Doctors, more than most people, know a thing or two about educational debt. As a result, many physician parents work extra hard to help their children avoid this burden. Luckily, through the years more and more options have become available to save for college while lessening your tax hit and protecting your savings.
Here are some college savings plans that could help you pave the way for Junior’s academic career:
529 plan. This is perhaps the most popular of the available college savings plans. According to Morningstar the 529 plan offers tax advantages such as tax-free growth and tax-free withdrawals so long as the money withdrawn is used for qualified college expenses. There may also be state tax incentives, but that varies from state to state. There is no income limit for participants and as confirmed by SavingforCollege.com, an individual can save $15,000 per child per year ($30,000 per married couple).
Coverdell Education Savings Account. As explained by The Balance, the Coverdell, like a 529 plan, offers tax benefits like tax-free growth and tax-free withdrawals for qualified college expenses. Coverdell savings can also be used for primary and secondary education (529 plan funds can also be used for K-12, but only in some states). The Coverdell has income limitations that can prevent high-income earners from using it and the contributions are limited to $2,000 per beneficiary per year.
UGMA/UTMA Savings Accounts. The Uniform Gift to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA) can be opened by adults for children younger than age 19 and full-time students less than age 24. The tax benefits are not the same as the 529 plan and Coverdell. With UGMA/UTMA the first $1,050 of unearned income is tax-exempt, the next $1,050 is taxed at the child’s rate, and anything more than $2,100 is taxed at the parent’s rate. One of the biggest concerns that parents have in opening a UGMA/UTMA account is that when the child reaches adulthood, the money is theirs and they have no incentive to use it for college expenses. Happy 18th birthday Mikey, that’s a great looking Tesla you have there.