kids savings accounts

Saving for Your Child’s College Education: A Savings Account or a 529 Plan?

Posted on 26. Apr, 2010 by admin.

An educational savings account can be a great way to save for your child’s education. This can be a traditional kids’ savings account, whereby you as his or her parents can open up a savings account in your child’s name, and he or she can deposit money into the account (such as allowance, from gifts, or even earned money), as a means to save for college and other needs. Creating a specialized child saving plan is best to start early so the amount grows but can be done in a number of ways.

Oftentimes, banks will give children slightly higher interest rates on these accounts, and they will usually waive minimum balance or other fees. There are some caveats with these accounts, though. That is, your child may not be able to make frequent withdrawals from this account, and interest rates can be relatively low. Oftentimes, the tax on the interest earned needs to be reported to the IRS.

The Coverdell Education Savings Account

The Coverdell Education Savings Account, or ESA, has a $2000 limit annually per beneficiary. However, distributions are tax free, as long as the money is used for specific purposes as designated by the ESA. Withdrawals that are made in excess of ESA limitations must report these as excess withdrawals on current income tax year returns, paying a penalty of 10% on that money. When those holding these accounts reached the age of 30, they must withdraw the money within 30 days, and pay income tax on the interest generated.

A 529 Plan For College Education

The 529 College Savings Plan is a plan whereby you can save for your child’s college education with fewer tax difficulties. You can open a 529 account with any mutual fund company, and the money he depositS into that account can grow tax-deferred, similar to an IRA. In addition, in contrast to the ESA (Educational Savings Account), contributions can be up to $11,000 per person instead of the $2000 as limited by the ESA, and there are no income restrictions when it comes to contributions for the 529 plan.

529 plans, however, can ONLY be used for college expenses, not educational expenses prior to college. As with the ESA, qualified withdrawals are tax free, but unqualified withdrawals are subject to a 10% tax penalty, just as with the ESA.

Finally, ownership is also different between the Coverdell Educational Savings Account and the 529 plan. With the educational savings account, the child is actually the owner, but the 529 plan account is owned by the person who actually opened that account. This could be a difficult, depending on what happens when the child reaches college age and begins to apply for financial aid.

The biggest deciding factor as to whether you should open an educational savings account or a 529 plan is what the expected annual contributions for each plan will be. If contributions are expected to be less than $2000 from all sources, then an educational savings plan is likely to be a good idea. If contributions are expected to exceed $10,000 from all sources, then a 529 plan is probably a better bet.

A Standard Kids Savings Account

Finally, getting back to a simple savings account that is in your child’s name, this is also a good way to save for college, but the interest may be taxable. Nonetheless, it’s a much more “fluid” way to save money for your child, in that it can be used for a variety of purposes, and not just to cover the cost of a college education. The final choice is up to you, and of course it also depends on what your child’s own goals are going to be in the end. Because with an ESA you can pay for some elementary and high school expenses as applicable, this may be a much more flexible option if you do intend to have your child go to private school whereby these expenses will be a factor even before college. And of course, if your child opts not to go to college at all, the 529 plan can have some limitations, in that it can only be used for college expenses (if there is to be no penalty for withdrawals) and must be withdrawn in full by the age of 30 regardless. This can result in penalties that can be somewhat expensive, and in this case, it may be better to go with a simple savings account and/or an educational savings account.

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529 College Savings Plan: Should You Get One, and Why?

Posted on 23. Apr, 2010 by admin.

Basically, 529 plans can be useful if you plan to send your child to college; the money can be used for anything related to college education, including books, fees, tuition, supplies, equipment, and so on, as long as the school in question is an accredited university, college, or vocational school in the United States; in some cases, foreign universities qualify, too.

If beneficiaries are half-time students, the money can also be used to pay for room and board. Off-campus housing costs, too, can be covered to an extent, in that it’s limited to what the college itself says is the cost of attendance in regard to federal financial aid guidelines. However, qualified expenses don’t include student loans or student loan interest.

If distribution is taken from the 529 savings plan and does not qualify as a legitimate withdrawal, it will be taxed as income plus will be charged an additional 10% early distribution penalty, with certain exceptions.

What are the advantages of the 529 College Savings Plan?

Contributions to the 529 plan by the donor are not tax-deductible federally, but may be deductible on a state-by-state basis. In addition, the principal’s interests will grow tax-deferred, and any distribution taken by the beneficiary for approved expenses are not taxed.

Unlike some savings accounts, the donor retains control of the account, and the beneficiary has no right to the money except as designated by the donor. Most 529 plans allow you to “take back” the money for yourself at any time, no questions asked, although if withdrawals are made on a nonqualified basis, they will be taxed as income and given an extra 10% penalty besides.

It’s also very easy to set up a 529 plan, with just a simple enrollment form and then contributions as desired; you can even set up an automatic deposit plan. The account’s ongoing investments are handled by the plan, and not by the donor.

529 plans can also be used as a means to move assets outside of your state while you still retain control of the money, as applicable. That’s because assets within the 529 plan are not counted as part of your gross estate for the purposes of determining estate taxes.

529 plans can also often be transferred to other beneficiaries if the original beneficiary is either finished the school and has not used up all the monies in the account, or if the beneficiary has decided not to attend college or another appropriate school where the monies could be used.

What are the disadvantages to the 529 plan?

As stated previously, if money is in the account are not spent on eligible college expenses, the withdrawals are subject to income tax plus an additional 10% federal tax penalty. State tax deductions or credits may also be read capture.

The 529 account is also counted as an asset, and may affect how much financial aid one is eligible for in the form of loans or grants. Although this is often true for parents or students if they own the account, this can often be discounted if the grandparent or someone else not in the immediate family is the one who is the donor.

Other considerations

If a 529 account experiences investment losses during its period of time in existence, the donor can withdraw funds and the losses can be deductible from current taxable income.

529 plan contributions are considered gifts and therefore, contributions cannot be made above a certain amount coming usually $13,000 year, or $26,000 a year if married filing jointly with two donors. In addition, the amounts can not exceed $65,000 singly or $130,000 jointly every five years.

Finally, if the money is not used for college expenses, and there are no beneficiaries to transfer it to, or the original beneficiary has finished school and there’s money left over, it will be penalized upon withdrawal. That is, penalties and tax will usually apply, so that this is not a particularly good investment to make if you think the intended beneficiary will decide not to go to school whereby qualifying expenses can be paid from the 529, but have no one else to transfer the money to.

If you would simply want the beneficiary to have money available to him or her to pay for other things besides these rather restricted educational expenses, then a simple savings account, an alternative college savings plans or other investment vehicle is probably a better idea.

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