Your Money

Options for getting a jump on saving for college

Certified financial plannerJune 22, 2013 

One of the biggest goals for many parents is to send their children to college.

With the price of a college degree rising at more than double the rate of inflation, families are often intimidated by the sticker price of a quality education.

Fortunately, there are some options that enable family members to contribute towards a child’s education years before they are accepted to college.

Coverdell Education Savings Account: The Coverdell ESA is an account that allows contributions up to $2,000 per year per child. One of the benefits of the Coverdell is that the money within this account can be used for education expenses for elementary and secondary education, as well as college or vocational school. While there is no tax deduction available for ESA contributions, the investments can grow tax-free while it remains within the account. And, all qualified distributions are tax-free.

While the Coverdell offers an avenue to cover the costs of education, there are some limitations to this account. First, if your modified adjusted gross income in 2013 exceeds $110,000 for single taxpayers and $220,000 for those filing a joint return, then you cannot establish or make contributions to a Coverdell ESA. The account also has time constraints that require the account balance to be exhausted by the beneficiary’s 30th birthday. Otherwise, a 10 percent penalty will be imposed on the taxpayer.

Section 529 Savings Plan: The 529 is perhaps the most popular of the accounts used to prepare for higher education costs. With this account, individuals can contribute up to the annual gifting limits for a beneficiary, which is $14,000 for 2013. That means that parents can contribute a total of $28,000 in 2013 for one child, and if other relatives want to, then they can also contribute.

Just like the Coverdell, contributions are not tax deductible, but the earnings grow tax-free, and all qualified distributions are tax-free. Unlike the Coverdell, the 529 can only be used to cover qualified higher education costs. It does not have income limitations for donors and there is no deadline to withdraw the money. Therefore, if your child enrolls in a graduate program after years of participating in the workforce, then any money left in the 529 can continue to grow in the account tax-free without penalty for not withdrawing it.

Uniform Gift/Tranfers to Minors Act Accounts: UGMA and UTMA accounts are trusts established in the name of the child and allow others to transfer assets to the intended beneficiary. This money can be used for anything including college, starting a business, the down payment toward a home or paying for a wedding. Keep in mind that once the gift is made, you cannot take back the asset. And, unlike the education accounts, any gains and income produced by the assets are subject to taxation.

One of the key differences of these accounts and the Coverdell and 529 is that at the age of majority, the property legally becomes that of the beneficiary. So, if your child decided to pay for a trip to Las Vegas for him and his friends on his 21st birthday, then he has every right to do so. Therefore, parents are advised to think about the 21-year-old your child may become, as opposed to the angelic 5-year old they currently are before deciding to permanently transfer assets into their name through one of these accounts.

Life is a journey. Plan for it.

Ashleigh Brooker is the principal of A. J. Brooker Financial Associates in Columbia.

The State is pleased to provide this opportunity to share information, experiences and observations about what's in the news. Some of the comments may be reprinted elsewhere in the site or in the newspaper. We encourage lively, open debate on the issues of the day, and ask that you refrain from profanity, hate speech, personal comments and remarks that are off point. Thank you for taking the time to offer your thoughts.

Commenting FAQs | Terms of Service