529 college savings plans are accounts set aside by parents, grandparents or guardians to pay for the future tuition of young children. Earnings grow tax-deferred, and the minimum contributions are kept low to allow various families to be able to afford these plans (i.e. $50 a month). Further, funds are not subject to taxation when they are withdrawn, as long as they are used for approved educational purposes. (For more information, check out MainStreet's 529 plan explainer.)
But 529 plans do have a contribution limit. So if you're looking to give more to your child's education (or you want to shop around before settling on a savings plan), here are some other options.
Coverdell Education Savings Account (CESA)
CESAs can be purchased through most brokerage and fund companies. This option provides broad investment choices and features tax-free earnings as long as they are used to pay for qualified education expenses, including elementary and high school costs.
- Contribution limits: $2,000 per year, per child.
- Qualification restrictions: Adjusted gross income must be less than $110,000 for a single filer or $220,000 for those married filing jointly.
- Financial aid treatment: Same as 529 plans.
UGMA/UTMA Custodial Account
Most financial institutions can set up UGMA/UTMA accounts for you. The first $800 of income is tax-free if the child is 13 or under. The next $800 is taxed at the child’s rate and any more income is taxed at the parents’ rate.
- Contribution limits: None, although gifts greater than $11,000 per child are subject to gift tax.
- Qualification restrictions: None.
- Financial aid treatment: Beware that this account is considered to be a student asset, so it is assessed at a 35% rate according to the national financial aid formula.
Taxable accounts have no contribution limits and can be invested broadly in stocks, bonds or mutual funds. There are no direct tax benefits but you can save on taxes by investing in an index fund.
This is an irrevocable trust that is designed to earn a large sum of money over the lon -term. Even the most modest gift can grow into hundreds of thousands of dollars over time with the compounded growth in a Kiss Trust. These accounts can start at birth and mature over time until the child is retirement age, if desired. A gift of $2,500 to a small child, for example, has a projected value of $1.3 to $1.5 million by the time the child reaches age 65 because of the compounding interest set up in this type of trust. The funds can be taken out at college age as long as the trust is set up that way at inception. These funds stay in the donor’s name, so they never adversely affect the student’s financial aid consideration. A Kiss Trust can be invested in a tax-deferred annuity or an after-tax mutual fund.
Under this concept, loans are taken out from whole life insurance policies to fund college tuition for beneficiaries. The beneficiary is not taxed and there is no adverse affect on financial aid consideration because it is not in the student’s name.
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