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COLLEGE FUNDING/529 PLANS
College savings plans allow individuals to contribute
to an account to pay a beneficiary’s qualified higher
education expenses, such as tuition, fees, books,
supplies, and room and board.
A person has four major investment vehicles to save
for college expenses. Each one has advantages and
disadvantages. It is important to consider investment
options, contribution limits, control over the account,
affect on financial aid and qualified expenses of the
money before selecting a specific vehicle
529 Plans
The 529 plan is probably the most well known
college savings plan. 529 plans allow money to
grow tax deferred and if used for qualified higher
education expenses, tax free. There are not income
limits to participate. Up to five times the annual gift
tax exclusion ($65,000 in 2009) can be given in one
year per beneficiary by each tax payer. This allows
for very large contributions, regardless of income.
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| 529 plans are sponsored by individual states and by some universities. Most use mutual funds, but some 529
plans are for prepaid tuition at State universities. If 529 funds are not used for the intended beneficiary they
can be used by a family member. If removed from the 529 plan for expenses other than qualified higher
education expenses, a 10% penalty plus ordinary income tax is due.
Contributions to 529 plans are made with after-tax dollars and any earnings grow tax-free at the federal level.
Earnings withdrawn from 529 plans to pay for qualified higher education expenses are free from federal
income tax for state-sponsored programs and programs of any eligible higher education institution.
State-tax treatment of college savings plan contributions, earnings, and withdrawals vary from one state to
another. A number of states allow residents who participate in their own state’s plan to claim a partial or full
state income tax deduction on contributions. In addition, many states provide residents with a state tax break
on earnings distributions from 529 plans that are used to pay qualified college expenses. Check with your tax
advisor for your state’s tax treatment of contributions to, and earnings distributions from, both in-state and
out-of-state 529 plans.
Coverdell Education Savings Account (ESA)
The ESA has similar tax treatment as the 529 plan, but has some very important differences. Only $2,000
can be contributed per year per child, additionally if the donor has a high level of income they are not eligible
to make contributions to an ESA. Unlike the 529, ESA funds can be used for elementary, middle, and high
school expenses. ESA’s have the broadest range of investment options, as they are not limited to state
specific 529 mutual funds. Also, like the 529, ESA’s can be moved to a new beneficiary but must be moved
before the beneficiary turns 30.
Uniform Transfer to Minors Act (UTMA) Custodial Account
The UTMA is a special account for minors which allows permanent gifts to be made to children, allowing for
a custodian to manage the account during childhood, and then becomes the property of the child when
reaching 18 or 21 (depending on the State). Once a gift is made to a minor through an UTMA, the gift is
completed and may not be rescinded. When the child becomes a certain age, they retain total control over the
assets and do not have to use it for education. The UTMA does not provide a tax sheltering for realized
investment gains and gifts to the UTMA over the annual gift tax exclusion amount ($13,000 in 2009) would be
taxable gifts.
U.S. Savings Bonds
If parents purchase Series EE or I bonds, the interest is exempt from taxation if it is used to directly pay the
expenses of tuition at a qualified university. Unlike the 529, this exemption does not apply to books or room
and board. Tax payers cannot claim the deduction if they have an income above certain levels and filing
status. Possibly the biggest drawback is the very low rate of interest U.S. Savings Bonds pay.
Contact us, at Team Oliver to help you review which type of college savings plan is best for you.
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Financial Life Advisors (FLA), a Registered Investment Adviser, and Jim Oliver & Associates, P.C. (JOA) are under common ownership and control. Team Oliver is used to describe collaborative services of both firms. Professional tax services are provided by JOA and investment advisory services are provided by FLA, each under separate agreements.
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Sign up here to schedule a
COMPLIMENTARY
consultation with a member
of Team Oliver.
Please bring a copy of last
year's income tax return.
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