There are several ways to plan for your loved one’s education, and strategies to help them fund their education as well:
Many states offer a 529 college savings plan, also known as Qualified Tuition Programs (QTP). After-tax money is typically invested into the plan. Withdrawals are tax-free when withdrawn for qualified education expenses, such as college tuition and books.
Each state’s plan offers various investment options, varying annual fees, and operating costs. Contribution limits vary depending on state and marital status, so be sure to check with your advisor. If your child doesn’t end up going to college, you may face fees and tax penalties when withdrawing the funds, though you may be able to transfer the account to another beneficiary.
Prepaid plans let you start paying for portions of your child’s college tuition now. The possible benefit is that you are able to lock in current prices and protect from exponential tuition hikes that are likely in the future. Many states offer tax-advantaged prepaid tuition plans. Carefully review all your financial plans with your financial counselor before making any final decisions.
A Coverdell ESA is generally tax-advantaged if the money is used to pay for educational expenses. This option, as is a 529 plan is viewed as your asset — not your child’s. Upon assessment of your child’s resources, typically this account will not impact on your child’s chance of getting federal assistance. Unlike a 529, Coverdell ESAs can be used to cover any educational expenses, including K-12 costs such as private school tuition. There are some limitations, best to assess your goals and then discuss the best way forward with your financial advisor.
Custodial accounts hold a minor’s financial gifts in a managed account until the child reaches adulthood. There are tax advantages to this option, but fewer than 529 plans and unlike other plans these accounts are considered your child’s asset, not yours. A custodial account will directly impact your child’s financial aid eligibility. Once the child reaches age, he or she can use the money for education or something else entirely.
Instead of giving toys for birthdays, holidays, or other occasions, ask loved ones to give a gift directly to your 529 college savings plan. This gift will make a more lasting impact on a child’s life.
Leaf offers family and friends a way to give a monetary gift that can be transferred to any 529 college savings plan to be used toward your child’s education.
Funding your family’s education can be daunting, start planning today and then discuss with your financial advisor to map out a plan that’s best for now and down the road.
Please note that the content of this blog does not constitute tax advice and is only intended for the educational purpose of the reader. Please consult your tax advisor for specifics regarding your circumstances.
For more information contact us at 845.563.0537 or Contact@CompassAMG.com
Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC a Federally Registered Investment Advisory Firm. Securities offered through an affiliated company Spire Securities, LLC a Registered Broker/Dealer and member FINRA/SIPC.
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Kuchar, K. (July, 30, 2015). How to Save for Your Child’s College Education. The Simple Dollar.
Orman, S. Paying for College. Retrieved on January 17, 2016 from http://suzeoraman.com/paying_for_college/funding_your_child’d_education. Sue Orman Media, Inc.
Williams, G. (May 20, 2014). 5 Ways to Save for Your Child’s College Education. US News and World Report, Money.
Tags: 529 College Savings Plans, 529 plan, college, coverdell, coverdell plan, education, education planning, financial aid, higher education, qualified tuition program, ugma, utma