Prepare for your child’s education
Going to college can more than double your child’s earning power.1
Tuition in some colleges or universities is more than $35k a year. But don’t be alarmed. The average tuition is well below that and most students receive some financial aid.
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Education Costs |
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2010-2011 Average Yearly College Costs
Source: www.collegeboard.com |
How much will it cost for your child’s education? Use the College Savings Calculator to:
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Investment options for college education
Your investment professional can help you fund your child’s education using one of these options:
- Coverdell Education Savings accounts – This option offers tax-deferred growth and tax-free withdrawals for educational expenses
- Uniform Gifts/Transfers to Minors Act accounts – This option gives your child ownership of mutual funds, securities and bank products that you, grandparents or others purchase on their behalf
Other education funding options, include:
- Section 529 College Savings plans – These state-sponsored investment plans offer tax-deferred growth and tax-free withdrawals for secondary educational expenses although investment options may be limited in some states
- Personal savings and investments
- Financial aid programs
Compare investment options for education
This side-by-side comparison of three common education savings options provides a brief overview and may help you decide if one is right for you. Your own personal circumstances may dictate different results than those shown here, so keep in mind that this isn’t advice. You should always work with your tax professional for tax advice.
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Coverdell Education Savings Account |
Uniform Gifts/Transfers to Minors Act(UGMA/UTMA) |
Section 529 |
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Description |
An account used to save for a beneficiary’s education expenses − primary through graduate school. |
An account that permits the transfer of mutual funds, securities or bank products to a minor without establishing a trust. |
State-sponsored investment plans for college expenses |
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Owner |
Parent or legal guardian until beneficiary reaches age 18. |
Minor (with a custodian) |
Account donor |
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Contributors |
Anyone can contribute. |
Anyone can contribute. |
Anyone can contribute. |
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Maximum contribution |
$2,000 a year from all sources. Contributions are limited if certain earning levels are exceeded. |
$13,000 from each individual ($26,000 from married couples) per year tax free. There is no annual maximum contribution limit. |
Limits vary by state |
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Investment options |
Broad range of options |
Broad range of options |
Limited. Age-based and static portfolios, vary by state Some states allow direct investment in mutual funds |
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Taxes |
Qualified withdrawals are tax-free. Investment earnings accumulate federal income tax free. Nonqualified withdrawals are taxed at a 10% federal tax rate (and possibly state tax rate) in addition to the standard federal tax rate of the account holder. |
Account earnings of more than $1,900 are taxed at the parents' tax rate. The parent must file an income tax return on behalf of the child. Children older than 14 must sign their own return. The account becomes part of the custodian’s estate if he/she is the child’s legal guardian and the child has not reached the age of majority. |
Qualified withdrawals are tax-free
Investment earnings accumulate federal Nonqualified withdrawals are taxed at a 10% federal tax rate (and possibly state tax rate) in addition to the standard federal tax rate of the account holder. |
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Qualified expenses |
Education expenses, including: tuition, fees, tutoring, books, supplies, related equipment, room and board, uniforms, transportation, extended day programs, computers used by the beneficiary. |
Money can be used for any purpose that solely benefits the child. After the child reaches the age of majority, the money is his/hers to use any way they would like. |
Secondary education expenses, including: tuition, fees, tutoring, books, supplies, related equipment, room and board computers used by the beneficiary |
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Financial aid implications |
Could reduce financial aid. May affect, or tax benefits may be affected by, HOPE Scholarship and Lifetime Learning tax credits. |
Could reduce financial aid |
Less impact on financial aid |
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Final disbursement of funds |
Money must be used by age 30 or earnings are taxed as ordinary income plus a 10% penalty. Unused funds can be transferred to another member of the beneficiary’s family under without creating a taxable event. |
Account is closed and control of money is transferred to the child when he/she reaches the age of majority (Usually 18 to 21 depending on the child’s state of residence).
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The donor retains control of account. The donor retains money the beneficiary doesn't use for qualified expenses but would owe taxes on the earnings and pay a 10% penalty. Unused funds can be transferred to another member of the beneficiary’s family under without creating a taxable event. |
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Fees |
The financial institution maintaining the account may charge fees. |
The financial institution maintaining the account may charge fees. |
Each of the state and asset-management firms may charge fees |
Next steps
Contact your investment professional for more information about college savings investment options and how mutual funds from Nationwide can help. Or, learn how to invest in Nationwide mutual funds on your own.
1www.trends.collegeboard.com What It Costs to Go to College
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