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Preparing for the Increasing Costs of Higher Education cont.
529 Plans (technically known as qualified state tuition plans) allow parents; grandparents and
anyone else interested in saving for college to contribute money into a tax-deferred account
for higher education. Regardless of income levels, a donor may contribute $11,000 per year
per beneficiary or $55,000 in a single five-year period ($110,000 for married couples) without
triggering gift taxes. The earnings in college savings plans grow tax-deferred from Federal
taxes. When funds are withdrawn they are received Federal income tax-free if used for
qualified expenses (tuition, books, room and board). If a child decides not to attend college,
you can defer use of the account, change beneficiaries or withdraw the assets. If the assets are
withdrawn and not used for higher education, regular taxes and a 10 percent penalty may be
imposed on the earnings.
Coverdell Education Savings Accounts (formally Educational IRAs) allow parents,
grandparents and others to contribute cumulatively up to $2,000 a year for qualified
elementary, secondary school and higher education expenses of a child. Withdrawals from a
Coverdell Education Savings Accounts are Federal income tax-free if used for qualified
expenses such as tuition, room and board. Beneficiaries of the Coverdell can be transferred to
another family member to pay for educational expenses. If the account is not used by age 30
or the funds are not used for higher education, regular income taxes and a 10 percent penalty
may be imposed on the earnings.
Custodial Accounts (UGMA/UTMA) are created for a minor usually at a mutual fund
company or brokerage firm. This account provides a simple way to transfer property to a
minor without the complications of a formal trust. When the child reaches age of majority
(age 18 or 21 depending on the state), the child then has full discretion over the account. Any
earnings on the account up to $750 are tax free if the child is under age 14. Earnings from
$750 to $1500 will be taxed at the child’s tax rate. Earnings over $1,500 are taxed at the
parent's highest marginal tax rate (for children under 14 years of age). For children over 14,
the earnings are taxed at the child’s tax rate.
Determining which approach is best can be a difficult task. A financial professional can help
you develop a disciplined approach to saving for college costs. Together, you can determine
which college-funding vehicle will work best for your family.
Securities and Advisory Services
offered through registered representatives of Lincoln Financial Securities Corporation Registered Broker/Dealer, Member
FINRA SIPC Eugene W. Harris & Co. and Lincoln Financial
Securities Corporation are not affiliated.