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.
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.
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.
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.