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Education Savings Account
Your Child's College Education Savings Plan, Discover 4 Great Options
By Jay Fran
With higher education costs increasing at double digit
percentages an effective college savings plan for your kid's
education is becoming much more critical. Most parents will find
that their kid's future college costs will be much more than they
have planned. This leaves many kids to be faced with obtaining
financial aid to compensate for a portion of their higher education
costs. This article will explore the pros and cons of 4 common
college savings options. This article will also seek to show which
of these 4 options are a better option if part of your kid's higher
education costs are to be funded by financial aid.
529 College Savings Plan: Since January 2002, 529 college savings
plan have become a new option for achieving tax free college
savings. These plans are state sponsored investment programs that
offer special tax treatment. It allows just about everyone to save
for their kid's college education. While there are many benefits of
a 529 college savings plan, perhaps the most important is that your
investment earnings are tax deferred if you use the funds for
qualified education expenses. Additionally, another big advantage is
that the maximum amount you can contribute to a 529 savings plan can
go as high as hundreds of thousand dollars but be aware these are
based on your States specific guidelines. If for some reason you do
not use the investment funds for college, you can still withdrawal
your investment earnings, but you will have to pay a federal penalty
of 10% and federal income taxes on your earnings. The penalty can be
waived if your child receives a college scholarship, or in the event
your child becomes disable or dies.
A 529 plan can typically be easily purchased through an
investment broker or mutual fund company like Vanguard or Fidelity.
Please be aware that one of the biggest disadvantages of a 529 plan
is that investment options can sometimes be limited. However, as 529
plans become more popular it is likely that more plan options will
open. For instance, the State of Ohio just announced the option for
bank CDs and saving accounts for 529 plans. One last main advantage
of a 529 college savings plan is that the money in the plan is
classified as a parents assets so less that 6% of the value counts
against your kid's eligibility for financial aid.
Coverdell Education Savings Account (CESA) (formerly known as an
Educational IRA): A Coverdell Education Savings Account is a savings
account created as an incentive to help parents and students save
for higher education expenses. A Coverdell Education Savings Account
is easy to set up at most financial institutions and banks. A
Coverdell Education Savings Account is similar to a 529 college
savings plan, but different in the contribution limits. With a
Coverdell Education Savings Account you can only contribute $2000
per child per year and to qualify your adjusted gross income must be
less than $110,000 if you are single and less than $220,000 if you
are married filing jointly. For financial aid eligibility a
Coverdell Education Savings Account is classified as a parent's
asset so less that 6% of the value counts against your kid's
financial aid eligibility.
UGMA/UTA Custodial Account (Uniform Gifts to Minors Act/Uniform
Transfers to Minors Act): A UGMA/UTMA account allows someone to make
gifts to a minor without setting up a trust. While there are
benefits to a UGMA/UTMA account the first limitation is that these
types of accounts offer very little federal tax advantage. Secondly
if your child is 14 or under only the first $800 of income is tax
free, the next $800 is taxed at your child's tax rate and after that
there is no tax benefit at all. The other big disadvantage is that
an UGMA/UTA Custodial Account has to be set up in your child's name.
This can create a big problem if your child needs financial aid
since all of the assets will be reviewed at a 35% rate. As a result,
a UGMA/UTA Custodial Account is not advisable for those who may need
to qualify for financial aid eligibility.
The main advantage of a UGMA/UTA Custodial Account is that there
is no limit on the investment contribution and it is very easy to
set up at most major financial institutions including some insurance
companies. However, as can be seen above the disadvantages of a
UGMA/UTA Custodial Account far outweigh the benefits.
Taxable Investment Accounts: Taxable investment accounts can be a
broker account, a mutual fund, a certificate of deposit or just a
regular savings account. Essentially it is just a regular account
that earns taxable interest, or investment income. A benefit of a
taxable investment account if set up in the parents name is that the
assets are classified as a parent's asset so they do not count as a
negative in the financial aid formula. Additionally, taxable
investment accounts offer lots of flexibility, and are easy to set
up at any financial institution. However, the big limitation to
taxable accounts in saving for college is that they offer no tax
advantage for college savings.
In summary, a solid savings plan for college is a very important
undertaking for parents to consider. The above 4 education
investment options can be highly useful in the college planning
process. Furthermore since some of these investments offer
substantial federal tax advantages and do not count against
financial aid eligibility they can maximize parent's investment
resources.
This article may be freely distributed as long as the
copyright, author's information and one of the below live links is
published with the article:
http://www.motorcycle-financing-guide.com/credit-card-motorcycle-financing.html
About the Author
Copyright (c) 2005, by Jay Fran. Jay Fran is the creator of
Motorcycle-Financing-Guide.com - A website that offers new and used
motorcycle loans, and motorcycle refinancing.
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