Eduation Savings

“Back-To-School” is a good time of the year to think about saving for your children’s and grandchildren’s education. 

There are several types of education accounts that you can choose from. We can help you plan education savings that may be right for you!

Here are some facts about the different accounts:


529 Accounts – What is a 529 plan?

A 529 plan is a tax-advantaged savings plan designed to encourage saving for future college costs. 529 plans, legally known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code.

  • An account holder establishes a 529 account for a beneficiary (student) for the purpose of paying the beneficiary’s eligible college expenses (tuition, room & board, mandatory fees, books and computer, if required by school).
  • Several Investment options are available (stocks, mutual funds, bond mutual funds, and money market funds, as well as, age-based portfolios that automatically shift toward more conservative investments as the beneficiary gets closer to college age).
  • Withdrawals from college savings plans can generally be used at any college or university for qualified expenses.
  • The beneficiary of the account can be changed or monies transferred to another beneficiary, should the original beneficiary not need the funds or if they do not meet the requirements for withdrawal.
  • Tax benefits – Earnings in 529 plans are not subject to federal tax, and in most cases, state tax, so long as you use withdrawals for eligible college expenses.
  • If withdrawals are made and are not used for an eligible college expense, the earnings of that withdrawal will be subject to income tax and an additional 10% federal tax penalty.
  • Some states offer state income tax or other benefits for investing in a 529 plan. But you may only be eligible for these benefits if you participate in a 529 plan sponsored by your state of residence. Just a few states allow residents to deduct contributions toany 529 plan from state income tax returns.


Coverdell ESA AccountsWhat is an ESA account?

A Coverdell ESA is a trust or custodial account created for the purpose of paying the qualified education expenses (higher education expenses, but also to elementary and secondary education expenses) for a designated beneficiary.

  • When an account is established, the designated beneficiary must be under age 18 or a special needs beneficiary.
  • Contributions to a Coverdell ESA are not deductible, but amounts deposited in the account grow tax free until distributed.
  • Contributions can be made to an ESA account by any individual who has a modified adjusted gross income for the year less than $110,000 ($220,000 in the case of a joint return).
  • Contribution must be made in cash.
  • Contributions are limited to $2,000 per year.
  • There is no limit on the number of separate Coverdell ESAs that can be established for a designated beneficiary. However, total contributions for the beneficiary in any year cannot be more than $2,000, no matter how many accounts have been established.
  • Generally, distributions are tax free if they are not more than the beneficiary’s adjusted qualified education expenses for the year.
  • Any amount distributed from a Coverdell ESA to a beneficiary is not taxable if used for qualified expenses or if it is rolled over to another Coverdell ESA for the benefit of the same beneficiary or a member of the beneficiary’s family (including the beneficiary’s spouse) who is under age 30. This age limitation does not apply if the new beneficiary is a special needs beneficiary.
  • The balance in the account generally must be distributed within 30 days after the earlier of the following events.
    • The beneficiary reaches age 30, unless the beneficiary is a special needs beneficiary.
    • The beneficiary’s death.

UTMA AccountsWhat is a UTMA Account?

A UTMA (Uniform Transfer to Minor’s Act) account is a custodial account which allows you to invest in the child’s name taking advantage of the child’s potentially lower tax rate.

  • These accounts can be used for any expense for the benefit of the child (health, education or welfare).
  • UGMA and UTMA accounts are not specifically designed to provide financing for college, however many investors use them for this purpose because the assets become available to the minor when he or she reaches the age of majority specified under the state’s UTMA law (varies from 18-25).
  • A donor’s income taxes may be lowered by transferring income-producing assets or appreciated securities to a child, who is likely to be in a lower tax bracket.
  • Interest, dividends and other unearned income from UTMA accounts are taxed at Child’s Investment Income (Kiddie Tax) rate.  The first $2,000 of interest, dividends and other unearned income in the UTMA account is tax-free.  The second $2,000 of unearned income is taxed at the Child’s rate.  Unearned income over $4,000 (in a UTMA account) is then taxed at the parents’ marginal tax rate.
  • Anyone can contribute (or “gift”) to a child’s UTMA account (within legal “gifting” limits).