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Several options available for investing for a child's college

Radio Transcript, 3 minutes 5 seconds, for use during week of March 17.

Description: Penny and Susan discuss Uniform Gifts to Minors accounts, Coverdell education Savings Accounts, and 529 state savings plans.

Announcer: Invest Wisely comes to you from Iowa State University Extension through a grant from the Investor Protection trust, providing investor education on the web at: investorprotection.org.

Susan: Penny, we’ve been talking about investing for college and, as you know, one of my goals is to help my granddaughter with her college tuition in ten to fifteen years.  Last time we met, you mentioned that there are some options that can have an impact on the taxes I pay.

Penny: There are three options you might consider.  First, the Uniform Transfers to Minors Act or Uniform Gifts to Minors Act is an account where you invest money in your granddaughter’s name.  In 2007, the first eight hundred fifty dollars of a child’s investment income would be tax free, the next eight hundred fifty dollars would be taxed at the child’s own rate. Unearned income in excess of seventeen hundred dollars would be taxed at the parents’ tax rate.

Susan: Are there other things to think about with an account like this?

Penny: With a custodial account, your granddaughter assumes control when she reaches legal age; she might not use the money the way you intended.  Also, the money will count as an asset when her student aid is calculated.

Susan: What about Coverdell Education Savings Accounts?

Penny: Formerly known as the Education IRA, these accounts let you contribute up to two thousand dollars a year while your granddaughter is under 18.  Withdrawals are tax-free if used for qualified education expenses before age 30 and can be used for elementary or secondary school expenses as well.

Susan: And 529 college savings plans?

Penny: 529 plans are offered by most states, with some differences in benefits and restrictions.  Withdrawals are exempt from federal income tax when used for qualified education expenses.  When investing in Iowa’s 529 plan, earnings and withdrawals are example from Iowa state income tax as well. 

Susan: With IRAs there are income limits--if my income is too high, I can’t get the tax benefits--does this apply to college savings plans?

Penny: With the Coverdell ESA, your income must be less than $110,000.  However there is no income limit on contributing to a 529 plan.  With both the Coverdell and 529 plans, you may be able to transfer the account to a new beneficiary .

Susan: Thank you, Penny.

Penny: You’re welcome.  And remember, for more information visit the ISU Extension website at extension.iastate.edu and look for ‘Invest Wisely.’

 

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Updated March 17, 2008