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Britt Erica Tunick is an award winning financial journalist who has spent the past 17 years writing about virtually every aspect of finance. She has mastered the art of boiling down complicated financial topics for readers to understand. |
Careful planning for college tuition costs using 529 Plans and the Uniform Gift to Minors Act will maximize your savings in smart, tax efficient ways. College Savings Alternatives By Britt Erica Tunick With the cost of college on a seemingly endless upward trajectory, the prospect of saving enough by the time your child (or children) reaches college can be overwhelming particularly if college is still more than a decade away. For the 2015/2016 school year, the annual cost of tuition for in-state, public four year schools averaged $19,548, per the College Board. Meanwhile, the annual costs of most private schools are more than double the cost of state schools, with the average cost rising to $43,921 for the 2015/2016 year. When you consider the fact that the 10-year historical rate of increase for college tuition is about 5% higher than the rate of inflation it is crazy what a four-year college degree will cost in about a decade. Given this reality, it is important to start saving as early as possible and to do so in the smartest and most tax efficient way. Most people are aware of 529 college savings plans, which not only allow the earnings generated by the money you invest to grow on a tax-free basis but which also allow for that money to be withdrawn tax-free as well, if it is being used for qualifying college expenses. While 529 plans are the most common college saving vehicle, there are other options you should be aware of as well, particularly if you are saving not only for college, but for private school for anything between kindergarten through 12th grade. Under the Uniform Gift to Minors Act (UGMA) assets such as securities can be saved for the benefit of a child by placing them into a custodial account where the donor gives up possession and control. Unlike 529 plans, assets placed into these accounts do not have to be used solely for education, just for the benefit of the minor the account is set up for, and can be withdrawn for use at any time if it is for the benefit of the minor. But like 529 plans, there is a tax benefit to these accounts. If the beneficiary of a UGMA account is under the age of 19 or 23 if they are a student the first $1,000 of earnings generated through these accounts is tax-free, the second $1,000 is subject to tax at the minor’s tax rate and any amount over $2,000 is subject to the tax rate of their parents. The benefit of setting up a UGMA account is that there is no need to hire an attorney to do so, like with a trust. However, as soon as the beneficiary of these accounts reaches the age of maturity, which is 18 in most states, the assets in the account become their property outright and you cannot control how they are used. |
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