Other College Savings Accounts
Besides
529 Plans
and
Coverdell Education Savings Accounts,
there are other ways to save for college. They don't offer the same advantages as
529s and Coverdell ESAs, but they don't have the same restrictions either! Although
529 plans and Coverdell ESAs provide tax benefits that help your savings grow faster,
they limit your contributions and have other restrictions. As an alternative or
supplement to them, check out custodial accounts, savings bonds, and rebate and
loyalty programs.
UGMA (Uniform Gifts to Minors Accounts) and UTMA (Uniform Transfers to Minors Accounts)
Custodial Accounts
UGMA and UTMA custodial accounts allow parents or guardians to give a minor assets
– money, stocks, and real estate – while limiting the minor's access to them until
he or she reaches 18 years old (or 21 in some states). A custodian, named by the
parent or guardian, controls the account on the minor beneficiary's behalf. Any
withdrawals or changes made by the custodian must benefit the child. When the beneficiary
reaches adulthood, he or she controls the assets.
You can save for college by depositing money in an UGMA or UTMA. However, unlike
some college savings plans, the money and assets in UGMAs and UTMAs are taxed. The
first $1,900 of the savings is taxed at the child's income tax rate. Any money in
the account above $1,900 is taxed at the parents' income tax rate if the child is
a dependent younger than 24 years of age. (This is called the "Kiddie Tax.")
An UGMA or UTMA is reported as a student's asset on the federal student aid application
(FAFSA). This means that it is assessed at 20% when the federal Department of Education
calculates your expected family contribution (EFC), as opposed to the rate of 5.6%
for parental assets.
To open an UGMA or UTMA custodial account, check with a trusted financial institution
in your home state. To learn more about UGMAs and UTMAs,
click here.
Series EE Bonds/Savings Bonds
Savings bonds are a low-risk way to accumulate money for college. When you buy a
savings bond, your money earns interest for as long as you own the bond. Savings
bonds with tax benefits include Series EE Savings Bonds and Series I Savings Bonds.
These are low-risk investments. The interest generated by the savings bond is tax-free
if the bond is spent on a qualified education expense or deposited in a 529 Plan.
You can purchase bonds directly through the U.S. Treasury or a trusted financial
institution. To learn more about savings bonds,
click here.
Rebate and Loyalty Programs
Some credit cards and retailers offer loyalty programs that reward customers with
gifts to thank them for their continued business. The largest programs include Upromise
and BabyMint. Depending on the card, the rebate could be in the form of cash, an
investment into a 529 Plan, or a payment for a student loan. Using rebates to save
for college is beneficial because you will not be charged income or sales tax on
a rebate. And you don't have to do anything special – the rebates are based on your
spending habits with the associated card. While a single or small handful of purchases
won't amount to much in education awards, qualified purchases during several years
really add up!
If you have credit cards, check with your issuer for rebate programs for education.
Check with large retailers that you frequently purchase from for these types of
programs as well.