With the rising cost of education, students are finding it
increasingly difficult to fund their education. If you are looking
for a valuable gift for a child, you should consider making a
contribution to their future education expenses. There are several
investment vehicles for those wanting to give the gift of education
including Coverdell ESA's and 529 Plans. We will consider the risks
and benefits of each of these accounts so that you can determine
which plan would be the most valuable for you and the
beneficiary.
Coverdell ESA
These education savings accounts grow tax deferred and are
withdrawn tax free. There are strict contribution limits and no
more than $2,000 can be contributed to an ESA each year per child
even if there are multiple donors involved. The sum of their
contributions cannot exceed the $2,000 limit. There are two
important things that make these accounts unique. The money can be
withdrawn for qualified elementary and secondary school expenses as
well as higher education and secondly, they have a wider range of
investment options including stocks, bonds, and mutual funds giving
you more control. If a child does not use the funds before the age
of 30, the account must be transferred to a relative under the age
of 30 or penalties could be incurred.
If you are considering making a contribution to an ESA, you will
need to evaluate your eligibility. If your modified adjusted gross
income exceeds $190,000, you will not be eligible to contribute the
full $2000 to an ESA. If you do not qualify, your best alternative
is to contribute to a 529 Plan. If you do qualify, you are eligible
to contribute to both an ESA and a 529 Plan for the same recipient
in the same year.
529 Plans
These plans are sponsored by each individual state and also
educational institutions. 529 Plans have many similarities to ESA's
including their tax advantages; however, there are a few key
differences that make these plans more valuable. First,
contributors do not have income limitations that would make them
ineligible to contribute to a 529 Plan. You can contribute as much
as necessary to provide for all potential qualified education
expenses. Be sure and review the potential tax implications if you
plan on giving more than the $13,000 allowable Estate and Gift tax
rule. Also, there is no age limits for their utilization. If
someone is planning on going back to school later in life, this
type of plan would allow them to use the money on qualified
education expenses at any age.
There are two types of 529 Plans to consider: prepaid and
savings. Savings plans act much like most investment accounts. You
invest a certain amount of money and there are variable rates of
return that can be used for any qualified education expenses.
Prepaid tuition plans differ in that the donor actually pays for
the student's tuition at the current rate and the institution or
state invests the money to keep up with the inflation of tuition.
Prepaid plans allow you to lock-in a certain price for tuition
while savings plans funds can be used not only for tuition but also
room-and-board and other qualified expenses.
Each state offers at least one 529 plan. It is important to
research and evaluate which plan is the most suitable for your own
unique situation. If you invest in another state's 529 Plan, the
beneficiary is not limited to using the funds in that state. Most
529 Plans can be used at the majority of colleges no matter the
location of the educational institution, the resident, or the 529
Plan. If you are looking for a perfect gift for a loved-one, I urge
you to consider making a contribution to their future education
expenses.
The intent of this article is to help expand your financial
education. Although the information included may be relevant to
your particular situation, it is not meant to be personalized
advice. When it comes to investing, insurance and financial
planning, it is important to speak to a professional and get advice
that is tailored to your unique, individual situation. All
investments involve risk including possible loss of principal.
Investment objectives, risks and other information are contained in
the Snider Investment Method Owner's Manual; read and consider them
carefully before investing. More information can be found on our
website or by calling 1-888-6SNIDER. Past performance is not
indicative of future results.