Intro to College Savings - Lesson 2

Compare your options Lesson 1 helped you figure out how much you should be setting aside each month for college, and now it's time to discuss the type of savings vehicle to use. After all, your choice of vehicle can make a significant difference in how much you end up with in your college savings account. Several options exist, and each has its advantages and disadvantages. Of primary importance is the opportunity for investment earnings and the associated risk of loss. But beyond that aspect other considerations exist: federal and state income tax treatment, including potential tax penalties gift and estate tax treatment financial aid treatment control and revocability flexibility and ease of use Remember, you donï ¿ ½t have to choose just one optionï ¿ ½many parents successfully incorporate two or more options into their college savings strategy. Here are the primary vehicles to consider for your college savings: 529 college savings plansï ¿ ½These are special investment programs operated by the states permitting you to save tax-free toward future college expenses. 529 prepaid tuition plansï ¿ ½These are programs offered in some states and by some private colleges allowing you to prepay future yearsï ¿ ½ tuition costs so that you do not have to be concerned about annual increases in tuition. Coverdell Education Savings Accountsï ¿ ½These are tax-advantaged bank or investment accounts for a childï ¿ ½s future education expenses, but they have a $2,000 annual contribution cap. Qualified U.S. Savings Bondsï ¿ ½Certain EE and I bonds can be purchased and later redeemed for college expenses without owing tax on the interest. Age and income limitations apply. Parent-owned mutual funds, bank accounts, etc.ï ¿ ½You can always save for college in traditional bank and investment accounts, understanding that the interest, dividends, and capital gains will be subject to income tax. UTMA or UGMA accountsï ¿ ½Investments in your childï ¿ ½s name will typically be held in a custodial account under the Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA) until your child reaches legal age and takes direct ownership. Children are usually in a lower tax bracket than their parents, although the ï ¿ ½kiddie taxï ¿ ½ removes that advantage if the childï ¿ ½s investment income rises above $2,000 in a year. College Savings Vehicle Comparison 529 Savings Plan 529 Prepaid Plan Coverdell ESA Qualified U.S. Savings Bonds Parent-owned mutual funds/bank accounts UTMA/UGMA accounts Federal Income Tax Non-deductible contributions; withdrawn earnings excluded from income to extent of qualified higher education expenses Non-deductible contributions; withdrawn earnings excluded from income to extent of qualified higher education expenses Non-deductible contributions; withdrawn earnings excluded from income to extend of higher education expenses, qualified K-12 expenses also included Tax-deferred for federal; tax free for state Earnings and gains taxed in year realized; special lower tax rates for certain dividends and capital gains Earnings first $1,000 of unearned income is tax exempt Maximum Investment Established by the program Lump-sum of the projected cost of college at the time of contract purchase $2,000 per beneficiary per year $10,000 face value per year per owner No limit No limit Qualified Expenses Tuition, fees, books, supplies, equipment and special needs; room & board for minimum half-time students Tuition, fees, books, supplies, equipment and special needs; room & board for minimum half-time students Tuition, fees, books, supplies, equipment, special needs; room additional K-12 expenses Tuition and fees No restrictions No restrictions Time/Age Restrictions None unless imposed by the program Restrictions on age of beneficiary at time of enrollment; usually some restriction on when benefits may be used Contributions before beneficiary reaches age 18; use of account by 30 Bond purchaser must be at least 24 years old at time of bond issue Custodianship terminates when minor reaches age established under state law None Income Restrictions None None Ability to contribute phases out for incomes between $190,000 and $220,000 (joint filers) or $95,000 and $110,000 (single) Interest exclusion phases out for incomes between $115,750 and $145,750 (joint filers) or $77,200 and $92,200 (single) None None Federal Financial Aid Counted as asset of parent if owner is parent or dependent student Counted as asset of parent if owner is parent or dependent student Counted as asset of parent if owner is parent or dependent student Counted as asset of bond owner Counted as studentï ¿ ½s asset Counted as asset of the owner Coming up: Lesson 3: Shop for a plan Lesson 4: Get family and friends involved Lesson 5: How will my savings affect financial aid? Previously sent: Lesson 