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Finding the Right Savings Plan for Your Children or Grand Children

by Rob Scharar, President and Portfolio Manager of Commonwealth Funds

 

There are many ways to prepare for elementary, secondary and college expenses for your children or grandchildren. Below we will discuss the most some of the most popular savings plans: The Coverdell ESA, Section 529 plan and The Texas Uniform Transfers to Minors Act (UTMA).

 

About the Coverdell ESA

The Coverdell ESA, created as part of the Taxpayer Relief Act of 1997, is a tax-advantaged savings vehicle that is similar to a 529 plan but with lower contribution limits. You can contribute up to $2,000 per year to a Coverdell ESA established for a child or grandchild. The Coverdell ESA lets you save money for the qualified education expenses of the named beneficiary. Qualified education expenses include college expenses as well as a range of elementary and secondary school expenses. Be aware that to contribute to an ESA, you must meet the modified adjusted gross income (MAGI) limits. The MAGI income phase-out is $190,000 to $220,000 for a married couple filing jointly. If your MAGI is greater than $220,000, no contribution is allowed.

As you consider your child’s educational savings plan, you may want to talk to a qualified financial professional, who can help you better understand what’s available and what fits your unique situation. Best results generally involve using a combination of the available options. Whichever savings vehicles you choose, it’s a good idea to get started as soon as possible to meet your child’s financial needs.

 

About the 529 Plan Account

A 529 Plan is a tax-advantaged education savings plan designed to help set aside funds for future college costs, named after Section 529 of the Internal Revenue Code. It may be established by a parent, but anyone can contribute. In addition to college costs, up to $10,000 a year can be used for elementary and secondary tuition. Contributions to this plan are treated as a gift to the beneficiary and are subject to gift tax exclusion limits (which are $15,000 annually for each donor, or $30,000 annually for a married couple). It is possible to “pre-use” up to five years of the annual exclusion amount for a gift to a 529 plan. All 50 states and the District of Columbia sponsor 529 plans, and some states may allow an income tax deduction for 529 contributions.

As you consider your child’s educational savings plan, you may want to talk to a qualified financial professional, who can help you better understand what’s available and what fits your unique situation. Best results generally involve using a combination of the available options. Whichever savings vehicles you choose, it’s a good idea to get started as soon as possible to meet your child’s financial needs.

 

About the UTMA Account

The Texas Uniform Transfers to Minors Act (UTMA) authorizes a parent or guardian to hold assets on behalf of a minor child until the child turns 21. There may be lifetime expenses related to your child’s education or other needs that are not eligible to be paid by an ESA or 529 plan – establishing a UTMA account could help you meet those additional needs. If your child’s income from interest, dividends or capital gains is less than $2,100 a year, there may be no income tax. Thus, you can use the UTMA account to accumulate money tax free without the education spending restrictions like a 529 plan. The 2017 Tax Cuts and Jobs Act changed how a child’s income is taxed. Instructions to IRS Form 8615 give a good summary of the new rules.

As you consider your child’s educational savings plan, you may want to talk to a qualified financial professional, who can help you better understand what’s available and what fits your unique situation. Best results generally involve using a combination of the available options. It’s a good idea to get started as soon as possible to meet your child’s financial needs.


Rob Scharar serves as President and Portfolio Manager of Houston-based Commonwealth Funds, as well as President of FCA Corp, a Houston-based financial planning firm founded in 1975.

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