Most parents want to contribute to their children’s future education costs, but many don’t know how to do so in the most productive way. Even if your children are young, you should still look to the future and think about college. Paying for the college education can feel daunting, but it doesn’t have to be when you know your facts. While there are many different college savings vehicles, the most important step a parent can take is to start saving early and continue saving until the child heads off to college.

For example, if you save $50 per month from the time the child is born until he/she reaches age 18, you will have over $19,000 for college (at an average return of 6%). Double the savings to $100 per month and you’ll have almost $40,000 when your child heads off to college.

Qualified Tuition Programs—529

⦁ Contributions grow tax deferred

⦁ Annual contributions are limited to the amount of the federal gift tax exclusion ($14,000 per child for 2017)

⦁ Withdrawals from the account used for “qualified education expenses” are not taxed at the federal level and usually are not taxed at the state level.

⦁ Tuition, fees, books, supplies, equipment required for enrollment or attendance.

⦁ Some expenses for the purchase of computer or peripheral equipment, software or internet access.

⦁ Special needs services.

⦁ Room and board for students attending college at least half time.

⦁ Withdrawals not used for qualified education expenses are considered income and subject to income tax.  In addition, these withdrawals are subject to a 10% additional tax unless they qualify for an exemption from the additional tax.

⦁ Parent is the owner of the account, child is the beneficiary.

⦁ Many states have plans providing tax deductions for their residents.

⦁ A Nebraska resident contributing to a Nebraska college savings plan can deduct up to $10,000 on their Nebraska tax return.

⦁ The beneficiary can be changed to another child or grandchild.

⦁ Funds in the account are considered the parent’s asset for financial aid purposes.

⦁ For additional information on 529 Plans read this blog.

Coverdell Education Savings Accounts

⦁ Contributions grow tax deferred.

⦁ Contributions are limited to $2,000 per year per child.

⦁ Excess contributions are taxed at 6%.

⦁ Contributions must stop when the child reaches age 18.

⦁ There are income restrictions for the parent making the contribution.

⦁ Withdrawals from the account are not taxed as long as all of the funds are used for “qualified education expenses.”

⦁ Tuition, fees, books, and supplies.

⦁ Some room and board charges.

⦁ Special needs services.

⦁ Withdrawals not used for qualified education expenses are considered income and subject to income tax.  In addition, these withdrawals are subject to a 10% additional tax unless they qualify for an exemption from the additional tax.

⦁ Funds in the account are considered the parent’s asset for financial aid purposes.

Uniform Gifts to Minors Act (Uniform Transfers to Minors Act) Accounts

⦁ Parent sets up the investment plan account titled in the child’s name “under the Uniform Transfers to Minors Act.”

⦁ Parent is the custodian of the account.

⦁ Income in the account is taxed to the child.

⦁ Under current law, depending on the child’s other income and the character of the income in the account, up to $2,100 of income in the account will not be taxed each year.

⦁ Money in the account can be used for any purpose, not just college tuition.

⦁ When the child reaches the age of majority (age 21 in Nebraska), all funds in the account must be distributed to the child.

⦁ Funds in the account are considered the child’s asset for financial aid purposes.

⦁Click here for more information on these types of accounts.

As stated earlier, the most important step a parent can take to accumulate college savings is to start saving early and save often.  If you have questions or need help when it comes to planning your children’s education, reach out to me at [email protected].

Judith Ackland has more than 26 years of experience in accountancy and financial planning, including seventeen years as a CFO of a diverse business. She started Crystal Financial in 2010 to help a wide array of individuals, families, and business owners better understand their finances and how good financial management could help them achieve their goals. Judith has an MA in Professional Accountancy from the University of Nebraska at Lincoln as well as a Certified Public Accountant Certificate and a Certified Financial Planner designation.

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