Plan. Plan. Plan. I’d rather plan than not to. Planning affords me the opportunity to focus on specifics rather than generalizations. So it is, in my opinion, with planning for our children’s (or grandchildren’s – I don’t have any yet) education.
“Planning is bringing the future into the present so that you can do something about it now.”Alan Lakein
Yesterday, I blogged about buying whole life insurance for kids that can be used towards their college.
Today’s post is about savings plans that can equally be used for your kids/grandkids’ education. There are a few savings plans available.
. . .
Have you heard of Coverdell or Plan 529 or UGMA and UTMA?
Though I am familiar with these, I used known sources to support my blog. Notwithstanding, always do your research/due diligence. When researching and comparing, note differences in the following:
- tax advantages,
- annual allowable contribution limits, if any;
- does it transfer to child or not,
- effect on financial aid at college time,
- fees, and, of course,
- withdrawal restrictions or penalties, etc.
Coverdell or Plan 529?
According to Investopedia, A Coverdell education savings account (ESA) is a tax-deferred trust account created by the U.S. government to assist families in funding educational expenses for beneficiaries who must be 18 years old or younger when the account is established; while a 529 savings plan is a tax-advantaged savings plan designed to encourage saving for future education costs. 529s are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code (hence its name).
There’s no annual limit for the amount that may be deposited into a 529 plan. For the Coverdell ESA, however, “while more than one ESA can be set up for a single beneficiary, the total maximum contribution per year for any single beneficiary is $2,000.” The amount might seem small considering college expenses these days, but if a parent starts saving $2,000 from birth till the child is 18 years of age and ready for college, a total of $36,000 would have been saved. The $36,000 will accrue interest and not just sit idly in the account. This means a lot more than $36K with the interest compounded over 18 years! That’s cool money for starters for a really good college, isn’t it?
Various investment companies offer the plans. Ask you bank/investment company.
UGMA or UTMA?
There are also Custodial UGMA and UTMA accounts that can also be set up and used for your grand/children’s educational purposes. However, these accounts can also be used for purposes other than education.
UGMA (Universal Gifts to Minors Act) and UTMA (Uniform Transfers to Minors Act) accounts are both custodial accounts, held in the name of the minor, but controlled by a parent or other relative until the child reaches the age of majority in your state. UGMA is limited to purely financial products such as cash, stocks, mutual funds, bonds, other securitized instruments and insurance policies; whereas UTMA can hold any form of property, including real property and real estate.
Some plans/accounts are redeemable at your child/ren’s 18 years of age; depending on how it’s set up. Once your grand/children attain age 18 and the money legally transfers to them, there’s no telling what they might use it for. As such, set it up wisely such that you, the grand/parent have control over the funds and/or stipulate the conditions (i.e., educational use only).
Once any of these accounts/plans are set up for your kids, encourage families and friends to donate to the fund rather than buying/sending them more material gifts such as clothings, shoes, gadgets, more of the intangibles during their birthdays or holidays.
As I always say, this blog is merely informational. ThinkTalk is not an investment advisor nor insurance agent. The information contained herein is merely to stir grand/parents up to research, if they’re not already familiar with these plans/accounts. If interested in any, please do your due diligence.
Thanks for reading.