Children’s college fund – Learn how to save 

There are several advantages to investing in a children’s college fund, such as the possibility of receiving tax benefits.

This means that federal and state income tax is deferred while the money remains in the plan.

In addition, other advantages may be guaranteed, depending on the state in which you live.

For example, Iowa taxpayers can deduct some contributions from their adjusted gross income.

Another advantage is that qualified withdrawals are not subject to tax.

Therefore, any growth of your principal investments in a plan for qualified expenses will never be included in your income tax.

Read on to find out more about the advantages of saving in a children’s college fund, as well as tips on how you can do this.

Other benefits 

First, you have the freedom to choose your investment strategy.

There are dozens of investment options, such as recommended investment ranges based on the age of the beneficiary and their level of comfort with risk.

This way, you can choose between individual portfolios of bonds and specific stock funds.

Once you’ve chosen your investment strategy, know that you can change it in the future.

Therefore, make changes to existing contributions up to twice a calendar year.

You also have the option of making regular contributions to the children’s college fund, making just one initial deposit or making deposits whenever it suits you.

This is interesting because it gives you greater freedom.

So, in months when you are facing any kind of financial difficulty, you can stop contributing.

That way, when everything settles down, you can start making contributions again.

It’s worth mentioning here that there is no annual contribution limit.

So you can contribute as much money as you like.

Another positive point is that anyone can start or contribute to a plan.

For example, you don’t have to be related to the student you’ve named as a beneficiary of the children’s college fund plan.

So, whether you’re the student’s father, mother, grandfather, grandmother, uncle, aunt or friend, you’re free to start contributing.

In this sense, you should know that there are no income or age limits for account holders.

On the other hand, if you’re thinking of someone who wants to give the student a gift, you can make a single contribution to an existing account.

In other words, on a special date such as a birthday, you can give this type of gift.

Minimum investments, use of money and transfers

It’s also worth mentioning that the minimum investments in the children’s college fund are small.

College Savings Iowa allows initial investments or contributions of $25 or more and a minimum of $15 through an employer payroll deduction plan. 

It may be that a person prefers to make a gift to the student through small monthly contributions and this is possible!

Also, know that you are not limited to your state’s plan.

Even if you don’t live in a particular state, you can choose the plan there if you notice that the advantages are greater.

You don’t even have to plan to attend college in that particular state.

The next great advantage of the children’s college fund is that you can use the money for expenses at various institutions.

You can use the funds to attend any eligible 2- or 4-year college, graduate program, trade or professional school.

As well as online college and university programs, international institutions or study abroad programs.

In all of the above cases, the money is used to pay for tuition.

However, it can also be used for other qualified higher education expenses.

For example, software and internet access, computer and printer, supplies, food, housing and books.

Depending on the plan you choose, it may also be transferable.

If the student named in the plan doesn’t need the money, they can transfer it to another eligible family member such as a spouse, child, parent or sibling.

Controlling and withdrawing money from the children’s college fund

Even though the plan is designed to fund your child’s studies, you retain control of the account and how the funds are spent.

In other words, the money is not automatically transferred so that your child can spend it as they wish.

You can choose between the following options:

• Reimburse the student for qualified expenses;
• Receive the funds spent on qualified expenses;
• Pay the college directly.

As far as withdrawals are concerned, if your child wins a scholarship or enrolls in a limited academy, you can withdraw up to the amount of the scholarship or tuition fee without penalty.

However, you must pay taxes on any income included in the withdrawal from the children’s college fund.

If the student dies or becomes unable to attend college, there is also no penalty for withdrawals.

However, taxes may still be levied on the earnings.

It’s also worth noting that if you withdraw the money for any other reason and don’t use it for qualified higher education expenses, the following can happen:

You may have to pay a 10% federal tax penalty on any earnings from your investments.

So you get paid – money that was saved on all contributions, minus any administrative fees.

There are certainly other details and tax consequences of unqualified withdrawals, so we recommend that you contact a financial advisor for more information.

Also, be aware that some of the information and advantages change depending on the type of account you choose:

Account options for children’s college fund

First, we should talk about high-yield savings accounts.

This is certainly one of the easiest ways to save money for college because this type of account can offer APYs of up to 0.50%.

To give you an idea, other types of savings accounts had a national average APY of 0.06% in January 2022.

