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. Investing

    Advising FAs: Explaining College Savings Accounts to Clients

    There are several types of savings accounts designed for higher education available today. The right one for you will depend upon factors such as your tax bracket, time horizon, investment objectives ...
  2. Professionals

    Custodial Accounts

    Custodial Accounts
  3. Professionals

    Education-Related Tax Incentives

    Education-Related Tax Incentives
  4. Professionals

    College Savings Plans

    FINRA/NASAA Series 26 Section 4 - College Savings Plans. In this section coverdell education savings account (ESA) and section 529 plans.
  5. 529 Plans

    What 529 Plans are: College savings accounts that are exempt from federal taxes. Pros: No income restrictions for contributors; investments grow tax-deferred; distributions are tax-free at the ...
  6. Savings

    Stop Procrastinating! Enroll In A College Savings Plan

    The cost of sending your kids to college could be a serious financial burden - unless you get prepared. Now.
  7. Savings

    529 Plans: Distributions

    By Denise ApplebyDistributions from 529 plans used for qualified education expenses are tax- and penalty-free if the amount is equal to or less than the designated beneficiary's qualified ...
  8. Savings

    529 Plan Contribution Limits in 2016

    Learn about the contribution and account balance limits on 529 plan accounts and discover how these contribution limits differ in each state.
  9. Professionals

    Coverdell Education Savings Plan

    Series 6, Coverdell Education Savings Plan. This section discusses the Coverdell Educational Savings Plan and related tax issues.
  10. Professionals

    Section 529 College Savings Plans

    Series 6, Section 529 College Savings Plans. This section deals with Section 529 Plans and related issues to the 529 plan.
RELATED TERMS
  1. 529 Plan

    529 is a category of plans that provide tax advantages when saving ...
  2. Coverdell Education Savings Account ...

    A tax-deferred trust account created by the U.S. government to ...
  3. 529 Savings Plan

    A tax-advantaged method of saving for future college expenses ...
  4. Uniform Gifts to Minors Act - UGMA

    An act that allows minors to own property such as securities. ...
  5. Uniform Transfers To Minors Act ...

    An act that allows a minor to receive gifts such as money, patents, ...
  6. 529 Prepaid Tuition Plan

    A tax-advantaged method for paying future college tuition costs ...
RELATED FAQS
  1. Can minors invest in mutual funds?

    Learn how UGMA or UTMA accounts including mutual funds can be set up for minors through a guardian who oversees the account ... Read Answer >>
  2. What are the risks involved in a banker's acceptance?

    Learn about the different kinds of college savings accounts, how they can benefit a college saver and how to open these savings ... Read Answer >>
  3. What options do I have to save for my child's education?

    There are numerous options available to invest savings for a child's education: State-sponsored "529" college savings plans: ... Read Answer >>
  4. A parent would choose to set up a Coverdell Education Savings Account for a child ...

    A parent would choose to set up a Coverdell Education Savings Account for a child in order to save for college expenses AND: ... Read Answer >>
  5. What is the Education Savings Bond Program?

    Learn about the education savings bond program and find out if you are eligible to use your savings bonds for payments toward ... Read Answer >>
  6. Can my IRA be used for college tuition?

    Find out how to use your IRA retirement savings to pay for your college tuition, including what institutions and expenses ... Read Answer >>
Hot Definitions
  1. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  2. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  3. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  4. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
  5. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures that companies use to compile their financial statements. ...
  6. DuPont Analysis

    A method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are ...
Trading Center