Financially Fit Friday by Linda Lingo/Life Changes: Sending Your Child Off to College
This is the time of year when many of us are preparing our child to go to college for the first time. For me, it is a very emotional time, as my youngest child, my daughter, is starting college full time this fall. She decided to get her own place, instead of living in the dorm. Either way, dorm or apartment, it is expensive buying all those household items (even on a small scale), plus clothes, books, tuition, laptop, and the list goes on! The pocket book gets hit hard. Add to the emotional issues, the financial cost, and WOW!
Fortunately, we can prepare for this financially, maybe more so than emotionally. I want to review a couple different ways you can save for your child (or grandchild’s) college education.
529 College Savings Plan
The most well known college savings plan is the 529 College Plan. Every state offers their own plan, but you do NOT have to buy their plan. Personally, I have found the California plan to offer me no tax savings, and therefore invested in the Virginia Plan which offers American Funds as their mutual fund investment vehicle. Right now, don’t worry about the investments, as much as what plan serves you personally and tax wise. This is where you may want to consult your tax advisor. The advantage of the 529 College Plan is the earnings are not taxed, as long as they are used for “qualified education expenses” when withdrawn. If you contribute to a 529 College Plan, however, be aware that there may be gift tax consequences if your contributions, plus any other gifts, to a particular beneficiary exceed $14,000 during the year. Another benefit of the 529 College Plan is IF the initial beneficiary doesn’t use all the funds, you can name a different beneficiary, (maybe a second grandchild) and the IRS is pretty liberal on how far reaching “family members” go.
There are IRS rules governing contributions and distributions. This is a great Q&A that is easy to read and understand: https://www.irs.gov/uac/529-plans-questions-and-answers
Coverdell Education Savings
Another way to save for college is through the Coverdell Education Savings Account. This account allows individuals to deposit up to $2,000 per year in an educational savings account for an eligible beneficiary (child) without being taxed on earnings from interest, dividends, appreciation, etc. – as long as the child uses the funds before the age of 30 for qualified educational expenses. The account must be started and all contributions made before the child is 18. In addition to college expenses, these funds can be used for secondary private school costs.
Unified Gift to Minors Act (UGMA)
In addition to the above two, you can save for college using the UGMA (Unified Gift to Minors Act). This can be used for any expense, not just college expenses, so if you’re not sure if your child, or grandchild, will be going to college, this may be a better vehicle for you to utilize. However, there are no tax benefits to this account. It is basically a savings account set up in the minor’s social security number. So, when the minor reaches “age of maturity” (18 in some states, 21 in other states), the money is technically the child’s. The income from a custodial account must be reported on the child’s tax return and is taxed at the child’s rate, subject to the Kiddie Tax rules. The parent is responsible for filing an income tax return on behalf of the child. There is no special tax treatment for UGMA accounts. Children aged 14 and older must sign their own tax returns.
Neither the donor nor the custodian can place any restrictions on the use of the money when the minor becomes an adult. At that time the child can use the money for any purpose whatsoever without requiring permission of the custodian, so there’s no guarantee that the child will use the money for his or her education. Also, since UGMA accounts are in the name of a single child, the funds are not transferrable to another beneficiary.
These are a couple of different ways you can save for college so that saying good bye isn’t quite so painful. If you want more information on preparing for college education expenses, feel free to schedule an appointment to discuss your options at www.lindalingo.com
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