Education Planning - Education Savings Vehicles

  1. Qualified Tuition Program (also known as Section 529 plans) - Program run by a state, state agency or education institution that allows for prepayment of qualified education expenses or contributions to a tax-free account for education savings. Earnings are tax free. Comes in two varieties: the college savings plan and the prepaid tuition program.
    • Prepaid tuition plan - parent or other account owner contributes cash for beneficiary and the contribution purchases tuition credits at current tuition rates.
    • College savings plan - parent or other account owner contributes on behalf of beneficiary with contributions invested according to the term's investment options.
    • Contributions are not deductible.
    • Tax-free distributions for qualified expenses.
    • Applies to tuition, fees, books, supplies, equipment, room and board if at least a half-time student and expenses for special needs services.
    • Covers undergraduate and graduate education.
    • Qualifies for $14,000 annual gift tax exclusion for 2013.
    • Contributor may prorate contribution over five years for purposes of claiming gift tax exclusion. Allows for one-time contribution of $70,000 ($14,000 per year times five years) for a single beneficiary.
    • No income phaseout.
    • May be eligible for state tax deduction.
    • Nonqualified distributions subject to regular income tax plus additional 10% tax.
    • Transfers between beneficiaries belonging to the same family allowed.
  2. Coverdell Education Savings Account- Account set up to pay the qualified education expenses of a designated beneficiary. Earnings are tax free.
    • $2,000 contribution limit per beneficiary regardless of the number ESAs set up for the beneficiary.
    • Contributions are not deductible.
    • Contributions not allowed once beneficiary reaches age 18 (unless a special needs beneficiary).
    • Tax-free distributions for qualified expenses.
    • Covers undergraduate, graduate and K-12 education.
    • Applies to tuition, fees, books, supplies, equipment, payments to qualified tuition programs and special needs services.
    • Assets must be distributed by age 30 unless beneficiary has special needs.
    • Nonqualified distributions subject to regular income tax plus additional 10% tax.
    • Income phaseouts for contributions: $95,000 to $110,000 (single); $190,000 to $220,000 (joint returns).
  3. Custodial Accounts - An account created at a bank, brokerage firm or mutual fund company that is managed by an adult for a minor that is under the age of 18 to 21 (depending on state legislation).
    • UTMA and UGMA allow parents and other family members to transfer assets to a minor without setting up a special trust. The donor appoints a custodian or trustee to look after the account. The donor can appoint him/herself to be custodian.
    • Transfers to UTMA or UGMA accounts qualify for the annual gift tax exclusion.
    • At one time, UTMA and UGMA accounts were popular vehicles for college savings, but they have declined with the emergence of 529 plans.
    • Property transferred to UTMA or UGMA account becomes property of child immediately and irrevocably.
    • Child gains full control of the account at the age of majority, usually 18 or 21, depending on the state.
    • UGMA accounts, which came first, are restricted to holding cash or securities.
    • UTMA accounts, in addition to cash and securities, may also hold other property, including real estate, art, patents and royalties.
    • Assets held in an UTMA or UGMA account may hurt a student's chances of qualifying financial aid since a greater portion of a child's assets are expected to be allocated to education costs than a parent's.
    • Expansion of "kiddie tax" to those up to age 18 expected to diminish further popularity of UTMA and UGMA accounts for college savings.
  4. Savings bonds- Interest earned on savings bonds used to cover qualified education expenses is not subject to tax.
    • Limit is equal to amount of qualified education expenses.
    • Covers only tuition and required enrollment fees.
    • Tax-free transfers to Coverdell Education Savings Accounts and 529 plans also allowed.
    • Applies to undergraduate and graduate education.
    • Only series EE bonds issued after 1989 or all series I bonds qualify.
    • The bond owner must be an adult at least 24 years old before the bond's issue date.
    • Income phaseouts: $74,700 to $89,700 (single); $112,050 to $142,050 (joint returns).
Financial Aid
Related Articles
  1. Options & Futures

    Five Advantages of Futures Over Options

    Futures have a number of advantages over options such as fixed upfront trading costs, lack of time decay and liquidity.
  2. Products and Investments

    How to Create a New Financial Product in 10 Steps

    The 10 steps outlined here are essential to the creation of a new financial product.
  3. Professionals

    A Day In The Life Of A Public Accountant

    Here's an inside look at the workdays of two experienced CPAs, to give you an idea of what it might be like to pursue a career as a public accountant.
  4. Professionals

    A Day in the Life of a Public Accountant

    There’s no typical day in the life of a public accountant, but one accountant’s experience may shed some light on what the career entails.
  5. Saving and Spending

    A Key Tip for Making Your Nest Egg Last Longer

    Retirees who don't want to deplete their nest eggs during a bear market should make sure to do the following.
  6. Mutual Funds & ETFs

    Fidelity Target Risk Funds Overview

    Get a brief overview of Fidelity's seven target risk funds, with a description of each fund's asset allocation and expense ratio.
  7. Investing News

    Is it the Right Time to Raise Interest Rates?

    Warning signs have started to emerge that point to a potentially dismal 2016 for the U.S. economy.
  8. Markets

    Four Big Risks of Algorithmic High-Frequency Trading

    Algorithmic HFT has a number of risks, and it also can amplify systemic risk because of its propensity to intensify market volatility.
  9. Mutual Funds & ETFs

    The Top 3 Invesco Funds for Retirement Diversification in 2016

    Explore analyses of the top three Invesco mutual funds for retirement diversification in 2016, and learn about the characteristics of these target-date funds.
  10. Investing Basics

    Hedging Risk for Beginners: How and When to Do It

    Hedging risk is always a good idea. Here is how sophisticated investors go about it.
RELATED TERMS
  1. Sortino Ratio

    A modification of the Sharpe ratio that differentiates harmful ...
  2. Equity Risk Premium

    The excess return that investing in the stock market provides ...
  3. Net Line

    The amount of risk that an insurance company retains after subtracting ...
  4. Political Risk Insurance

    Coverage that provides financial protection to investors, financial ...
  5. Maximum Drawdown (MDD)

    The maximum loss from a peak to a trough of a portfolio, before ...
  6. Gross Exposure

    The absolute level of a fund's investments.
RELATED FAQS
  1. What's the difference between a stop and a limit order?

    Different types of orders allow you to be more specific about how you'd like your broker to fulfill your trades. When you ... Read Full Answer >>
  2. Are secured personal loans better than unsecured loans?

    Secured loans are better for the borrower than unsecured loans because the loan terms are more agreeable. Often, the interest ... Read Full Answer >>
  3. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  4. Why are mutual funds subject to market risk?

    Like all securities, mutual funds are subject to market, or systematic, risk. This is because there is no way to predict ... Read Full Answer >>
  5. Why have mutual funds become so popular?

    Mutual funds have become an incredibly popular option for a wide variety of investors. This is primarily due to the automatic ... Read Full Answer >>
  6. Can your car insurance company check your driving record?

    While your auto insurance company cannot pull your full motor vehicle report, or MVR, it does pull a record summary that ... Read Full Answer >>
Hot Definitions
  1. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  2. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  3. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  4. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  5. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
Trading Center