College Funding Choices

Melissa N. Osika, MBA

How can you help cover your child’s future college costs? Saving early (and often) may be key for most families. Here are some college savings vehicles to consider.

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 college costs 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.

Remember, a 529 plan is a college savings plan that allows individuals to save for college on a tax-advantaged basis. 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. Whether a state tax deduction is available will depend on your state of residence. State tax laws and treatment may vary and may be different from federal tax laws. Earnings on non-qualified distributions will be subject to income tax and a 10% federal penalty tax.

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.

Coverdell ESAs. 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 The money must be withdrawn when the beneficiary turns 30, or taxes and penalties may occur.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 the form of a trust. When you put money in the trust, you are making an irrevocable gift to your child.⁴ You manage the trust assets until your child reaches adulthood and the trust 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.

Using a trust involves a complex set of tax rules and regulations. Before moving forward with a trust, consider working with a professional who is familiar with the rules and regulations.

Imagine your child graduating from college, debt-free. With the right kind of college planning, that’s a possibility. Contact us today about these savings methods and others.