FINANCING YOUR CHILD'S EDUCATION

by Marissa Guijarro, Education Editor

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Even though your little one may not be ready for pre-kindergarten, it's not too early to think about saving for college. Parents and other family members and friends may want to start a fund on the child's behalf. Depending on your financial situation, certain investment vehicles are more advantageous than others. This article provides an overview of the popular options. Before investing, the staff of momsandtotsmag.com strongly encourages you to research all options thoroughly and to consult with your accountant or financial advisor.

Uniform Gift to Minor Accounts (UGMAs), Uniform Transfer to Minor Accounts (UTMAs)

UGMAs/UTMAs have traditionally been the means of saving for a child's future expenses. The account may be opened by any adult who acts as "custodian" for the money, but it is in the child's name and social security number. Hence, the account's proceeds are taxed at the child's rate (up to $950 in interest income is tax-free, and income in excess is charged at a lower "kiddie" rate). These accounts can be used for any expense beyond the what is typical for the child, therefore custodians have some leeway in accessing it on the child's behalf. However, once the child is of the "age of majority" (age 18 or 21 depending on the state), he/she is the legal owner and may access the money at will for any expenditure. That is one downside. The other concern regards applying for financial aid for college. Colleges assume a higher rate of expenditure for college from UGMA/UTMA accounts as opposed to accounts under the parents' names and social security numbers. Funds in the child's name and social security number will be assessed at 20% in the calculation of the estimated family contribution (EFC) for financial aid applications, as opposed to about 6% for funds that are in the parents' names. Custodial accounts can work well if you have a substantial income and assets, and if you are not worried about making an irrevocable gift to your child that is not transferable to siblings.

Coverdell accounts

Coverdell accounts are similar to Roth IRAs but are earmarked for education. The main disadvantage with Coverdells is that contributions to the child may not exceed $2000 per year. Depending on Congress, certain benefits of Coverdells may be eliminated in 2010.

529 Plans

529s appeared on the investing scene in 1996 with Section 529 of the Internal Revenue Service tax code. The account is in the parent's/guardian's name and social security number. Many employers offer 529 saving plans featuring pre-tax direct paycheck withdrawals into an account, making it a convenient and smart way to save. In New York State, contributions of up to $5000 by an individual, or $10000 for a couple, are tax-deductible towards New York State taxable income. Accounts may offer choices regarding the proportion of equity and fixed income assets customized for the child's age, based on the philosophy that investments for a younger child can be more aggressive because of a long time horizon, while those for an older child should be more conservative. Plans do vary from state to state. Grandparents may also open accounts. The money from a 529 can only be used for higher education expenses. Parents with more than one child can transfer unused funds from one child to another. The money can only be used for education and there is a limit on the amount you can save per year. New York State 529s prohibit contributions from third parties to a parental 529. A major advantage of 529s is that these accounts are not considered among the child's assets when filing for financial aid. Therefore, 529s are often the better option for families who plan to apply for some type of assistance from a college or the federal government (including federal student loans).

U.S. Savings Bonds

Education savings bonds present an easy gifting option, especially for grandparents and friends of the family. Bonds issued in the child's name will not qualify for an education tax exclusion or other tax exemptions. Bonds in the parents' names allows for state and possibly federal tax exemptions within certain income levels when used for a child's educational expenses (tuition and fees). Family members and friends who plan sustained giving over a number of years may want to compare the benefits of bonds vs. 529 plans. Generally, 529 plans may provide better tax savings if the parents' income exceeds the maximum level for education tax exclusion ($134,900 for a married couple filing jointly in 2009).

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May 22, 2013

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