Annual contributions, which are nondeductible, are limited to $2,000 per beneficiary. Married joint filers with modified adjusted gross income (AGI) of $220,000 or more aren’t eligible to make Coverdell contributions. The AGI limit is $110,000 for individual taxpayers.**
The Uniform Gift to Minors Act and Uniform Transfer to Minors Act allow parents, grandparents and others to contribute money to custodial accounts used to hold assets in trust for minors until they reach the age of majority in their state, either 18 or 21. UGMA/UTMA accounts are considered the child’s assets for financial aid purposes and may adversely affect need-based aid. because the child has access to the account at 18 or 21, there’s no guarantee the assets will be used to pay education costs.
529 plans and Coverdell accounts are intended to pay education costs — and nothing else. You’ll generally owe taxes and penalties if you withdraw money for other reasons. If you want more flexibility in using the money, consider investing in a brokerage or other taxable investment account instead.
* Certain benefits may not be available unless specific requirements (e.g., residency) are met. There also may be restrictions on the timing of distributions and how they may be used. Before investing, consider the investment objectives, risks, and charges and expenses associated with municipal fund securities. The issuer’s official statement contains more information about municipal fund securities, and you should read it carefully before investing.
** The allowable contribution is reduced for taxpayers with AGI between $190,000 and $220,000 (married joint) and $95,000 and $110,000 (single).
Article is adapted from content provided by DTS.
