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College Savings Accounts

Updated: Dec 7, 2020

There is one thing my parents never did, and that was pay for my college.  That was up to me.  I have a 16 year old and a 13 year old, and I am proud to say that my children’s college is paid for.  We live in Florida and did something called Florida Prepaid College.  We also have an IRC §529 Plan.  On top of those plans there are Coverdell Education IRA’s and other ways to save for college.  I thought this week we would discuss the different college savings accounts and how you qualify for them.

Most states have some sort of prepaid college program.  For instance in Florida we have Florida Prepaid College.  Florida Prepaid allows the purchaser to lock in the cost of a college education at today’s prices for tomorrow’s education.  The cost of these plans are based on the age of the beneficiary.  For instance let’s say you want to purchase a prepaid plan for you daughter that is three years old and your son that is six years old.  The cost of the plan will be more for the six year old because he is closer to college age than is your daughter.  Then there are different plans you can purchase.  For instance, in Florida you can purchase a plan that will pay for two years of Community College and then two years of a University education.  You can purchase two years of just Community College.  You can purchase four years at a University.  You can also purchase a dorm plan, meal plans, the list is endless.

Aside from prepaid plans there are Section 529 Plans, named after IRC §529.  A 529 plan is a college savings plan whereby you contribute after tax money to the plan, up to $250,000 in a lifetime.  The money in the plan is invested in pretty much anything that you want to invest in.  The money grows tax free, and when it is taken out of the plan, provided that it is used for post-secondary education purposes, then the earnings are tax free.  A 529 Plan is owned by the person that opens the plan.  For instance Jim opens a 529 Plan for his son Tom.  Jim would own the plan and Tom would be the beneficiary.  If Tom decides not to go to college, Jim can transfer the plan to anyone in his immediate family or even a first cousin for college.  If there is no one to transfer the plan to, Jim can take the money out and use it for anything, but it would be taxable to Jim.

There are Coverdell Education IRAs.  A Coverdell ESA is a trust or custodial account created or organized in the United States only for the purpose of paying the qualified education expenses of the Designated beneficiary (defined later) of the account.  When the account is established, the designated beneficiary must be under age 18 or a special needs beneficiary.  To be treated as a Coverdell ESA, the account must be designated as a Coverdell ESA when it is created.  The document creating and governing the account must be in writing and must satisfy the following requirements.

  1. The trustee or custodian must be a bank or an entity approved by the IRS.

  2. The document must provide that the trustee or custodian can only accept a contribution that meets all of the following conditions.

  3. The contribution is in cash.

  4. The contribution is made before the beneficiary reaches age 18, unless the beneficiary is a special needs beneficiary.

  5. The contribution would not result in total contributions for the year (not including rollover contributions) being more than $2,000.

  6. Money in the account cannot be invested in life insurance contracts

  7. Money in the account cannot be combined with other property except in a common trust fund or common investment fund.

The balance in the account generally must be distributed within 30 days after the earlier of the following events.

  1. The beneficiary reaches age 30, unless the beneficiary is a special needs beneficiary.

  2. The beneficiary’s death.

Typically a Coverdell is used to pay for K-12 education, like private school.

If you are a business owner, and your kids are old enough to do light office work, put your kids to work.  Pay them a salary and contribute their pay check to college savings.  This would make your college savings program tax deductible.


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