College tuition has reached unprecedented, astronomical heights, and many families are finding it more and more of a struggle to come up with sufficient funds to put their children in school without the worry of incurring a multitude of costly loans. This is an issue that only seems to be getting worse. According to FinAid.org, the cost of college tuition could skyrocket by four times the current cost by the time a child born today is ready to enter college.
Many taxpayers miss out on lucrative breaks and savings options when it comes to tax season simply because of ignorance. There are numerous education fund incentives that you can utilize to finance your child’s college venture, so consider the following accounts and bolster your child’s college accounts in no time.
A Roth IRA
Yes, an IRA is a retirement account, but a Roth IRA also allows you to withdraw money tax-and-penalty free to pay for qualified education expenses, so long as the withdrawal occurs after the first five years from its opening date. There are strict income and contribution limits with Roth IRAs that you may not face in other options, but these accounts do provide a measure of flexibility, especially if your child doesn’t end up attending college.
529 College Plans
If you haven’t heard of 529 college plans, you could be missing out on a great deal of money to fund towards your child’s education. A majority of states in the U.S. offer these plans, and they’re essentially a vehicle in which you can place money for your child’s college expenses. You may have also heard them referred to as QTP, which stands for Qualified Tuition Programs. Typically, you’ll invest after-tax funds into the 529 plan, and then withdraw the funds (and any interest gains they may have made) without paying taxes on them. This money must go towards qualified expenditures, like tuition or books. Options for investment, fees, and costs all differ depending on your state, but know that there are contribution limits each year. If it turns out that your child doesn’t attend college, you’ll likely pay fees for withdrawing your funds. Savings in these plans belong to the parent, not the child, meaning they won’t likely affect your child’s financial aid options as much as other types of college savings accounts might. This option is rife with tax benefits, and if you need help navigating the filing process after starting such an account, be sure to use a qualified company like www.communitytax.com.
Coverdell Education Savings Account
Formerly known as an Education IRA, the Coverdell Education Savings accounts has some pretty strict rules about contributions, as you can’t put more than $2,000 into the account each year. Even if your child has multiple ESA accounts, the sum total of contributions committed to all of these accounts cannot be in excess of this dollar amount. These may only be established if your modified adjusted gross income is less than $110,000 if you file singly, and $220,000 if you file jointly. These accounts offer tax-free investment growth and tax-free withdrawals so long as
they’re used on qualified education expenditures. Sometimes, education expenses incurred during the grades of kindergarten through senior year of high school can qualify for withdrawals from an ESA.
UTMA and UGMA Accounts
Both Uniform Transfer to Minors (UTMA) and Uniform Gift to Minors Act (UGMA) are custodial accounts that allow you to gift your child with money that can be put towards education. There are certain tax benefits related to these types of accounts, but they’re not always as beneficial as some of the other account options, like 529 plans. However, because these accounts are considered your child’s assets, your child could likely receive less financial aid from their school and other scholarship options. These accounts can be used as trusts, meaning you can put stocks, bonds, cash, or annuities into the account to reserve for your child. Always speak with a qualified financial advisor from a company like National Financial Advisors, Ltd. before committing to any particular account type and determine which options are best for your individual situation.