The pleasantly brisk mornings of fall are starting to become more frequent, and many parents are still reeling from writing those first tuition checks of the school year. College is becoming an insurmountable and somewhat terrifying expense for many these days, but there are a few savings vehicles that can help us battle its high costs with the power of tax deferred growth. Here’s the quick rundown on the three we see most often.
- High contribution limit ($500,000 per beneficiary)
- Money grows federal tax deferred
- Money and earnings come out tax free if used for qualified higher education expenses
- Treated as parental assets for FAFSA no matter what type of account you have
- Beneficiary can be changed (as long as it’s not a Custodial 529)
- Contributions may be deductible from state taxes. Depending on the plan you invest in and state you live in
- Anyone contributing to a 529 other than their own needs to worry about the gift tax exclusion limit ($14,000/yr. for and individual or $28,000/yr. for a couple). Gifts can be front loaded, however, and you can give 5 years’ worth of gifts up front to give the money more time to grow.
- Money can only be used for qualified higher educational expenses. If they aren’t, withdrawals are treated as normal income with a 10% penalty on the earnings.
The Coverdell ESA
- Earnings grow tax free
- Qualified withdrawals are tax free
- Money can be used for elementary, secondary, and higher education
- Beneficiary can be changed
- Counted as a parental asset for aid purposes if owned by parent.
- Contribution limit is $2000/yr per beneficiary
- Can’t contribute to one if income is over $220,000 for married couple or $110 for individual
- Beneficiary can take ownership at age of majority
- Non-qualified withdrawals are subject to normal income tax and earnings get a 10% penalty.
UTMA a.k.a. Custodial account
- Money can be used for anything beneficial to the minor by the custodian
- No contribution limits
- Contributions treated as gifts so watch out for the exclusion again.
- Earnings don’t grow tax deferred and are reportable income for the minor. Can cause taxes for parents.
- Minor can take ownership of funds at age of majority.
- Treated as beneficiary’s money for aid purposes.