Educational Savings Accounts
Savings Accounts (Educational IRAs)
are trust/custodial accounts set up
specifically to pay for educational expenses for a designated beneficiary
under the age of 18, or for a special needs person. There are strict limits
on income; 2006 contributions are capped at $2,000 per beneficiary. These
accounts are allowed to grow tax-free. Withdrawals are also tax-free when
used to pay qualifying education expenses, such as tuition, fees, books and
supplies, as well as room and board. Unused amounts are treated as
non-qualifying distributions and taxable to the beneficiary. The taxable
amount represents that portion of the account that accumulated from the
tax-free earnings; it’s treated as ordinary income and subject to a 10%
penalty. There are, however, tax-free rollover provisions for the
beneficiary’s family members under 30 years old. Unused account balances
must be distributed within 30 days after the beneficiary’s 30th
birthday or death.
If the beneficiary
(student) is eligible for financial aid, then balances in this or other
custodial accounts will most likely reduce his/her chances of getting
financial aid. If a parent owns the account, up to 5.6% of its value will be
used in the federal financial aid formula.
are state-operated prepaid tuition programs
and college saving accounts. This is the rich men’s piggy bank, used to fund
their children’s education. There are many benefits; here are just a few. 1)
Parents maintain control of the assets. 2) Contribution limits are usually
$250,000 and up. 3) There are no income or net worth limits. 4) Plan
contributions are not considered part of your estate for federal tax
purposes. 5) Future tuition costs at some schools are paid at today’s
prices. 6) Contributions are made with after-tax dollars. 7) Earnings are
exempt from federal (and certain state) taxes, as are withdrawals that are
used to pay qualified education expenses. 8) Under the federal financial aid
formula, 529 savings accounts are treated assets of the parents; as such,
only 5.6% (or less) of its value would be available for college costs.
Private universities, however, may have different rules.
Student assets, assessed
in the financial aid formula in 2006 at 35%, will be reduced to 20% in the
2007-2008 school year.
deferred retirement and savings accounts are a benefit that every citizen
should take advantage of.