Now since it is time for school again, we should start talking about the best personal investments for your tots. With the price of tuition going up and the decrease in blue collar jobs being created, it is now more important than ever to invest in your child’s educational future.
The first type of account we will look at is the Coverdell Education Savings Account or ESA. This type of account can be used for all qualified educational expenses from grade school to graduate school. You can put up to $2,000 a year into an account up until the child is 18 years of age. The earnings grow tax free. When you use the money for educational purposes for the child, you pay no federal income tax. Keep in mind that if you use the money for purposes other than educational expenses, you will be taxed at your tax rate and accessed a 10% penalty by the IRS.
Another type of account is the 529 college savings plan. The contribution limits are higher at $13,000 a year. These types of plans are state specific. A lot of states have no beneficiary age limit to make contributions. Let’s say you live in Charlotte NC, you can open a SC state 529 plan. The only thing is that you may not be able to get a NC state tax break like you would if you opened a NC state 529 plan. Keep in mind the rules differ for each state so go to your local education resource website and compare. For North Carolina the website is CFNC.org. The earnings on 529’s grow tax free and you don’t pay any federal taxes on your earnings when you withdraw.
You can also check out the Uniform Gift to Minors Account/Uniform Transfer to Minors Account or UGMA/UTMA. This type of account allows you to save for educational purposes and other purposes that benefit the child. You cannot use these savings for expenses that you as a parent, guardian, or legal representative should provide such as shelter, food, and clothing. You can contribute up to $13,000 a year. Anything over that amount will incur a federal gift tax. The nice thing about this type of account is that if the money is not used for educational purposes, there’s no penalty. When the child reaches the age of majority, which is 18 or 21 depending on the state, the assets can be transferred to the beneficiary (child) to be used for any purpose. So a nice car after graduating college would be nice mom and dad! The earnings on this account are subject to federal income tax and capital gains tax.
Saving for your child’s education will make life after school a better experience. Go to the website of an investment firm or visit your local bank to find out what types of accounts they offer.