1: How much to save Compare your options Lesson 1 helped you figure out how much you should be setting aside each month for college, and now it's time to discuss the type of savings vehicle to use. After all, your choice of vehicle can make a significant difference in how much you end up with in your college savings account. Several options exist, and each has its advantages and disadvantages. Of primary importance is the opportunity for investment earnings and the associated risk of loss. But beyond that aspect other considerations exist: federal and state income tax treatment, including potential tax penalties gift and estate tax treatment financial aid treatment control and revocability flexibility and ease of use Remember, you donï ¿ ½t have to choose just one optionï ¿ ½many parents successfully incorporate two or more options into their college savings strategy. Here are the primary vehicles to consider for your college savings: 529 college savings plansï ¿ ½These are special investment programs operated by the states permitting you to save tax-free toward future college expenses. 529 prepaid tuition plansï ¿ ½These are programs offered in some states and by some private colleges allowing you to prepay future yearsï ¿ ½ tuition costs so that you do not have to be concerned about annual increases in tuition. Coverdell Education Savings Accountsï ¿ ½These are tax-advantaged bank or investment accounts for a childï ¿ ½s future education expenses, but they have a $2,000 annual contribution cap. Qualified U.S. Savings Bondsï ¿ ½Certain EE and I bonds can be purchased and later redeemed for college expenses without owing tax on the interest. Age and income limitations apply. Parent-owned mutual funds, bank accounts, etc.ï ¿ ½You can always save for college in traditional bank and investment accounts, understanding that the interest, dividends, and capital gains will be subject to income tax. UTMA or UGMA accountsï ¿ ½Investments in your childï ¿ ½s name will typically be held in a custodial account under the Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA) until your child reaches legal age and takes direct ownership. Children are usually in a lower tax bracket than their parents, although the ï ¿ ½kiddie taxï ¿ ½ removes that advantage if the childï ¿ ½s investment income rises above $2,000 in a year. College Savings Vehicle Comparison 529 Savings Plan 529 Prepaid Plan Coverdell ESA Qualified U.S. Savings Bonds Parent-owned mutual funds/bank accounts UTMA/UGMA accounts Federal Income Tax Non-deductible contributions; withdrawn earnings excluded from income to extent of qualified higher education expenses Non-deductible contributions; withdrawn earnings excluded from income to extent of qualified higher education expenses Non-deductible contributions; withdrawn earnings excluded from income to extend of higher education expenses, qualified K-12 expenses also included Tax-deferred for federal; tax free for state Earnings and gains taxed in year realized; special lower tax rates for certain dividends and capital gains Earnings first $1,000 of unearned income is tax exempt Maximum Investment Established by the program Lump-sum of the projected cost of college at the time of contract purchase $2,000 per beneficiary per year $10,000 face value per year per owner No limit No limit Qualified Expenses Tuition, fees, books, supplies, equipment and special needs; room & board for minimum half-time students Tuition, fees, books, supplies, equipment and special needs; room & board for minimum half-time students Tuition, fees, books, supplies, equipment, special needs; room additional K-12 expenses Tuition and fees No restrictions No restrictions Time/Age Restrictions None unless imposed by the program Restrictions on age of beneficiary at time of enrollment; usually some restriction on when benefits may be used Contributions before beneficiary reaches age 18; use of account by 30 Bond purchaser must be at least 24 years old at time of bond issue Custodianship terminates when minor reaches age established under state law None Income Restrictions None None Ability to contribute phases out for incomes between $190,000 and $220,000 (joint filers) or $95,000 and $110,000 (single) Interest exclusion phases out for incomes between $115,750 and $145,750 (joint filers) or $77,200 and $92,200 (single) None None Federal Financial Aid Counted as asset of parent if owner is parent or dependent student Counted as asset of parent if owner is parent or dependent student Counted as asset of parent if owner is parent or dependent student Counted as asset of bond owner Counted as studentï ¿ ½s asset Counted as asset of the owner Coming up: Lesson 3: Shop for a plan Lesson 4: Get family and friends involved Lesson 5: How will my savings affect financial aid? Previously sent: Lesson 1: How much to save