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Caught in the Middle
Family Resources
There is no one perfect way to save for college. The needs of every family are unique. Just remember it is important to:
- Start saving (as early as possible)
- Put money away consistently and regularly
- Stay on top of changes in the tax code AND the financial aid regulations so that you understand how different savings vehicles affect your tax liability and your student’s financial aid eligibility. Click here for more information on savings & financial aid.
Below you will see links to the most common college
savings vehicles. The list is not exhaustive, and the highlights, tax tips and financial
aid notes provided in each section represent some important features
(but certainly not all) that you should know. Be sure to consult
your accountant or financial planner before making any final investment
decisions.
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The Importance of Saving Regularly
Many families think that they will never be able to save enough to cover the cost of college, so they shouldn't even try. Wrong! Saving even just a few dollars every week can add up over time. It also means that you are really starting the process of planning for college. Click here to get a better idea of how your savings can grow over time.
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Coverdell Education Savings Account
Features |
- Accounts must be set up for children under age 18 and all contributions made before age 18 (unless the beneficiary meets the special needs designation which allows for later contributions)
- Total maximum contribution per year per child = $2,000
- Contribution eligibility currently phases out at $110,000 of AGI for singles and $220,000 for married, joint filers
- Withdrawals can be used for many elementary and secondary school expenses as well as higher education expenses
- Beneficiary can be changed to another family member
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Tax Considerations |
- Earnings are exempt from federal income taxes until disbursed; withdrawals are tax free if used to cover qualified elementary, secondary or higher education expenses at an eligible institution
- 10% penalty on withdrawals if not used to cover qualified education expenses
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Current Consideration Under the Federal Formula |
- Considered the asset of the account owner (not the beneficiary) and subject to parent asset rules under the formula unless owned by someone outside the student's household*
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*Important information regarding Asset Treatment under the Federal Formula:
Parents are given an asset protection allowance based on the number of parents in the household (1 or 2) and the age of the older parent. Only parent assets above the parent asset protection allowance are considered under the federal formula. For exposed assets (those above the asset protection allowance), the "worst case" contributions is approximately 5.6% in calculating the Expected Family Contribution (EFC).
For students, the contribution expected under the federal formula is 20% of all current student assets in calculating the EFC
For more information visit the following sites:
www.irs.gov/publications/p970/ch07.html
www.savingforcollege.com/coverdell_esas/
Section 529 Plans
(Prepaid Tuition and College Savings Plans)
Features |
Two types:
- Prepaid Tuition Plans – purchase of tuition units today to cover tuition in the future; some states’ plans limit purchase of tuition to in-state colleges; offered by states and some private colleges
- College Savings Plans – money invested to cover qualified higher education expenses at any qualified college or university for beneficiary in the future
- Most states have Section 529 plans and individuals can select a home state plan or open an account in another state; typically administered by third-party money managers; (note: compare fees carefully from plan to plan as they can vary tremendously.)
- There are no household AGI limits restricting who can contribute to such accounts
- Anyone can establish an account for a given student and anyone can contribute to that account; students can be the beneficiary of more than one account; the aggregate total of all account values for a given beneficiary is subject to the maximum contribution limits designated by each state’s plan
- Beneficiary can be changed to another family member
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Tax Considerations |
- Earnings and distributions are not subject to federal income tax if withdrawn to cover qualified higher education expenses at eligible institutions; earnings and withdrawals also are exempt from state income tax in many states.
- Some states provide a tax deduction or credit for contributions if you invest in your home state's plan(s)
- Contributions/gifts subject to federal gift tax rules; however, there is a one-time individual gift exception of up to $65,000 (subject to certain provisions)
- Typically, one annual rollover (for example, from one state’s plan to another) is allowed without penalty
- 10% penalty on earnings if not used for qualified higher education expenses (in addition to taxation on earnings at normal income tax rate)
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Current Consideration Under the Federal Formula |
- Considered the asset of the account owner (not the beneficiary) and subject to parent asset rules under the formula unless owned by someone outside the student's household*
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*Important information regarding Asset Treatment under the Federal Formula:
Parents are given an asset protection allowance based on the number of parents in the household (1 or 2) and the age of the older parent. Only parent assets above the parent asset protection allowance are considered under the federal formula. For exposed assets (those above the asset protection allowance), the "worst case" contributions is approximately 5.6% in calculating the Expected Family Contribution (EFC).
