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Other College Plans

There are other options to the 529 savings plan to help your child get his or her college education. Below is some basic information on other methods and plans. If you have any questions or would like more information, please contact us.

Coverdell ESA
The Coverdell ESA is similar to an IRA and allows a maximum yearly contribution of up to $2000.00 per student until they reach the age of 18. Anyone can establish a Coverdell ESA, and a responsible person controls the fund until the student reaches the age of majority. The person establishing the fund also retains control over investments and may invest in stocks, bonds, mutual funds or cash equivalents.

Contribution limits are phased out as contributors reach an adjusted gross income between $95,000. and $110,000.00 for single tax filers or $190,000,00 and $220,000.00 for those filing jointly. The phase out stage is ratable too. If you're a single taxpayer and your income is between $95,000 and $110,000, you may contribute $1,000.00 per year of one half of the maximum. Contributions may be made up until tax filing due date for the previous year. If your income exceeds the established limits, you may gift the child the yearly amount, and they may then establish their own account.

Funds from the account grow tax free and may be used for eligible education expenses. Eligible expenses are not limited to tuition or books, but may also be used to cover additional expenses like computers, uniforms or transportation associated to attaining education. Funds may also be used for the attendance in elementary or secondary schools and may be used at any type of public, private or religious school.

Funds must be utilized before the beneficiary turns 30 years old. However, the account can be transferred to a relative (including cousins, step-relatives, and in-laws), for funds that are used as a qualified expense. Funds that are used for a non-qualified expense are assessed a 10% penalty and treated as ordinary income to the beneficiary.

529 Prepaid Tuition
Prepaid tuition plans allow the conservative investor to prepay or invest with the state to assure a given amount of future tuition credits at a public college or university at today's prices. Whatever increase there is in tuition costs in the future, your child is assured that the state will pay any adjusted expenses as long as the child attends a qualified school within that state.

Prepaid savings plans are a good choice for the student that is only three to seven years away from attending college since investing in other plans probably will not allow enough time for your savings fund to adequately grow to cover all costs. Most prepaid tuition plans stop allowing enrollment at around the beginning high school level.

Currently there are 18 states that participate in prepaid education plans and most only allow participation by state residents. Some cover all costs including room and board while others cover tuitions and associated fees. Check with your state to be sure of what is covered since room and board may require an additional savings plan.

If for some reason your child decides that he or she does not wish to attend school within the state where the plan was established, then most states have provisions that allow tuition payments based on the originating states then current tuition rates. Some states may simply refund your original investment with a minor interest accumulation. However there is no guarantee that your state allows either event to occur, and you should fully understand all exceptions prior to establishing such an investment.

Most prepaid plans are transferable to another student if required.

The Uniform Gifts to Minors Act (UGMA) and the Uniform Transfer to Minors Act (UTMA) allows anyone to give any child up to $12,000.00 per year in after tax funds or up to $24,000.00 for married couples. These amounts are indexed for inflation and may change accordingly over time. Since contribution gifts are made from after tax dollars, the gift is not subject to gift taxes. Your contribution does not allow a deduction of the gift on your taxes.

Taxation of the gift or transfer for children under the age of 18 are generally as follows:

  • The first $850.00 is generally tax free to the child.
  • Between $850.00 and $1700.00 is taxed at the child's rate.
  • Over $1700.00 is taxed at the parent's rate.
  • Over 18 years of age, all gifts are taxed at the recipient's rate.

Until a child reaches the age of majority, all funds are controlled by the executor who may invest in any number of financial instruments. However, once the child reaches the age of majority, the money automatically is transferred to their control and they may then do as they please with it.

At this time a UGMA or a UTMA may or may not be transferrable to a 529 college savings plan depending upon the state you reside in.

For additional information regarding any of these savings plans, please contact us.

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