options available for investing for a child's college
Transcript, 3 minutes 5 seconds, for use during week of March
Description: Penny and Susan discuss Uniform Gifts to Minors
accounts, Coverdell education Savings Accounts, and 529 state
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
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
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
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
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
investing in Iowa’s 529 plan, earnings and withdrawals
are example from Iowa state income tax as well.
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
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.’