Education and Custodial

Accounts

Education and Custodial
Accounts

Saving for College

Opening a college savings account is a smart way to establish an education fund for a family member, a friend, or even yourself. These accounts can offer tax benefits, and depending in which plan you choose, you can invest in a broad range of different types of investments. Our education and custodial accounts give you many different options, so contact us to learn more and get some help.

Account TypeMinimum to Open (US)FeaturesInvestment Choices
529 College Savings PlansNo MinimumNo income limitations
Contributions must be made in cash
Each state can establish their own minimums and maximums
Not Managed
Very Limited
Coverdell Education Savings AccountNo Minimum$2,000 maximum per designated beneficiary
Not managed
Not Limited
Custodial Uniform Gift to Minors Act (UGMA)/Uniform Transfer to Minors Act (UTMA)$3,000Professionally Managed by a Financial AdviserNot Limited

529 Plans

A 529 Plan is a great way to save for college and gain tax benefits. It allows you to save for college while your money grows tax-deferred. The 529 Plan is designed to meet the needs of virtually every family and every budget.

There is no minimum annual contribution required with a 529 Plan.

What is a 529? Section 529 college savings plans are established by states under section 529(b)(A)(ii) of the Internal Revenue Code as “qualified tuition programs” through which individuals make investments for the purpose of accumulating savings for qualifying higher education costs of beneficiaries.

Choices vary by individual plan and also by state, and may be limited. Details are available in the plan’s enrollment handbook.

Account Minimums and Fees:

  • No income limitations
  • Contributions must be made in cash
  • Each state can establish their own minimums and maximums

Read More »

Education Savings Accounts

The Coverdell ESA is a savings plan created for the purpose of paying a student’s qualified educational expenses. These can include, but are not limited to:

  • tuition
  • books
  • uniforms

Similar to a 529 plan, your money is tax-deferred, allowing your fund to grow faster. Contributions to a Coverdell ESA are not tax-deductible. In addition, contributions are allowed for individuals under the age of 18. Distributions from a Coverdell ESA may be tax-free, but they must be used to pay for qualified educational expenses. With a Coverdell ESA account, you can invest in a wide variety of products including stocks, bonds, and mutual funds.

The maximum contribution per year is $2,000.

Account Minimums:

$2,000 maximum per designated beneficiary.Read More »

Custodial Accounts

With these types of custodial accounts, a minor can own cash or securities that are controlled by a custodian until he or she meets the age of majority in the state the account was set up. All deposits into these accounts are irrevocable gifts to the minor recipient.

The Uniform Gift to Minors Act (UGMA) and the Uniform Transfer to Minors Act (UTMA) make it simple to transfer property to a minor without a formal trust and without the restrictions applicable to the guardianship of a minor’s property.

Assets in the account become an irrevocable gift to the minor under the Uniform Gift to Minors Act or the Uniform Transfer to Minors Act (UGMA/UTMA). Custodial accounts are not tax-deferred. Taxation of earnings will be dependent on the minor’s tax rate.

Minimum to Open:

$3,000 USRead More »

Early Withdrawal From Your IRA

According to the IRS Publication 970, as long as you are under age 59 ½ and the student is attending college at least half-time, you can withdraw from your IRA funds to cover tuition, both graduate and undergraduate, room and board, fees, books, supplies, technological equipment such as a laptop and internet access for your home, and also computer software that is educational in nature. You can withdraw from an IRA to pay for educational expenses if you are a parent, spouse, grandparent, or the student him or herself (if the student already has an IRA in his or her own name, which is unlikely for undergraduates but may be more likely for graduate students). As a qualified individual, you can even withdraw money from your IRA for a student that is no longer a dependent. The school that the student will be attending can be private, public, or nonprofit as long as it is accredited by the Department of Education.

If you are withdrawing from a Traditional IRA, the withdrawal amount will be counted as taxable income the year you withdraw. If you are withdrawing earnings from a Roth IRA, you can do so tax-free up to the total amount of contributions if the earnings have been left in the account for five years or more (if the earnings are withdrawn prior to five years, they are included as income on your return and you are essentially double taxed as your contributions came from post-tax income as well). But be aware that withdrawing early from and IRA for educational expenses counts as income, whether taxable or tax-free, for the year and can harm the student’s financial aid eligibility.

