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Education Planning

Whether college is years away for your child or right around the corner, there’s no such thing as starting too soon when it comes to how to pay for college. And you want to make sure that when they do head off to school, you’re able to provide an education that doesn’t bury them in student loans. While tuition isn’t getting any cheaper, there’s a lot you can do to start saving for your child’s future today. So, before you’re ready to take pictures of them in their graduation cap, let's start a conversation about your options.

An education IRA may be opened on behalf of a minor under the age of 18. Contributions are set at a maximum of $2,000 (per child, per year) and are not tax deductible, nor can they come from pre-tax dollars. The savings account then grows tax-free until the time of distribution.

If the funds are used for educational-related expenses, including tuition, fees, required books, computers and/or room and board, the distribution is also tax free. If the distribution amount exceeds the cost of educational expenses, or the funds are used for non-educational expenses, the earnings on the account will be considered as regular income and will be taxed accordingly, along with an additional tax of 10%.

Education expenses are not limited to college and university costs, and can include elementary and secondary school, vocational and other qualified post-secondary institutions, as well as higher education. Contribution limits exist for taxpayers based on their Modified Adjusted Gross Income (MAGI). 

If the beneficiary does not redeem funds before the age of 30, the account must be distributed within 30 days or be subject to taxation. Taxes may be avoided, however, if the full balance is rolled over into a new education IRA for another family member.

Looking to save for college? Take a number – the number 529 to be exact.
 
College Savings Accounts, or 529s as they’re nicknamed (after the IRS tax code), is a tax-advantaged savings plan designed to help pay for education. Originally limited to post-secondary education costs, it was expanded to cover K-12 education in 2017 and apprenticeship programs in 2019.
 
The two major types of 529 plans are savings plans and prepaid tuition plans. Savings plans grow tax-deferred, and withdrawals are tax-free if they're used for qualified education expenses. Prepaid tuition plans allow the account owner to pay in advance for tuition at designated colleges and universities, locking in the cost at today's rates. 529 plans are also referred to as qualified tuition programs and Section 529 plans.
 
Anyone can open a 529 account, but they are typically established by parents or grandparents on behalf of a child or grandchild, who is the account's beneficiary. In some states, the person who funds the account may be eligible for a state tax deduction for their contributions.
 
The money in the account grows on a tax-deferred basis until it is withdrawn. As long as the money is used for qualified education expenses, as defined by the IRS, those withdrawals aren't subject to either state or federal taxes. In the case of K-12 students, tax-free withdrawals are limited to $10,000 per year.
 
Tax Advantages of 529 Plans

The earnings in a 529 plan are exempt from federal and state income taxes, provided the money is used for qualified educational expenses. Any other withdrawals are subject to taxes plus a 10% penalty, with exceptions for certain circumstances, such as death or disability.
 
The money you contribute to a 529 plan isn't tax-deductible for federal income tax purposes, However, more than 30 states, including Nebraska provide tax deductions or credits for contributions to a 529 plan.
 
529 plans have very specific transfer-ability rules, governed by the federal tax code (Section 529). The owner (typically you) may transfer to another 529 plan once per year, unless a beneficiary change is involved. You are not required to change plans to change beneficiaries. 
 
Other Considerations

As with other kinds of investing, the earlier you get started, the better. With a 529 savings plan, your money will have more time to grow and compound. With a prepaid tuition plan, you'll most likely be able to lock in a lower tuition rate, since many schools raise their prices every year.
 
If you have money left over in a 529 plan—say the beneficiary gets a substantial scholarship or decides not to go to college at all—you'll have several options. One is to change the beneficiary on the account to another relative. Another is to keep the current beneficiary in case they change their mind about attending college or later go on to graduate school. If worse comes to worse, you can always cash in the account and pay the taxes and 10% penalty.
 
Calling our office as soon as possible is a wise choice if you are looking for college savings options or have questions on the details of the accounts. The only thing left to do is remember the number: 529.
 
*Investments in 529 plans involve risks to principal and may involve additional fees such as enrollment charges and annual maintenance fees. 529 plans offer no guarantees. Depending on your state of residence and the state of residence of the beneficiary, the plan may or may not be eligible for state tax benefits. There are exceptions to the gift tax and estate tax exemptions; please contact a qualified tax, legal or financial advisor for more information prior to investing.
 
The Uniform Transfers to Minors Act (UTMA) allows a minor to receive gifts—such as money, patents, royalties, real estate, and fine art—without the aid of a guardian or trustee. A UTMA account allows the gift giver or an appointed custodian to manage the minor's account until the latter is of age. UTMA also shields the minor from tax consequences on the gifts, up to a specified value.

The difference between the UTMA and UGMA is the maturity time. The UTMA allows for maturity before it is handed to the beneficiary, up to 25 years. The UGMA matures at 18 years.
 
The termination date for each are different as well. While UGMA termination is at 18 years, the termination age for UTMA is 21. Further, UGMA accounts allow parents to donate gifts such as money, stocks, or life insurance. However, UTMA accounts only allow the donation of basic assets.
 
Tax Implications

Starting in 2018, the IRS allows for an exclusion from the gift tax of up to $15,000 per person for a qualifying gift, including gifts to minors. The UTMA provides for a convenient way for children to save and invest without carrying the tax burden. The minor’s Social Security number is used for tax reporting purposes on UTMA accounts. It is also important to note that because assets held in a UTMA account are owned by the minor, this may have a negative impact when the minor applies for financial aid or educational scholarships.
 
Control of Assets

The Act allows the donor to name a custodian, who has the fiduciary duty to manage and invest the property on behalf of the minor until the minor becomes of legal age. The property belongs to the minor from the time the property is gifted. If the donor dies while serving as custodian, the value of the custodianship property is included in the donor’s estate.