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You’ve made the decision to start saving for education, but what are your options?
529 College Savings Plans
These state-sponsored plans offer you the opportunity to invest for a child’s higher education in a tax-favored manner. While you can’t deduct plan contributions for federal tax purposes, account earnings aren’t taxed if the money is used for qualified education expenses (including tuition, room, board, and books) at an eligible educational institution. There is no annual income limitation for making contributions.
Coverdell Education Savings Accounts
For federal tax purposes, these accounts are treated in much the same way as 529 plans, but the funds can also be used for certain elementary and high school expenses. Annual contributions for a beneficiary are limited to $2,000. To make the maximum contribution, the contributor’s adjusted gross income (AGI) can’t exceed $95,000 for a single filer or $190,000 for a joint filer. Partial contributions are allowed with AGI between $95,000 and $110,000 (single) and $190,000 and $220,000 (joint).
Custodial Accounts
Another option is to set up a custodial account under the Uniform Gifts to Minors or Uniform Transfers to Minors Act. With custodial accounts, all funds are available to the child when he or she reaches age 18 (21 in some states). Unless otherwise exempt, annual investment earnings above $850 (in 2006) are taxable to the child, with earnings above $1,700 taxed at the parent’s rate if the child is under age 14. (Parents may elect to include amounts in excess of $1,700 on their own return.)
The appropriate option — or combination of options — will vary based on your own situation. We can answer any additional questions you may have.
MFN-1106-9333
Article is for educational purposes only and is not intended to provide specific tax or legal advice. For answers to tax questions, please see your tax professional. For legal questions, consult an attorney.
Representatives are registered, securities are sold, and investment advisory services offered through CUNA Brokerage Services, Inc. (CBSI), member FINRA/SIPC, a registered broker/dealer and investment advisor, 2000 Heritage Way, Waverly, Iowa 50677, toll-free (800) 369-2862. Nondeposit investment and insurance products are not federally insured, involve investment risk, may lose value and are not obligations of or guaranteed by the financial institution. CBSI is under contract with the financial institution, through the financial services program, to make securities available to members. CUNA Brokerage Services, Inc., is a registered broker/dealer in all fifty states of the United States of America. The Representative may also be a credit union employee that accepts deposits on behalf of the financial institution.
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