Company's 401(k) Plan.
01 March 2011
There are many ways to fund a child’s education or assist that child later in life when they are starting a business or buying a home. Each method has positive, negative and unique aspects. As is always the case when making a decision on the appropriate method(s) in a specific situation, it is best to consult with a tax professional.
Informal Account: Assets can be set aside in an informal account earmarked for the child’s needs as determined by the account holder.
Outright Gift: An individual can make an outright gift to anyone up to the annual gift tax exclusion ($26,000 for couples for 2011).
Direct Pay: Payment must be made directly to the school and not the beneficiary. Direct payment of tuition is not a gift for gift tax purposes.
Custodial Accounts: Custodial accounts are similar in some ways to trusts. Both place property under the control of someone other than the beneficial owner. The property held in a custodial account is owned by the child.
529 Plan: A 529 plan is an education savings plan designed to help set aside funds for future college costs. College savings plans generally permit a college saver to establish an account for a student for the purpose of paying college expenses. Withdrawals from college savings plans can generally be used at any college.
Coverdell Account: If you understand how a Roth IRA works, you have the basic understanding of a Coverdell. The difference is that a Coverdell is used for education instead of retirement. Typically, you set up a Coverdell account for a particular child and make contributions of up to $2,000/year.
Roth: A Roth IRA can be established, naming a child as the beneficiary. A Roth IRA can also be used for education without incurring penalties for early withdrawal.
IRA: Similar to a Roth, an IRA can fund education in the same manner. There is no penalty for taking money from an IRA, regardless of the IRA owner’s age, to fund education. However, unlike a Roth, the funds are taxable at the owner’s tax-rate.
Trust: Whether you should establish a trust for your child (or grandchild) depends on your financial objectives. Trusts are generally used to minimize estate taxes, while providing for minor children.
Before establishing any account, you should carefully consider your objectives. There are many choices and some have unforeseen tax consequences that might be avoided with planning. Make your plan flexible, as things have a way of changing. If you would like to discuss this topic further, please contact our office.