The Right Education Savings Plan

I recently had a friend ask what I thought was the best education savings plan to invest in for her children. It's not an easy question to answer. I used to feel overwhelmed at the prospect of investing for my children. There seemed to be too many options, each with their pros and cons. I had asked several people what the best investment vehicle was and there was no universal answer. The correct answer is that there is no correct answer. Each person needs to decide what is most important to them (besides making the most money) when it comes to investing for their child's future. Is it tax implications, investment limits, who controls the investments? Below are some of the features of the most popular vehicles; 529 plans, Coverdell Education Savings Accounts, and UGMA/UTMA. Hopefully this can help make your decision a little easier.

529 Plans

• Non-deductible contributions. Earnings withdrawals are free from federal tax when used for qualified higher education expenses. State tax implications vary by state and plan.
• Qualified expenses include tuition, fees, books, supplies, equipment and room and board.
• Maximum investment varies by state/plan. Many in excess of $250,000 per beneficiary
• Ability to change beneficiary to another member of beneficiary's family.
• No time/age restrictions unless imposed by the program.
• No income restrictions
• For federal financial aid purposes, counted as asset of parent or other account owner, not as a student asset
• Investments controlled by state appointed fund manager and developed by the plan.
• If used for non-qualifying expenses, withdrawn earnings are subject to federal tax and 10% penalty.

Coverdell Education Savings Plan

• Non-deductible contributions. Withdrawals are free from federal tax when used for qualified higher education expenses. Withdrawals can also be used for K-12 educational expenses.
• Maximum investment is $2,000 per beneficiary per year combined from all sources.
• Qualified expenses include tuition, fees, books, supplies, equipment, room and board, plus additional K-12 expenses.
• Ability to change beneficiary to another member of beneficiary's family.
• Contributions until age 18; use of account by age 30.
• Ability to contribute phases out for incomes between $190,000 and $220,000 (joint filers).
• For financial aid purposes, counted as asset of parent or other account owner, not as a student asset.
• Broad range of investments options that you have control over.
• If used for non-qualifying expenses, withdrawn earnings are subject to federal tax and 10% penalty.

UGMA/UTMA

• Earnings and gains taxed to minor; first $850 of unearned income is tax exempt, next $850 at child’s rate, over $1,700 for minors below age 18 taxed at parent’s rate.
• No limit on contribution amounts.
• No restrictions, does not have to be used for educational expenses.
• Not able to change beneficiary, represents an irrevocable gift to the child.
• Custodianship ends when minor reaches age of maturity (varies by state, usually 18 or 21).
• No income restrictions
• Considered asset of the child.
• Broad range of investment options that you have control over.
• Funds must be used for benefit of the child.