Intro to College Savings - Lesson 2 Compare your options Lesson 1 helped you figure out how much you should be setting aside each month for college, and now it's time to discuss the type of savings vehicle to use. After all, your choice of vehicle can make a significant difference in how much you end up with in your college savings account. Several options exist, and each has its advantages and disadvantages. Of primary importance is the opportunity for investment earnings and the associated risk of loss. But beyond that aspect other considerations exist: federal and state income tax treatment, including potential tax penalties gift and estate tax treatment financial aid treatment control and revocability flexibility and ease of use Remember, you donï ¿ ½t have to choose just one optionï ¿ ½many parents successfully incorporate two or more options into their college savings strategy. Here are the primary vehicles to consider for your college savings: 529 college savings plansï ¿ ½These are special investment programs operated by the states permitting you to save tax-free toward future college expenses. 529 prepaid tuition plansï ¿ ½These are programs offered in some states and by some private colleges allowing you to prepay future yearsï ¿ ½ tuition costs so that you do not have to be concerned about annual increases in tuition. Coverdell Education Savings Accountsï ¿ ½These are tax-advantaged bank or investment accounts for a childï ¿ ½s future education expenses, but they have a $2,000 annual contribution cap. Qualified U.S. Savings Bondsï ¿ ½Certain EE and I bonds can be purchased and later redeemed for college expenses without owing tax on the interest. Age and income limitations apply. Parent-owned mutual funds, bank accounts, etc.ï ¿ ½You can always save for college in traditional bank and investment accounts, understanding that the interest, dividends, and capital gains will be subject to income tax. UTMA or UGMA accountsï ¿ ½Investments in your childï ¿ ½s name will typically be held in a custodial account under the Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA) until your child reaches legal age and takes direct ownership. Children are usually in a lower tax bracket than their parents, although the ï ¿ ½kiddie taxï ¿ ½ removes that advantage if the childï ¿ ½s investment income rises above $2,000 in a year. College Savings Vehicle Comparison 529 Savings Plan 529 Prepaid Plan Coverdell ESA Qualified U.S. Savings Bonds Parent-owned mutual funds/bank accounts UTMA/UGMA accounts Federal Income Tax Non-deductible contributions; withdrawn earnings excluded from income to extent of qualified higher education expenses Non-deductible contributions; withdrawn earnings excluded from income to extent of qualified higher education expenses Non-deductible contributions; withdrawn earnings excluded from income to extend of higher education expenses, qualified K-12 expenses also included Tax-deferred for federal; tax free for state Earnings and gains taxed in year realized; special lower tax rates for certain dividends and capital gains Earnings first $1,000 of unearned income is tax exempt Maximum Investment Established by the program Lump-sum of the projected cost of college at the time of contract purchase $2,000 per beneficiary per year $10,000 face value per year per owner No limit No limit Qualified Expenses Tuition, fees, books, supplies, equipment and special needs; room & board for minimum half-time students Tuition, fees, books, supplies, equipment and special needs; room & board for minimum half-time students Tuition, fees, books, supplies, equipment, special needs; room additional K-12 expenses Tuition and fees No restrictions No restrictions Time/Age Restrictions None unless imposed by the program Restrictions on age of beneficiary at time of enrollment; usually some restriction on when benefits may be used Contributions before beneficiary reaches age 18; use of account by 30 Bond purchaser must be at least 24 years old at time of bond issue Custodianship terminates when minor reaches age established under state law None Income Restrictions None None Ability to contribute phases out for incomes between $190,000 and $220,000 (joint filers) or $95,000 and $110,000 (single) Interest exclusion phases out for incomes between $115,750 and $145,750 (joint filers) or $77,200 and $92,200 (single) None None Federal Financial Aid Counted as asset of parent if owner is parent or dependent student Counted as asset of parent if owner is parent or dependent student Counted as asset of parent if owner is parent or dependent student Counted as asset of bond owner Counted as studentï ¿ ½s asset Counted as asset of the owner Coming up: Lesson 3: Shop for a plan Lesson 4: Get family and friends involved Lesson 5: How will my savings affect financial aid? Previously sent: Lesson 