| With higher education costs increasing at double digit | | | | Coverdell Education Savings Account you can only |
| percentages an effective college savings plan for | | | | contribute $2000 per child per year and to qualify |
| your kid's education is becoming much more critical. | | | | your adjusted gross income must be less than |
| Most parents will find that their kid's future college | | | | $110,000 if you are single and less than $220,000 if |
| costs will be much more than they have planned. This | | | | you are married filing jointly. For financial aid eligibility a |
| leaves many kids to be faced with obtaining financial | | | | Coverdell Education Savings Account is classified as a |
| aid to compensate for a portion of their higher | | | | parent's asset so less that 6% of the value counts |
| education costs. This article will explore the pros and | | | | against your kid's financial aid eligibility. |
| cons of 4 common college savings options. This | | | | UGMA/UTA Custodial Account (Uniform Gifts to |
| article will also seek to show which of these 4 | | | | Minors Act/Uniform Transfers to Minors Act): A |
| options are a better option if part of your kid's higher | | | | UGMA/UTMA account allows someone to make gifts |
| education costs are to be funded by financial aid. | | | | to a minor without setting up a trust. While there are |
| 529 College Savings Plan: Since January 2002, 529 | | | | benefits to a UGMA/UTMA account the first limitation |
| college savings plan have become a new option for | | | | is that these types of accounts offer very little |
| achieving tax free college savings. These plans are | | | | federal tax advantage. Secondly if your child is 14 or |
| state sponsored investment programs that offer | | | | under only the first $800 of income is tax free, the |
| special tax treatment. It allows just about everyone | | | | next $800 is taxed at your child's tax rate and after |
| to save for their kid's college education. While there | | | | that there is no tax benefit at all. The other big |
| are many benefits of a 529 college savings plan, | | | | disadvantage is that an UGMA/UTA Custodial |
| perhaps the most important is that your investment | | | | Account has to be set up in your child's name. This |
| earnings are tax deferred if you use the funds for | | | | can create a big problem if your child needs financial |
| qualified education expenses. Additionally, another big | | | | aid since all of the assets will be reviewed at a 35% |
| advantage is that the maximum amount you can | | | | rate. As a result, a UGMA/UTA Custodial Account is |
| contribute to a 529 savings plan can go as high as | | | | not advisable for those who may need to qualify for |
| hundreds of thousand dollars but be aware these are | | | | financial aid eligibility. |
| based on your States specific guidelines. If for some | | | | The main advantage of a UGMA/UTA Custodial |
| reason you do not use the investment funds for | | | | Account is that there is no limit on the investment |
| college, you can still withdrawal your investment | | | | contribution and it is very easy to set up at most |
| earnings, but you will have to pay a federal penalty | | | | major financial institutions including some insurance |
| of 10% and federal income taxes on your earnings. | | | | companies. However, as can be seen above the |
| The penalty can be waived if your child receives a | | | | disadvantages of a UGMA/UTA Custodial Account far |
| college scholarship, or in the event your child | | | | outweigh the benefits. |
| becomes disable or dies. | | | | Taxable Investment Accounts: Taxable investment |
| A 529 plan can typically be easily purchased through | | | | accounts can be a broker account, a mutual fund, a |
| an investment broker or mutual fund company like | | | | certificate of deposit or just a regular savings |
| Vanguard or Fidelity. Please be aware that one of the | | | | account. Essentially it is just a regular account that |
| biggest disadvantages of a 529 plan is that | | | | earns taxable interest, or investment income. A |
| investment options can sometimes be limited. | | | | benefit of a taxable investment account if set up in |
| However, as 529 plans become more popular it is | | | | the parents name is that the assets are classified as |
| likely that more plan options will open. For instance, | | | | a parent's asset so they do not count as a negative |
| the State of Ohio just announced the option for | | | | in the financial aid formula. Additionally, taxable |
| bank CDs and saving accounts for 529 plans. One last | | | | investment accounts offer lots of flexibility, and are |
| main advantage of a 529 college savings plan is that | | | | easy to set up at any financial institution. However, |
| the money in the plan is classified as a parents assets | | | | the big limitation to taxable accounts in saving for |
| so less that 6% of the value counts against your | | | | college is that they offer no tax advantage for |
| kid's eligibility for financial aid. | | | | college savings. |
| Coverdell Education Savings Account (CESA) | | | | In summary, a solid savings plan for college is a very |
| (formerly known as an Educational IRA): A Coverdell | | | | important undertaking for parents to consider. The |
| Education Savings Account is a savings account | | | | above 4 education investment options can be highly |
| created as an incentive to help parents and students | | | | useful in the college planning process. Furthermore |
| save for higher education expenses. A Coverdell | | | | since some of these investments offer substantial |
| Education Savings Account is easy to set up at most | | | | federal tax advantages and do not count against |
| financial institutions and banks. A Coverdell Education | | | | financial aid eligibility they can maximize parent's |
| Savings Account is similar to a 529 college savings | | | | investment resources. |
| plan, but different in the contribution limits. With a | | | | |