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College
Planning
PLANNING
for future education expenses can be an incredibly difficult task. College tuition
is increasing every year, and the demand for a secondary education by the workplace is
stronger than ever. This is why planning for your children and loved ones ahead of
time is so important. Here are instruments that aid in the investment planning for
college expenses.
ACCOUNT TYPE
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DESCRIPTION
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| UNIFORM
GIFTS TO MINORS ACT (UGMA
or UTMA)
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This is the typical custodial account for a minor. Anyone may be the
custodian for a minor, but the minor is liable for all tax consequences that may be
generated by dividends, interest, or sale of securities. There are no limits on
contribution amounts, but gifts totaling over $11,000 per year are subject to the federal
gift tax. The funds can be used by the owner (minor) for any purpose when he/she
becomes of age.
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| COVERDELL
EDUCATION SAVINGS ACCOUNT (formerly the Education IRA) |
As long as the donor meets the adjusted gross income requirements, a
person may contribute up to $2,000 annually toward a minor's education expenses. The
contributions are non-deductible, but the capital gain and dividend income on the
investment holds no federal tax consequences on the minor or the donor when the funds are
withdrawn for qualified purposes. Qualified uses of the money include elementary and
high school expenses in addition to college expenses. If the beneficiary does not
use the funds for a qualified purpose by the time he/she reaches age 30, it can be
transferred to an account for another family member. Otherwise, non-qualified
distributions from the account are subject to a 10% penalty. Rollovers to other IRAs
are not allowed. Regardless of who makes the contribution, a student cannot receive
more than $2,000/year in contributions.
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| SECTION
529 |
These are state sponsored plans that allow large contributions to be
invested on behalf of a minor/student for the purpose of paying higher education
expenses. Limitations vary by state, but generally an individual may invest in any
state sponsored plan regardless of their place of residence and receives special gifting
provisions which can allow for more than $100,000 to be invested in a single year.
Investment options are dictated by the individual states and may be limited in
scope giving the investor less control compared to other investments. Some plans offer state tax deductions of
contributions, age-weighted investment portfolios, and transfers to relatives of the
student if the plan is not being used for higher education. With the Tax Relief Act
of 2001, withdrawals from a Section 529 plan for qualified purposes may be exempt from
federal taxation. |
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