If you’re a parent or guardian who has recently started stressing about college finances… don’t worry, you’re not alone.
Whether you have a first-year college student or this is your third time around, it never seems to get easier; however, there are some things you can do to be better prepared for the financial burden that inevitably comes with college.
It’s never too early to start saving for your children’s education. One investment option available is a 529 Plan, an account created under the Internal Revenue Code Section 529 to invest money for a child’s education. Money invested into this type of plan is managed by a parent or guardian and is tax-free as long as it’s used to pay for tuition at a qualifying post-secondary institution. It may also be used to pay for tuition at a public, private, or religious primary and secondary institutions.
A 529 Plan offers a few tax advantages thereby making them an attractive investment option. For starters, any earnings in the account grow tax deferred and may be eligible for state tax deductions. And, distributions from the account for qualified educational expenses are tax-free.
A UGMA/UTMA account is another type of investment vehicle that is set up under the rules of the state’s Uniform Gift to Minors Act or Uniform Transfer to Minors Act. Money placed into this account will remain until a minor reaches the appropriate age to manage it, typically 18 or 21. A UGMA/UTMA account offers a broader range of investment options compared to a 529 Plan. Most importantly, there is no limit on contributions into the account and it can accept any type of asset. Keep in mind that this type of account will be viewed as a student’s asset when being considered for financial aid, therefore, it may affect eligibility.
Interest, dividends and capital gains for a UGMA/UTMA account are reported under a child or minor’s social security number. The first $1,050 is taxed at the child’s tax rate. Any subsequent annual earnings above $2,100 are taxed at rates that apply to trusts and estates.
Depending on the kind of educational institution your child will be attending, the total financial investment will likely be a lot; therefore, this is an easy way to start saving and the money and earnings will help offset the cost for tuition.
The costs for a college education can vary depending on whether your child picks a public or private university as well as the amount of financial aid awarded, if they are eligible. While we only covered a 529 Plan and UGMA/UTMA accounts, there are other investment options to consider. Our wealth management group, Independence Financial Advisors, is available to assist you with creating a saving plan for your child’s college education. Give them a call at 1.800.821.1776 to set up an appointment today!