Education Planning

Education Planning Strategies in the Spokane, WA Area 

529 College Savings Plans for the Future

A 529 plan is a college investment program sponsored by a state government and administered by one or more investment companies. Some plans let you prepay college tuition while others allow you to accumulate and invest education funds. The underlying investment options typically are mutual fund portfolios – “age-based” asset allocations that become more conservative as the beneficiary gets closer to attending college or static portfolios with predetermined allocations that remain consistent over time.

Contributions cannot exceed the amount necessary to provide for the qualified education expenses of the beneficiary. Additionally, certain contribution limits apply to avoid gift tax consequences. Earnings on investments in a 529 plan grow tax-deferred and qualified withdrawals are exempt from federal taxes. Non-qualified withdrawals are subject to ordinary income taxes and a 10% additional federal tax. Eligibility to contribute to a 529 plan is generally not restricted by age or income.

Prior to investing in a 529 Plan, investors should consider whether the investor's or designated
beneficiary's home state offers any state tax or other benefits that are only available for investments in
such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free.
Tax treatment at the state level may vary. Please consult with your tax advisor before investing.

Note that the principal value of an “age-based” or “target date” fund cannot be guaranteed at any time,
including the target date, and may decline at any time. The target date in the fund is the approximate date when an investor plans to start withdrawing money.

Coverdell ESA's.

A Coverdell ESA (Education Savings Account) is a flexible, tax-advantaged way to invest money for education expenses.  Besides the 529 College Savings Plan, a Coverdell ESA is the other main type of college savings account.  Contributions are made on an after-tax basis. While Coverdell has a lower $2,000 annual contribution limit per beneficiary, accounts can hold a wide variety of stocks, bonds, or mutual funds.

Note that qualified withdrawals are not limited to higher education.  Certain elementary and secondary educational expenses also qualify.  For example, if your child needs a tutoring service in high school, you can use funds from your Coverdell to pay for it.¹

A Gift for Children, a Tax Break for You

A UGMA/UTMA (Uniform Gift to Minors Account/Uniform Transfers to Minors) account allows you to establish a savings or investment account in a child's name, with one adult named as custodian.  The tax break associated with gifts per individual (see IRS gift tax form 706 each year for limits) can be especially beneficial for adults looking to minimize their estate taxes.  These funds can be used to plan for the child's future – whether for college, marriage, buying a house, or other financial challenges looming in their future.  Optional investments may include savings accounts; Series EE U.S. Savings Bonds; individual securities such as stocks, Treasury Bills, and zero-coupon bonds; and mutual funds. Be aware that regardless of the gift intention, when the child reaches an age defined by state law the money belongs to the child, free and clear, to use as they wish.  Once transferred, they are also responsible for paying taxes on all earnings.

Roth IRA's

Roth IRA's are funded with after-tax dollars and allow earnings to be withdrawn tax free after age 59½, provided the account has been open for at least five years. Accumulations are not tied to educational purposes only. However, nothing prohibits you from using these accounts to build college savings. And, if your student gets a full scholarship or does not go to college, you can use your Roth IRA assets to enhance your own retirement strategy.

Note that a Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax-free as long as they are considered qualified.  Withdrawals prior to age 59½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax.  Limitations and restrictions may apply. 

These are just four ways to save for educational needs that you may want to consider as you prepare for your future and the future of your children.  Your education planning strategy should be one building block of your overall financial planning strategy.  Contact a financial planner today to help you begin the process of planning for your future.



¹Should I use a Coverdell ESA? Retrieved 9/19/2018 from

Investing in stocks and mutual funds involves risk, including possible loss of principal.  Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.  Zero coupon bonds are subject to large price fluctuations if sold prior to maturity.  Investors pay ordinary income tax every year even when no payments have been received.  The government guarantee applies only to the timely payment of principal and interest, not to market value if sold prior to maturity.

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