For most Americans, college is expensive (so much so that for those with young children, imagining the day when they enter college and reach out to you for their quarterly tuition check is terrifying, to say the least). Have you begun saving for the big day?
There are a number of savings options to address your children’s or grandchildren’s college costs. They vary in terms of contribution limits, tax benefits, and even college choice. Understanding what’s available may help lessen the anxiety — and financial sting — for when the school bell rings
The cost of college continues to escalate. If you have children or teens, develop a savings plan to help
support their education.
Roth IRAs (Individual Retirement Account) feature enhanced flexibility that allow you to make after-tax contributions and even tax-free withdrawals. Interest that accrues is tax deferred, and you can make tax-free withdrawals from your earnings if you comply with the rules. Consult your financial professional to determine current law and its impact on the benefits of Roth IRAs.
Early withdrawals that you use to pay for qualified education expenses avoid penalties that would otherwise be assessed for non-educational purposes. You are limited to $6,000 per year in contributions — or $7,000 if you’re 50 years of age or older — though high-income earners have other restrictions that limit their contributions.
Finally, a Roth IRA value isn’t included on the Free Application for Federal Student Aid (FAFSA)®, though any withdrawals you make are counted as base year income.
U.S. Savings Bonds
You can purchase up to $10,000 per year (per-owner, per-bond type) in qualified U.S. savings bonds, redeeming them tax-free (of federal taxes) when you apply them to college expenses. The bonds earn modest interest, though an interest exclusion is phased out for those in the higher-income bond category.
A 529 plan provides generous benefits, allowing couples to contribute up to $30,000 a year without triggering the gift tax (you can even increase this amount if you take the money from your lifetime gift tax exemption). Money that you put into a 529 plan earns tax-deferred interest, while withdrawals you make for qualified college expenses are tax-free and exempt from reporting on the FAFSA. Contributions to 529 plans can be made regardless of your income, and 529 plans are available to pay for college in all 50 U.S. States. Before investing in a plan, consult your financial professional to determine whether your state offers state tax benefits.
NOTE: Non-educational withdrawals from a 529 Plan are subject to taxes and penalties.
UGMA and UTMA Accounts
You can also make contributions pursuant to the Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA), adding up to $15,000 ($30,000 for couples) in a child’s name free of the gift tax. If you use some of your lifetime gift tax exemption, you can contribute even more. Keep in mind, any interest, dividends, or capital gains income in excess of $2,100 may be subject to a tax. However, if this is the child’s only income and it is less than $10,500, you can report the income on your own tax return.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Prior to investing in a 529 Plan investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program. Tax treatment at the state level may vary. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. This material was prepared by LPL Financial. Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC). Insurance products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL Financial affiliate, please note LPL Financial makes no representation with respect to such entity.
Not Bank/Credit Union Guaranteed | Not Bank/Credit Union Deposits or Obligations | May Lose Value | Not Insured by FDIC/NCUA or Any Other Government Agency