At Merriman, we often help our clients plan for more than just retirement. One topic that commonly comes up is saving for college. My colleague, Lowell Lombardini Parker, wrote about the various college savings options in an earlier post, and this three-part series will focus specifically on the 529 plans highlighted in his article. Part I will review 529 plan basics; Part II will evaluate Washington’s 529 prepaid tuition plan, known as the GET; and Part III will take a look at the best 529 savings plan we know – the West Virginia Smart529 Select. (more…)
In today’s competitive job market, saving for your child’s higher education is as important as ever. Although there are not an overwhelming number of savings choices, the subtleties between them are paramount. Below you will find what we at Merriman feel are the most important distinguishing characteristics between 529 plans, Coverdell ESA’s and UGMA/UTMA accounts.
Coverdell Education Savings Account (ESA)
Uniform Gift/Transfer to Minor Account (UGMA/UTMA)
Investment options available
There are two types of 529 plans: 1) 529 savings plans, where the mutual fund investment choices are dictated by state run allocation programs, 2) 529 prepaid plans, which allow you to purchase tuition credits at prevailing rates.
Investment options include individual stocks, CD's, or mutual funds. Precious metals, collectibles, partnerships in private business and direct ownership in real estae are not permitted.
These accounts allow for stock, bond, and mutual fund investments. However, stock options and buying on margin are not allowed.
You can currently contribute $13,000 per year. As an alternative, you can contribute $65,000 (five times the annual gift tax exclusion) without incurring gift taxes, but then cannot contribute for the next four years.
You can contribute a maximum of $2,000 annually.
For 2011, contributions above $13,000 per year ($26,000 for married couples) are subject to gift tax.
Donor income restrictions
There are no donor income restrictions.
Donor income restrictions apply.
There are no donor income restrictions.
Assets grow tax-free and withdrawals are tax-free if used for qualified education expenses.
Certain states offer tax incentives for investing in 529 plans.
Contributions are not tax-deductible, but the account grows tax-free and withdrawals are tax-free if used for qualified education expenses.
Both the Hope and Lifetime Learning tax credits are allowed in the same year as an ESA withdrawal is made.
Contributions are not tax-deductible and they do not receive the tax benefits associated with 529 plans and ESA's.
Restrictions on use of funds
Withdrawals are only tax-free when used for qualified education expenses.
There is no age limit for investment disbursements.
The assets can be used for eligible expenses from kindergarten through graduate school.
There is no requirement to use the funds for qualified education expenses.
When the beneficiary reaches the age of majority (usually 21, but could be 18 depending on the state), there are no restrictions on the use of withdrawals.
Who owns the funds?
The account owner retains complete control of the assets and may change the beneficiary to an eligible family member of the original beneficiary.
The account owner retains complete control of the assets and may change the beneficiary to an eligible family member of the original beneficiary
Assets are treated as belonging to the beneficiary, and will impact their ability to receive financial aid.
I am saving money for two children who are heading for college. One will start this year, and the other will start in six years. I have saved approximately $20,000. What asset allocations would you recommend in these 529 accounts at Vanguard?
First, I have to say your children are very fortunate to have a parent who supports them in this way.
To address your question, I assume you have two separate 529 accounts, one for each child.
With a total of $20,000 saved for two presumably four-year college educations, I do not believe you can afford the risk of losing what you have set aside. Some people might be tempted to invest in equities for a student, who is starting this year, in the hope of growing those savings over the next three years.
However, I believe you should expect any growth in that account to come from additional savings you can add, not from market gains. (more…)