Funding Your Child's College EducationJan 31, 2013
By Staff writer State Farm™ Employee
Are you looking for a great gift to give to the children in your life this holiday season? If so, consider giving the gift of higher education. It's never too early to start saving money for your child's education – or as a gift for your nieces, nephews, or grandchildren. Long after toys are broken or outgrown, a college savings account will still be appreciated.
Three popular ways to save for college are:
- 529 Plans. These "qualified tuition programs" allow you to save and pre-pay for college tuition under Section 529 (b) of the Internal Revenue Code. The 529 college savings plan allows you or any other family member to open an account specifically for future higher education expenses. A 529 plan lets you invest in any public college or university in your state at present-day prices. Residency requirements apply. Your investment is tax-deferred and distributions from the fund are exempt from federal income tax.
- Coverdell Education Savings Account (ESA). A Coverdell ESA is a trust that lets you contribute funds earmarked for future educational costs (elementary and secondary education through college and graduate school), up to $2,000 per year, per child. Contributions can begin at birth and continue until a child turns 18 years of age. Coverdell ESA accounts are exempted from federal income tax and withdrawals are tax-free.
- UGMA and UTMA Accounts. You can also set up a college account for your child under the Uniform Gift to Minors Act (UGMA) or the Uniform Transfer to Minors Act (UTMA). With these two accounts you can make monetary gifts towards your child's future educational needs without setting up a trust. Minors can take control of the funds when they reach the age of trust termination (which is age 18 to 21, depending on state and account restrictions). The donor pays no taxes. Income from UGMA/UTMA accounts must be reported on the child's tax return, but the assets are taxed at a much lower tax rate than those of an adult.
Talk to your financial advisor before moving forward with any of these educational account options.