CFP
Education Planning - Education Savings Vehicles
- 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 $12,000 annual gift tax exclusion.
- Contributor may prorate contribution over five years for purposes of claiming gift tax exclusion. Allows for one-time contribution of $60,000 ($12,000 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.
- 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).
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.
- 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: $63,100 to $78,100 (single); $94,700 to $124,700 (joint returns).
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