UGMA / UTMA • With an UTMA / UGMA there are unlimited contributions. • The account is controlled by the custodian until the student has reached the
appropriate age (age varies by state). • A portion of the earnings is taxable at the student's lower rate. • The money must be used for the benefit of the student. • The only consideration on financial aid is it's considered the students
assets. • The advantages are the contributions can be made by anyone and there are
no family income restrictions. |
Coverdell ESA • With an Educational IRA you can invest a maximum annual contribution of
$2,000 per child up to the age of 18. • The account is controlled by a parent or another responsible individual.
• You have Federal tax-free qualified withdrawals. • Withdrawals must be used for qualified higher education expenses and
must be used by the age of 30. • The effects on financial aid considerations are the student cannot claim
HOPE or Lifetime Learning Credits on expenses paid for the Education
Savings Account withdrawals and will be considered student's assets. • The advantages are the account can be transferred to another family
member, any taxpayer can make contributions and they may be used for
elementary and secondary school expenses. • The disadvantages are they are not available to high-income families. The
following table will help you determine whether or not you are eligible to
contribute to a Coverdell ESA: |
| For tax year 2002 - 2010 | Modified Adjusted Gross Income | | | | | | | Your Tax Filing Status | Full Contribution | Partial Contribution | Not Eligible | | | | | | | Single/Head of Household* | Up to $95,000 | $95,000-$110,000 | Above $110,000 | | | | | | | Married Filing Joint | Up to $190,000 | $190,000-$220,000 | Above $220,000 | | | | * Limits are the same for married filing separate. |
529 Plan Up to $12,000 a year in contributions allowed - (If you are married the amount changes to $24,000) without gift-tax consequences. Tax-free Earnings Growth - There is no federal income tax due on any earnings while they are in your 529 Account. Some states may also allow the earnings to grow state tax free.* Distributions for qualified education expenses** are federal income tax free*** No Income Limits - Everyone can invest in 529 Plans because there are no income limits restricting who is eligible to contribute. Other college savings vehicles, such as the Coverdell Education Savings Account (formerly the Education IRA), restrict individuals from investing in their income more than a certain amount. Anyone can have a 529 Plan – You can start an account for yourself, your child or grandchild, niece or nephew, or a friend. You can even change the beneficiaries within the same family. You are in control of the assets – You are able to move your assets once a year or when you change beneficiaries. You decide when to make the withdrawals.
* Check with your tax advisor to see how 529 plans are treated in your state for income tax purposes. If you are a resident of the state of Rhode Island, you do receive the benefit of state income tax-free earnings growth. **Qualified expenses include tuition, fees, room and board, books and other supplies needed for attendance of a student at an institution of higher education. A 10% penalty or additional tax on the earnings withdrawn for non-qualified expenses will apply. ***Under a "sunset provision", the tax exemption for earnings on qualified withdrawals is scheduled to expire on December 31, 2010, unless extended by Congress. As with all tax-related decisions, consult with your tax advisor. |
Savings Bonds | • You have unlimited contributions with Savings Bonds. • The bond owner controls the account. • Savings bonds are tax-free interest if you meet the following conditions. - You pay qualified education expenses for yourself, your spouse, or a dependent for whom you claim an exemption on your return.
- Your modified adjusted gross income (MAGI) is less than $80,600 ($128,400 if married filing jointly or qualifying widow(er)).
- Your filing status is not married filing separately
• There are no restrictions on using the money. • Financial Aid considerations are effected, as interest is taxable in years
HOPE or Lifetime learning Credit are used and are considered bond
owner's assets. • The advantages are there is a guaranteed minimum return and there are no
family income restrictions. • The disadvantage is a low rate of return. |
Roth IRA • With a Roth IRA you can invest up to $5,000 if you are age 49 & below or
up to $6,000 if you are age 50 & above annually across all Roth and
traditional IRA's. • The account is controlled by the account owner not the beneficiary. • Withdrawals of the principal and withdrawals of earnings after 5 years
and the age 59 1/2 are both tax and penalty-free. Withdrawals of earnings
for education expenses are always penalty-free. • There are no restrictions on using the money. • For financial aid considerations, Roth IRA's are considered the owner's
assets. • The advantages to Roth IRA's are the account owner retains control of
assets and can use the savings for any child. • The disadvantages to Roth IRA's is the child must have an earned income
to open an account, dollar-for-dollar reduction in tax-advantage retirement
savings, contributions are not deductible and there is a low contribution
limit. |
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