Best available investments plan option to save for child's and grandchildren's college education

In this article I like to share with you some of the most popular savings accounts for kids' education available to parents. Please keep in mind that the college saving account plans, tax laws and the income limits are constantly changing in order for you to qualify for part or all of the tax-free benefits offered by some of these educational savings accounts/investment options. Therefore, this is an area where you will definitely need to stay abreast of all the latest tax changes. I have also given links to some websites where you can get the latest information on the various college saving plans and college saving accounts.

Some of the college savings account / investment options available

1. Personal Savings
2. Custodial accounts (UGMA & UTMA)
3. US Saving Bonds
4. Coverdell Educational Savings Accounts (Educational IRAs)
5. 529 Qualified Tuition Plans (QTP), including education savings accounts and prepaid tuition plans
6. Some additional college education saving options

2. Custodial Accounts:

Custodial accounts created under Uniform Transfer to Minors Act (UTMA) or Uniform Gifts to Minors (UGMA) are one way that parents can earmark funds for their children's education. It has lots of tax benefits. Smaller amounts of earnings escape taxation entirely because the child doesn't have an income to owe taxes. Once the earnings exceed the child's unearned income limit, all excess earnings are subject to the kiddie tax, which means those excess earnings will be taxed at the parent's tax rate. When the child reaches 14, earnings are again taxed at the child's own rate, which will be lower than parent's.

This education saving account have several potential problems. If your son, Jack wants to buy a motorcycle using the college education savings, he can do so, and you can't do a thing about it. Child will have complete control over the account and can use it in the way he wants or spend it on some other things that he or she considers to be important.

Another disadvantage of this account is that, under the current law (2010), custodial accounts are considered the asset of the child. When he/she applies for financial aid, government formula expects up to 35% of child's account to be used for college fees. This means he will get less financial aid. In contrast, if the assets are kept in parent's name, the formula expects to take only 5.6% of assets each year.

3. US saving bonds (both EE and I bonds)

If titled correctly, Saving Bonds qualify for the tax-free educational benefits. Bonds must be titled in one or both of the parent's name. It cannot be titled in child's name, but child can be listed in the bond as the beneficiary.

Some of the other requirements in order to obtain tax-free benefits

• You must be 24 years or older when you purchased the bonds
• Must meet the income requirements that are in effect at the time you use the bonds for educational purposes.
• If married you must file a joint return
• You must use the entire amount (interest and principal) to pay for qualifying educational expences for you, your spouse, or your dependants in the year that you redeem the bonds.

If your child get a scholarship, you could use the money for some other purposes. They will be continue to grow tax-deferred, for up to 30 years. It will act as an emergency fund and could contribute to your retirement asset and you can also benefit from the growing interest rates on savings.

4. Coverdell Education Savings Account (ESA)

ESA was formerly known us Educational IRA. The current contribution limit for ESA is $2000 per student. The growth in the account is tax free as long as the proceeds are used for any qualifying educational expences.

The definition of qualifying educational expences is much broader in ESA. It can be used to pay for the following

• Tuition fees for elementary, secondary, private, public and religious schools
• Books and supplies
• Room and board
• Computers
• Transportation
• Tutoring
• Contributions to a 529 Qualified Tuition Program (QTP)

Anyone who meets the current income requirements listed in IRS Publication 970 can open a Coverdell ESA and make contributions on behalf of a child's saving for college education.

5. 529 Qualified Tuition Plans (QTP):

There are two types of QTPs; 529 college savings program and 529 prepaid tuition plans. Every state has its own 529 college savings plans and each comes with its own set of rules. The 529 college saving plan you decide to invest in doesn't have to be run by the state where you reside (most don't), or even where you expect your child to go to college. Therefore you are free to shop around for the best 529 educational savings account.

Second type of 529 prepaid tuition plan is a prepaid tuition plan that can be offered by a state or an educational institution. If your state offers a 529 prepaid tuition plan,you can prepay (in a lump sum or in instalments) some or all of the tuition for your child's future education at a state university at today's prices. Hence, the younger the child is, the lesser you have to pay. After you have prepaid your child's tuition at a state university, should your child decide to go to a private school, or attend college in another state, you will be allowed to use some or all of the value of your 529 college savings accounts to pay for your child's education at the other school.

6. Some other options available

• Employer paid tuition plans
• Scholarships
• Loans
• Federal grants
• Schoolwork programs

Attending a local community college for the first two years might be a lower-cost option. Many of these community colleges work hand in hand with local four-year colleges, and successful community-college graduates might be guaranteed admission into their four-year program.