What’s more, this type of account guarantees great flexibility.

The amount can be withdrawn without having to pay a penalty, no matter how much the amount is used.

You can even decide whether to use the funds for another child, friend or relative.

However, the return on this type of account is lower than other types, and there are no tax benefits.

Also, when it comes to applying for financial aid, if the account for the children’s college fund is in your child’s name.

This reduces the amount of aid based on the need your child can receive.

If the account is in your name, it will be valued the same as a 529 plan.

Find out more below:

529 plans 

This is a savings tool that guarantees tax advantages to save for a child’s future expenses.

There are different types.

We’ll mention two, starting with the education savings plan.

This first model works like an investment account to save for qualified expenses.

For example, food, lodging, tuition, fees, books, supplies and necessary equipment.

So the money can even be used to buy a computer to make it easier for your child to study.

In other words, this type of plan isn’t just for children’s college fund.

So, as well as 4-year universities and colleges, we can include 2-year schools.

As well as business, professional and graduate schools in the United States and other countries around the world.

It’s worth noting that you can use up to US$10,000 per year per beneficiary to pay tuition at a private or religious primary or secondary school.

Similarly, the amount can be used to repay up to US$10,000 per borrower in student loans.

And the best part: this loan may have been requested by the borrower themselves or by their siblings.

So, when the money is used for qualified educational purposes, you don’t have to pay taxes to withdraw it.

But of course, if you need to withdraw the money to use it for non-qualifying items, you will have to pay penalties and taxes.

It’s also worth mentioning that although contributions are not tax-deductible at the federal level, you can deduct them on your state income tax return.

More information about children’s college fund 529 plans

With regard to contributions, understand that there is no limit.

However, if the donor intends to contribute an amount greater than US$16,000, they will have to pay taxes.

Alternatively, the donor can use superfunding.

This is a one-off contribution of up to five times the annual gift tax exclusion over a five-year period.

Finally, investment portfolio options can include savings products, exchange-traded funds and mutual funds.

This means that the potential for contributions is increased.

Despite this, it is essential to be aware of the risks:

Given that the amount is invested, keep an eye on market changes.

Prepaid tuition plan

This is a plan that allows you to make up the children’s college fund by paying future college fees at the current rate.

This way, you can buy units or credits, either upfront or in regular installments.

The units or credits include fees and tuition.

However, if you need to pay for equipment, supplies or food, the plan does not cover this.

Therefore, the moment the child is ready to attend school, the funds are made available so that the eligible costs can be paid.

It’s worth noting that the plans are sponsored by state governments.

As a result, normally only residents of a given state can take out the plan.

However, this does not prevent some children’s college fund plans from being operated by private organizations.

In this case, you buy the credits and must invest the money, although payment is still guaranteed based on current state tuition costs.

It’s also worth noting that you don’t have to pay any tax on withdrawals.

However, it is essential that the money is used exclusively for qualified educational expenses.

Otherwise, the earnings may be subject to tax and a 10% penalty.

In the event that the child receives a scholarship or does not wish to attend college, the credits can be transferred to another child in the family.

More information about the plan

First, it’s worth mentioning the protection against tuition fee inflation of this children’s college fund alternative.

This is the main advantage because, according to a report by the Manhattan Institute, the average net cost of a 4-year public college has risen 81% above inflation in the last decade.

The increases have not been matched by scholarships and other forms of financial aid.

Therefore, this type of plan guarantees you greater peace of mind.

This is because, regardless of economic factors involving tuition inflation, your child’s college is paid for.

Disadvantages

Despite this, you should think about some disadvantages.

For example, there is great inflexibility with school choices.

Again, this is a children’s college fund plan offered by the state.

So the plans are based on in-state tuition at one of the state’s public colleges.

In other words, if the child prefers to choose a private college or even go outside the state in question, you have to pay the difference between the actual costs and what you have in your plan account.

Even if the student chooses a school not covered by the plan, the investment gains are lost.

This is because you can only use the original principal balance (what you paid for the plan).

It’s also worth mentioning the limitation on eligible expenses for this children’s college fund option.

When you opt for this plan, you have to pay for other student costs such as supplies, food and accommodation.

In this case, you need to save even more to ensure that you have enough money to cover your expenses.

Finally, keep track of your contributions.

Once you have bought the credits, you are not responsible for controlling the investment.

