As we enter into mid-August, now is the time to be thinking about starting (or adding to) a college fund for your child, or grandchild. There are several strategies that make using brokerage accounts, 529s, and sometimes Roth IRAs, a tax-intelligent way to build savings for college.

Please note: This writing does not include all of the rules around distributions and other considerations or the ideas for qualifying for Financial Aid or Investment Considerations. This discusses primarily the differences in investment vehicles available for building tax-intelligent college savings. Make sure to give us a call with any individual questions so we can determine according to your situation more closely. Not discussed are grandparent 529’s among other plans.

A 529 Plan:
A 529 plan is kind of like a Roth IRA, but for qualified education expenses. These do not permit a tax deduction today, but you do achieve tax-free growth on earnings if used for college and some other qualified expenses. See an article from the College Investor here for a complete review. For those looking to dive into the characteristics, see this article from Kiplinger article on 529s.

A Roth IRA:
The benefit of using a Roth IRA in conjunction with a 529 is the flexibility, dual benefit, and peace of mind. For instance, if your child does not end up going to school, you’ll have to hand the 529 over to a qualified relative or pay a 10% penalty. The Roth IRA avoids this because, simply, if the child doesn’t end up in school, then either you or your child will have retirement savings. Now, this strategy is one to be prudent when exercising. Your child or teenager will have to qualify with “earned income”, if they wish to set up a Roth. One strategy would be setting up a Roth IRA for minor account and funding this in conjunction with a 529. The other would be putting the Roth IRA in the parent’s name. There are rules around funding Roths so make sure to contact us. If you have the financial means to fund all 3, then that’s what you would want to do. But remember, for the child to have a Roth IRA they must have income. If you’re a business owner, you might be able to compensate for administration or marketing services. Again, please make sure to contact us so we can assess your personal situation.

A Brokerage Account:
This offers flexibility and no limitations. You can add long-term money that will grow for your future college goal. This account can also function as a liquid investment account that is available to you with no penalty. So that is nice and works well with the 2 above. The account is not tax-deferred, however, with the flexibility of contributions and higher rate of return than a bank or CD, this is another optimal account type to add savings for college.

A Coverdell ESA:
In order to qualify for a CESA, your income in 2021 needs to be under $190,000 married filing joint (or under $95,000 if filing single). If you make over $220,000 married ($110,000 single) you cannot contribute anything. There are also other limitations. So, these are not the most popular choices for funding college expenses. They work like a 529 for tax purposes, meaning you will not receive a tax deduction for adding money into a CESA, the earnings will be tax-free (for qualified education). The max contribution limit is low, $2,000 per year, and that is per child (which is unlike the 529 that allows 1 individual to gift up to $75,000 each for a 5-year period, so in theory a child could receive multiple deposits). However, this account still has advantages. Depending on how the account is structured, CESAs may be treated as a child’s asset for FAFSA, unlike the 529 plan, which falls under the parent’s assets usually.

These are options, to name a few, that would be reasonable to consider for funding your child’s college goal. If you have questions or would like to review your current college plan, please feel free to contact me below.

Matt Ward, CFP^®
New Century Investments
817-238-6300
Matt.Ward@newcenturyinvestments.com

The post The Ins and Outs of 529s and other College Planning tools appeared first on New Century Investments.

article by Matthew Ward, CFP^®

With your kids back in school, now is the time to start planning for their college funding.  Many individuals ask about the advantages of a 529 Plan.  The truth is 529 Plans can be a great way to save for college on a tax advantaged basis.  However, there may be better alternatives.  Read below for the advantages and disadvantages of the different account types for college funding.

529 Plans

   Advantages: The biggest benefit of these plans is when you withdraw these funds in the future for college expenses, the growth of the account is tax free.  Contributions are not tax-deductible.  A second advantage is 529 plans have no specific contribution limits, but if your contributions exceed $15,000 (for 2019) per recipient per year, you may be subject to gift tax.

   Disadvantages:  The first disadvantage is that if your child opts out of college, you will have money tied up that either must be passed along to another qualified relative for college, or, you risk withdrawing funds and paying taxes and penalties.  Another disadvantage comes into play if you over-save with this account.  You’ll be forced to pass it to a qualified relative, or risk paying taxes/penalties when withdrawing.  A third disadvantage is the potential impact on financial aid availability. In brief, if a student has a 529 plan in his or her name, then financial aid providers will take those funds into account when determining the student’s eligibility and level of need.

Read NerdWallet’s article: 529 Plan Rules

Coverdell education savings account (ESA)

   Advantages:  If your modified adjusted gross income is under $110,000 per year for single taxpayers or $220,000 per year for married-filing-jointly taxpayers (2019), then you’re eligible to open a Coverdell ESA.  The Coverdell ESAs are typically set up in the parent’s name, so they don’t have the same impact on financial aid that many 529 plans do.

   Disadvantages:  There are low contribution limits.  You can only contribute up to $2,000 per year.  Also, the account must be emptied by the time the beneficiary hits age 30, or the remaining funds will be subject to taxes and penalties.

Read The Balance’s article: A Beginner’s Guide to the Coverdell ESA

Roth IRAs 

   Advantages:  The Roth IRA is effective for college planning.  First, unlike a Traditional IRA, the Roth IRA allows you to withdraw the money you put in at any time tax and penalty free.  If used for college, the Roth also allows you to avoid the 10% penalty on the growth of your investments.  You will still pay income tax on the growth until you’ve held the account for over 5 years and reached the age of 59.5.

   Disadvantages:  Contribution limits are limited to $6000 (for 2019) for those under 50.  You will not enjoy tax-free growth if you are under 59.5 years old for college expenses, as you would with the 529.  Also, if you earn too much, you may not be eligible to contribute to a Roth.  Please contact us or your qualified advisor to determine.

Read NerdWallet’s article: 529 Plan vs. Roth IRA? The Roth Wins, Mostly / Read CNBC’s article: Using Roth IRA to pay for college

Taxable Brokerage Accounts

   Advantages: The greatest benefit of these plans is your money is not tied up.  There are no penalties associated with this account.  You can withdraw everything including growth of the account as you wish.  Another benefit is the growth of the account is taxed at the more favorable capital gains rates if held over 1 year.  If you’re unsure your child will go to school, this can be an alternative to funding a college account.

   Disadvantages:  A disadvantage would be the potential tax free growth is lost.  But if you’re unsure whether your child is going to attend college or you would like to use the account as a dual savings account for yourself as well as college, then this is a suitable alternative to all the above-mentioned accounts.

Call us today.  817-238-6300 or email us at: Matt.Ward@newcenturyinvestments.com

We are geared to determine the best type of college savings account for you and your children.  We have expertise in setting up each of these account types and helping design an investment strategy to help you achieve your savings goals.

Or schedule an appointment with Matt at New Century Investments:

Click here for 2020’s Top Ranked National Universities from US News

The post Choosing the Best College Savings Account appeared first on New Century Investments.