The Gift of Education

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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These education savings accounts grow tax deferred and are withdrawn tax free.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 The money can be withdrawn for qualified elementary and secondary school expenses as well as higher education and secondly, they have a wider range of investment options including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.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Personal Finance , College

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