While some plans are specifically designed for education savings, you may find a different option is better suited for you – especially if you’re looking for more choices in how the money can be used. Other ways we can help you fund an education include UGMA/UTMA accounts and Roth IRAs.
How you choose to save for college depends a lot on you and your family’s specific situation. See our College Savings Plans Comparison Guide for a side-by-side look at your choices. COUNTRY Financial is here to help you understand your options so you can make informed decisions for you and your family.
Creating an account for your child under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA) is another common way to save money for college. As the account owner, you’d control the fund until your child turns 18 or 21, depending on what state you live in. The account would then be turned over to them.
An UGMA or UTMA can be a good choice if you’re looking for a variety of ways to fund the account and want the flexibility for your child to use the money for things other than education.
The accounts can also be beneficial for your estate planning, since the money is passed along to your beneficiaries. And contributions qualify for the annual federal gift tax exclusion (in 2023, $17,000 for single filers and $34,000 for joint filers).
A Roth IRA can be used for more than just retirement. The money in a Roth can be used to pay for qualified education expenses too, without the normal 10 percent federal tax penalty charged when you withdraw money early. A Roth IRA might be good for you if you want the option of having a retirement fund already in place if all the money isn’t used for education.
There are two ways you can use a Roth IRA for education purposes:
Your child can open a Roth IRA if they have earned income. Since Roth IRAs are funded with after-tax money, the child’s contributions won’t be taxed when the money is withdrawn. However, earnings distributed for educational purposes will be taxed unless they are held until age 59 ½. The good thing is, the usual 10 percent tax penalty on earnings withdrawn before age 59 ½ is waived when the distribution is used for qualified higher education expenses.
You can open your own Roth IRA and use the assets to pay for qualified education expenses. You can pay those expenses for your child, grandchild, your spouse or yourself. Again, you won’t pay the 10 percent penalty, but you will have to pay taxes on earnings withdrawn before age 59 ½. Contributions can be withdrawn at any time without tax or penalty.
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The information contained herein is general and should not be considered legal or tax advice. Laws of your particular state and your particular situation may significantly affect the general information presented herein. The availability of the tax or other benefits mentioned above may be conditioned on meeting certain requirements. State tax deductions mentioned here may only be available if you invest in a 529 plan offered by the state in which you reside. COUNTRY Financial and our representatives cannot give tax or legal advice. You should consult your attorney or tax advisor regarding your specific legal or tax situation.
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COUNTRY Financial and our representatives cannot give legal or tax advice. Please consult tax and legal counsel of your choice regarding your personal circumstances.