1: How much to save Compare your options Lesson 1 helped you figure out how much you should be setting aside each month for college, and now it's time to discuss the type of savings vehicle to use. After all, your choice of vehicle can make a significant difference in how much you end up with in your college savings account. Several options exist, and each has its advantages and disadvantages. Of primary importance is the opportunity for investment earnings and the associated risk of loss. But beyond that aspect other considerations exist: federal and state income tax treatment, including potential tax penalties gift and estate tax treatment financial aid treatment control and revocability flexibility and ease of use Remember, you donï ¿ ½t have to choose just one optionï ¿ ½many parents successfully incorporate two or more options into their college savings strategy. Here are the primary vehicles to consider for your college savings: 529 college savings plansï ¿ ½These are special investment programs operated by the states permitting you to save tax-free toward future college expenses. 529 prepaid tuition plansï ¿ ½These are programs offered in some states and by some private colleges allowing you to prepay future yearsï ¿ ½ tuition costs so that you do not have to be concerned about annual increases in tuition. Coverdell Education Savings Accountsï ¿ ½These are tax-advantaged bank or investment accounts for a childï ¿ ½s future education expenses, but they have a $2,000 annual contribution cap. Qualified U.S. Savings Bondsï ¿ ½Certain EE and I bonds can be purchased and later redeemed for college expenses without owing tax on the interest. Age and income limitations apply. Parent-owned mutual funds, bank accounts, etc.ï ¿ ½You can always save for college in traditional bank and investment accounts, understanding that the interest, dividends, and capital gains will be subject to income tax. UTMA or UGMA accountsï ¿ ½Investments in your childï ¿ ½s name will typically be held in a custodial account under the Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA) until your child reaches legal age and takes direct ownership. Children are usually in a lower tax bracket than their parents, although the ï ¿ ½kiddie taxï ¿ ½ removes that advantage if the childï ¿ ½s investment income rises above $2,000 in a year. College Savings Vehicle Comparison 529 Savings Plan 529 Prepaid Plan Coverdell ESA Qualified U.S. Savings Bonds Parent-owned mutual funds/bank accounts UTMA/UGMA accounts Federal Income Tax Non-deductible contributions; withdrawn earnings excluded from income to extent of qualified higher education expenses Non-deductible contributions; withdrawn earnings excluded from income to extent of qualified higher education expenses Non-deductible contributions; withdrawn earnings excluded from income to extend of higher education expenses, qualified K-12 expenses also included Tax-deferred for federal; tax free for state Earnings and gains taxed in year realized; special lower tax rates for certain dividends and capital gains Earnings first $1,000 of unearned income is tax exempt Maximum Investment Established by the program Lump-sum of the projected cost of college at the time of contract purchase $2,000 per beneficiary per year $10,000 face value per year per owner No limit No limit Qualified Expenses Tuition, fees, books, supplies, equipment and special needs; room & board for minimum half-time students Tuition, fees, books, supplies, equipment and special needs; room & board for minimum half-time students Tuition, fees, books, supplies, equipment, special needs; room additional K-12 expenses Tuition and fees No restrictions No restrictions Time/Age Restrictions None unless imposed by the program Restrictions on age of beneficiary at time of enrollment; usually some restriction on when benefits may be used Contributions before beneficiary reaches age 18; use of account by 30 Bond purchaser must be at least 24 years old at time of bond issue Custodianship terminates when minor reaches age established under state law None Income Restrictions None None Ability to contribute phases out for incomes between $190,000 and $220,000 (joint filers) or $95,000 and $110,000 (single) Interest exclusion phases out for incomes between $115,750 and $145,750 (joint filers) or $77,200 and $92,200 (single) None None Federal Financial Aid Counted as asset of parent if owner is parent or dependent student Counted as asset of parent if owner is parent or dependent student Counted as asset of parent if owner is parent or dependent student Counted as asset of bond owner Counted as studentï ¿ ½s asset Counted as asset of the owner Coming up: Lesson 3: Shop for a plan Lesson 4: Get family and friends involved Lesson 5: How will my savings affect financial aid? Previously sent: Lesson 1: How much to save