Between Coverdell ESAs, UTMAs, UGMAa and 529 savings plans,
it
’s easy to get lost in the alphabet soup of college funding.
Between Coverdell ESAs, UTMAs, UGMAa and 529 savings plans, it’s easy to get lost in the alphabet soup of college funding.
And even if you can sort out the acronyms, deciding which plan may be right for you requires careful calculations that take into account your child’s age, your personal financial situation and your college savings goals.
One should also realize, as with other investments, there are generally fees and expenses associated with participation in an education savings plan.
There is also the risk that plan investments may lose money or not perform well enough to cover college costs as anticipated.
Nonqualified withdrawals may be subject to income taxes and an additional 10 percent federal tax penalty.
Qualified withdrawals from 529 savings plans are tax-free through December 31, 2010, unless Congress extends the tax law provision.
Coverdell ESA
The Coverdell Education Savings Account allows you to save up to $2000 a year for each child under 18. Withdrawals for qualified elementary, secondary or higher-education expenses are free of federal income tax and can be used for qualified expenses ranging from tuition and books to room, board and supplies.
However, people with modified gross income exceeding $95,000 per year ($190,000 for joint filers) will be subject to contribution restrictions.
UTMAs and UGMAs
Uniform Transfers to Minors Act (UTMAs) and Uniform Gifts to Minors Act (UGMAs) are custodial accounts, meaning that the asset belongs to your child but you control the money. With this type of account, gains, dividends and income are taxed at the child’s rate. The only catch is what that when the child reaches adulthood (between ages 18 and 25), he or she gains control of the money and may choose not to spend it on education.
529 Savings Plans
State-sponsored 529 savings plans offer many of the benefits of Coverdell ESAs with fewer contribution restrictions and no income limits. Qualified withdrawals for higher-education expenses are free of federal taxes, and donors may contribute up to $11,000 per year ($22,000 for married couples) without incurring gift tax consequences.
With college costs rising at more than twice the rate of inflation according (2003 statistic from The College Board, 2002), it’s important to find a savings plan that fits in with the rest of your portfolio. Undoubtedly, this is one case in which “doing your homework” can really pay off.
