These Plans Will Ensure You Have Enough Saved Down the Road.

By Susan Lawrence

Helping loved ones receive an education is a major goal for most Americans. Today’s choices of education savings accounts can be complex. To make this a bit easier, below is a brief summary of some savings accounts available. Below are highlights of the three types of accounts:

529 college savings plans

There are two types of 529 plans: prepaid tuition plans and savings plans. Prepaid tuition plans allow you to pay future tuition costs now, based on today’s rates. Most prepaid tuition plans are sponsored by state governments and have limited enrollment periods. Many state governments guarantee investments in the prepaid tuition plans.

MAXIMUM CONTRIBUTION: $375,000 per student; varies by state.

WITHDRAWALS: Must be used to pay for qualified higher education expenses or will be subject to penalties.

TAXATION: Although contributions are not tax deductible, the distributions are tax free as long as they are used to pay for qualified higher education expenses. Earnings in the account grow tax free.

BENEFICIARIES: These can be changed within immediate family, including cousins. NOTE: You can use one state’s plan to pay for college expenses in other states.

INVESTMENT OPTIONS: A menu of mutual funds selected by the state plan.
For more information on the Washington State guaranteed Education Tuition, or GET, prepaid tuition plan, see www.get.wa.gov.

Coverdell Education Savings Accounts (Education IRAs)

MAXIMUM CONTRIBUTION: $2,000 per child until the child’s 18th birthday, except for a special-needs child. (Your adjusted gross income must be less than $110,000 if you file as an individual, $220,000 for a joint return.)

WITHDRAWALS: Can be used to pay for primary, secondary or higher education or will be subject to penalties. Distribution is mandatory when the beneficiary reaches age 30.

TAXATION: Although contributions are not tax deductible, the distributions are tax free as long as the distributions are taken to pay for Internal Revenue Service–qualified educational expenses prior to the beneficiary reaching age 30. Earnings in the account grow tax free.

BENEFICIARIES: Can be changed if the new student is not yet age 30 and the original student gives consent.

INVESTMENT OPTIONS: Various, at the discretion of the owner.

Custodial Accounts (UGMAs and UTMAs)

MAXIMUM CONTRIBUTION: Unlimited.

TAXATION: gains, dividends and income are taxed each year to the owner of the account at his or her tax rate.

WITHDRAWALS: Rules vary by state, but withdrawals can be made for any reason at any time without a tax penalty.

BENEFICIARIES: Cannot be changed, but, based upon the state, once the beneficiary is between ages 18 and 21 the owner of the account changes to whoever is the beneficiary.

INVESTMENT OPTIONS: Various, at the discretion of the owner.

Education savings accounts have different features, with different pros and cons. To know the best fit for your situation, consult with a financial advisor. ❖
elping loved ones receive an education is a major