Two lesser-used higher education funding options.
For many of the reasons discussed in this issue of The Business Owner Journal, the Coverdell Education Savings Account ("Coverdell ESA" or "ESA") and the Qualified Tuition Program ("QTP," also referred to as a "529 Plan") are the programs most selected by persons setting aside monies to pay for future higher education expenses. But two other options merit mention.
Education Savings Bond Program
The education savings bond program allows investors in U.S. series EE (after 1989) and series I savings bonds to cash them in without reporting the interest income--as long as the proceeds are used to pay qualified expenses for the person the bond is issued to, or such person's spouse or dependent. Qualified expenses include higher education expenses or contributions to an ESA or QTP.
Restrictions exist as to who may participate. For example, couples who wish to take advantage of this program must file a joint return and must not exceed certain income limits ($71,100 for single filers, $106,650 for joint filers in 2011). This program is little used because the rate of return on government bonds has historically been inferior to equity investments and some corporate bonds.
Individual Retirement Accounts (IRAs)
If you are in the rare position of having excess retirement funds, you can withdraw assets from any of your IRA accounts to pay qualified higher education expenses for yourself, your spouse, or the children or grandchildren of you or your spouse. Typically, a withdrawal from an IRA account before age 59/ is assessed a 10 percent penalty.
If you are saving for your own higher education, IRA plans offer similar benefits to the programs that are specifically designed for college savings (i.e., ESA and QTP), which is the ability to invest funds into an account that grows and can be withdrawn penalty tax-free.
But if you want to dedicate funds toward the future higher education expenses of another, IRA accounts offer few advantages. First, IRAs have strict annual contribution limits, which make the QTP's liberal limits more appealing. Second, if you are over 701/2 years of age, you will not be able to contribute to your own IRA but must bestow the monies on the intended beneficiary so he or she can then contribute them to his or her own IRA. When you do so, you lose control of the funds, and the beneficiary can use the money as he or she wishes. And, due to strict qualification requirements, your targeted beneficiary may not be able to accept such funds.
Finally, don't forget that any withdrawal from a traditional IRA will be taxed as ordinary income even if funds are used for higher education expenses. The exclusion allows only the early withdrawal penalty to be avoided, not elimination of taxes that otherwise would be due.
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|Publication:||The Business Owner|
|Date:||May 1, 2011|
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