Posted on August 18, 2016 in

College Savings Accounts-Part 2

By Peter C. Golotko, CPA/PFS, MBA and Sherrie Morgan, Director of Marketing & Public Relations.

Published Thursday, August 18, 2016 , by Lakeland Ledger

Two weeks ago, we looked at ways to help children or grandchildren pay for their college expenses responsibly. This week, we’re going to address the types of plans you can choose from to aid your child or grandchild with certain college expenses. Some of the most common options are Prepaid Tuition Plans, 529 College Savings Plans, and UTMA/UGMA accounts. These different plans allow parents and other family members to begin saving for children or grandchildren years in advance.

When determining the best method to plan for college expenses, there are many factors to consider such as taxes, income restrictions, contributions limits, financial aid eligibility and the transferability of these plans. Each of these factors are present in the different plans and need to be reviewed with your trusted financial advisor before making the decision.

The Prepaid Tuition Plan allows you to pay for future tuition at a public state college at today’s rate. Prepaid plans can include tuition only or be upgraded to include room and board as well. As college tuition often rises year after year, it is important to review this plan sooner than later to have a better chance at locking in a lower tuition rate. Contributions to a prepaid plan may be treated as a gift and could be subject to gift-tax limitations and are not tax-deductible. However, one drawback to the prepaid plan is associated with private schools or out of state colleges. Prepaid plans are created state by state and have some flexibility with out of state schools and private schools, but they are primarily designed for in-state, public school tuition. If a student attends a private school or out of state school, they may not receive the same total benefit.

A 529 College Savings Plan is a tax-advantaged account established and controlled by the account owner. Earnings and withdrawals are income-tax-free if used for qualified higher-education expenses. Contributions may be treated as a gift and may be subject to gift-tax limitations. Contributions to 529 plans are limited on a state by state basis. They are reported as parental assets. Qualified withdrawals and higher education expenses are not considered to be income to the parents or students. One disadvantage of 529 plans is there are limited investment options. Most plans offer investment portfolios consisting of underlying mutual funds or individual mutual fund options, and you can only make changes twice per year.

Custodial accounts that include UTMA (Uniform Transfer to Minors Act) and UGMA (Uniform Gift to Minors Act) are taxable accounts that are controlled by the parent until the minor reaches 18 or 21 depending on the state. Custodial accounts are more flexible as funds can be used to pay for any expense that benefits the minor and are not limited to educational expenses. Income on UTMA/UGMA accounts is taxed at different levels, so consulting a financial advisor is important. Contributions may be treated as a gift and may be subject to gift-tax limitations. There is no annual contribution limit. Custodial accounts are much more flexible when it comes to investment options, allowing almost any investment asset. One disadvantage related to UTMA/UGMA accounts is they are listed as a student asset which can hinder financial aid from a college or university.

The earlier you start saving for college, the better. But, also be aware of fees and expenses associated with each plan and consider financial aid eligibility. Consult with your CPA or trusted financial advisor before making any college savings or investment decisions to see how each method will affect you and your child. The best option will depend on each individual or couple’s personal circumstances and goals.

Peter C. Golotko, CPA/PFS, MBA is President and CEO of CPS Investment Advisors.