College Savings Plans Options 8/16/15

College costs are skyrocketing. National average costs for one year at a public university are $18,943 and $42,419 for a private school. Many times when you see estimates of the cost of a college education, they simply take the annual number and multiply it by 4, or the number of years it used to take to get a 4-year degree. Those numbers do not reflect current reality; the average number of years it takes to get a bachelor's degree at a public school is 6.2 years, and 5.3 years for a private school.

However, the cost of that degree is worth it. According to statistics from the U.S. Census Bureau and the Bureau of Labor Statistics, a college grad will earn on average $2.4 million during their working years as compared to a high school graduate's lifetime earnings of $1.4 million, a difference of $1,000,000. In addition to higher earnings, college graduates have greater employment opportunities and lower rates of unemployment.

So, what's the best way to save for college? The three best options are to put money into a Coverdell Education Savings Account, a 529 Plan or a Uniform Transfer to Minors Act Account (UTMA). There are pro's and con's to each and each offers different tax savings and terms.

In most cases, the Coverdell Account provides the most tax savings if you actually use the funds for higher education expenses or K-12 costs. These include: tuition, books, equipment and room and board. That's because the money can be invested and grows totally tax free. But if you take the money out for some other reasons, you'll pay income taxes and penalties. You can only put in $2000/year total from all sources. With the Coverdale account, the beneficiary of the account can be changed, at any time, to another family member. Or you could take the money back with a 10% penalty and taxation on the growth. The assets are treated as owned by the parent or grandparent.

A 529 Plan offers the same tax benefits, but the money can only be used for higher education costs, not K-12. For the 529 Plan, you can put in $14,000 per year, up to a total of $414,000. With a 529 Plan, the beneficiary of the account can also be changed, at any time, to another family member. Or you could take the money back with a 10% penalty and taxation on the growth. The assets are treated as owned by the parent or grandparent.

An UTMA is very different. Here, you put money into an account in the child's name as owner. The investments are then taxed with the first $1,050 of income tax free, and the next $1,050 taxed at the child's tax rates. Any unearned income over $2100 is taxed at the parent's tax rate. With an UTMA, you can put in up to $14,000/year with no gift tax. But here, the money does not have to be used for education. When you contribute money to an UTMA, those assets can only be used for that child, and when they turn 21 (or 18 depending on how the UTMA was established), those assets transfer to the child and can be used for anything the child wishes. The assets are treated as owned by the child and could affect financial aid awards.

Make a choice and get out there and SAVE for your child or grandchild!