Phillip G. Sinclair

Certified Public Accountant

310 North First

Longview, Texas 75601

903-753-5871

Fax 903-753-5982

HOW NOT TO SAVE FOR A CHILD'S EDUCATION

Some frequently hyped ways to save for a child's education may not be a good idea.

Education IRAs. These provide only small tax savings-only $500 per year may be contributed per child, and contributions aren't deductible. Only the income earned on contributions is tax favored.

Also, using an education IRA limits the availability of Hope and Lifetime Learning tax credits.

State tax-favored college savings plans. Rules vary by state, but these often pay poor returns and you may get no return at all on your money if the child goes to college in a different state, or doesn't go to college.

Drawback: The above two techniques lock in the use of funds, even if circumstances change-the child doesn't go to college or wins a full scholarship.

Uniform Transfer to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA) accounts. The funds in these accounts legally are the child's property So...
The child can do anything he/she wants with them on reaching the age of legal majority.
The wealthier child may lose eligibility for college tuition aid.

Better college-saving strategy: Use appreciating investments that you keep in your own name.
When the child goes to college, make gifts of the investments to the child, and let the child cash them in to pay costs.

Advantages...

Tax savings. The child who doesn't work can take $700 of capital gains tax free, and another $20,050 of gains will be taxed at only 10% (1999 numbers).

Safety. The assets stay in your control until you make the gifts.

Flexibility. If an emergency arises and you need the money it remains yours to use.

Click here to return to Home Page.

Last Updated 08/26/2001