College Funding Plans Part 2 of 2
This is the second installment of the various methods to save for a child’s college education.
Crummey Trust
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Can invest in wide variety of investment vehicles.
Child does not gain control at age of majority, although child has right to withdraw contributions when made.
Trust can have more than one beneficiary.
Gift qualify for $12,000 gift-tax exclusion.
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Can be expensive to set up.
Assets are child’s for financial-aid purposes.
Beneficiary could exercise his or her withdrawal right over contributions.
Only trusts for single beneficiary can qualify for GST exclusion for grandchildren.
Standard Brokerage Account in Parents’ Names
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Maximum investment flexibility.
Investors avoid layer of fees charges by 529s and Coverdells.
Parent control assets.
Keeps assets out of child’s ownership for financial-aid purposes.
If child doesn’t go to college, fund can be used for any purpose.
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Capital gains and income are taxed.
Does not remove assets from parents’ estate for estate and gift-tax purposes.
Retirement Accounts
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No 10% penalty on IRA withdrawal if used to pay qualified expenses.
IRA balances are not part of financial-aid calculations.
Unused funds can be used for retirement.
Account owners can take a loan from 401(k) plan and pay it back over time..
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For traditional IRAs, ordinary income tax will be due on full distributions.
For Roth IRAs, ordinary income tax will be due on the earnings portion of the distribution if withdrawn before owner reaches 59 ½ and has held account less than five years, full distribution is tax-free.
Withdrawals may be counted as income in financial-aid formulas.
Account owners may hinder their retirement funding.
Savings Bond
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Safe.
Interest exempt from state and local taxes.
Series EE bonds purchased after 1989 and all Series I bonds allow tax-exempt distributions if used for qualified education expenses and if income limits are met.
Can buy $30,000 each of I-bonds and EE-bonds a year.
No penalty if not used for college.
No account-maintenance fees.
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Muted returns.
Income restrictions limit interest exclusion from taxes.
Only bondholder, his or her spouse, or a dependent is eligible for the interest exclusion. If grandparent holds the bond, he or she can’t claim any interest exclusion unless the grandchild is dependent.
Interest exclusion may be reduced by other education tax breaks (HOPE Scholarship, Life-time Learning Credit, scholarships, Coverdell withdrawals, Section 529 plan withdrawals) when used in the same tax year.
Bondholder forfeits three months of interest if redeemed within five years.
Bond owner must be at least 24 years old.