Saving for your children's college education is one of the most important financial tasks you will ever undertake. Luckily, you have plenty of savings options, most of them with tax advantages designed to encourage you to invest in your children's future.
Consider custodial accounts: Often called UGMAs or UTMAs, after the Uniform Gifts to Minors Act and the Uniform Transfers to Minors Act, these custodial accounts let you set aside money or other assets in a trust for your minor child. As trustee, you manage the account for your child until he or she reaches the age of majority — 18 or 21, depending on the state. You can withdraw the money to use for the benefit of your child, but you can’t take it back.
Custodial accounts once served as a way for parents to shift the tax on earnings from their own higher rate to their child’s, but a change in the law has greatly restricted that strategy. In 2014, children who are full-time students under age 24 pay no tax on the first $1,000 of investment earnings, and they pay the child’s (presumably low) rate on the next $1,000. Earnings above $2,000 are taxed at the parents’ marginal rate. (That trigger point may increase.)
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Custodial accounts carry no limits on income or contributions (although annual gifts over $14,000 can raise gift-tax issues), but they can have a significant impact on your student’s chances for financial aid because the federal financial-aid formula assesses 20% of student-owned assets, as opposed to up to 5.64% of parents’ assets. You can, however, cash out the account and transfer the money to a 529 plan, where it will be treated for financial-aid purposes as a parental asset.
-
You Don’t Want to Retire in Portugal: Here Are Three Tax Reasons WhyRetirement Taxes With the NHR benefit retiring and pension taxes increasing, you might rethink your retirement plans in Portugal.
-
Home Depot's Winning Ways Fueled Its 100,000% ReturnHome Depot's wide moat leaves little room for competition – and shareholders have profited as a result.
-
What To Know if You’re in the Market for a New Car This YearThe Kiplinger Letter Buying a new car will get a little easier, but don’t expect many deals.
-
How Intrafamily Loans Can Bridge the Education Funding GapTo avoid triggering federal gift taxes, a family member can lend a student money for education at IRS-set interest rates. Here's what to keep in mind.
-
How an Irrevocable Trust Could Pay for EducationAn education trust can be set up for one person or multiple people, and the trust maker decides how the money should be used and at what age.
-
Will Lower Mortgage Rates Bring Relief to the Housing Market?The Kiplinger Letter As mortgage rates slowly come down here's what to expect in the housing market over the next year or so.
-
UTMA: A Flexible Alternative for Education Expenses and MoreThis custodial account can be used to pay for anything once the beneficiary is considered an adult in their state. There are some considerations, though.
-
Coverdell Education Savings Accounts: A Deep DiveWhile there are some limitations on income and contributions, as well as other restrictions, a Coverdell can be a bit more flexible than a 529 plan.
-
529 Plans: A Powerful Way to Tackle Rising Education CostsContributions to 529 plans grow tax-free and are not taxed when they are used to pay for qualified educational expenses for the beneficiary.
-
Car Prices Are Finally Coming DownThe Kiplinger Letter For the first time in years, it may be possible to snag a good deal on a new car.
