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Education Planning
With the escalating cost of higher education, it is critical to plan ahead in order to send your
children to the college of their choice. There are several options available to help fund your
child's college expenses. Three options include 529 Plans, Coverdell Education Savings
Accounts, and Custodial Accounts that can be established to help prepare families for the
increasing cost of higher education.
Section 529 Plans offered through Lincoln Financial Securities Corporation:
Section 529 Plans (technically known as qualified state tuition plans) allow parents, grandparents,
and anyone else interested, to contribute money into a tax-deferred account for the higher
education of a beneficiary. Section 529 Plans also offer unique estate planning benefits. The law
provides that a contribution into a 529 Plan is treated as a completed gift and thus is removed
from the donor's estate. Furthermore, the gift also qualifies for the annual gift tax exclusion
amount. The law also allows the donor to treat a contribution of more than the annual exclusion
as occurring ratably over five years for gift tax purposes. The earnings in college savings
plans grow tax-deferred from Federal income taxes. When funds are withdrawn, they are
received Federal income tax-free if used for qualified expenses (tuition, books, room and board).
If the original beneficiary decides not to attend college, you can defer use of the account,
change beneficiaries or under certain conditions, withdraw the assets. If the assets are withdrawn
and not used for higher education, Federal income taxes, State taxes (if applicable) and a
10 percent penalty may be imposed on the earnings. In addition, purchasing a Section 529 Plan
that is not domiciled in your state of residence may entail additional tax consequences.
Coverdell Education Savings Accounts:
Coverdell Education Savings Accounts (formally Educational IRAs) allow parents, grandparents
and others to contribute cumulatively up to a specified dollar amount a year per child for
qualified elementary, secondary school and higher education expenses. Withdrawals from a
Coverdell Education Savings Accounts are Federal income tax-free if used for qualified expenses
such as tuition, room and board. Beneficiaries of the Coverdell Account can be transferred to
another family member to pay for educational expenses. If the account is not used by age 30, or
the funds are not used for higher education, regular income taxes and a 10 percent penalty may
be imposed on the earnings.
Custodial Accounts:
Custodial Accounts (UGMA/UTMA) are created for a minor usually at a mutual fund company
or brokerage firm. This account provides a simple way to transfer property to a minor without
the complications of a formal trust. When the child reaches age of majority (age 18 or 21
depending on the state), the child then has full discretion over the account. There are specific
federal income tax implications that apply to earnings in Custodial Accounts. These tax implications
are commonly referred to as the "Kiddie Tax" and should be discussed with your tax or
investment professional.
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