As you plan for your children's education, there are several ways for help parents to invest and save to cover tuition costs.
Some — like the Uniform Gift to Minors Act, UGMA, and the Uniform Transfer to Minors Act, UTMA, custodial accounts — are taxed at the child’s lower rate, but because they are irrevocable gifts they are also considered a “student asset” for the purposes of determining financial aid. As a result, they could bump your child out of eligibility for student loans.
Others, like the Coverdell Education Savings Account, ESA, allow parents to put money away and pay no federal capital gains tax on the earnings if the money is used for qualifying educational expenses.
But Coverdells, formerly known as Education IRAs, also come with a low annual contribution limit ($2,000) and an income cap. (Contributions start to phase out for single filers at $95,000 and for married taxpayers who file jointly at $190,000.)
Then, of course, there’s your friendly IRA. Money from your Roth or traditional individual retirement account can be used to cover higher education expenses without incurring a 10 percent early withdrawal penalty—though most financial planners advise against borrowing from your future unless you’ve got cash to spare.
Enter the 529.