The value of a college education is the highest it’s ever been but so is the cost of actually getting one. While most students rely on low-interest loans, scholarships, and grants, or even a work-study job to help them pay, there are many options available to help your student save for college before they even get there. You can help them get started by contributing to their future education. It can make a life-long impact. These are four options that can help you save and plan ahead for your child’s education.
A 529 College Savings plan, or previously known as the Qualified Tuition Program, is designed with the goal of saving funds in a tax-advantaged account with the goal for the money invested to grow in the time between plan inception and when your loved one attends college. The funds may be used for qualified higher education expenses but may be restricted based on whether the student is full or part-time. The plan is subject to market conditions and the savings may not be sufficient to cover all college costs. It is a tax-exempt plan with no lock on tuition rate. Anyone is able to contribute on behalf of the beneficiary and may be tax-deductible.
This next option gives parents the ability to transfer assets of a trust to their child, also known as a custodial account. The two most common accounts are the Uniform Gift to Minors Act (UGMA) and the Uniform Transfer to Minors Act (UTMA). The UGMA is a simple way for a minor to own securities without requiring the services of an attorney to prepare trust documents or the court appointment of a trustee and the UTMA allows minors to own other types of property, such as real estate, fine art, patents and royalties, and for the transfers to occur through inheritance.
Any income must be reported on the child’s tax return and is taxed at the child’s rate. The parent is responsible for filing the tax return on behalf of the child. This type of account could affect Financial Aid eligibility and the custodial accounts are considered assets of the student. Funds are not transferable to another child and restrictions cannot be placed on the funds when the minor becomes an adult.
A Coverdell used to be called the Education IRA until 2002. This option offers tax-free investment growth and tax-free withdrawals when funds are spent on qualified education expenses. It can also be used to cover certain K-12 purchases. It is only available to families below a specified income level and contributions cannot be more than $2000 a year. It is not tax deductible and distributions are tax-free only if used for qualified education expenses.
There are two types of tax credits that you can utilize. The American Opportunity Credit allows you to claim $2,500 per student per year for the first four years and the Lifetime Learning Credit allows you to claim up to $2,000 per student per year for any college or career school tuition or fees. If you have one or multiple students in college at the same time, be sure you file this in your tax return. These tax credits could end up putting some money back in your pocket.
College can be expensive but it is a vital part in setting your child up for future success and happiness. Each one of these plans are designed to give a little help along the way and any contribution to their future can keep them out of the ever-growing crisis of student debt. Take time to review your options and ensure a lifetime of success for your child.
Disclosures: United Capital Financial Advisers, LLC (“United Capital”) provides financial life management and makes recommendations based on the specific needs and circumstances of each client. Investing involves risk and clients should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. The information contained herein is intended for information only, is not a recommendation to buy or sell any securities, and should not be considered investment advice. Please contact your financial adviser with questions about your specific needs and circumstances. Section 529 plans are not guaranteed by any state or federal agency. Before investing in a 529 plan, please read the plan disclosure document and other relevant documents carefully. Also, consider the investment objectives, risks, charges, and expenses carefully. As with other investments, there are generally fees and expenses associated with a 529 plan. United Capital does not provide tax advice. The tax implications should be discussed with your legal and/or tax advisors because they can vary significantly from state to state. Also note that most states offer their own 529 plans, which may provide advantages and benefits exclusively for their residents and taxpayers. Investments in college savings plans that invest in mutual funds are not guaranteed by state governments and are not federally insured. Please remember there's always the potential of losing money when you invest in securities.
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