Intro to College Savings - Lesson 2 Compare your options Lesson 1 helped you figure out how much you should be setting aside each month for college, and now it's time to discuss the type of savings vehicle to use. After all, your choice of vehicle can make a significant difference in how much you end up with in your college savings account. Several options exist, and each has its advantages and disadvantages. Of primary importance is the opportunity for investment earnings and the associated risk of loss. But beyond that aspect other considerations exist: federal and state income tax treatment, including potential tax penalties gift and estate tax treatment financial aid treatment control and revocability flexibility and ease of use Remember, you donï ¿ ½t have to choose just one optionï ¿ ½many parents successfully incorporate two or more options into their college savings strategy. Here are the primary vehicles to consider for your college savings: 529 college savings plansï ¿ ½These are special investment programs operated by the states permitting you to save tax-free toward future college expenses. 529 prepaid tuition plansï ¿ ½These are programs offered in some states and by some private colleges allowing you to prepay future yearsï ¿ ½ tuition costs so that you do not have to be concerned about annual increases in tuition. Coverdell Education Savings Accountsï ¿ ½These are tax-advantaged bank or investment accounts for a childï ¿ ½s future education expenses, but they have a $2,000 annual contribution cap. Qualified U.S. Savings Bondsï ¿ ½Certain EE and I bonds can be purchased and later redeemed for college expenses without owing tax on the interest. Age and income limitations apply. Parent-owned mutual funds, bank accounts, etc.ï ¿ ½You can always save for college in traditional bank and investment accounts, understanding that the interest, dividends, and capital gains will be subject to income tax. UTMA or UGMA accountsï ¿ ½Investments in your childï ¿ ½s name will typically be held in a custodial account under the Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA) until your child reaches legal age and takes direct ownership. Children are usually in a lower tax bracket than their parents, although the ï ¿ ½kiddie taxï ¿ ½ removes that advantage if the childï ¿ ½s investment income rises above $2,000 in a year. College Savings Vehicle Comparison 529 Savings Plan 529 Prepaid Plan Coverdell ESA Qualified U.S. Savings Bonds Parent-owned mutual funds/bank accounts UTMA/UGMA accounts Federal Income Tax Non-deductible contributions; withdrawn earnings excluded from income to extent of qualified higher education expenses Non-deductible contributions; withdrawn earnings excluded from income to extent of qualified higher education expenses Non-deductible contributions; withdrawn earnings excluded from income to extend of higher education expenses, qualified K-12 expenses also included Tax-deferred for federal; tax free for state Earnings and gains taxed in year realized; special lower tax rates for certain dividends and capital gains Earnings first $1,000 of unearned income is tax exempt Maximum Investment Established by the program Lump-sum of the projected cost of college at the time of contract purchase $2,000 per beneficiary per year $10,000 face value per year per owner No limit No limit Qualified Expenses Tuition, fees, books, supplies, equipment and special needs; room & board for minimum half-time students Tuition, fees, books, supplies, equipment and special needs; room & board for minimum half-time students Tuition, fees, books, supplies, equipment, special needs; room additional K-12 expenses Tuition and fees No restrictions No restrictions Time/Age Restrictions None unless imposed by the program Restrictions on age of beneficiary at time of enrollment; usually some restriction on when benefits may be used Contributions before beneficiary reaches age 18; use of account by 30 Bond purchaser must be at least 24 years old at time of bond issue Custodianship terminates when minor reaches age established under state law None Income Restrictions None None Ability to contribute phases out for incomes between $190,000 and $220,000 (joint filers) or $95,000 and $110,000 (single) Interest exclusion phases out for incomes between $115,750 and $145,750 (joint filers) or $77,200 and $92,200 (single) None None Federal Financial Aid Counted as asset of parent if owner is parent or dependent student Counted as asset of parent if owner is parent or dependent student Counted as asset of parent if owner is parent or dependent student Counted as asset of bond owner Counted as studentï ¿ ½s asset Counted as asset of the owner Coming up: Lesson 3: Shop for a plan Lesson 4: Get family and friends involved Lesson 5: How will my savings affect financial aid? Previously sent: Lesson 