Instead, you need to rely on the investment managers who work for the state.

You also depend on state funds.

In this case, the funds are used to cover the difference if the performance of the investment is not sufficient to cover tuition price inflation.

Coverdell Education Savings Account for Children’s College Fund

This is a trust account developed by the US government to help families finance the studies of children under the age of 18.

However, if the student has special needs, the age limit is waived.

Furthermore, not all families can open this type of account for their children.

This is because it is limited to families of a certain income level.

This way, adjusted gross income is taken into account, check it out:

• US$95,000 limit for single taxpayers;

• US$190,000 for married taxpayers.

In this sense, the maximum annual contribution is US$2,000 for a single beneficiary.

Therefore, although more than one account may be created for the same student, the annual limit on the children’s college fund must be respected.

This type of account has also been called an “educational IRA” and when contributions become available, they are tax-free.

But for this to actually happen, it is important that they are less than the account holder’s adjusted annual qualified education expenses.

You should also be aware that the money can be used for tutoring, equipment, books and tuition.

The money is also used to pay for special needs services.

The funds can be used for primary and secondary schools (from kindergarten to 12th grade).

And, of course, it serves as a children’s college fund.

Other information

Here, it’s worth noting that if distributions are higher than expenses, earnings will be taxed at the account holder’s rate, rather than the taxpayer’s rate, which is usually higher.

The contribution limit is lower for people with higher incomes and is phased out for individual taxpayers with an AGI of $110,000 or more and for joint filers with an AGI of $220,000 or more.

On the other hand, if the child doesn’t go to college, he or she will have access to the money, but will be taxed on the amount.

The same goes for a child who doesn’t use the fund until the age of 30.

UTMA and UGMA accounts for children’s college fund

With these accounts, you can save and transfer financial assets to a minor child without setting up a trust.

UGMA stands for Uniform Gifts to Minors Act and UTMA for Uniform Transfers to Minors Act.

In this way, they are opened and maintained through a bank or brokerage account and can hold cash, mutual funds, stocks and bonds.

They can also hold real estate and other tangible assets.

Unlike other types of children’s college fund plans, in this case the relative who created the account retains control only until the child reaches the age of majority.

For example, in Alabama and Nebraska, the age of majority is 19, and 21 for the following states:

New York, Mississippi, Puerto Rico and Indiana.

For the other states, the child reaches the age of majority at 18.

It’s also worth mentioning that UTMA and UGMA accounts don’t have the tax benefits that a 529 plan offers.

So you make contributions with after-tax dollars.

According to IRS rules, you can contribute up to US$17,000 per year without incurring gift tax (US$34,000 per couple).

This way, the first US$1,250 of income is tax-free, but the IRS taxes the next US$1,250 of unearned income.

This happens according to the child tax rate.

In addition, any amount in the children’s college fund above is subject to income tax at the parents’ rate.

Use of the fund

As for the use of the amount, there are fewer limitations.

While in the 529 plan, for example, the money can only be used for specific educational expenses, this type of account does not.

Basically, the money can be used for anything.

So, as long as your child is a minor, you can use the funds in the account to pay for expenses that benefit the child.

These expenses include summer programs or school clothes.

Roth IRAs

Yes, this is a retirement account, but it can also be a good alternative to a children’s college fund!

That’s because withdrawals are tax-free after you turn 59 and a half, including any return earned on contributions.

So you can count on the same tax benefits as a 529 plan.

But remember that for this to happen, you shouldn’t need the money before you reach the right age.

Another interesting point is that there are no limitations to how the money can be used.

It’s also worth mentioning that Roth IRAs don’t require minimum distribution until the death of the account owner.

Withdrawal of earnings is counted as taxable income.

As a result, it will be taxed.

Despite this, income from the children’s college fund is exempt from the 10% federal tax penalty.

Regarding the annual limit, you should know that in 2019 it was $6,000, ($7,000 if you are at least 50 years old).

However, depending on your income, the contribution limit may be reduced.

To put it simply, Roth IRAs offer fewer tax advantages but more flexibility.

You can use them as an alternative to supplement college.

For example, if you opt for the prepaid tuition plan, you can also open this type of account.

This way, you are guaranteed to pay for tuition and college fees with one plan and with the second children’s college fund, you cover additional expenses such as food and lodging.

Daniel 29 de April de 2024