Planning & Saving
Planning and saving for private school tuition now is possible and more affordable than funding the expense from future cash flow. While some limitations may exist, there are tax advantaged ways of making the cost more affordable and more efficient with your overall financial plan.
- 529 Plan – The most widely used education savings account. Contributions are non-deductible into a 529 plan, but they grow tax free within the account. The contribution limit for 2018 is $15,000 per year per donor or $75,000 per donor as a 5 year “prepaid” gift. If used toward qualified secondary and post-secondary education expenses, distributions are tax free. There are distribution limits for K-12 expenses. The adult retains full control as the owner of the account.
- Coverdell Savings Account (ESA) / Education IRA – The non-deductible contributions grow tax free within the account. If the funds are used for qualified education expenses, distributions are tax free provided they are used for qualified expenses relating to private schools, but they may be used for both secondary and post-secondary educational expenses. Contribution limitations contain several factors including amount ($2,000 per year for 2018), income limits, and age limits of the minor. Contributions are considered a gift to the minor and automatically become the property of the beneficiary if they are not used for qualified educational expenses.
- Traditional Custodial Accounts (UTMA/UGMA) – This account is similar to the ESA in that contributions are a gift to the student. At age 18 the student takes ownership of the account. The tax advantage is different from 529s and ESAs. Distributions do not carry additional taxes as the earnings are taxed throughout the life of the account. The taxation of UTMA accounts have changed for 2018, making it very important to understand how this account would be taxed for you. This account usually has a dual-purpose in that the goal is to pay for education with the intention that the child will receive the balance as a “graduation gift” once he / she has completed school. The contribution limit into an UTMA is $13,000 per year per donor for 2018.
- Prepaid State Tuition Plans – Although not available in every state, some have specific plans for resident students attending an in-state university that allows for a parent to prepay college costs. The adult pays for tuition at a discounted rate and can “lock in” the tuition cost for that child, years in advance. This plan is rarely used, however, due to the limitation on where the child can attend. Each state plan is different and requires further study, if being considered.
As with retirement, it is important to prepare for college expenses as early as possible to take advantage of long-term growth opportunities. Any one of these options will help save for those expenses and relieve the pressure of tuition payments when they come due. It is recommended that one seek the advice of a Certified Financial Planner™ professional or tax professional when deciding which plan is best for each unique situation.
Cliff Taylor, CFP®
Financial Planner/Partner - TrustCore
Brentwood Academy Alum 2003