Saving for Education Expenses
The cost of a college education continues to rise, so it’s crucial to start planning for that education as early as possible. There are several ways to save for education costs, whether it’s for a child, grandchild, or yourself. Our CFS Advisors can assist you with choosing tax-advantaged solutions to accumulate funds to pay for college.
529 College Savings Plans (also called Qualified Tuition Programs) are flexible and may be advantageous from a tax perspective.
There are no income limitations for contributing to 529 Plans, and the maximum amounts that may be contributed per beneficiary are fairly high. The account remains in the contributor's name, so it may have less of an effect on a student's ability to qualify for financial aid than some other college savings options. The beneficiary of the 529 Plan can be changed easily, and doesn't require a transfer of the account.
Contributions are not tax-deductible, but the earnings are tax-free and withdrawals are exempt from federal income tax when used for qualifying expenses. Funds can be used only for higher education expenses, such as tuition, books, and room and board. Generally, a 10% penalty must be paid if funds are used for non-education purposes, however there are some exceptions which can be found in this IRS publication.
Investors should consider the investment objectives, risks, charges and expenses associated with 529 plans, a municipal fund security, before investing. More information about municipal fund securities is available in the issuer’s official statement which should be read carefully before investing.
Coverdell Education Savings Accounts (CESA)
A Coverdell Education Savings Account can be used to save for educational costs for elementary school, high school and college.
Parents must meet eligibility requirements in order to use a CESA, and the amount which can be contributed on behalf of each beneficiary is limited to $2,000 per year. You can choose to invest funds in a CESA in many types of investments, such as stocks, bonds and mutual funds. Funds can be withdrawn on a tax-free basis for education-related costs such as computers, tutoring and private school tuition.
Custodial Savings Accounts
Custodial Savings Accounts are another way to provide funding for education.
Also referred to as an UGMA (Uniform Gifts to Minors) or UTMA (Uniform Transfers to Minors) Account, custodial accounts are a way for minors to own assets, under direction of a custodian, which they normally would not be allowed to own. Examples of assets typically held in one of these accounts include stocks, bonds, mutual funds and real property.
Custodial accounts do not have the immediate tax benefits associated with a 529 plan or a CESA. Income, earnings and capital gains generated by assets in the account are taxable to the minor, which may provide the contributor with some tax advantages.
An important thing to remember about custodial accounts is that once the minor reaches the age of majority, he or she has control of all assets in the account and can choose how to spend them – which may not be for college.