Education Funding

Coverdell Education Savings Account

A Coverdell education savings account is a particular type of savings vehicle that allows you to invest for the education cost of a child or other beneficiary. Coverdell ESAs offer tax-deferred savings opportunities. Your contributions aren’t tax deductible, but any distributions used to pay qualifying education expenses (which include elementary and secondary school expenses) will be completely tax free. Generally distributions are tax tree if they are not more than the beneficiary’s education expenses for the year, but if a distribution from a Coverdell ESA isn’t used to pay qualifying education expenses, the portion of the distribution that represents earnings will be included in the beneficiary’s taxable income and is also subject to an additional 10 percent penalty.

Generally, the beneficiary of a Coverdell ESA can be anyone under age 18. Once that person reaches 18, you can no longer make contributions on his or her behalf. The exception is if the beneficiary is a special needs child, in which case you can still contribute to the account after the beneficiary reaches age 18. Note, no more than $2,000 a year can be contributed to all Coverdell ESAs for the benefit of any one beneficiary.

Custodial Accounts (UTMA/UGMA) for Education Savings

A custodial account is an account established at a financial institution for the benefit of a minor child and managed by the parent or another designated custodian. A custodial account is established under a particular state’s Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA).

Any money placed in a custodial account is gifted irrevocably to your child. While a child is a minor under the age of 18 or 21 — depending on the state — the money is controlled by the custodian and can be used only for the benefit of the child. Any income earned by the account is taxed to the child, though certain children are subject to the "kiddie tax." When the child reaches the relevant age, the custodianship ends and the child assumes sole control of the money.

There are two differences between UTMA and UGMA custodial accounts. First, is the type of property each account may hold. The UGMA authorizes cash, bank accounts, stocks, bonds, mutual funds and so on. A UTMA broadens these holdings to include real estate and other property, including limited partnership interests. Second, UGMA accounts generally terminate at age 18, whereas UTMA accounts generally end at age 21, and in some state, age 25. Most states have enacted UTMA to supersede UGMA.

529(b) Plans**

Plans in the 529 category provide tax advantages to save and pay for higher education. There are two major types: prepaid tuition plans and savings plans. Prepaid tuition plans allow the plan holder to pay for the beneficiary’s tuition and fees at designated institutions in advance. Savings plans are tax-advantaged investment vehicles, similar to IRAs.

The 529 is an excellent way to save for education expense. Earnings accumulate on a tax-deferred basis and distributions that are used for qualified education expenses are tax and penalty-free. The 529 plan may be set up in a way that allows individuals to prepay a student’s qualified higher-education expenses at an eligible educational institution.

*Non-deposit investment products and services are offered through CUSO Financial Services, L.P. ("CFS"), a registered broker-dealer (Member FINRA/ SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. The credit union has contracted with CFS to make non-deposit investment products and services available to credit union members.

For specific tax advice, please consult a tax professional.

Financial Advisors are registered to conduct securities business and licensed to conduct insurance business in limited states. Response to, or contact with, residents of other states will be made only upon compliance with applicable licensing and registration requirements. The information in this website is for U.S. residents only and does not constitute an offer to sell, or a solicitation of an offer to purchase brokerage services to persons outside of the United States.

**There are fees associated with 529 savings plans. Investments in 529s involve investment risks. You should consider your financial needs, goals, and risk tolerance prior to investing. More information about 529 plans can be found in the issuer’s official statement or plan disclosure document which should be read carefully prior to investing. Most 529 plans are sponsored and administered by states. State tax benefits vary among the states and some offer residents additional tax benefits if they invest in their own state plan. Consult a qualified tax professional for more information.

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Tax-deferred accounts

Grow your investments today and defer the taxes you pay until a later date. Learn more from one of our CFS Financial Advisors today.

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529 plans

Find out if saving for college with a 529 is beneficial for you. Schedule a no-obligation consultation with a CFS Financial Advisor today.

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