College costs a lot and it's not getting any cheaper. While you may have the option to use the GI Bill to pay for some or all college expenses, what happens if you have more than one child? You may want to help fund college for those years GI Bill doesn't cover. That means saving and investing (sooner rather than later). Here are some options designed for accumulating funds for college expenses.
529 college savings plans
Offered by states and some educational institutions, these plans allow you to save up to $15,000 per year for your child’s education expenses without having to file an IRS gift tax return.1 A married couple can contribute up to $30,000 per year. However, an individual or couple’s annual contribution to a 529 plan cannot exceed the yearly gift tax exclusion set by the IRS. You may be able to front-load a 529 plan with up to $75,000 in initial contributions per plan beneficiary—up to five years of gifts in one year—without triggering gift taxes.
Funds in a 529 plan grow tax-deferred and if used on qualified education expenses the earnings are tax-free. If the funds are used for non-qualified expenses the earnings are taxed as ordinary income and are subject to a 10% penalty. Many states allow a deduction for the amount contributed to their 529 plan against income when calculating your state income tax. State tax treatment of 529 plans is only one factor to consider before committing to a savings plan; the fees and expenses associated with the particular plan should also be considered.
If your child doesn’t want to go to college, you can change the beneficiary to another child in your family. You can even roll over distributions from a 529 plan into another 529 plan established for the same beneficiary (or another family member) without tax consequences.2
Grandparents can also start a 529 plan or another college savings vehicle.1,2 In fact, anyone can set up a 529 plan on behalf of anyone. You can even establish one for yourself.
Single filers with modified adjusted gross incomes (MAGIs) of $95,000 or less and joint filers with MAGIs of $190,000 or less can pour up to $2,000 into these accounts annually.3 If your income is higher than that, phaseouts apply above those MAGI levels. Money saved and invested in a Coverdell ESA can be used for college or K-12 education expenses.
Contributions to Coverdell ESAs aren’t tax-deductible, but the accounts enjoy tax-deferred growth, and withdrawals are tax-free, as long as they are used for qualifying education expenses.3 Contributions may be made until the account beneficiary turns 18. The money must be withdrawn when the beneficiary turns 30, or taxes and penalties may occur.
UGMA & UTMA accounts
These all-purpose savings and investment accounts are often used to save for college, and take is similar to a trust. When you put money in the account, you are making an irrevocable gift to your child.4 You manage the assets until your child reaches adulthood and the account terminates. At that point, your child can use the UGMA or UTMA funds to pay for college; however, it should be noted they can also use the money to pay for anything else. Funds in these accounts affect financial aid much more than funds in a 529 plan or ESA, so make sure you understand the exact ramifications before you set up one of these accounts
Imagine your child graduating from college, debt-free. With the right kind of college planning, that’s a possibility. Talk to a financial professional today about these savings methods and others.
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This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.