US residents: 529 plan or UGMA to fund college for kids?

[sswan11]

I'm trying to decide on which vehicle is better for my 9 year old (I live in Washington State).  I understand that UGMA can impact college financial aid (reducing aid) -- otherwise are there recommended brokers for 529 plans and what are advantages/disadvantages? Can you buy securities/LEAPS in 529 plans? Thank you in advance for any advice.

[ERICOPOLY]

I'm trying to decide on which vehicle is better for my 9 year old (I live in Washington State).  I understand that UGMA can impact college financial aid (reducing aid) -- otherwise are there recommended brokers for 529 plans and what are advantages/disadvantages? Can you buy securities/LEAPS in 529 plans? Thank you in advance for any advice.

 

You can only buy mutual funds in 529 plans.

 

Did you know that Fairholme Funds offers Coverdell ESA (Education Savings Accounts)?  My kids each have some of their college savings funds managed by Bruce Berkowitz via those accounts.

[zarley]

One problem with the Coverdell's is the contribution limits -- $2,000 per year IIRC.  But they do benefit from the flexibility.

 

I've gone simple for my kids with 529's at Vanguard.  Simplicity and higher contributions won out.  Nothing stopping you from doing both, but I don't need two extra accounts to manage.

[bargainman]

Can somebody give me a quick paragraph or two on what

 

Coverdell ESA

 

Are?  I have 529 plans for the kids, but have not looked into  Coverdell ESA yet.  Should I?

[fareastwarriors]

http://en.wikipedia.org/wiki/Coverdell_Education_Savings_Account

;D

[sswan11]

looks like Coverdell accounts aka Education IRAs have a MAGI limit of $110K:

 

Coverdell Education Savings Accounts (formerly called Education IRAs)

allow you to set aside money each year toward a child's education. The

contribution limit is $2,000. Withdrawals for qualified education

expenses are federal (and possibly state) income tax free, and account

balances can be transferred to siblings without any tax consequences

so long as it is done prior to the previous beneficiary's 30th

birthday and the new beneficiary is under the age of 30. While tax

benefits make these accounts attractive, the low contribution limit

may not provide enough money to pay for college. Unlike

state-sponsored plans, income limits apply for eligibility. Only

single filers with modified adjusted gross income ("MAGI") of less

than $110,000 and joint filers with MAGI of less than $220,000 are

eligible to contribute.

 

http://www.merrilledge.com/article/section529plansinvestingforcollege

[sswan11]

Also there are some weird gift tax rules for 529 plans (from same Merrill site):

 

Withdrawals for qualified higher education expenses are tax free.

There are no income restrictions on the ability to contribute and typically no annual contribution limits, although annual contributions of more than $14,000 ($28,000 when made jointly with a spouse) may require filing a federal gift tax return (and in certain cases, could cause you to be subject to federal gift tax). You may contribute five years' worth of gifts all at once, or $70,000 per beneficiary, without triggering the federal gift tax.

 

Merrill gives you $50 to open a 529 plan, but its administered by the State of Maine (?!)

[ERICOPOLY]

Also there are some weird gift tax rules for 529 plans (from same Merrill site):

 

Withdrawals for qualified higher education expenses are tax free.

There are no income restrictions on the ability to contribute and typically no annual contribution limits, although annual contributions of more than $14,000 ($28,000 when made jointly with a spouse) may require filing a federal gift tax return (and in certain cases, could cause you to be subject to federal gift tax). You may contribute five years' worth of gifts all at once, or $70,000 per beneficiary, without triggering the federal gift tax.

 

Merrill gives you $50 to open a 529 plan, but its administered by the State of Maine (?!)

 

The gift tax rules only come up because you are taking the money out of your taxable estate when you put it into a 529 plan.

 

However, the gift is revocable at any time (if you later decide your child won't use it or if you fear they'll waste it on parties).

 

Should estate taxes be of concern to you (and you do want to leave money to your kids) then you wouldn't want to spend the funds from the 529 plan on their education.  Instead, you would want to leave the funds in the 529 plan and pay your child's expenses for education directly out of your own pocket (further reducing your taxable estate).  Then they can spend the plan's money on college for their own kids (and/or grandkids). 

 

These plans with such huge contribution limits are more about tax planning than college saving, if you ask me.  But fair enough, if I educate my child the rest of the country will benefit from the taxes he pays or from the jobs he creates after he starts a company.  Whatever.  Or somebody else's company benefits from having an educated employee.  So not paying taxes on the income that funds his education seems only right and fair since in a way his education is for the good of all.

[krazeenyc]

looks like Coverdell accounts aka Education IRAs have a MAGI limit of $110K:

 

Coverdell Education Savings Accounts (formerly called Education IRAs)

allow you to set aside money each year toward a child's education. The

contribution limit is $2,000. Withdrawals for qualified education

expenses are federal (and possibly state) income tax free, and account

balances can be transferred to siblings without any tax consequences

so long as it is done prior to the previous beneficiary's 30th

birthday and the new beneficiary is under the age of 30. While tax

benefits make these accounts attractive, the low contribution limit

may not provide enough money to pay for college. Unlike

state-sponsored plans, income limits apply for eligibility. Only

single filers with modified adjusted gross income ("MAGI") of less

than $110,000 and joint filers with MAGI of less than $220,000 are

eligible to contribute.

 

http://www.merrilledge.com/article/section529plansinvestingforcollege

 

This is the easiest rule to get around. Completely legally.

 

We set up UGMA accounts for our children. ANYONE making under 110k can contribute to a coverdell but max is $2k a year. So our kids technically contribute to their own coverdells. My eldest has been contributing to his coverdell for 3 years and my 4 month old just started this year :D .

[sswan11]

Any recommendations on mutual funds for 529 plan? (Apparently Fairholme isn't an option) Thanks!

[shalab]

It seems WA state has GET program. ( http://www.get.wa.gov/ ) Have you checked this out? More guaranteed than the mutual funds - last decade tuition went up 9.5% according to this site, so you will get the money indexed against tuition costs.

[sswan11]

t seems WA state has GET program. ( http://www.get.wa.gov/ ) Have you checked this out?

 

Thanks for the tip - I did take a look - was advised that the guaranteed return program is "underfunded", so they price in tuition amount  > current tuition costs to "catch up" and this trend may continue. 

 

I was also hoping to get a higher rate of return (which I think Fairholme Funds would provide!)

[krazeenyc]

SUPERFUND your 529.

 

http://www.cnbc.com/id/101278924