If you want your nieces and nephews to get a head start in life, investing in a college savings plan for them is the way to go. Several college savings plans allow extended family members like aunts and uncles to provide funds for future students. A brokerage firm or financial services firm can set up these accounts so you can make a real difference in your nephews' and nieces' lives.
Use a 529 Plan
Two types of 529 plans exist: a prepaid tuition plan and a college savings plan. A prepaid tuition plan locks in the rate of tuition at today's price to pay for tomorrow's tuition at any of the state’s eligible colleges or universities. The student must attend an eligible college or university to receive the funds. A savings plan lets people save money in a college savings account for a beneficiary that they designate so that the student can use the funds for the college or university of his choice. These plans provide several benefits, including allowing you to save more than $200,000 for each beneficiary. There are no income or age limitations with a savings plan. Interest is earned tax-free when the funds are used for qualified withdrawals for tuition, mandatory fees, books, supplies, and equipment required for enrollment or attendance. You can give $65,000 in five years as a single person or $130,000 as a couple to each beneficiary without triggering the gift tax. Some states give tax deductions to individuals who invest in 529 plans in their state, but others only give the deduction to the account owner. A financial services firm can explain who gets the tax benefit in your state and can invest the funds in a mutual fund, stocks, bonds or a mixture of these investment tools.
Establish a Coverdell Account
A Coverdell Education Savings Account allows interested parties to save for a designated beneficiary's college expenses while the beneficiary is under 18 years old. Contributions are not tax-deductible, but distributions are tax-free as long as they are used on qualified educational expenses. The beneficiary can receive a contribution of up to $2,000 each year. The account is part of the student's assets, so funds in it may influence the type and amount of financial aid available for the student.
Several states have passed acts -- the Uniform Gift to a Minor Act and/or the Uniform Transfer to a Minor Act -- to allow gifts to a minor that cannot be revoked. Although an adult manages the UGMA and UTMA funds, the minor student actually owns the asset, so the amount in the account can affect the amount of other financial aid eligible for the student. The child takes control of the account when she is between 18 and 21 years old. Earnings are taxed at the child's income tax rate, which is usually at a lower rate than the parent's income tax rate.
The federal government allows people to give a certain amount of money or assets to other individuals without incurring taxes up to a certain limit, which changes periodically. The limit for 2013 is $14,000 per individual donor or $28,000 per couple. If you don't want to deal with the hassle of establishing accounts, you can simply give each niece and nephew an amount up to this limit each year. If you want to pay tuition directly to the college your niece or nephew attends you may do so without incurring a gift tax penalty, since the federal government does not recognize paying another person's tuition as a gift. State gift taxes may still apply.
Video of the Day
- CNN Money: Guide to College Savings Plans
- Kiplinger: Helping a Family Member Save for College Read more at http://www.kiplinger.com/article/college/T042-C001-S001-helping-a-family-member-save-for-college.html#SHaBvB754wihwxHU.99
- College Savings.org: Common 529 Questions
- Internal Revenue Service: Like Share Print Coverdell Education Savings Accounts
- North American Securities Administrators Association: Understanding College Savings Plans
- Internal Revenue Service: Frequently Asked Questions on Gift Taxes
- Comstock Images/Comstock/Getty Images