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Tag: "NJ 529 college savings plans"

Why Use College Savings plans

[ 0 ] May 28, 2014

Spectrum Financial Solutions, NJ, College fundWhen parents decide to begin saving for college for their children, they will have to determine what type of account is most suitable. In some cases, parents may prefer 529 plans over Uniform Transfer to Minor Accounts (UTMA) since the 529 plans must be used for higher education purposes while the UTMA accounts may be used for any purpose the child sees fit.

Understanding UTMAs

Under the UTMA plans, the custodian of the account does not have control over how the funds are spent. The funds are designated to the minor child at the time the account is established. Once the child reaches the age of maturity (18 or 21 depending on the state) the account is then fully-owned by the child. Withdrawals are then controlled by the child and may be used for any purpose they wish to use them for including, but not limited to college. While the child is a minor, the custodian has an obligation to use the funds in the account solely for the beneficiary. There is no option for the custodian to change the ownership from one minor to another unlike 529 plans.

Tax benefits are often similar

In most cases, 529 college savings plans allow the funds to grow free from federal taxes. In the event the funds are used for higher-education purposes, the withdrawals are also free from federal taxes. In the case of UTMA accounts, the custodian may gift up to the maximum amount allowed under gifting laws. For federal tax purposes, 529 plan contributions are non-deductible but earnings are excluded from income if they are used for approved educational expenses. With UTMA accounts, earnings and gains are taxable though typically taxed at a lower rate since they are taxed to the minor. The first $1,000 is typically treated as tax-exempt and may be exempt up to $2,000 for certain minors.

When saving for college, 529 plans are often the plan of choice. Custodians have complete control of the funds and if the intended beneficiary elects to not attend college, a new beneficiary may be placed on the account. Your investment advisor can help you decide which plan is most appropriate for your needs.

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