College savings plans give the gift of education

How should you save for your child's college education? Consider these plans.

529 Plan form with eyeglasses and pen.

Are you looking for an impactful gift to give to the children in your life for a birthday, holiday or other special occasion? It's never too early to start saving money for your child's education, or you can make contributions for your nieces, nephews or grandchildren. Long after toys are broken or outgrown, a college savings plan will still be appreciated because you will have started a way to save for college.

529 plans

These "qualified tuition programs" allow you to save for future educational costs under Section 529(b) of the Internal Revenue Code. The 529 college savings plan allows you or any other family member to open an account specifically for future higher education expenses. Residency requirements may apply. Your investment is tax-deferred and distributions from the fund are exempt from federal income tax if used for qualified education expenses.

In addition to traditional 4-year colleges, these funds may be used for community college, trade school or vocational schools. If the designated child doesn't attend higher education, the funds can be used for other family members as IRS rules allow. If you find no one will use the funds, even a future grandchild, the funds may be redeemed with taxes and a 10% penalty applied to the earnings.

Coverdell Education Savings Account (ESA)

A Coverdell ESA is a trust that lets you contribute funds earmarked for future educational costs (elementary and secondary education through college and graduate school), up to $2,000 per year, per child. Contributions can begin at birth and continue until a child turns 18 years of age. Coverdell ESA accounts are exempted from federal income tax and withdrawals are tax-free if used for qualified education expenses. In addition, the funds can be transferred to a sibling if your child doesn't need it.

UGMA and UTMA accounts

Uniform Gift to Minors Act (UGMA) or Uniform Transfer to Minors Act (UTMA) accounts are designed to hold and protect assets for the benefit of a minor. With these two accounts, you can make monetary gifts without setting up a trust. Assets can be used for any reason at any time for the benefit of the named beneficiary and the minor gains control of the funds when they reach the age of trust termination (which is age 18 to 21, depending on state and account restrictions). Assets can be used for education expenses, but because assets are considered the property of the beneficiary, there may be a high impact on financial aid.

Tips for students

Savings accounts: Students can open savings accounts when they’re young saving monetary gifts or money earned from jobs. Parents and grandparents can deposits in to these accounts to help the student save for college.

Scholarships: This is free money — and never has to be paid back. Some websites offer thousands of scholarships. There are scholarships for all kinds of things — athletics, extracurricular activities, need-based, degree being sought, minority or ethnicity status and the list goes on. Students should apply for as many scholarships as possible.

Encourage students to take AP classes that will give them college credits while still in high school. Getting a job is a good way to save money. And it’s best to only use student loans as a very last option to avoid debt upon graduating.

The information in this article was obtained from various sources not associated with State Farm® (including State Farm Mutual Automobile Insurance Company and its subsidiaries and affiliates). While we believe it to be reliable and accurate, we do not warrant the accuracy or reliability of the information. State Farm is not responsible for, and does not endorse or approve, either implicitly or explicitly, the content of any third party sites that might be hyperlinked from this page. The information is not intended to replace manuals, instructions or information provided by a manufacturer or the advice of a qualified professional, or to affect coverage under any applicable insurance policy. These suggestions are not a complete list of every loss control measure. State Farm makes no guarantees of results from use of this information.

Before investing in a 529 plan, consider the plans investment objectives, risks, charges, and expenses. Contact the plan issuer for an official statement containing this and other information. Read it carefully.

Qualified higher education expenses include tuition, fees, textbooks, supplies and equipment (including computers) required for enrollment or attendance and certain room and board expenses for the academic term during which the student is enrolled at least half time at an eligible educational institution. Expenses for special-needs students that are necessary in connection with their enrollment or attendance may also be eligible.

Investors should consider before investing whether their or their beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program and should consult their tax advisor, attorney and/or other advisor regarding their specific legal, investment or tax situation.

Neither State Farm nor its agents provide tax or legal advice.

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Also Important

How a 529 Plan Works

A 529 education savings plan is a tax-favored program operated by a state designed to help families save for future education costs. Check out "529"benefits.

Ways to Pay for College

Learn the average cost of college and ways you can start to save now such as 529, Coverdell and Uniform Gift to Minors. Let us help you by offering savings and debt reduction ideas.

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