By The Galecki Financial Management Team
Education savings vehicles are great ways to begin saving for your child or grandchild’s education. With recent updates from Congress, education savings vehicles arguably deserve a higher exposure in your overall financial plan.
The 529 plan is a tax-advantaged plan to help you pay for a college education, and it’s been expanded to do more. Other education savings vehicles, such as the Coverdell Education Savings Account (ESA), an account under the Uniform Gifts to Minors Act (UGMA), and the Uniform Transfers to Minors Act (UTMA), also have implications beyond just saving for education.
These education savings vehicles could provide you with the educational benefits each program intended as well as tax, estate, and retirement planning options you might not have considered.
Here is an overview of these education savings vehicles.
The 529 Plan
The 529 assists families with paying for college; however, it’s been expanded to include K-12 education and apprenticeships.
You also can use the money to pay up to $10,000 in student loans, and as of Jan. 1, 2024, up to $35,000 remaining in an account can be rolled over into a Roth IRA if your 529 has been in place for at least 15 years.
There are two basic types of 529 plans: education savings plans and prepaid tuition plans. The money in a 529 plan grows tax-deferred, and it is tax-free when withdrawn and spent on education expenses such as tuition, books, and supplies. With an education savings plan, the money can pay for nearly any school. The prepaid tuition 529 plan allows you to lock in the current cost of college for future attendance.
Any funds contributed to a 529 plan remain in the owner’s control yet are excluded from their taxable estate. 529 plans can be a way to shelter assets from future estate taxes while meeting the goal of helping to pay for a child, grandchild, or other relative’s education costs.
A 529 plan differs by state. For instance, in Indiana, you can take an income tax credit of 20% of your contribution, up to $1,500 ($750 for those filing separately), through the CollegeChoice 529.
The Coverdell Education Savings Account
The Coverdell ESA, often overlooked, is a trust to help families below a certain income pay education expenses for a beneficiary. The beneficiary must be under 18 unless the person qualifies as having special needs.
Coverdell contributions are limited to a total of $2,000 from all sources, including family, organizations, or trusts. The Coverdell ESA can be used for many education expenses for K-12, while the 529 plan permits money to be spent only on tuition for elementary through high school.
Distributions from the account are tax-free for qualified expenses. However, distributions above the expenses will have a portion taxed at the beneficiary’s rate. If a beneficiary turns 30 before the money is spent, money from the trust is given to the beneficiary within 30 days.
An Account Under UGMA and UTMA
An account under the UGMA and UTMA allows you to contribute property to help pay for a child’s education without a trust. You can transfer nearly anything of value—cash, stocks, bonds, mutual funds, and real estate—into the account. You hold the account until the child reaches the age of majority (age 21 in Indiana).
Contributions are made with after-tax dollars up to an $18,000 annual limit ($36,000 for married couples) without incurring gift taxes. Any income generated by the account is taxable in the year it is earned. The IRS allows the first $1,300 tax-free, taxes the next $1,300 at the rate of the child, and anything above that at your tax rate. Both the annual gifting exclusion of $18,000 and Kiddie Tax of $2,600 can be adjusted each year by the IRS.
You don’t own the account but can spend money from it to benefit the child. Once the child turns the age of majority, you are removed as the custodian and the child has full ownership.
Choose the Right Education Savings Vehicles for You
Deciding which education savings vehicles to use has implications beyond funding education. The Galecki Financial Management team helps individuals and families in Fort Wayne, throughout Northeast Indiana, and around the country pursue an ideal financial future for their family.
We provide our personalized financial planning services on a Fee-Only basis, which means you can trust that we are always—and only—looking out for your best interests as we help you make the right choice for your financial goals. To schedule a meeting, call (260) 436-8525 or email [email protected].
About Galecki Financial Management
At Galecki Financial Management, we help individuals and families confidently pursue their financial goals. We’re anything but a business-as-usual wealth management firm. We’re different. Friendly. Casual. And really good listeners. Indeed, that’s a big part of what makes us different. Everything we do is based on what we hear from you, because our experienced team of professionals specializes in comprehensive financial planning, cash flow analysis, IRA rollovers, financial services, money management, estate planning, retirement planning, and advising. We help you identify your short- and long-term goals, and then we work together to pursue them. Lastly, and most importantly, we’re fee-only, meaning we’re only compensated for our time. Our only incentive is to help you succeed.