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Thinking Ahead
You just received the wonderful news that you and your partner are going to become parents. The last thing on your mind may be paying for college, but thinking about it now can make your life easier later.
College Savings Vehicles
The following is an exploration of the most common college savings vehicles:
529 plans are one of the most popular tax-advantaged college savings options. Contributions accumulate tax deferred and withdrawals are tax free at the federal level if the money is used for qualified education expenses. Nonqualified withdrawals are subject to income tax, as well as a 10% federal income tax penalty.
A Coverdell Education Savings Accounts (ESAs, formerly known as Education IRAs), is a tax-advantaged education savings vehicle that lets you contribute up to $2,000 per year for a beneficiary's K-12 or college expenses. Your contributions grow tax deferred and earnings are tax free at the federal level if the money is used for qualified education expenses.
Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) are custodial accounts that allow a minor to hold investment assets in his or her own name with an adult as custodian. All contributions to the account are irrevocable gifts to your child, and assets in the account can be used to pay for college.
The UGMA account is particularly useful if you are considering purchasing stocks or mutual funds for your child to help save for education. More specifically, UGMA typically authorizes the transfers of cash, bank accounts, stocks, and mutual funds to minors without the need for an attorney
The UTMA account authorizes expanded transfers, including real estate, and royalties.
For both UGMA and UTMA accounts, a portion of the earnings may be tax free or taxed at the child’s rate, generally a lower figure.
Some parents use Roth IRAs to save and pay for college. Contributions to a Roth IRA can be withdrawn at any time and are always tax free, with tax advantages varying based on the age of the parents.
To determine your financial need, the federal government and colleges look primarily at your family's income. Other factors come into play, including your assets and how many children you'll have in college at the same time.
Start Now
If you are wondering whether you should begin saving for your child’s education now, the answer is yes. Regardless of which option you choose, beginning today to save for a child’s education will help ensure your child a more secure tomorrow.
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