Strategies for Your Education Goals
An investment strategy, designed around your specific education goals and the time you have available to invest, is critical to ensure you are prepared to finance all or a portion of your child's educational expenses.
Your H&R Block Financial Advisor will help you develop a plan and choose investment products based on the age of your child, how soon you might need the money for education (your time horizon) and your risk tolerance.
In general, if you have a longer time horizon to invest, you may decide to choose a more growth-oriented investment strategy that could offer greater returns. If you have a shorter time horizon, you would likely choose an investment strategy with less risk to preserve your capital investment.
Here are the most common investment options designed for education savings:
Qualified Tuition Programs (QTPs)
Commonly known as 529 Plans, QTPs are state-sponsored college savings plans, and carry no age or income restrictions. Most plans permit out-of-state residents to participate. And these federally tax-free accounts (when used for qualified education expenses) can be funded by anyone, even a non-relative. Also, account ownership is retained by the parent/guardian and the account can be rolled over to a related beneficiary if, for instance, the original account beneficiary earns a scholarship or chooses not to attend college.
Prepaid Tuition Plans
Prepaid tuition plans, a type of 529 Plan, allow parents, grandparents and others to lock in today's tuition rates at any of a state's eligible public colleges or universities so they don't need to worry about future tuition increases. Most of these plans require you or your child to be a resident of the state offering the plan when you apply.
Coverdell Education Savings Accounts (ESAs)
Formally known as Education IRAs, ESAs offer tax-deferred savings and tax-free withdrawals for qualified education expenses. Funds can be used to cover not only college expenses but elementary and secondary costs as well. You can contribute up to $2,000 a year, and change beneficiaries at any time.
Custodial Accounts
These include Uniform Gifts to Minors Act (UGMA) and Uniform. Transfers to Minors Act (UTMA) accounts. Typically the funds' ownership is automatically transferred to the beneficiary at age 18 or 21, depending on your state's rules. Gifts are irrevocable and cannot be transferred to another child's account. For dependent children under age 18, investment (unearned) income up to $850 is not taxed. The next $850 investment income is taxes at the child's tax rate. Investment income in excess of $1700 is taxed at the parent's marginal tax rate. For children older than 18 all income is taxed at the child's tax rate.
Other Options
There are other ways to fund your child's education, including financial aid, Tuition Repayment Programs, federal grants and loans, scholarships, gifts from relatives and EE government bonds.
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