For students, the contribution expected under the federal formula is 20% of all current student assets in calculating the EFC
For more information visit the following sites:
www.collegesavings.org
www.savingforcollege.com
Uniform Gifts to Minors Act (UGMA) / Uniform Transfer to Minors Act (UTMA) Accounts
Features |
- Established for minors by adults who act as custodians of accounts until the age of majority (18 or 21 depending on state)
- At age of majority, student is entitled to trust (no change in beneficiary allowed) and money is available for use at student’s discretion
- No limit on contributions
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Tax Considerations |
- Tax liability lies with minor – “kiddie tax rules” apply
- Subject to federal gift tax rules
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Current Consideration Under the Federal Formula |
- Considered a student asset (even if access is restricted until age 21) and is subject to corresponding student asset rules under formula*
- Trusts restricted by court order for specific purposes typically are not considered
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*Important information regarding Asset Treatment under the Federal Formula:
Parents are given an asset protection allowance based on the number of parents in the household (1 or 2) and the age of the older parent. Only parent assets above the parent asset protection allowance are considered under the federal formula. For exposed assets (those above the asset protection allowance), the "worst case" contributions is approximately 5.6% in calculating the Expected Family Contribution (EFC).
For students, the contribution expected under the federal formula is 20% of all current student assets in calculating the EFC
U.S. Series EE and I Savings Bonds
Features |
- Only Series EE and Series I bonds issued January 1990 and later are eligible for this special tax treatment under the Education Bond Program
- There are maximum limits on Series EE and I bond purchases in a calendar year
- Interest bearing maximum = 30 years
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Tax Considerations |
- Interest is excluded from federal income tax when used to cover qualified higher education expenses incurred by the bond owner, his/her spouse or his/her dependent (based on tax exemption) at an eligible institution or used to make contributions to a Coverdell ESA or Section 529 Plan in the year of redemption; interest is exempt from state and local income taxes
- Both principal and interest from bonds must be used for qualified higher education expenses to avoid tax on interest
- Savings Bonds (Series EE and I) - phases out between $100,650 and $130,650 of modified AGI (MAGI) for married, joint filers and $67,100 and $82,100 for single filers
- Bond owner must be at least 24 years old on the first day of the month in which the bond is issued to get preferential tax treatment listed above
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Current Consideration Under the Federal Formula |
- Considered the asset of the bond owner and subject to the corresponding parent asset rules under the formula if the bonds are in the parent(s) names(s); subject to the student asset rules if bonds are in the student's name*
- Current value of bonds reported at time of FAFSA filing
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*Important information regarding Asset Treatment under the Federal Formula:
Parents are given an asset protection allowance based on the number of parents in the household (1 or 2) and the age of the older parent. Only parent assets above the parent asset protection allowance are considered under the federal formula. For exposed assets (those above the asset protection allowance), the "worst case" contributions is approximately 5.6% in calculating the Expected Family Contribution (EFC).
For students, the contribution expected under the federal formula is 20% of all current student assets in calculating the EFC
For more information visit the following sites:
www.irs.gov/pub/irs-pdf/p970.pdf
www.publicdebt.treas.gov/save/saveduca.htm
www.savingsbonds.gov
Standard Savings & Investment Plans (Savings Accounts, Mutual Funds, Stocks, Bonds, etc.)
Features |
- Accounts can be set up for ownership and use according to contributor’s specifications
- No maximum contribution limits
- Can be invested and used at the owner’s discretion
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Tax Considerations |
- Earnings subject to federal, state and local income tax and capital gains regulations
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Current Consideration Under the Federal Formula |
- Considered the asset of the owner(s) and subject to corresponding asset rules*
- Interest income may affect the adjusted gross income (AGI) of the account owner(s)
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*Important information regarding Asset Treatment under the Federal Formula:
Parents are given an asset protection allowance based on the number of parents in the household (1 or 2) and the age of the older parent. Only parent assets above the parent asset protection allowance are considered under the federal formula. For exposed assets (those above the asset protection allowance), the "worst case" contributions is approximately 5.6% in calculating the Expected Family Contribution (EFC).
For students, the contribution expected under the federal formula is 20% of all current student assets in calculating the EFC
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The information listed above is provided for information purposes only. Consult your financial planner and/or tax advisor before making any investment decisions.
Click here for a printable chart summarizing all of the college savings vehicles outlined above. |
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