College savings options
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.
| 529 Plan | 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. |
| Contribution limits | 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. |
| Tax implications | 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. |
