additional savings plans

Although utilized on a lesser basis than 529 Plans, additional education investing vehicles to consider include:

Taxable Savings

• Maintain ownership control
• Higher taxes

Uniform Gift (or Transfer) to Minors Act (UGMA OR UTMA) offers favorable tax advantages when a mutual fund account is established in a child’s name.

• Lower tax rate than investments made in parents’ name
• Parents retain control over investments until the child turns 18 (in Michigan)
• Contributions can be made as desired
• Earnings are not restricted to education expenses

Irrevocable Trusts

• Maintain control of assets
• High tax rates
• Expensive to establish and maintain

Traditional or Roth IRA Distribution

• IRA withdrawals may be taken without penalty if used to pay qualified higher education expenses

Coverdell Education Savings Account

• Formerly known as Education IRA
• Account grows free of federal income taxes
• Use of Tax Credits: Lifetime Learning Credit and HOPE Scholarship:
  • The Hope Scholarship is a tax credit, not a scholarship. Your family may claim a federal income tax credit up to $1,500 for each eligible dependent during the first two tax years of post-secondary education.
  • The Lifetime Learning credit is also tax credit. As of tax year 2004 your family may claim a tax credit of up to $2,000 per tax year for the taxpayer, taxpayer's spouse, or any eligible dependents for an unlimited number of tax years. The amount of the Lifetime Learning tax credit is 20% of the first $10,000 of qualified educational expenses paid for all eligible students.
  • Income limitations apply for each of these tax credits.

Tax-savings from shifting income to children

The above descriptions are an overview of the plethora of choices for education savings.