Focal Point Financial: Saving for your childs education

Saving money for your children’s or grandchildren’s education may seem like a simple matter, but how can you be sure the money is used for the purpose you desire? Let’s look at a few choices.

UGMA’s & UTMA’s - Understanding Custodial Accounts:

The custodian must be an adult. There can be only one custodian. One child under 18 is allowed per account. This is not a joint account.

Contributions to the custodial account are after-tax dollars. These dollars cannot be deducted from one’s federal or state income taxes

The custodian may name a successor custodian and may transfer custodianship to another adult.

The custodian may buy and sell the assets in the account, but may not use the assets as collateral for a loan.

The account is set up in the child’s name and Social Security number. The child is the beneficial owner of the account.

The assets in the account transfer to the child at the age of majority. The custodian loses all control over the money. The child may use the money for any purpose. This is one of the biggest disadvantages of the custodial account.

All earnings are taxable to the child at their tax rate each year. There is no tax deferral.

Education IRA’s – (also known as a Coverdell Account):

Annual contributions up to $2000 per year can be made to an account for a child under 18. The child does not own the account

Contributions are made with after-tax dollars and are not deductible from federal or state income taxes. Contributors are not required to have “earned income” as they would for an IRA. A corporation or tax-exempt organization may also contribute to an Educational IRA. The earnings in the account are tax deferred.

Withdrawal of contributions and earnings are tax-free if used for qualified educational purposes, including pre- and post-secondary schooling.

New tax rules let parents use the money in these accounts to buy computers, even if the computer is not used for educational purposes.

If the beneficiary does not use the account assets before age 30, the assets may be rolled over to another family member. These requirements are waived for children with special needs.

There is a 10% penalty, plus taxes, if earnings are withdrawn and used for non-education related expenses.

Education Savings Plans (529 Plans):

529 Plans are becoming increasingly popular for parents and grandparents to provide money for post-secondary education. They offer the flexibility to name alternative beneficiaries and provide for estate tax planning. Ask us for a separate information sheet on 529 Plans.

Our clients are our business.

Focal Point Financial Services
2214-5th St., Suite 1
White Bear Lake, MN, 55110
(651) 426-7375 or 1-888-426-7373
Fax (651) 426-6004

dale@focalpointfinancial.com

NOTE: Dale Hedstrand is a registered principal associated with AIG Financial Advisors, Inc., Member NASD/SIPC. Before proceeding further, please be advised that Dale Hedstrand is licensed to discuss with or offer investment and financial services and products only to residents of AL, AZ, CA, FL, ID, MD, MI, MN, MO, NH, NM, ND, OH, OK, OR, SC, SD, TX, UT, VA, WA, WI, WY. Securities related services may not be provided to individuals residing in any state not listed above. The information offered is for informative purposes only. None of this information is to be construed as an offer to buy or sell securities referred to within or otherwise. Neither Dale Hedstrand nor AIG Financial Advisors, Inc makes any guarantee as to the accuracy or completeness of this information.

This information has been prepared from sources and data believed to be reliable but is not guaranteed by NASD/SIPC or AIG Financial Advisors, Inc., nor is any representation made herein as to its accuracy or completeness. This listing is provided for information purposes only and is not to be construed as an offer to buy or sell any securities mentioned herein.

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