Thus, an IRA can be used as a combined education and retirement vehicle. How much you can withdraw early from your IRA for education expenses, however, is not the total sum of your bill. To determine how much you can withdraw early, you must calculate your adjusted qualified education expenses. This is your total qualified education expenses (tuition, fees, books, supplies, equipment, room and board) minus any tax-free educational assistance (Pell Grant, scholarships, veterans educational assistance, employer provided educational assistance, and any expenses used to figure the tax-free portion of distributions from a Coverdell ESA.)

Borrowing From Your 401(k)

You cannot withdraw funds early from a 401(k), but you can borrow against the balance of your account. Not all employers allow you to do this and they are certainly not obligated to. If your employer allows borrowing against the 401(k) plan, each year you can borrow up to $50,000 or half of the account value, whichever is lower. However, it’s very important to note that you cannot switch jobs for the duration of the loan. In addition, you cannot borrow against an old 401(k) at a company you are no longer working for. If you lose your job, either with voluntary or involuntary termination, you will be subject to a 10% early withdrawal penalty for the funds you borrowed if you do not repay the full balance of the loan plus interest within 60 days.

The benefits of borrowing against your 401(k) are that you can get the loan quite quickly, usually within a week or so. Also you don’t have to qualify for the loan through a credit approval process because you are borrowing against your future retirement. 401(k) loans are generally paid off over a 5-year period via payroll deduction. Again, your employer and payroll provider have to support this functionality, so it’s worth asking before you make any concrete plans.

Alternatively, under the “hardship distribution,” you can take out all of your money from a 401(k) to pay for education expenses, but you will be charged the 10% federal penalty in addition to federal and state taxes on the amount, and you must go through a lengthy and embarrassing process of demonstrating financial need.

+ Overview

Saving for College

Opening a college savings account is a smart way to establish an education fund for a family member, a friend, or even yourself. These accounts can offer tax benefits, and depending in which plan you choose, you can invest in a broad range of different types of investments. Our education and custodial accounts give you many different options, so contact us to learn more and get some help.

Account TypeMinimum to Open (US)FeaturesInvestment Choices
529 College Savings PlansNo MinimumNo income limitations
Contributions must be made in cash
Each state can establish their own minimums and maximums
Not Managed
Very Limited
Coverdell Education Savings AccountNo Minimum$2,000 maximum per designated beneficiary
Not managed
Not Limited
Custodial Uniform Gift to Minors Act (UGMA)/Uniform Transfer to Minors Act (UTMA)$3,000Professionally Managed by a Financial AdviserNot Limited
+ 529 Plans

529 Plans

A 529 Plan is a great way to save for college and gain tax benefits. It allows you to save for college while your money grows tax-deferred. The 529 Plan is designed to meet the needs of virtually every family and every budget.

There is no minimum annual contribution required with a 529 Plan.

What is a 529? Section 529 college savings plans are established by states under section 529(b)(A)(ii) of the Internal Revenue Code as “qualified tuition programs” through which individuals make investments for the purpose of accumulating savings for qualifying higher education costs of beneficiaries.

Choices vary by individual plan and also by state, and may be limited. Details are available in the plan’s enrollment handbook.

Account Minimums and Fees:

  • No income limitations
  • Contributions must be made in cash
  • Each state can establish their own minimums and maximums

Read More »

+ Education Savings Account

Education Savings Accounts

The Coverdell ESA is a savings plan created for the purpose of paying a student’s qualified educational expenses. These can include, but are not limited to:

  • tuition
  • books
  • uniforms

Similar to a 529 plan, your money is tax-deferred, allowing your fund to grow faster. Contributions to a Coverdell ESA are not tax-deductible. In addition, contributions are allowed for individuals under the age of 18. Distributions from a Coverdell ESA may be tax-free, but they must be used to pay for qualified educational expenses. With a Coverdell ESA account, you can invest in a wide variety of products including stocks, bonds, and mutual funds.

