Charting the Education Funding Path

Zachary T. Lauzon
Wednesday, September 16th, 2020
Posted in: Education Funding, Financial Planning
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Education Funding Ideas

How to Choose the Best Investments for Education Funding

By Zachary T. Lauzon

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Given the diversity of investment channels available to help fund higher education – and the varied guidelines and tax consequences they carry – it’s vitally important to understand your objectives, and to build a smart strategy to achieve them. The Richard Brothers Whole Picture approach to personal wealth management places education funding in the broader context of your individual financial strategy. Working with a clear understanding of your “whole picture,” we determine the best means to accomplish all your investment goals, with ongoing vigilance to ensure you are prepared for both near and long-term needs.

As we consider the unique goals of education funding, we rely on several investment tools and resources. To give a clearer sense of the savings options available, we will highlight a few of those that warrant careful consideration as you develop your higher education funding strategy:

529 Plans – IRS Link

Want to learn more about Maine’s state-sponsored 529 Plan?

Click here for more information on NextGen- Maine’s 529 College Savings Plan

The 529 Plan is an education savings program operated by a state or educational institution with tax advantages and other incentives to help save for college and other post-secondary training.  As a result of a recent regulatory change, 529 Plans can now be used to fund tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school for a designated beneficiary, such as a child or grandchild. The primary advantage of these accounts is that investments grow tax-free – provided the proceeds are used for qualifying education expenses.

Family members may contribute to a child’s college savings by contributing to an established 529 plan only if the plan accepts third-party contributions. If not, they can do so by opening their own 529 plan on behalf of the designated beneficiary.

When states establish and maintain 529 Plans – also known as Qualified Tuition Programs (QTPs) – they allow taxpayers to either prepay or contribute to an account dedicated to funding qualified education expenses at a postsecondary institution. No tax is due on a distribution from a 529/QTP unless the amount distributed is greater than the beneficiary’s adjusted qualified education expenses.

In these accounts, qualified expenses can include, but are not limited to:

  • Required tuition and fees
  • Books, supplies, and equipment
  • Computer or peripheral equipment, computer software, and internet access and related services
  • Room and board for those who qualify as at least half-time students

Coverdell Education Savings Accounts – IRS Link

A Coverdell ESA is a trust or custodial account set up in the United States solely for paying qualified education expenses for the designated beneficiary of the account. This benefit applies not only to qualified higher education expenses but also to qualified elementary and secondary education expenses.

The Coverdell Educational Savings Account (Coverdell ESA) offers a tax-advantaged opportunity to contribute up to $2,000 each year to a child’s account – provided the child’s family falls beneath the program’s maximum income requirements.  Like 529 Plans, Coverdell Accounts allow contributions to grow free of federal taxation. In some cases, the accounts also offer state tax advantages. Although Coverdell ESA’s are not as popular as they once used to be, they still offer attractive benefits for educations savings.

Individual Retirement Accounts (IRAs) – IRS Link

Given their name, most people logically associate IRAs with – you guessed it – saving for retirement.  The Internal Revenue Service (IRS) allows account holders to pay for qualified education expenses without having to pay an additional 10% early withdrawal penalty. There are specific requirements you must follow to qualify for this special exemption, so be sure to pay close attention to ensure compliance.

UTMA/UGMA Accounts SS Link

Adopted by most states in the U.S., the Uniform Transfer to Minors Act (UTMA) & the Uniform Gift to Minors Act (UGMA) allow individuals to irrevocably gift and manage assets – such as securities or cash for minors. The custodian has control over the account with the minor being named as the beneficiary. Contributions immediately become the minor’s asset which may adversely affect the amount of financial aid received since it’s considered a “student-owned asset.” Once the minor beneficiary reaches the age of majority (usually 18-21, depending on the state), he or she can use the assets any way they choose. These accounts are not considered traditional college funds because the assets can be used for a variety of purposes.

Planning with the Experts

Given the range of available options for higher education savings, it’s worthwhile to partner with a financial advisor to develop a sound investment strategy. Like with any kind of investment, early planning and consistent contributions are the keys to success, allowing the power of time and interest compounding to work for you.

Funding can start conservatively with under $100 per paycheck automatically deposited into the college savings plan of your choice. But no matter which Education Funding plan you choose, starting a college savings fund for your child, grandchild, or as a gift for another is a big investment. Trust the education funding experts at Ricard Brothers to guide the development of a smart strategy that fits both your near-term education needs – and your long-term wealth management strategy.

Would you like to learn more about Education Funding options? Connect with a Richard Brothers financial professional located in South Portland, ME today to discover how you can secure your future with wise financial moves.

Every individual has a different set of circumstances, and we can help you personalize a strategy that fits your needs.

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For over 20 years, Richard Brothers has provided clients with comprehensive financial planning solutions and tailored investment advice with expertise in wealth management including retirement security, estate protection, business transition, education funding and corporate solutions.  The company focuses on the “whole picture” approach when helping clients realize their lifetime goals.  Headquartered in South Portland, Maine, Richard Brothers Financial Advisors provides goal-based solutions to individuals, families—as well as businesses, nationwide.