How To Save For A Child's Education
Saving for a child’s education is one of the most important financial goals parents have. Adults know one of the most important things they can give their child is the gift of a good education. A college degree allows children to go out into the world with a better resume, more options, and gives them the time they need to discover what they want to do for a living. A college education is not, however, an inexpensive purchase. Depending on where the child decides to go to school, the cost of tuition can reach into the tens of thousands of dollars for even just one semester. This is why parents must begin saving for college early. The following savings plans are designed to help parents do just that!
529 Plans
529 plans, which allows parents to pay for future higher education expenses by saving now, are great for parents who want to send their children to college and save a little money in the process. The account is a tax-advantaged investment which allows parents to save for their child’s education in any state, but it’s even more financially beneficial if the child chooses to go to school in their state of residence. Many states offer families a chance to save money for college in a 529 with certain tax advantages such as protection from creditors, non-taxable income status, and even matching grants for kids who have these savings accounts when they go into college. There’s a savings plan and a prepaid plan, but the prepaid 529 plan is only available in ten states. It allows families to lock in the current price of tuition for their child even if it goes up substantially. Savings based plans are grown using different investments over the years.
Continue reading to learn about Coverdell Education Savings Accounts.
Coverdell Education Savings Account
The United States government created the Coverdell Education Savings Account (ESA) to help families save for college while also taking advantage of tax savings. Parents are permitted to make up to two thousand dollars per year in contributions to this account. This is per account, so a parent with more than one child may make up to two thousand dollars per year in contributions to each child's account without paying taxes on this money. A Coverdell ESA can include almost any type of investment, which makes it possible for a child to end up with a lot more money than their parent contributed if the stock market benefits them. If the amount in the account is not completely dispersed to the student by the time the student reaches the age of thirty, the money becomes taxable, unless the student decides to create a new beneficiary for the account, such as a child of their own. It’s one of the many tax advantages this account offers.
Continue reading to discover the benefits of savings bonds.
Saving Bonds
There’s a program called the Education Bond Program that allows the interest on savings bonds in specific categories tax-free. This only works if they are cashed out and used to pay for a college education, but it’s something many parents and grandparents use when they want to invest in a college education for their kids and grandkids. Many individuals use these bonds because they’re guaranteed due to the backing of the United States government. They don’t lose value, so the person using the bond can keep the value plus any interest it accrues over the years. These bonds are also tax-free if they are rolled into a 529 plan at some point. Anyone who wants to take advantage of a tax-free bond for their higher education expense must be at least twenty-four years old the date it’s issued, and it must be in the name of a parent if the bond is issued before the child turns twenty-four. Children are listed as beneficiaries, though it’s possible for an adult to use a bond in their own name to pay their own education expenses.
Continue reading to learn about UGMA and UTMA accounts.
UGMA and UTMA Accounts
If a parent is looking for a lower tax rate in addition to the investment into their child’s education, Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts are the answer. Minors are taxed at a lower rate than adults, which means the gifts given to them from adults are less expensive from a tax standpoint. This is not a savings plan per say, but it is a way for an adult to transfer their assets to a minor. Since minors are almost always in a lower tax bracket, the amount they receive is greater due to the lower tax liability. This is a transfer of an asset, which means it’s an asset to the child once received. The child is not required to use this money for their education, and there is nothing that says they are penalized if they do not. It’s simply a way for an adult to transfer some of their own assets from their estate to a child for educational purposes while avoiding the tax penalties that come with being in a higher tax bracket.
Continue reading to learn more about money as gifts when it comes to education.
Money As Gifts
Giving a child a college education with money as a gift is one way to help them pay for college, but it must be done correctly so the money remains nontaxable. Monetary gifts of a certain amount are taxable, and many fail to realize money as a gift can cost them much more than they were bargaining for. The good news is a person can give money as a gift to a student without paying taxes on it and without the student paying taxes on it if it’s done correctly. Gift tax is expensive, but paying less than fourteen thousand dollars at a time is the way to avoid it. The giver and the recipient are exempt from paying taxes on this money as long as the giver does not give more than fourteen thousand dollars per calendar year to more than one person. Once it’s more than this amount in one year, the money becomes taxable.