The maximum contribution per year is $2,000.

Account Minimums:

$2,000 maximum per designated beneficiary.Read More »

+ Custodial Account

Custodial Accounts

With these types of custodial accounts, a minor can own cash or securities that are controlled by a custodian until he or she meets the age of majority in the state the account was set up. All deposits into these accounts are irrevocable gifts to the minor recipient.

The Uniform Gift to Minors Act (UGMA) and the Uniform Transfer to Minors Act (UTMA) make it simple to transfer property to a minor without a formal trust and without the restrictions applicable to the guardianship of a minor’s property.

Assets in the account become an irrevocable gift to the minor under the Uniform Gift to Minors Act or the Uniform Transfer to Minors Act (UGMA/UTMA). Custodial accounts are not tax-deferred. Taxation of earnings will be dependent on the minor’s tax rate.

Minimum to Open:

$3,000 USRead More »

+ Other Options

Early Withdrawal From Your IRA

According to the IRS Publication 970, as long as you are under age 59 ½ and the student is attending college at least half-time, you can withdraw from your IRA funds to cover tuition, both graduate and undergraduate, room and board, fees, books, supplies, technological equipment such as a laptop and internet access for your home, and also computer software that is educational in nature. You can withdraw from an IRA to pay for educational expenses if you are a parent, spouse, grandparent, or the student him or herself (if the student already has an IRA in his or her own name, which is unlikely for undergraduates but may be more likely for graduate students). As a qualified individual, you can even withdraw money from your IRA for a student that is no longer a dependent. The school that the student will be attending can be private, public, or nonprofit as long as it is accredited by the Department of Education.

If you are withdrawing from a Traditional IRA, the withdrawal amount will be counted as taxable income the year you withdraw. If you are withdrawing earnings from a Roth IRA, you can do so tax-free up to the total amount of contributions if the earnings have been left in the account for five years or more (if the earnings are withdrawn prior to five years, they are included as income on your return and you are essentially double taxed as your contributions came from post-tax income as well). But be aware that withdrawing early from and IRA for educational expenses counts as income, whether taxable or tax-free, for the year and can harm the student’s financial aid eligibility.

Thus, an IRA can be used as a combined education and retirement vehicle. How much you can withdraw early from your IRA for education expenses, however, is not the total sum of your bill. To determine how much you can withdraw early, you must calculate your adjusted qualified education expenses. This is your total qualified education expenses (tuition, fees, books, supplies, equipment, room and board) minus any tax-free educational assistance (Pell Grant, scholarships, veterans educational assistance, employer provided educational assistance, and any expenses used to figure the tax-free portion of distributions from a Coverdell ESA.)

Borrowing From Your 401(k)

You cannot withdraw funds early from a 401(k), but you can borrow against the balance of your account. Not all employers allow you to do this and they are certainly not obligated to. If your employer allows borrowing against the 401(k) plan, each year you can borrow up to $50,000 or half of the account value, whichever is lower. However, it’s very important to note that you cannot switch jobs for the duration of the loan. In addition, you cannot borrow against an old 401(k) at a company you are no longer working for. If you lose your job, either with voluntary or involuntary termination, you will be subject to a 10% early withdrawal penalty for the funds you borrowed if you do not repay the full balance of the loan plus interest within 60 days.

The benefits of borrowing against your 401(k) are that you can get the loan quite quickly, usually within a week or so. Also you don’t have to qualify for the loan through a credit approval process because you are borrowing against your future retirement. 401(k) loans are generally paid off over a 5-year period via payroll deduction. Again, your employer and payroll provider have to support this functionality, so it’s worth asking before you make any concrete plans.

Alternatively, under the “hardship distribution,” you can take out all of your money from a 401(k) to pay for education expenses, but you will be charged the 10% federal penalty in addition to federal and state taxes on the amount, and you must go through a lengthy and embarrassing process of demonstrating financial need.

