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Veteran business correspondent Karen Gibbs answers your personal money questions and addresses current topics that affect YOUR finances on a daily basis. Karen is the financial expert in your corner--no question is too basic or too small. Karen boils down the issues simply: here's what you need to know, and here's what you need to do. Send your money questions to AskKaren@mpt.org and post your comments below.

20

April

Alternatives to Education Savings Accounts

Karen Gibbs

My last column addressed 529 plans and Coverdell Education Savings Accounts (ESA).  But what happens if your child decides not to attend college?

College Fund
If you’re a parent or relative who has used an ESA to save for a child’s college tuition and that child opts not to go to college, you might not be happy but you have options.  First, you can always change the beneficiary of the ESA to anyone, regardless of relationship, as long as that person is a U.S. citizen or resident foreign national with a social security number or Federal tax identification number


You can also defer the use of the ESA and leave the contribution invested in the account.  Lastly, you can take a “non-qualified” ESA distribution, which in tax speak means that the earnings in that account will be subject to federal and state taxes plus a 10% federal penalty
To avoid that penalty, some parents use a Roth IRA as an education savings account.  Contributions to both 529s and Roth IRAs are after-tax dollars and the earnings are tax-free.  529s are treated as a tax deduction in Maryland, but not so for Roth.  However, if you child opts out of college, there is no penalty for withdrawal.  The Roth IRA money is all yours to do with as you please.


There are annual contribution limits to Roth IRAs of $5,000 per year ($6,000 of you’re over 50 years of age), so if you want to contribute more than the limit, you may want to employ both a Roth and an ESA.


Another alternative to an ESA is a custodial account.  You can establish a UGMA, a uniform gift to minors account or a UTMA, a uniform trust to minors account.  Usually invested in the parent’s name to avoid negatively affecting financial aid opportunities, these accounts may lower your tax bill by transferring income producing assets to a child in a lower tax bracket.  However, at majority age (18 in most cases) those assets become available to the child and can be used without restriction.  Anyone can make irrevocable transfers in any amount but, if the donor, acting as custodian, dies before the funds are released to the child, those funds may be considered part of the estate and taxed as such.


Any asset, including real estate, can be transferred to a UTMA.  UGMA transfers are limited to bank deposits, securities including mutual and exchange-traded funds and insurance policies.


One more ESA alternative to consider is an investment in U.S. Savings bonds. Interest accrued is tax-deferred and tax-free if used for qualified education expenses, otherwise it is taxed as income on the federal level while usually exempt from state and local taxes.  There is no limit to amount of bonds purchased and they can be used as contributions to 529s and Coverdell accounts.  The purchaser of the savings bond must be 24 years old when the bond is issued.
Finally, it’s never too early to start exploring scholarships, fellowships and grants available for college education – from Duct tape to Dr. Pepper – scholarships abound.  Check with your employer, place of worship and civic organizations.  You’ll never know what’s out there until you look. 


No matter what savings method you choose, start today. With time on your side, no matter what the end result, you’ll be ahead of the game.   

Karen

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