We can provide tax-efficient strategies that can help you save for education expenses.
Given the reality of fast-rising tuition costs, it’s more important than ever to start saving now for future education expenses. There are a variety of strategies to choose from, including several potentially tax-efficient options. U.S. Bank and U.S. Bancorp Investments can provide products and services to help you save for higher education.
A 529 College Savings Plan is one of the most flexible and potentially tax-advantaged education funding tools ever created.
All dollars accumulated in a plan can qualify for tax-free withdrawals, giving you more freedom to focus on other financial goals.You and others (such as grandparents) can invest money in a 529 plan for the benefit of specific individuals.
Earnings accumulated in a 529 plan are not subject to federal taxes and, in many cases, state taxes, as long as funds are used for qualified higher-education expenses like tuition, housing and books/equipment. States, state agencies and educational institutions may sponsor 529 plans. Tax benefits vary by state and plan.
Before investing in a 529 College Savings Plan, consider your state of residence, which may offer a 529 College Savings Plan with state tax or other benefits available only to residents of the state.
Coverdell Education Savings Accounts (ESAs) offer a potentially tax-efficient way to save not only for college expenses, but costs associated with elementary and high school education as well.
Similar to an IRA, dollars in an ESA can be put to work in a wide variety of investment options including stocks, bonds and mutual funds. Funds can be withdrawn on a tax-free basis for education-related costs such as computers, tutoring and private school tuition. The maximum contribution is $2,000 per year per beneficiary. Parents must meet income requirements to qualify for contributions to an ESA.
Custodial accounts let you set aside money for a child’s education and other expenses without the need to create a special trust fund.
With custodial accounts, the child owns the assets, but you can control the investments up until the child reaches the age of majority, which is 18 or 21, depending on the state. Once the child reaches the age of majority, the child takes control of the account.
Established under the Uniform Gift to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA), any monies deposited into a UGMA or UTMA are deemed an irrevocable gift.
Custodial accounts lack the immediate tax advantages of 529 and Coverdell Education Savings accounts, as the assets can be taxed based on the minor's income tax bracket (subject to "Kiddie Tax" rules).
To keep your education goals on track, use our calculator to estimate how much money you may need to save.
If I'm already a Private Client, whom do I contact to get started?
If you’re a client of the Private Client Group, the Private Client Reserve or Ascent Private Capital Management, please contact your personal advisor.
How would funds accumulated in a 529, ESA or Custodial plan affect my beneficiary's financial aid eligibility?
It may be advantageous to accumulate assets in a 529 Savings Plan or ESA if applying for financial aid using the FAFSA process. Only about 5.6% of the value of your 529 Savings Plan or ESA will be calculated into your child's Expected Family Contribution (EFC). By contrast, up to 35% of the value of custodial accounts and the student’s own assets will be included in the EFC. The EFC affects the amount of need-based financial aid your beneficiary will receive; a higher EFC reduces the amount of financial aid and need-based scholarship money your beneficiary will qualify to receive. An important point is that savings accumulated in any plan or account should not affect the amount that can be received from merit-based scholarships.
Would bankruptcy affect my 529, ESA or Custodial plan?
It depends on the state in which you declared bankruptcy and, for 529s, the state plan under which your 529 is created. Contact your legal advisor for more information.
How much should I save in my 529 plan?
The amount you need to save depends on where your child plans to attend college and the tuition required. You can use this College Planner calculator to help determine an estimate of how much you will need to save. You may be surprised just how expensive college can be. Even if it isn’t realistic to consider saving enough to pay all of the projected costs, keep in mind that other funding sources can be utilized, including loans, grants and scholarships.
How do I know if there is a state tax benefit for contributing to a 529 plan?
Visit savingforcollege.com to get details on whether your state offers potential tax benefits for your contributions to their 529 plan. Before investing in a 529 College Savings Plan, consider your state of residence, which may offer a 529 College Savings Plan with state tax or other benefits available only to residents of the state. Contact your financial professional and tax advisor for more information. See disclosures for additional information.
What happens if my child finishes college and there is money left over in the 529 account?
If money is leftover in your 529 account after the beneficiary’s qualified higher education expenses have been paid, you can name another qualifying family member as the beneficiary in order to maintain the account. In the future, tax-free withdrawals could be used for the benefit of the newly-designated beneficiary’s higher education expenses. Alternatively, you can withdraw the money that is left over in your 529 account, but you'll have to pay a federal penalty tax of 10% on the earnings portion of the withdrawal (a state penalty may apply as well). You may also have to pay federal, and in some cases state, income taxes on the earnings portion of the withdrawal.
Can I open both a Coverdell ESA and a 529 plan for the same beneficiary?
Yes. Contributions can be made to both accounts, even in the same year. Tax benefits may vary. Please consult your tax advisor for more information.
Can a Coverdell Education Savings Account be converted into a 529 account?
Yes. A qualified withdrawal may be taken from an ESA (tax-free) if the money is then placed into a 529 account for the same beneficiary. There is no penalty for this liquidation as long as the assets are placed into a 529 account.
Can savings bonds in a child's name be transferred to a 529 account?
Series EE or I-Bonds purchased after 1989 may be converted to a 529 plan tax-free if eligibility requirements are met. However, the bonds would have to be liquidated, since only cash can be contributed to a 529 plan.
How do I open a Custodial account?
Before deciding on an education funding strategy, contact a financial professional to review your circumstances and goals. To open a custodial account, you will need:
What is the "kiddie tax," and how does it affect Custodial accounts?
Tax law typically specifies that income be taxed at the tax rate of the individual who receives it. Children typically earn less than their parents, making their earnings subject to a lower tax rate. However, the kiddie tax is a special tax that applies to a dependent child’s unearned income from investments. This tax applies once a dependent child’s investment income exceeds a limit, ($2,100 in 2016) at which time the investment income is taxed at the parent’s rate. For more information about how taxes on a custodial account apply to your situation, seek advice from a tax professional.
For what purpose can funds be withdrawn from a Custodial account?
Funds in a Custodial account are under control of the custodian until the child reaches the age of majority, which varies by state. At that time, the child takes control of the account, and funds in it can be used for any expense, regardless of whether it is education-related.
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This information represents the opinion of U.S. Bank and/or U.S. Bancorp Investments and is not intended to be a forecast of future events or a guarantee of future results. This information is designed to be educational and informative. It is not intended to provide recommendations, to provide specific advice concerning retirement accounts and investment planning, or to meet the needs of any particular investor. Investors should consult with their investment professionals for advice concerning their particular situations.
Before investing in a 529 College Savings Plan, consider your state of residence, which may offer a 529 College Savings Plan with state tax or other benefits available only to residents of the state. Contributions of up to $65,000 per person can be pro-rated over five years for gift tax purposes. Check with your tax advisor on whether you can take advantage of the gift and estate tax exclusions. If donor contributes more than $13,000 in one year and elects to apply the gift tax exclusion ratably over 5 years but dies before the close of the 5 year period, the portion allocable to calendar years beginning after the date of death is included in the donor's estate.
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