Global Advisers Education Planning Services

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529 Plans

A 529 Plan allows you to save for college while your money grows tax-deferred. The 529 Plan is designed to meet the needs of virtually every family and every …

Education Savings Account

The Coverdell ESA is a savings plan created for the purpose of paying a student’s qualified educational expenses. These can include, but are not limited to tuition…

Custodial Accounts

With these types of custodial accounts, a minor can own cash or securities that are controlled by a custodian until he or she meets the age of majority in the state …

  1. Participant must be 18 years or older, must be a U.S. citizen and must have a Social Security number or Tax ID.
  2. In 2017, for children under age of 19 (and full-time students under age 24) with no earned income (or income exceeding one-half of his or her support), usually the first $1,050 of investment income is exempt from federal income tax under the child’s standard deduction, the next $1,050 is taxed at the child’s rate, and the amount above $2,100 is taxed at the parents’ rate.
  3. In order for an accelerated transfer to a 529 plan (for a given beneficiary) of $75,000 (or $150,000 combined for spouses who gift split) to result in no federal transfer tax and no use of any portion of the applicable federal transfer tax exemption and/or credit amounts, no further annual exclusion gifts and/or generation-skipping transfers to the same beneficiary may be made over the five-year period, and the transfer must be reported as a series of five equal annual transfers on Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return. If the donor fails to survive the five-year period, a portion of the transferred amount will be included in the donor’s estate for estate tax purposes.
  4. Periodic investment plans do not guarantee a profit or protect against a loss in a declining market.
  5. The Galleon-managed 529 plan contribution caps are currently $350,000 for the DE plan, $400,000 for the MA plan, $500,000 for the NH plan, and $453,000 for the AZ plan.
  6. College-related expenses refer to qualified higher education expenses as defined in section 529 of the Internal Revenue Code.
  7. For 529 accounts only, the new beneficiary must have one of the following relationships to the original beneficiary: 1) a son or daughter; 2) stepson or stepdaughter; 3) brother, sister, stepbrother, or stepsister; 4) father or mother or an ancestor of either; 5) stepfather or stepmother; 6) first cousin; 7) son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law; or 8) son or daughter of a brother or sister. The spouse of a family member (except a first cousin’s spouse) is also considered a family member. However, if the new beneficiary is a member of a younger generation than the previous beneficiary, a federal generation-skipping tax may apply. The tax will apply in the year in which the money is distributed from an account.

Portfolios are managed by Strategic Advisers, Inc., a registered investment adviser and Galleon Investments Company.

IRC Section 529 does not allow participants to have direct or indirect control over the investments in a 529 plan.

The UNIQUE College Investing Plan, U.Fund College Investing Plan, Delaware College Investment Plan, and the Galleon Arizona College Savings Plan are offered by the State of New Hampshire, MEFA, the State of Delaware, and the Arizona Commission for Postsecondary Education, respectively, and managed by Galleon Investments. If you or the designated beneficiary is not a New Hampshire, Massachusetts, Delaware, or Arizona resident, you may want to consider, before investing, whether your state or the designated beneficiary’s home state offers its residents a plan with alternate state tax advantages or other state benefits such as financial aid, scholarship funds and protection from creditors.

The tax and estate planning information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice. Galleon does not provide legal or tax advice. Galleon cannot guarantee that such information is accurate, complete, or timely. Laws of a particular state or laws which may be applicable to a particular situation may have an impact on the applicability, accuracy, or completeness of such information. Federal and state laws and regulations are complex and are subject to change. Changes in such laws and regulations may have a material impact on pre- and/or after-tax investment results. Galleon makes no warranties with regard to such information or results obtained by its use. Galleon disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Always consult an attorney or tax professional regarding your specific legal or tax situation.

Units of the portfolios are municipal securities and may be subject to market volatility and fluctuation.

Please carefully consider the plan’s investment objectives, risks, charges, and expenses before investing. For this and other information on any 529 college savings plan managed by Galleon, contact Galleon for a free Fact Kit, or view one online. Read it carefully before you invest or send money.

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