1: How much to save Compare your options Lesson 1 helped you figure out how much you should be setting aside each month for college, and now it's time to discuss the type of savings vehicle to use. After all, your choice of vehicle can make a significant difference in how much you end up with in your college savings account. Several options exist, and each has its advantages and disadvantages. Of primary importance is the opportunity for investment earnings and the associated risk of loss. But beyond that aspect other considerations exist: federal and state income tax treatment, including potential tax penalties gift and estate tax treatment financial aid treatment control and revocability flexibility and ease of use Remember, you donï ¿ ½t have to choose just one optionï ¿ ½many parents successfully incorporate two or more options into their college savings strategy. Here are the primary vehicles to consider for your college savings: 529 college savings plansï ¿ ½These are special investment programs operated by the states permitting you to save tax-free toward future college expenses. 529 prepaid tuition plansï ¿ ½These are programs offered in some states and by some private colleges allowing you to prepay future yearsï ¿ ½ tuition costs so that you do not have to be concerned about annual increases in tuition. Coverdell Education Savings Accountsï ¿ ½These are tax-advantaged bank or investment accounts for a childï ¿ ½s future education expenses, but they have a $2,000 annual contribution cap. Qualified U.S. Savings Bondsï ¿ ½Certain EE and I bonds can be purchased and later redeemed for college expenses without owing tax on the interest. Age and income limitations apply. Parent-owned mutual funds, bank accounts, etc.ï ¿ ½You can always save for college in traditional bank and investment accounts, understanding that the interest, dividends, and capital gains will be subject to income tax. UTMA or UGMA accountsï ¿ ½Investments in your childï ¿ ½s name will typically be held in a custodial account under the Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA) until your child reaches legal age and takes direct ownership. Children are usually in a lower tax bracket than their parents, although the ï ¿ ½kiddie taxï ¿ ½ removes that advantage if the childï ¿ ½s investment income rises above $2,000 in a year. College Savings Vehicle Comparison 529 Savings Plan 529 Prepaid Plan Coverdell ESA Qualified U.S. Savings Bonds Parent-owned mutual funds/bank accounts UTMA/UGMA accounts Federal Income Tax Non-deductible contributions; withdrawn earnings excluded from income to extent of qualified higher education expenses Non-deductible contributions; withdrawn earnings excluded from income to extent of qualified higher education expenses Non-deductible contributions; withdrawn earnings excluded from income to extend of higher education expenses, qualified K-12 expenses also included Tax-deferred for federal; tax free for state Earnings and gains taxed in year realized; special lower tax rates for certain dividends and capital gains Earnings first $1,000 of unearned income is tax exempt Maximum Investment Established by the program Lump-sum of the projected cost of college at the time of contract purchase $2,000 per beneficiary per year $10,000 face value per year per owner No limit No limit Qualified Expenses Tuition, fees, books, supplies, equipment and special needs; room & board for minimum half-time students Tuition, fees, books, supplies, equipment and special needs; room & board for minimum half-time students Tuition, fees, books, supplies, equipment, special needs; room additional K-12 expenses Tuition and fees No restrictions No restrictions Time/Age Restrictions None unless imposed by the program Restrictions on age of beneficiary at time of enrollment; usually some restriction on when benefits may be used Contributions before beneficiary reaches age 18; use of account by 30 Bond purchaser must be at least 24 years old at time of bond issue Custodianship terminates when minor reaches age established under state law None Income Restrictions None None Ability to contribute phases out for incomes between $190,000 and $220,000 (joint filers) or $95,000 and $110,000 (single) Interest exclusion phases out for incomes between $115,750 and $145,750 (joint filers) or $77,200 and $92,200 (single) None None Federal Financial Aid Counted as asset of parent if owner is parent or dependent student Counted as asset of parent if owner is parent or dependent student Counted as asset of parent if owner is parent or dependent student Counted as asset of bond owner Counted as studentï ¿ ½s asset Counted as asset of the owner Coming up: Lesson 3: Shop for a plan Lesson 4: Get family and friends involved Lesson 5: How will my savings affect financial aid? Previously sent: Lesson 1: How much to save