By Mary Ann Pierce, CLU MARATHON FINANCIAL ADVISORS, INC.
It’s that time of year again – summer is winding down, the Fair has come and gone (can I admit to trying the newest deep-fried delicacy?) and we’re starting to see the big yellow school buses out and about during our morning commute. For many of us, this will lead us to thoughts of children and college. Will they go to college, where will they go, and how will we ever be able to pay for it?
There are many ways to save for a child’s future, whether that future includes a college education, learning a trade, or simply to give a financial “boost” after completion of high school. Many simply fund an account “earmarked” for future use by that individual, using birthday and holiday gifts and money from other occasions.
Others may prefer to use one or a variety of college savings accounts, and there are several options available. Namely, there is the UGMA/UTMA (Uniform Gift to Minors Account/Uniform Transfer to Minors Account), a Coverdell Education Savings Account, or a 529 Plan account. Each of these has it’s own set of rules for how the funds are handled, and how and when they may be disbursed.
UGMA/UTMA accounts may be set up at any time for a child. There is no income limitation for those who contribute, and no limitation on the amount of the contribution(s). The beneficiary of the account gains control at the age of majority (18 or 21 in most states) and may use the funds in any way that they wish. Upon distribution, a portion of the account earnings may be income-tax-free, a portion taxed at the child’s tax rate, and the remainder taxed at the parents’ rate. It is always a good idea to consult your tax advisor when it is time to take distributions from an UGMA/UTMA.
A Coverdell Education Savings Account (ESA) can be used by the beneficiary for any qualified education expenses, grades K-12 and higher. There are income limits (for parents) at which the ability to contribute to a Coverdell ESA will be phased out, and the contribution per beneficiary is limited to $2,000 per year. The account grows tax-free, and as long as withdrawals are made for qualified educational expenses the earnings will be free from federal tax. As in the UTMA//UGMA account, the beneficiary gains control of the account at the age of majority.
529 Plans are often used to save for higher education expenses, and there are no income limitations for contributors to these accounts. Anyone may contribute, and the contribution limit for these accounts is much higher ($350,000 per beneficiary). The owner of the account maintains control of the assets, and may decide when withdrawals may be made; the owner may also change the beneficiary of the account, should the named beneficiary decide not to continue their education, or not use the entire account. This is an attractive feature of the 529 Plans.
There may be state tax advantages to the parents/owners of a 529 Plan depending upon which plan they choose. Earnings grow tax-free, and as long as the withdrawals are for higher education expenses they are free from federal tax. Both 529 Plan and Coverdell ESA withdrawals may be assessed tax and penalties if they are used for anything other than qualified educational expenses.
Each of these accounts vary in their features and benefits, as well as tax treatment which is why I always encourage you to have a conversation with your tax advisor and financial advisor before establishing one, to make sure that it is the right fit for you and your beneficiary.
Mary Ann Pierce, CLU / Owner of Marathon Financial Advisors, Inc.
Securities and investment advice offered through CADARET, GRANT & CO., INC. Member FINRA/SIPC
Marathon Financial Advisors, Inc. (formerly Susan Budrakey & Associates) and Cadaret, Grant & Co., Inc. are separate entities.