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3 Ways to Get Started Saving for Education
Investing without a specific goal in mind can present challenges. Without goals, it can be pretty hard to figure out things like how much you need to set aside or whether you’re investing for retirement, for a specific purpose or for education.
Fortunately, saving for your children’s (or your) education is a goal in itself. The hard part is figuring out everything else. Do you really know whether your 3-year-old will end up in an Ivy League university, a state college or a vocational school?
And then there are the various investment vehicles available when saving for education expenses. How do you figure those out? We’ll try to help by offering a thumbnail sketch of the major types of education accounts you can consider.
Coverdell Education Savings Account
Coverdells can be tapped for qualified education expenses for elementary, secondary or higher education purposes. (You can refer to the IRS website or consult with a tax advisor for details on what expenses qualify.) Contributions to a Coverdell Education Savings Account are not tax deductible, but distributions are tax-free as long as they are used for qualified education expenses.
A maximum of $2,000 per year can be contributed annually to each Coverdell beneficiary, and contributions cannot be made after the beneficiary turns 18. There are income limits to contributing. For the latest limits you can refer to the IRS or a tax advisor.
Finally, Coverdell accounts can be transferred to another beneficiary if the funds are not used for the original beneficiary.
UTMA/UGMA Custodial Accounts
These acronyms stand for United Transfer to Minors Act and United Gift to Minors Act. Contributions to these accounts are considered an irrevocable gift to a minor. The custodian has full control over the account until the child’s account is terminated or the child is no longer a minor. UTMA/UGMA funds can be used for any purpose as long as the custodian shows it's for the benefit of the child.
These popular accounts can help fund qualified education expenses of a beneficiary. While contributions are not tax deductible, earnings are not subject to federal tax; most states don’t tax earnings either. Some states even offer incentives on contributions made to 529 plans.
Contributions are limited to gifting limits, but the IRS does allow five years of gifting at one time, for those who might be starting late. Contributions can be made after a beneficiary turns 18.
Variety of Investment Choices
Scottrade offers both Coverdell and UTMA/UGMA accounts.
All of the above are types of accounts, and each has advantages and disadvantages. In most cases, beneficiaries, contributors or custodians can gain access in their education accounts to virtually any type of investment – from stocks and bonds to mutual funds and exchange-traded funds.
Question: What kinds of education accounts do you use or are considering using?
Next Steps: You might consider using our College Savings Calculator if you’re unsure how much you might need to invest. The calculator can help you run the numbers based on the age of your child (and beneficiary), your level of investment risk and even the type of school (public or private) that you’re considering.
The information and content provided is for informational and/or educational purposes only. The information presented or discussed is not, and should not be considered, a recommendation or an offer of, or solicitation of an offer by, Scottrade or its affiliates to buy, sell or hold any security or other financial product, or an endorsement or affirmation of any specific investment strategy. You are fully responsible for your investment decisions. Your choice to engage in a particular investment or investment strategy should be based solely on your own research and evaluation of the risks involved, your financial circumstances, and your investment objectives. Scottrade, Inc. and its affiliates are not offering or providing, and will not offer or provide, any advice, opinion or recommendation of the suitability, value or profitability of any particular investment or investment strategy.
Contribution and income limits are subject to change without notice.
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Before you can achieve success in your financial portfolio, you should consider setting clearly defined investing goals.
Scottrade Brokerage President Peter deSilva was drawn to the firm by its client-first approach. This approach was demonstrated with the company named “Highest in Investor Satisfaction with Self-Directed Services” by J.D. Power.