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From College
Coverdales to Trusts
The Facts on Planning for Your Child's Education
By Kendeyl Johansen
Roth IRAs (maximum contribution $3,000 per year) offer no tax deduction for contributions, but future earnings are sheltered from taxes. These accounts are a good option if you're saving for both retirement and college or if you will be older than 59 1/2 when withdrawing funds.
One advantage of Roth IRAs is the waived 10 percent early withdrawal penalty when funds are used for qualified higher-education expenses. But regular income tax applies for withdrawals prior to age 59 1/2. And not everyone can contribute. "Roth IRAs have income limitations," Feyche says. "Right now to make the maximum annual contribution singles must have an adjusted gross income of $95,000 or less and couples $150,000 or less."
These accounts allow minors to own stocks and bonds. "With a UTTM account, you're basically making a monetary gift to a minor," Feyche says. "If the child is under 14, the income is taxed at the parent's highest rate for income in excess of $1,500. But once the child is 14 (or over) funds are taxed at the child's own rate." A UTTM account can be opened at a bank, mutual fund or brokerage firm. Singles can contribute up to $11,000 per year and married couples $22,000 without gift tax (or $55,000 and $100,000 respectively if no additional contributions are made for five years).
The big downside to a UTTM account is that the child controls the assets at age 18. Funds that were earmarked for college can now be used for a trip to Mexico, a new car, etc.
