529 Plans and College Savings plans

529 Plans and College Savings plans

I don’t know if you’ve heard the news but I’m a godmother now! This title comes with a tremendous amount of responsibility. I want to do my part for my little “Emma Christine.”  This got me thinking, and I decided that I really want to make a contribution to her future education.  So I did some research and I wanted to share my findings. I know a lot of you have or will soon have a little special someone in your life. It is important to understand the most beneficial ways to financially give to that special someone.

A 529 plan is a tax-advantaged savings plan for college. 529 plans, or “qualified tuition plans,” are sponsored by state agencies, or specific Universities. There are two types of 529 plans: pre-paid tuition plans and college savings plans.

Pre-paid tuition plans allow parents to purchase units or credits for certain colleges and universities. It locks in the price of tuition. The plan sets up an initial investment, and then an agreed upon installments based on the age of your child. Some of these plans have an age or grade limit for the child and have a limited enrollment period. This plan is great for investing in future education but it is not flexible because usually the child is restricted to a state or specific university.

College Savings plans, on the other hand, are just tax beneficial accounts that allow one to invest money for college. It is not subject to federal or state tax (depending on your state) and the money can only be used for educational purposes, such as tuition, board, fees, or even books or computers. Many plans have a state regulated contribution limit.  However, you can open a college savings plan at any time and it can invest in it in many ways. Your child can also contribute up to 20% of his or her own income to the plan. This would be a general savings plan. It is flexible and tax deductible.

Coverdell Educational Savings Account

Educations Savings Plans are another way to save for college. They are not tax deductable; however, there is no tax on the distributions. It’s the ROTH IRA of the educational savings world. Contributions to the account cannot exceed $2,000 in any year. Although this plan has less benefits than 529 Plans, it is more flexible.  It can be used not only to help with college expenses, but also with elementary and secondary education expenses as well as vocational training.  This may be a great option if you want to save for a private high school.  You can continue to contribute to it while you are receiving distributions so you can save for future college expenses while the child uses the money for high school tuition. If your child gets a scholarship to a university, any remaining money can be saved for a graduate program.

UGMA or UTMA Uniform Gifts to Minors ct Account, or Uniform Transfers to Minors Act. Our tax-exempt

UGMA or UTMA’s were established for a child who is under the age of 18 to have money, accounts, or hold securities without a court appointed lawyer.  The money is gifted to the minor but in the control of a parent or guardian until the age of 21. The money is part of the parent’s/guardian’s tax estate. The parent also controls the fiduciary responsibility. This is a tricky account because it is expensive to set up, it does not have any tax benefits and it does not have to be used for educational purposes. It also becomes the child’s property when he or she turns 21, so after that age the parent/guardian does not have any control over what the child spends the money on.  However, the parent or guardian can invest the money on whatever they would like. I would have this account as a secondary account after funding a 529 or ESA. The child could eventually use the money toward a house, wedding, or graduate education.

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