Are there savings plans specifically to pay for education?

Are there savings plans specifically to pay for education?

In honor of 529 Day (May 29th), let’s take a look at a few savings options families have to pay for education:

529 Plans

• Two types of qualified tuition plans
  • Prepaid tuition plans
    • Locks in tuition prices at eligible colleges and universities
    • Pays for tuition, mandatory fees, and sometimes room and board
    • Most plans set up a lump sum plus installment payments (based on age of beneficiary and number of years of college purchased) prior to purchase
    • Usually state-sponsored (though some private universities and colleges offer prepaid plans) and may have residency requirements
    • Most plans have a limited enrollment period
    • Most plans have an age/grade limit for beneficiary
    • Many state governments guarantee the investments
  • Education savings plans
    • Can be used for private elementary and secondary school as well as college expenses
    • No lock on college costs
    • Pays for tuition, mandatory fees, room and board, and (if required) books and computers
    • Opened and administered for a “beneficiary” (usually a child) by an “account holder” (usually a parent) who directs the investments, usually including stock mutual funds, bond mutual funds, and money market funds, or an age-based portfolio (which may include all three funds) that becomes more conservative as the beneficiary approaches college age
    • Investment earnings are tax-deferred, and withdrawals used for qualified education spending are tax-free
    • No residency requirements
    • Year-round enrollment period
    • No age limits, open to adults and children
    • No state guarantee, funds are subject to market risks and may lose value
• All 50 states and the District of Columbia offer at least one 529 plan.
• Known as a “529 Plan” because the rules fall under Internal Revenue Code Section 529

TIP: 529 Plans are considered parent assets and therefore have little impact on financial aid

Coverdell Education Savings Account

• An Educational Savings Account, or ESA, can be used for private elementary and secondary school as well as college expenses
• Investment earnings are tax-deferred, and withdrawals used for qualified education spending are tax-free
• Annual contribution limited to $2,000 per year per beneficiary (total from all sources, for example $1,000 from your parents and $500 each from two grandparents)
• Investment options are almost unlimited (except for life insurance contracts)
• Can be established at many financial institutions including brokerage firms and mutual-fund companies

TIP: Existing Coverdell ESAs can be rolled into a 529 Plan, as funding a 529 Plan is considered a qualified education expense.

Uniform Gifts to Minors Act / Uniform Transfer to Minors Act

• The Uniform Gifts to Minors Act (or UGMA) and its expansion, the Uniform Transfer to Minors Act (or UTMA), allow transfer of assets such as stocks, bonds, real estate, and even fine art to a child
• Account administered by the gift giver or an appointed custodian until the child reaches adulthood (usually either 18 or 21, depending on the state)
• Taxed at the child’s (usually lower) tax rate
• Available in most, but not every state

TIP: Since the assets belong to the child, their value may affect financial aid eligibility.