Client Profile...

Alexa wants to save for her daughters’ education, but also wants to control the funds so they don’t spend the money for something else when they become adults. Alexa wonders where she can save and maintain control.

Custodial accounts, like those under UGMAs and UTMAs, would not give Alexa the control she seeks when her daughters reach the age of majority in their state, either 18 or 21, and the assets become theirs. Holding assets in a college student’s name makes qualifying for financial aid harder than if only the parents’ assets were considered.

Two college accounts that would give Alexa more control are 529 plans and Coverdell Education Savings Accounts (ESAs). Both count as parental assets and offer tax-free withdrawals for qualified education expenses. Both would allow Alexa to change beneficiaries if she wanted.

The ESA has annual income qualifications, and time and age restrictions permits only $2,000 per beneficiary per year in contributions. A 529 plan has large contribution limits and no time or age restrictions. For the most flexibility, a 529 plan is probably Alexa’s best choice.

Client Profile is based on a hypothetical situation. The solutions discussed here may or may not be appropriate for you.